PERSONAL FINANCE: How to make those hard choices easier

Does cutting down on spending sometimes have a negative effect? A student asked me this question during on of our Centonomy classes the other day. They had just done an exercise where they had to role-play being the objective financial advisor to somebody who was in a bind.

One of the options they came up with for their client was to move into a cheaper house. Easier said than done. Imagine that was you and the glaring solution to some of your challenges was to find a cheaper place to live in; would you do it? What my student wanted to know was if some of the measure you had to take would make you feel like a failure.

The options we choose need to be put in perspective. In reality, we have to make these tough decisions. Ken and Mary are a young couple who bought a house when they got married. Keeping up with the mortgage payment was not easy but they made do. Everything changed when they got children. They had sort of planned for one child but were blessed with twins. Reality checked in. Food, milk, formula, diapers, domestic help for not one but two children became more important than their emotional attachment to owning their own home. They were also thinking about longer term expenses like school fees. Finally, it was cheaper to rent a similar place than pay a mortgage. They considered renting it, but it would not have covered their mortgage payment. So they sold their house.

This move provided the finances they needed to handle their unexpected expenses. And it came with some peace of mind. Many of us do not want to face this tough decision and prefer to live in denial. We get scared about how we will look and even go the extremes of borrowing to save face.

Remember, your temporary trimming of wallet will not last forever. Ken and Mary will own a home one day, after they earn more money and get a better grasp on their expenses. Their current discipline will pay off big in future.

Lucy and Mutua did the same thing, but for another reason. They had bought an apartment and spent time furnishing it really well. It looked like something from a magazine. Their apartment was also in an area where there was high demand for serviced units. They wanted to create residual income, so they did their research and discovered that it was a great property to lease. They put the word out and in less than a month, there was an offer to lease it for eight months. The income would cover their mortgage and rent expense for the place they would move into. Their home would be essentially paying for itself leaving them with extra funds to invest elsewhere. They moved, leaving behind their furniture. Their bigger vision allowed them to make this sacrifice.

At the end of the day, that’s the key to the answer that my student asked. Why are you making that big decision? What is the objective? It may be a situation that you need to resolve, like Ken and Mary, but it could also be for the bigger picture you have for yourself. In my experience constant cutting back just for the sake of doing what you have been told is right does not have much success. There has to be a goal, vision or end in mind.

I have met people who have crossed that thin line between prudent money management and a scarcity mentality. If your mind is constantly focused on scaling down, you do not have time to see the other side of the coin, which is the opportunity to generate more income. Don’t get so scared of spending or losing that you can’t even make decisions to grow, invest or take risks. Do what is necessary, prudent, and makes sense right now, but look beyond the circumstance. Practically speaking, if your income is not increasing, your strategy to keep up with rising costs and invest at the same time cannot be to cut expenses forever. Always question what you want to achieve and whether the move you are about to make is a step in the right direction towards that objective. Sometimes two steps back are actually 10 steps forward.

Waceke runs personal finance and wealth creation courses. For details, get in touch at [email protected].