How Tall Is Your Tree?
by Gary Foreman
The other day I was sitting in the courtyard of a tall hotel
building. I happened to notice how small some palm trees appeared
against the building. Then it occurred to me that I had similar sized
palm trees in my yard. And compared to my split-level home they
appeared huge. The difference? It's all a matter of perspective.
Our finances are also often a matter of perspective. Whether $500 is
a lot or a little depends on what we compare it to. So let's take a
look at some situations where our perceptions could have a big impact
on our bank account.
We'll begin with something very familiar - our homes. According to
the National Association of Homebuilders the average home size in the
U.S. in 2004 was 2,330 square feet. That was up from 1,400 s.f. in
1970. So is your home large or small?
If you have a 1,900 s.f. home you might compare it to your friends
and think that you're really quite cramped. In fact, it might be very
important to you to find something bigger. Even if it means higher
mortgage payments, insurance costs, utility bills and additional
upkeep. Moving to a larger home could have a major impact on your
budget and your bank account. But, if your friends' homes are the
comparison, you'll probably talk yourself into moving.
On the other hand, if you compare your home to the one you grew up
in, it probably seems spacious. No need to move to a bigger home.
Just a matter of controlling how much stuff you try to cram under
your roof. The savings could be significant. Not to mention the peace
of mind. It's all just a matter of perspective.
Or let's try car payments. Suppose that you have a car payment of
$400 per month. That doesn't seem like much. Especially when
you compare it to your neighbor's payment of nearly $650. And, it
sure is nice having a nearly new car in the driveway for everyone to
see. After all, you wouldn't want them to think that you couldn't
afford a new car. Because you can handle those payments with no problem.
Of course if you should happen to lose your job that $400 a month
payment will suddenly look like a huge mountain. Trying to live on
unemployment is hard enough when there's only the mortgage and food
to consider. But that car payment is going to make things very
difficult. From this vantage point it looks like a big problem.
Here's another one. Two thirds of college graduates had student
loans. And students with loans had an average debt of over $19,000 at
graduation (source: National Center for Education Statistics).
Depending on the type of loan the monthly payment will run $200 a
month or slightly more. So is that a large debt for a college grad?
Depends on how you look at it. The U.S. Dept. of Commerce estimates
that a college grad will earn about $23,000 more per year than
someone with a high school diploma. So in those terms, a $19,000 debt
doesn't seem so big. In fact, it might even seem cheap.
But, let's take another look. The first thing to note is that the
difference in earnings for college grads is an average over their
entire career. So they'll probably average less their first job out
of college.
What can current grads can expect to be paid? That depends a lot on
the job. So we'll select something that's fairly typical. The average
business administration grad can expect to earn about $38,000 a year
(source: National Association of Colleges and Employers). Depending
on state taxes and some other deductions, he'll take home about
$2,400 per month.
That would mean that 5% of his take home pay is going to repay
student loans. Now the debt seems a little bit bigger. Let's further
suppose that our graduate wants to replace the beater he drove
through school. Add a car payment to the mix and the budget starts
getting pretty tight. Once again, a different perspective on the same
situation.
Why is all this important? Many of us make financial decisions based
on how we 'feel' about a situation. Those feelings are very much
affected by what we're comparing to our potential financial
transaction. Unfortunately sometimes we focus on that first
perspective and don't consider any others.
It's important to our financial well-being that we get more than one
comparison on any major financial decision. Let's give our feelings
and our intellect a chance to see both sides of our potential
choices. We'll be much more likely to make a decision that is
comfortable in the future.
So how tall is that tree? It all depends on what it's standing next to.
Gary Foreman is a former financial planner who currently edits The
Dollar Stretcher.com website. You'll find hundreds of ways to "live
better...for less". Visit today!