Personal finance and the long game

When you think about it, personal finance is about playing the long game. Sure, it’s about other things as well. It’s about paying off debt. It’s about spending less than you earn. But when you think about it overall, it’s about making choices that are harder in the short term for the good of the long term. Here’s what I mean….

Saving for retirement

Saving for retirement, for example, means having less money to spend today. Having less to spend today can help avoid lifestyle inflation, which is generally regarded as a good thing.

However, there are plenty of responsible things that could be done in the short term with that money. For example, you could pay off debt or give to a charitable cause that is meaningful to you. You could stash that cash in an emergency fund or eat organic foods and hire a personal trainer.

None of those are necessarily bad choices. But you decide that taking responsibility for caring for yourself in the event that you are no longer able to work full time is more important, so you play the long game.

Saving in liquid vehicles

Keeping an emergency fund in a “high-yield” online savings account or even a few certificates of deposit (CDs) doesn’t provide nearly as good of a return as many other types of investments. (Notice the sarcastic quote marks around “high-yield,” and even CD rates aren’t much better at the moment.) However, investments that typically provide higher returns are also riskier; that is, they don’t always provide higher returns.

In addition, keeping your funds in other types of investments may mean they are not easily accessible if you need them quickly. By maintaining a reasonable balance in liquid vehicles, you decide that losing out on some dividends or interest is a smarter choice than paying interest to a credit card company when emergency strikes, so you play the long game.

Being insured

Insuring yourself also means having less money to spend today. And sometimes it seems that there is no end to the types of insurance we “need.” I have the following:

  • Homeowner’s insurance
  • Life insurance
  • Disability insurance (short- and long-term)
  • Long-term care insurance
  • Health insurance
  • Dental insurance
  • Vision insurance
  • Auto insurance

And those are just the ones I can think of off the top of my head! I’m sure there are some I am missing. In the short term, that is hundreds or thousands of dollars I am “losing” each year to the mere possibility that something bad might happen. However, if something were to go wrong, I could lose much more, and that is what I’m protecting myself against. An event like a car crash (even if it isn’t my fault) or a catastrophic illness or injury could blow through even the beefiest of emergency funds in a single day. So I pay my insurance premiums and play the long game.

Maintaining big-ticket items

Think about the type of maintenance you have performed on your car: Changing the oil, rotating the tires and checking their air pressure, changing the air filters. Now think about your house: Changing the air filters, tuning up your air conditioner or heater annually, flushing the water heater, pruning large trees.

Why do we pay to take care of the things that we own? It’s because the better we take care of them, the better they will work. (You may save on gas by getting better mileage, for example). Not only that, but regular maintenance can help extend the lives of big-ticket items so you don’t have to pay the much higher replacement cost. In this case, playing the long game can mean you’ll be less likely to replace big-ticket items at an inconvenient time.

Replacing big-ticket items

What? We just finished the section on maintaining big-ticket items, now I’m saying replace? Yes, part of playing the long game is knowing how long maintenance and judicious repair are the least expensive options and when replacement will actually save more in the long run.

In the case of our HVAC, for example, a thousand-dollar repair on our 20-plus-year-old unit, coupled with electric bills that exceed $300 during the hottest part of the summer meant that replacement was the better option. We are paying just over $5,500 for our new unit, which is definitely a play for the long game. However, we anticipate saving enough to make that investment worth it, especially since we saved for the purchase and won’t be paying any interest.

Paying off debt

Financing your life with debt is a tricky proposition. Not only do you pay more over the long run because of interest; in essence, you’re also placing a lot of bets that are unlikely to pay off. You are betting, for example, that you will always make as much money as you do now. You’re betting that you won’t retire, be injured, or get sick.

That’s pretty much the opposite of playing the long game! Fortunately, making more than the minimum payment each month on your debts can save some money you would have spent on interest. It can also get those payments out of your life sooner so you can start funneling money into some other aspects of the long game.

Financing big purchases judiciously

As I pointed out above, sometimes it is cheaper to maintain or repair and other times it is cheaper to replace. Similarly, sometimes it is cheaper to save and pay for things outright and other times it is financially responsible to take on some debt. The trick is to be rational about these types of decisions if you can. (Sadly, our relationship with money isn’t always rational!) For example, Jake’s decision to take out student loans for three years to go to law school and gain a skill that would net him a six-figure salary was financially sound. My decision to spend eight years in graduate school accumulating an equivalent amount of student loans for degrees in English was not.

To give another example, the combination of low interest rates and the value that homes in our area lost during the Great Recession led us to conclude that buying when we did was the better financial decision — even though we were unable to put 20 percent down. Waiting would have meant paying a higher purchase price and having a higher interest for an equivalent house, all while paying rent in the meantime.

Priorities and the long game

Perhaps the biggest trick to the long game is realizing that you can’t do everything at once. As the saying goes, you can have anything you want, but you can’t have everything you want. You have to establish financial priorities and create your own personalized long game.

What specific actions are going to save you the most money in the long run (or enable you to earn the most)? What order makes sense for your life and goals? If you haven’t always played the long game in the past, how can you start now and get back on track? Decide and take action!

More about...Planning, Retirement

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There are 15 comments to "Personal finance and the long game".

  1. Mrs. Frugalwoods says 16 March 2015 at 04:37

    I’ve always played the long financial game, especially when it comes to the amount we save every year. The reason for our large savings rate has always been that we don’t want to be financially surprised. We’ve always put ourselves in the position that a job loss or an illness would be an inconvenience, but not a crises.

    Conversely, living paycheck-to-paycheck essentially ensures that you’ll have to take on debt at some point. By buffering ourselves from catastrophe with a robust savings, we’ve always felt secure, which in turn has led us to plan for an unusual life of early retirement.

    I think planning ahead financially actually enables far greater risk-taking and potentially a far more interesting life than simply frittering away money in the present. If you consider the things you can buy in the moment (cars, food, clothes) versus the things you could afford if you saved for 10 years (travel, early retirement, a paid-off house), I think it’s clear where you’ll reap the most value.

  2. The Money Spot says 16 March 2015 at 05:22

    One thing that I’ve always lived with is spending less than you earn and avoiding lifestyle inflation.

  3. Wiggles @FirstYouGetTheMoney says 16 March 2015 at 06:29

    To help play the long game you need some short victories along the way. It’s helpful to create some short term goals to keep motivation up. Try and set monthly and yearly goals to keep your head in the game. Accomplishing these short term goals will ultimately help you achieve your long term goal as well.

  4. Elise says 16 March 2015 at 07:40

    Early retirement is our end-game. For me, its actually much more exciting seeing my investments grow monthly than filling my house with the newest gadgets and buying new clothes constantly.

    I do think however, striking a balance between savings and spending is important to avoid burn out. Life would be pretty sad without any extras until retirement!

    • William Cowie says 17 March 2015 at 13:37

      That’s awesome! Do you have a clear idea what you will do when you retire?

  5. Fervent Finance says 16 March 2015 at 09:52

    Sometimes I feel I’m saving for the long-term at the expense of the short-term. Long-term takes priority since I’m young and have so many compounding years, and that’s a trade off I’m willing to make. I do want to own a home which can definitely be a drag on your finances… a personal home (one you do not rent) is definitely not an investment and I understand that.

    • Sherry says 16 March 2015 at 10:34

      I’m sorry, Fervent, but I disagree. Maybe buying houses to fix up and flip isn’t investing; but the careful purchase of a home (or land and building one, as I did) absolutely is an investment. If thought out well, including the all-important “location, location, location” and maintained well, a home can go up in value over the long term and either be sold at a hefty profit or passed on as a legacy. Either way, it’s a big asset, and I know I see mine as such, and not just a drag on my finances.

      • Fervent Finance says 16 March 2015 at 12:50

        Sherry – here is a good article on the subject.

      • Tamara says 19 March 2015 at 20:40

        I know lots of homeowners and homeowners-to-be absolutely LOVE real estate. They can only think of the pros and rarely the cons. If you live in certain parts of California where the median price is $700k+ and the average is above a $1 million, buying a home can pretty much guarantee you will have no other investments unless you are an exceptionally high earner. If the economy tanks, how will the person shed the house (a huge liability at this point) and move to more appropriate neighborhoods? (I suppose there is always strategic default but that’s so unseemly). For those of you who say people should live in cheap neighborhoods, I’d like to bring up the point that expensive real estate is synonymous with a strong local economy.

        Young people need to be able to relocate for better jobs. This is doubly true for young people with skills that are high in demand (ex: technology). They should remain mobile so that they can accept promising offers from recruiters if they so choose, which will really turbo charge the career. Yes, the renter will be living in expensive neighborhoods and will have to pay exorbitant rent for very little in return. But, if the renter is frugal, s/he’ll be able to reach financial independence at a relatively young age, move to a cheaper neighborhood/state, and buy a house with cash.

        The global and local economies will have ups and downs within a person’s lifetime. To buy a house and assume you will always have a job within a 25 mile radius of your home is optimistic at best. In fact, economists say reduced workforce mobility is actually bad for the economy. (Now the employer would LOVE to lock down a highly skilled work force with homeownership.)

        Furthermore, the people who buy homes “for the school district” are making a huge commitment just for 4 years of their life (while one kid goes through high school). I’d rather pay cash for a house that I enjoy; irrespective of school district. I think homes are great “investments” for people who are already independently wealthy. For people TRYING to become wealthy, it’s not always a good deal.

  6. Beard Better says 16 March 2015 at 12:18

    I have always been playing the long game when it comes to savings, largely because I’m just naturally a frugal person and so it hasn’t required any effort. The more difficult thing for me to do has been to take a long-term view of earning extra side income.

    I always looked at it derisively becase it seemed like the amount of effort required for such a pittance was way out of proportion, especially considering that going to graduate school is already not a cake walk. I’m tired, and sometimes very cranky, when I get home just from that, so adding anything else in on top of that seemed like an impossibility.

    What made me get over it was looking at the long-term impact. Sure I might only make $40 in a single week from tutoring, but by doing it for a few weeks and getting another client referred to me I can now look back and see that I’ve made an extra few hundred dollars in the last ~2 months. It’s still not an enormous amount of money, but for me it’s nearly my rent for a month. If I keep it up for the rest of the year, I projected that I could probably pay for an entire semester’s worth of school fees without having to dip into my savings at all.

  7. Chelsea @ Broke Girl Gets Rich says 16 March 2015 at 12:55

    One thing that’s helped me play the long term end game more effectively than I ever would have thought is not owning a car.

    I realize it’s not for everyone, but I love not worrying about maintenance cost, saving for new tires, buying gas, or even insurance. I’ve been lucky enough to live in cities where a $75 bicycle, occasional public transport, and a few cabs when necessary get me around at a cost far less than even owning a car, let alone actually driving one.

  8. Lauren says 16 March 2015 at 14:21

    It is definitely hard to remember sometimes when saving for the long-term to not waste too much on short-term things. Thanks for sharing this post.

  9. BK10S says 16 March 2015 at 18:38

    I am struggling with the long term care insurance question. Our insurance provider is strongly recommending and provides very good arguments. A friend that used to sell insurance says it is a ripoff. My lawyer says that the policies are very difficult to collect on. We are so confused…..

  10. Jen From Boston says 17 March 2015 at 09:24

    It really depends on how long you’re going to live in that home, Fervent, and your financial health before you buy. Owning your home either free and clear or with a fixed rate mortgage provides stability that a hot rental market may not. Right now in my area the rent on a one bedroom apartment can be as much or MORE per month than what my 2BR 2BA condo costs me, and that’s including property tax, condo fees, and insurance on top of my mortgage payment. Odds are, over the next 10-20 years, rents will continue to rise. Yes, my tax, fees, and insurance will also rise, but a good chunk of my monthly cost won’t because I have a fixed rate mortgage. And when my condo is paid off that’s a good chunk of money I can put towards something else.

    And, here’s the thing, unless your living rent free at a friend’s or your parents, housing is going to cost you. Would you rather hand your money over to a landlord or have it go towards and asset you own?

    Of course, whether or not it’s worth it really depends on your situation – whether you’re going to live in the same area for 5+ years, if you have rent control, etc.

    Overall, I’m glad I purchased a condo. I no longer have that anxiety I’d get each May when my lease was due for renewal and I’d worry about the rent increase.

  11. Nick @ Millionaires Giving Money says 17 March 2015 at 11:05

    Its definitely important to be wary of lifestyle inflation. I only increase my spending on things that really give me utility and always try to cut spending that doesn’t really enhance my lifestyle. Great post, thanks for sharing.

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