When we think about big, long-term financial consequences, we assume theres a big money decision behind each one: saving up for a down payment on a house, buying Apple during its IPO, taking out student loans, or hiring #hectorconsultants as your investment advisor. And while those big decisions certainly will have an effect on your financial future, many small and non-money-related decisions you make every day may have an even larger impact. This is the Butterfly Effect — the theory that small, seemingly insignificant actions can have far-reaching consequences. You may already be familiar with the Latte Factor — the phenomenon described by David Bach, wherein small purchases, such as your morning latte, add up to large amounts over time. In a similar fashion, small choices and habits made early on can add up to major financial consequences over time. Here are five decisions you may be making right now than can seriously affect your finances for years to come. 1. How You Deal With Stress There are two ways that this choice can affect your finances. First, depending on how you deal with stress, you could be priming yourself to reap serious financial rewards or consequences. For instance, if you unwind after a stressful day by smoking a cigarette while enjoying a bacon cheeseburger, you are spending money on vices that could be better spent. For example, a pack-a-day cigarette habit costs a smoker $2,555 per year, and $201,994 over thirty years if you factor in compound interest. Poor food choices can cost up to $4,879 per year and $385,725 over thirty years (with compound interest). These numbers dont even factor in the health costs of these sorts of habits, which can lead to illness, lost productivity, high medical bills, and even death. No single cigarette or French fry is such a horrendous decision, but forming the habit over a lifetime can seriously derail your finances. In addition, the way you deal with stress can also affect your ability to make good decisions. Recent research has shown that people only have so much bandwidth for making decisions — which is why talking on a cell phone while driving makes you a worse driver. In particular, living with the constant stress of financial worry means that you have less cognitive ability to make decisions. As Emily Badger of The Atlantic put it, this explains, for example, why poor people who arent good with money might also struggle to be good parents. The two problems arent unconnected. While the research has shown that the kind of long-term, cognitive-ability-sapping financial stress that those living in poverty experience is not exactly the same as more temporary stress, it does seem fair to assume that living with any kind of stress over a long period of time can deplete your ability to make good choices. Choosing smart stress-reduction techniques can help you to keep your faculties sharp. 2. How Well You Negotiate Many of us are uncomfortable with negotiation. Women in particular are reluctant to come across as pushy or overbearing for fear of looking bad and potentially losing opportunities. But since most people dont have to negotiate more than a handful of times in a career, its not that big a deal if its not in your skill set, right? Wrong. According to a recent study by George Mason University and Temple University, your ability to negotiate can have a significant impact on your earning power over your lifetime. In particular, being able to negotiate a higher starting salary means that you will compound your annual raises to a big difference in your overall earnings. The study found that those individuals who chose to negotiate their starting salary increased that initial salary by an average of $5,000. The researchers concluded that assuming a 5% annual pay increase and a 40-year career, the negotiator with a $55,000 starting salary would earn an additional $600,000+ over their career compared to their non-negotiating co-worker who accepted $50,000 to start. (Although, to be fair, both the 5% annual raise and the 40-year career in the same field seem to be generous assumptions). However, its clearly important to get over your discomfort with negotiation so you can reap the benefits. 3. Who You Fall in Love With It sounds awfully mercenary to talk about money and love in the same breath, but it is important to consider the financial consequences of your choice of a life partner. Despite what John Lennon promised us, love is not all you need. Falling in love is easy, but staying in love and happily married is much harder. That means marrying couples ought to consider their long-term compatibility — or they may find themselves facing a costly divorce down the road. Even if you avoid divorce, incompatible money attitudes can limit your financial future — not to mention be the cause of some knock-down-drag-out fights. If you and your spouse are not on the same page regarding saving, investing, and spending, then you cannot commit to a shared plan for your finances. That makes it difficult (or impossible) to achieve your financial goals. That doesnt mean you should be asking dates for their bank balances before considering a future with them, but it does mean you have to work on your communication skills early and often to ensure that money wont be the death of your love — and love wont be the death of your financial security.
Posted on: Thu, 27 Feb 2014 14:21:08 +0000
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