There’s a concept in finance called “cost-benefit analysis” which involves calculating whether an item’s cost outweighs its benefit. For example, I spent 8 hours yesterday cleaning the apartment I just vacated. If I had bothered to perform a cost-benefit analysis, I would have asked myself whether or not the cost (8 hours of my time on my day off) was worth the benefit (a savings of about $150 of my deposit). Is my time worth $18.75 an hour? Or were those 8 hours worth more than spending time with friends or family? The answer, sadly, is probably not. But it brings up an interesting thought: how much time should we spend concerned with our personal finances.
If you wanted to, you could spend almost 24 hours a day worrying about your finances. You could build budgets, track stock movements, read personal finance books, and watch CNBC form the moment you woke up until the moment you slept. The truth is, there’s a lot of advice out there concerning money (including this blog) and there’s no way you can possibly learn everything there is to know. On the other hand, you can’t ignore money – it’s a part of our everyday life. So the question is, how much should you worry about money?
The answer, similar to most of my advice, is somewhere in the middle. And part of it has to do with your own self assessment of how important money is to you. In order to help you figure this out, try ranking the following items from 1 to 10 – 1 being the most important to you and 10 being the least:
- Immediate family
- Extended family
- Sports (watching or playing)
- Video Games
After some internal reflection, look at where money ends up in relation to other items on your list. If money is one of your top 3 choices, then I would assume that you are already faithfully checking your stock portfolio, 401(k) performance, and reading up on the latest and greatest personal finance topics. For those of you not as “obsessed” with your finances I would recommend setting aside at least one day each year to focus on your personal finances.
While your personal finance situation will most likely determine the kind of life you will lead (either now or in the future) don’t you think that dedicating at least 8-10 hours a year is worth it? This day of personal finance mastery is not meant for you to pay bills, but to go above and beyond your normal day-to-day financial activities. Take a day off work… use a holiday such as Labor Day (hint hint)… whatever you do make sure you have time to dedicate to this activity.
Suggestions for things to do include:
- Calling credit card companies to negotiate better rates.
- Updating your list of important financial information in case of emergency or death. Try something like this Financial Life Details (pdf) worksheet from Merrill Lynch.
- Update your will and/or trust documents. This may not seem “financial” in nature, but your will or trust has strong links to your financial portfolio.
- Organize your important financial documents, statements, or information for easy access on a day-to-day basis.
- Review your tax withholding amounts and re-examine whether or not you should change them.
- Consider setting up automatic withdrawals for savings, upcoming vacations, car repair, etc. using one of the popular online banks. (Personally I love the ING “sub-accounts” I can create to sock away money)
- Re-examine your insurance premiums and evaluate whether you are over or under-insured. It may be time to shop around for a new policy as well.
- If you haven’t done so lately, evaluate the returns in your investment portfolio and consider re-adjusting your mix in response to major life events or your current age.
- If appropriate, set up a 529 college savings plan (be sure to let relatives know they can contribute to it in lieu of presents).
The list could go on and on, but the important point is to set aside time to actually think about your current financial situation and evaluate how well you are accomplishing your goals. If you’re falling short, begin to research what you can do to improve. Do you need to ask for a raise? Cut back on spending? Move to a more affordable location? These are all questions you can ask yourself once you’ve taken the time to reflect on your personal finance situation – but are difficult to answer during your monthly bill-paying binge.