2. Consider Your Family Plan (and Save) for Retirement

A Sense of Timing

Three years out of college, you’ve established the emergency fund, and it is time to reward yourself. A Jet Ski costs $3,000. Investing in growth stocks can wait another year, you think; there is plenty of time to launch an investment portfolio, right? However, putting off investing for one year can have significant consequences. The opportunity cost of buying the personal watercraft can be illustrated through the aforementioned time value of money. The $3,000 used to buy the Jet Ski would have amounted to nearly $49,000 in 40 years at 7% interest, a reasonable average annual return for a growth mutual fund over the long haul. Thus, delaying the decision to invest wisely may likewise delay the ability to reach your goal of retiring at age 62.
Doing tomorrow what you could do today also extends to debt payment. A $3,000 credit card balance takes 222 months (that’s 18.5 years) to retire if the minimum payment of $75 is made each month. And don’t forget the interest that you’re paying: At an 18% annual percentage rate (APR), it comes to $3,923 over those months. Plunking down $3,000 to erase the balance in the current month offers substantial savings—nearly $1,000 over the cost of the Jet Ski.

Emotional Detachment

Personal finance matters are business, and business should not be personal. A difficult, but necessary, facet of sound financial decision-making involves removing the emotion from a transaction. Making impulsive purchases feels good but can have a big impact on long-term investment goals. So can making unwise loans to family members. Your cousin Fred, who has already burned your brother and sister, will likely not pay you back, either—so the smart answer is to decline his requests for help. The key to prudent personal financial management is to separate feelings from reason. By the way, this should not keep you from making seriously needed loans—or even gifts—to help out, especially in times of real trouble. Just try not to take it out of your savings and investment fund.