The Long-Term Cost of Having to Make Short-Term Decisions

A few weeks ago I wrote a post asking how long it would take for buying a house to be a better decision than renting. It was an interesting question all on its own, but actually running the numbers and thinking through my own situation got me thinking about another, even bigger, question:

What is the long-term cost of having to make short-term decisions?

I started thinking about this because when I ran the numbers, I realized that housing is MUCH more affordable down here in Pensacola than it was back in Boston. In Boston, there really wasn’t much question about whether renting or buying was a better decision for us (renting won in a landslide). But here in Pensacola, even with the uncertainty we still have about where we’ll end up within the next few years, it’s a much closer call simply because houses are less expensive.

Still, buying isn’t really an option for us right now for the simple reason that we need our savings for other purposes. I’m still in the process of building up my business, and in the meantime our savings are helping to pay our living expenses.

So even though buying a house might actually be a better long-term financial decision for us than renting, it’s not something we can really consider because we just don’t have the cash to do it. (Well, we do. It’s just being used for other purposes.)

In other words, we’re making a short-term decision out of necessity (renting) that might end up costing us in the long-term vs. the alternative (buying).

And that got me thinking: how much money are we all costing ourselves in the long-term when we put ourselves in the position of having to make short-term decisions?

What are some short-term decisions with long-term costs?

Now, our personal situation is a little unique. We’re not able to really consider buying right now because our cash is tied up in my new business. But the decision to start the business was itself a long-term decision with short-term costs. We’re giving up some income and financial flexibility now in the hopes that we’ll have more of both later. Starting a business is really the opposite of what I’m talking about here, and we were able to do it because we had spent so many years beforehand building up our savings.

Still, there are plenty of examples where poor financial planning could force you into decisions that are necessary in the short-term but have long-term costs.

Going back to the house example, while renting is often a better decision if you’re not yet settled, buying smartly will often save you money in the long-term if you actually stay in the same house for at least 5 years (make sure to run your own numbers). But it’s hard to buy if you don’t have cash readily available for a down payment, closing costs, property taxes, regular maintenance, and of course the new furniture and other things you’re going to want to buy for your brand new place to live. You may be forced into long-term renting and that can cost you money.

Or maybe you decide to buy anyways and you get a mortgage where you only have to put 3.5% down instead of the standard 20%. That’s less cash you have to pay up front, but then you’re going to have to pay PMI and your interest rate is probably going to be higher too. Those are extra costs you’ll have to pay month after month, potentially for 30 years. To see just how costly that bigger interest rate can be, check out the graph in this article here. An extra 1% in interest will cost you about $45,000 extra over the life of a $200,000 mortgage.

Maybe you need to buy a car, but you don’t have the cash on hand so you’re forced to take out a loan. Maybe you can’t find room in your budget for disability insurance and end up without the protection when you need it. Or maybe it’s something as simple as not being able to buy things like paper towels or toilet paper in bulk, and having to pay the higher cost of buying smaller quantities.

There are plenty of situations where being forced to make short-term decisions can have long-term costs. So now the question becomes how to put yourself in a position to make better long-term decisions.

How can you set yourself up to make long-term decisions?

To me, good financial planning is all about giving your future self options. It’s almost impossible to know what you’re going to want from life even 2 years from now, never mind 10 or 30. But I can guarantee that no matter what you end up wanting, you’ll appreciate having the freedom to make decisions that are in your best long-term interest rather than being forced into whatever you can afford in the moment.

With that in mind, here are a few ways you can give yourself that freedom and potentially save yourself big money over the long-term.

Live below your means

The bigger the gap between what you make and what you have to spend each month, the more flexibility you have to use your money on whatever opportunity presents itself.

If you’re currently living paycheck-to-paycheck, you’re going to have to create some room in your budget so you have the ability to make better choices. At first that’s probably going to mean finding ways to spend less money. That’s usually the easiest way to find quick results.

But don’t forget about the other end of the spectrum too: earning more. When you can not only find ways to cut out unnecessary spending but also increase the amount of money coming in, you can really accelerate your ability to make decisions that might have a short-term cost but a long-term gain.

Build up your savings

In a lot of cases, the better long-term decision is going to cost more money up front than the short-term decision. Whether it’s putting a bigger down payment on a home, paying for unexpected expenses out of a savings account instead of resorting to a credit card, or simply buying the bigger pack of diapers with the lower unit cost, the simple truth is that you often need more cash now if you want to save money over the long-term.

But where is that cash going to come from? In most cases it’s going to come from your savings, which is only going to be there if you make saving a habit that you practice month-after-month, year-after-year. It takes time to build up the kind of cash that allows you to take advantage of some of the really big opportunities in life, which is one of the big reasons why you want to start early.

If you haven’t already, find a way to set up some automatic monthly savings contributions. No matter how small you start, you’re giving your future self more options.

Avoid debt

Before I get into this, I want to say that I don’t believe that all debt is evil. There’s a time and a place for everything, and debt is no exception. When it’s used smartly, it can help people afford things like education and homes that can end up being good long-term financial decisions.

But the truth is that the more debt you have, the less freedom you have. Every dollar you have to pay to a lender is one less dollar you have for yourself, and you don’t have the ability to cut back on your debt payments the way you might with a cable or cell phone bill. You’re just kind of stuck until you can pay it off.

Don’t be afraid to take on debt when it makes financial sense, but understand that those situations are the exception rather than the rule. In most cases, debt will end up costing you more and force you into short-term rather than long-term decision-making.

Conclusion

When I looked at the numbers and saw that buying might actually be a pretty good financial decision, it was frustrating to know that it didn’t really matter because it wasn’t something we could do right now anyways. Even though there was a good reason for it (starting the business), I didn’t like that we didn’t have the choice.

Good financial planning is all about giving yourself options. The people who do it best are the ones who end up being able to make decisions based on what’s in the long-term interest of their families, regardless of the short-term costs. That’s where I’d like to get to.

What about you? Are there any decisions you’re currently making out of short-term necessity, even if there are better long-term choices? Or do you have a positive story of making a good long-term decision even though it cost you more in the short term? Either way, I’d love to hear about it.

Photo courtesy of U.S. Army