Regular readers know that I absolutely love Clint Eastwood movies. The other day I was watching for the umpteenth time one of my all-time favorites: the classic Sergio Leone spaghetti western The Good, the Bad and the Ugly. While I was watching the movie it came to me that there are also good, bad and ugly personal finance decisions made by people like you and me every single day.
So I decided to take a little time today to highlight a few.
By the way, while you’re reading these, you’ll have to supply your own whistle from the famous Ennio Morricone theme song. If you don’t know what I am talking about, you can listen to it here.
I now present to you Personal Finance Decisions: The Good, the Bad and the Ugly …
(cue the music!)
Scenario 1. Your new employer offers a 401(k) program where they will match the first 3% of any money you contribute into the retirement plan. After carefully evaluating your options you decide to …
Good: Immediately begin contributing at least 3% of your pay into the plan because to do otherwise would be throwing away free money.
Bad: Wait a year before contributing, until you have saved up for a decent down payment on that fancy new car you’ve got your eye on.
Ugly: Pass on the retirement plan for now because, like, hello, you’re only 23 years old!
Scenario 2. Uh oh. It’s late and the cupboards are bare so you decide to make a serious grocery run first thing in the morning. Of course, before heading to the grocery store tomorrow, you will…
Good: Make a detailed shopping list that you will strictly adhere to based upon a planned two-week dinner menu.
Bad: Make a mental note to avoid store-label products like the plague because everybody knows they’re inferior to the major brands. Yucky!
Ugly: Make sure you don’t walk out the door until you have built up the hearty appetite of a famished lumberjack.
Scenario 3. You have an old credit card with a large limit and a favorable credit history that you haven’t used in two years. After thinking it over, you …
Good: Cut up your card, but don’t close the account.
Bad: Cut up your card and close the account — not realizing that, by lowering the amount of credit available to you, you may actually be negatively affecting your credit score.
Ugly: Take a nice vacation to the South Pacific for a few weeks — there’s no sense letting all that available credit go to waste, you know!
Scenario 4. A financial adviser tells you that you need to keep an emergency fund equivalent to six months of your gross salary. After carefully considering your options you finally decide …
Good: That rather than trying to save six months of your gross salary, a more realistic goal would be to save six months of your living expenses. After all, that allows the emergency fund to cover its intended purpose of paying the bills.
Bad: To blindly follow his advice, never realizing that it could take years trying to save six months worth of salary — and even if you do, you risk surrendering potential big returns if that money was invested elsewhere.
Ugly: You don’t really need an emergency fund — after all, that’s what credit cards are for.
Scenario 5. While shopping for new school clothes for the kids, your teenage daughter begs you to buy her a new pair of designer jeans that cost four times more than the less glamorous ordinary jeans on the next shelf. After ten minutes of listening to her incessant whining about how she is never going to be able to wear those ordinary jeans in front of her super-cool friends, you …
Good: Tell her that the price of those expensive designer jeans does not fit within the household budget for school clothes. Since the budget is sacred, if she really wants them she’ll have to pay you the difference with her own money.
Bad: Tell her that the price of those expensive designer jeans does not fit the budget, but you’ll make an exception this one time. And you really mean it this time, Missy!
Ugly: Buy the designer jeans for your daughter and then get a pair for yourself too. Although you won’t admit it to your daughter, those jeans really are cool! (Besides, everybody’s wearing them.)
Scenario 6. You just got a 4% raise from your employer. After carefully evaluating your options you finally decide to …
Good: Take advantage of your employer’s automatic paycheck deduction option and contribute the entire raise toward your retirement plan — after all, it’s a great way to painlessly increase the size of your retirement fund.
Bad: Contribute none of the raise towards your retirement plan — after all, the raise is a great way to painlessly increase the amount of your discretionary spending.
Ugly: Quit your crappy job and try to make a living as a full-time blogger.
Now that’s really ugly.