Financial Sacrifices

I recently read an article where 81% of respondents said they or their children were making personal or financial sacrifices to help pay off their student loans.  My reaction to that is duh!  Personal finance is about personal and financial sacrifices 100% of the time.  We are always making choices which could be interpreted as sacrifices.

  • Choosing to put money away in a 401(k) or IRA instead of going on that cruise you desperately want to go on.
  • Paying for life insurance so your spouse and kids will be taken care of instead of going to that concert from your favorite band.
  • Building up an emergency fund instead of getting Starbucks every morning.

The real problem is not the need to make personal and financial sacrifices; instead the real problem is people blindly making those sacrifices without realizing they are doing so until the sacrifices are significantly larger than they need to be.  The article that cited the 81% of the people making sacrifices to pay off student loans also said people wish they had looked for ways to reduce the debt before they had to start paying for it.  For example:

  • Go to community college for the first two years and pay cheaper tuition and fees.
  • Go to a college near home to reduce living expenses.
  • Do anything and everything else, work while in college for example, to reduce the amount of loans.

It used to be that buying a house was considered the single largest financial decision in a lifetime, but now we have three.

  1. Buying a house
  2. Saving for retirement
  3. Paying for college (for yourself and your kids)

Buying a house was generally a fairly simple proposition.  Save for the down payment and then pay off the loan.  The problem with the other two is they are about behavior, not knowledge.  By behavior I mean the concept of putting away money a little at a time for years.  Put another way, they require a little sacrifice for a long time rather than a big sacrifice all at once.  People know they need to save but it is hard to change their behavior to do so.  It’s just like smoking, exercise and eating right.  We all know we need to do these things, yet people die from smoking and are obese because they tell themselves this tiny choice I make today won’t impact the big picture overtime.

As a profession, we have been doing an important job of teaching people about personal finance, but I think we need to take the next step.  The next step is telling people it’s not just about knowing, it’s about behavior. And helping people change behavior is a lot harder than teaching them something.

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