Every day we are faced with financial choices. It may be as simple as a choice of whether to buy this week's special at the supermarket or as complex as whether to buy a house. How we stack up financially at any point in time is the end result of all the financial decisions we have made in previous years. We all start out in life with nothing, and, as time goes on, there is increasing divergence in people's financial success depending on paths taken and financial decisions made.
Financial decisions are not just about money. They reflect our personalities, our values and the things we consider most important in life. For that reason, there is no such thing as a right or wrong financial decision. However, there is one essential ingredient to making a good financial decision and that is to understand the consequences of the decision. There are differences in what people consider financial success to be. For some, it is measured by vast wealth while, for others, it is simply having enough money to live a comfortable life free of worries about money. However, you measure financial success, making financial decisions without understanding the consequences is likely to lead to misery and failure.
Financial consequences are wide ranging. At the most basic level, spending more of your income now means you will have less to spend later, perhaps when you need it more. Some financial choices carry more risk and it is important to understand the consequences of possible loss. Borrowing money has consequences of future financial commitments and increased costs through payment of interest and fees.
There is nothing wrong with spending more, taking financial risks or borrowing money so long as you understand and accept the consequences of those choices.
• Liz Koh is an authorised financial adviser. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free by calling 0800 273 847. For free e-books visit moneymax.co.nz and moneymaxcoach.com.