Having Fun with Financial Trade-offs: 5 Common Trade-off Types

Trade-offs are Everywhere.

Everywhere.

Trade-offs are simply a game of ‘Would You Rather’. 

• Would you rather sleep in, cuddle, and then sit in traffic or wake up early and have a quick and painless commute? 

• Would you rather take a nonstop flight or scenic road trip to visit your friend out of state?

• Would you rather eat Thai food or Indian food for dinner tonight?

• Would you rather watch Breaking Bad (your obvious favorite) or the highly anticipated new season of Sort Of?

All day every day we are consciously and subconsciously making trade-offs. The trade-offs we make may be based on impulse, logic, personal preference, etc. Regardless, trade-offs exist, because we cannot do and cannot have everything all at once. We cannot sleep in and have a quick commute. We cannot take a quick flight and a scenic road trip simultaneously. Unfortunately, we cannot eat Thai food and Indian food for dinner…maybe this is how fusion was created?

Are Trade-offs Sacrifices?

| Yes…And No.

As the great financial journalist and podcaster Paula Pant says “You can afford anything…but not everything.” We are constantly and often unknowingly making trade-offs - many of which are seemingly insignificant. Due to the shear magnitude of trade-offs we make in a day, we could not possibly contemplate them all. If we were to dwell on every trade-off, we would be immobilized. So while trade-offs are based in scarcity, as we have to choose how to use limited resources (money, time, energy, etc.), more often than not trade-offs do not feel like sacrifices. They feel like choices. They feel like moving through our day.

However, when a trade-off creates emotional turmoil, it no longer feels like a choice but rather a sacrifice. While much less frequent, we notice and remember these sacrificial trade-offs much more vividly than everyday non-consequential trade-offs, simply because the decision making process hurts.

Duality of Trade-offs |

No Right or Wrong Answers!

‘Would You Rather’ has no objectively right or wrong answers. Therein lies the fun - shocking your friends with your decision, defending your decision to your coworkers, and attempting to convince your family to change their minds.  No right or wrong answers can feel overwhelming and stressful to some and exciting and empowering to others. If no right or wrong answers feels overwhelming and stressful to you, remember the following…

• The answer that is right for you is wrong for someone else (and vice versa). Consider this - your friend purchases one outfit and you purchase another. Neither of you purchased the right outfit. You both purchased the outfit that fits you best, that you feel most comfortable and confident in. As you should!

• Only you hold the answer. Perhaps you are choosing between $500 Beyonce tickets and a roundtrip flight from New York to Paris. You choose Beyonce, and your friend chooses Paris. Great! Or maybe not so great. Maybe, your friend choosing Paris has you doubting Beyonce (never doubt the Queen B). Knowing yourself - your wants, needs, desires, values, etc. - allows you to make the best decision for you and to feel assured in yourself and your decisions.

Understanding financial trade-offs can help you to feel increasingly confident in your relationship to money, financial decision making, and money management. Ask yourself…

• Without judgment - what do I desire? 

• Without judgment - what is important to me? 

• Without judgment - what would I do if no one else knew the outcome?

The Trade-off Illusion |

“I’m the only one making trade-offs.”

You are not alone in making trade-offs. We all make trade-offs constantly. However, we oftentimes do not see the trade-offs that others are making. For example, you see your former partner on Instagram with a gorgeous new home while you are still renting. The envy quickly kicks in. “Why do they get to buy a home, and I am stuck in this apartment?” You ignore the trade-offs they have made - not affording a car due to the home purchase and therefore taking the bus two hours roundtrip to work for the foreseeable future, working a second part time job to afford the down payment, etc. They traded-off time, comfort, convenience, proximity, accessibility - the list goes on and on. Ask yourself…

• How can understanding the trade-offs I make help me to understand the financial trade-offs others are making? 

• How might someone else have made a different decision based off their priorities and values?

• How might I feel differently about myself if I saw and understood the trade-offs others were making?

5 Common Types of Trade-offs

Financial Trade-offs |

Super Bowl Tickets

or A New Moped?

Every choice has a cost. That is okay. The key is knowing that the choice has a cost and choosing the cost that you want to pay. When we spend money, we no longer have that money. We cannot put that money towards anything else. We have made the choice to give up other opportunities in exchange for this opportunity. An opportunity cost (only slightly different than trade-offs) is simply the next best thing you are giving up in exchange for something else. When considering financial trade-offs, ask yourself…

• What is the opportunity cost of this decision?

• Between my two best options, which most closely aligns with my values, goals and priorities?

Mental Health Trade-offs |

Taylor Swift or Safety and Security?

Sometimes, we are not deciding between one purchase and another purchase, rather we are choosing between one purchase and an investment in our financial and emotional well being. For example, you are considering purchasing $500 Taylor Swift tickets. Alternatively, you could pay down an additional $500 of your student loan debt. Some people hate living with debt. The thought of going to a Taylor Swift concert instead of paying down their student loan debt is horrifying. They know that they will sleep more soundly being $500 closer to debt freedom. On the other hand, some people know that the Taylor Swift concert is a once in an era (see what I did there?) opportunity and will cherish the memory forever. Again, there are no right or wrong answers and it is important to know the trade-off that you are making, so you can make the most informed decision.

• What is the cost of this purchase - both financial and emotional?

• What is the return of this purchase - both financial and emotional?

• Which cost is greater, and which return is greater?

• Is the cost worth the return?

Future Trade-offs |

Now or Later?

By choosing to make a purchase today, you may be sacrificing future opportunities. Most of us have long forgotten high school algebra, so a quick refresh - compound interest means that you are receiving interest on the money you initially invested as well as any previously accrued interest. Therefore, investing your money has a snowball effect over time.

Back to Beyonce - If you were to invest $500 into your retirement today instead of purchasing a $500 Beyonce ticket, you would have approximately $8,725 in thirty years. So the decision you are making is not between a $500 Beyonce ticket and $500 towards your retirement. The decision you are making is between a $500 Beyonce ticket today and $8,725 thirty years from now. If you think I am trying to convince you not to buy the Beyonce ticket, keep reading!

• Have fun with Grant Sabatier’s Future Value Calculator which calculates the future value of a purchase you make today.

• Think about your long term goals and how your decisions today impact your ability to achieve these goals.

Physical Health Trade-offs |

Video Game or Gym Membership?

Our health impacts us all day, every day. It impacts our ability to play with our grandchildren, to travel the world, and to something. Finances and our physical health are intertwined on a number of levels.

• According to Purdue University, financial stress can cause physical health problems including headaches, sleep loss, high blood pressure, digestive issues, etc. While working two jobs to mitigate financial anxiety may seem like the answer, it could actually contribute to health complications as you do not have time to care for your body - ultimately, increasing your healthcare expenses.

• Healthier options usually have higher associated costs. While walking through the grocery store, we are engaging in a number of health trade-offs - carrots and hummus or Flamin’ Hot Cheetos? Conventional or organic eggs? Healthcare and healthy living is arguably worthwhile for everyone. However, it is also incredibly expensive and is not an option for the vast majority of people.

The health-wealth trade-off is a vicious cycle. Finding a balance that works for you is crucial to caring for your body and your financial future.

• What free or low cost health options can I engage in?

• How does my relationship to my job impact my physical health?

• How does my physical health impact my relationship to my personal finances?

• Get involved in healthcare reform advocacy - there are so many organizations doing this important work!

Time Trade-offs |

The Most Scarce of Resources

Money is fluid. Constantly coming and going. Paycheck in. Rent out. Birthday check in. Oil change out. People have filed bankruptcy only to later recover and live a life of wealth. However, we cannot reverse time. We cannot buy ourselves more time. We cannot reclaim time. Time is finite. Time is the most scarce resource. 

• 24 hours in a day. Regardless of how much money you have, we all have 24 hours in a day. While Jeff Bezos and Elon Musk can buy anything they want, they cannot buy a 25th hour. Therefore, how you spend your day and time is meaningful. In some cases, the trade off we are considering is between time and money. Do you work overtime to earn overtime pay or read a bedtime story to your children? Do you purchase a non-stop flight or a flight with two lay overs to save money?

• Life is short. We all die. Jeff Bezos and Elon Musk may be able to buy themselves better healthcare, healthier food, etc., which could allow them to live longer. However, there is still a limit, and even the best healthcare in the world does not guarantee a change in outcome. They cannot add-to-cart ‘2 extra years of life’. Ask yourself…

  • How do I want to live my life?

  • How can I spend, earn, and save money in a way that supports the way I want to live my life?

A Very Important Note To Financial Optimizers

Some people deny themselves the opportunity to spend in order to save and invest more. Sometimes the opportunity cost of saving and investing more today is sacrificing life experiences. Life is meant to be lived. By choosing $8,724 in thirty years instead of a $500 Beyonce ticket today, you are actually choosing $8,724 in thirty years instead of a fun night with your best friend seeing your idol - a memory you will never forget and always look back on with a smile on your face! Every time you hear Partition you will immediately be transported back! Financial optimization is important and certainly has its place. However, financial optimization can often be over glorified and life optimization under-appreciated. If you are a financial optimizer…

• Instead of thinking about the optimal financial decision, consider the optimal emotional or experiential decision. 

• Read Die With Zero by Bill Perkins to understand more about experiential optimization.

• Read Financial Freedom by Grant Sabatier to understand more about the negative implications of financial optimization.

• Consider working with a Certified Financial Therapist to uncover your beliefs about money.