Small choices have a big impact on your finances
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Through Sam farrington
Read more about Sam on NerdWallet’s Ask an advisor
Why do some people get rich and others go broke? In many cases, it is about choice.
To see the impact that choices can have on your life, let’s take a look at three fictional friends: Arthur, Brian, and Charlie. They grew up together in families of the same socio-economic status. Now 35 and married, they all have average health, income and debt, but their bottom line will not be the same.
Arthur is happy with the status quo and believes that nothing needs to change in his life. He’s just doing what he’s always done.
It contributes 3% to its 401 (k), enough to get his employer match. He knows he should save more, but he thinks he will when he earns more money.
He’s got student loan debt, a car payment, a mortgage and a credit card balance of approximately $ 5,000. He is able to make these payments every month, so he doesn’t worry about the debt. He thinks that if the bank is willing to lend him money, he is in good financial shape.
Life is good in Brian’s world. Money is tight, but it is for the good of the family.
He just bought a brand new TV, which his whole family loves. They watch it morning and night as they relax in their comfortable new recliners in their brand new home. (Brian believed they needed more space for their growing family.) They also have a new car, new appliances, and great vacations every year.
Her family is in debt as usual: student loans; a car payment; a new larger mortgage payment; and a credit card. He records his vacation expenses on his credit card, but still thinks he will pay it off in a month or two. He thinks it makes good tax sense to charge for purchases in order to earn as many “free miles” as possible – and that to carry credit card debt improve his credit rating.
Brian recently changed jobs. His 401 (k) was not doing very well, so he chose not to contribute anything to his new job, even though his employer is 3%. Instead, he cashed in his 401 (k) to buy his new TV and new furniture.
Like Arthur and Brian, Charlie and his family have student loans, a car payment, a mortgage, and a credit card. But it bothers Charlie. He feels like most of their income comes out in debt repayment, and he dreams of how his family will have more freedom without debt. To that end, he’s making small changes to strengthen their financial base.
Charlie reads about getting out of debt. He develops a plan to pay off all non-mortgage debt in three years and be 100% debt free, including mortgage, within eight years. Him and his wife too reduce their budget. For example, they stop going out to dinner once a week and Charlie starts bringing his lunch to work every day instead of buying it.
He also devotes an hour or two every weekday evening, after the kids are in bed, to earn extra money. With the extra income, Charlie open a Roth IRA and automatically contributes a little over $ 200 every two weeks so that he can max every year. This is on top of the 3% of his income he saves in his 401 (k), which his employer matches.
>> MORE: How to open a Roth IRA
He chooses to fill his mind with positive and inspiring information and new ideas. He begins to read more and listen to educational books and podcasts on his commute.
Charlie’s Four Simple Choices – pay off the debt, create more income, contribute to a Roth IRA, and nurture a positive attitude – it may not sound so impressive, but it will dramatically affect the well-being of your family in the long run.
Six months later
Six months go by and the three friends haven’t made much progress.
Arthur continues to connect without anything changing.
Brian still loves his new TV and is planning the next family vacation to Hawaii – they deserve a treat! He didn’t pay for his last vacation because his family wanted new granite countertops for their kitchen. And he still hasn’t signed up for his 401 (k).
Charlie keeps up with his lifestyle changes.
If you counted the net worth and investment accounts of the three friends, they would be roughly the same as before. No one is much closer to financial freedom.
Three years later
After three years, the results of Arthur, Brian and Charlie’s choices are really starting to be felt.
Arthur is always average. He’s in no rush to pay off his debt, but has accumulated around $ 10,000 in his 401 (k). Her net worth is around $ 0, where she has been for years.
Brian seems to be doing great, but he feels broke. His credit card is nearly depleted and he still hasn’t started contributing to his 401 (k). The market has been going up over the past few years and it really wants to invest, but it doesn’t feel like it can bring home less money each month and make ends meet.
And although they’re about to pay for one of their cars, Brian and his wife think they need a new one. Their neighbors, the Joneses, just got a new premium SUV, which makes Brian’s car look like junk.
Their debt now totals more than the value of what they own, which means they have negative net worth. Brian is backing down financially: he owes more money than he did three years ago and because he is not invest in his 401 (k), it did not take advantage of compound growth.
Charlie, on the other hand, is off to a fabulous start. Like Arthur, he racked up around $ 10,000 in his 401 (k). He also has nearly $ 18,000 in his Roth IRA due to the growth of the stock market.
>> MORE: The Best Roth IRA Account Providers
Better yet, Charlie’s family just paid off the last of their non-mortgage debts. They are about to pay off their mortgage in five years, and their equity is now around $ 100,000.
We all know people who fall into these three categories. There is average Arthur, who can never move forward but takes no action to change his situation.
Broke Brian is a little harder to spot because he seems to be doing well, but he’s never satisfied with what he already has. His financial problems only become apparent when he repossesses his car or has to file for bankruptcy.
Champion Charlie is perhaps the hardest to spot because he’s not flashy and doesn’t need to impress anyone. His main goal is financial freedom to create a better life for him and his family. He hopes to move in a positive direction by acting on a few simple choices.
If Arthur and Brian don’t start making better choices, even small changes, they won’t be able to achieve financial freedom. And if we were to check in three years, they would be even further behind.
One decision at a time
What these fictional characters remind us of is that wealth is built one decision at a time – and the only person who can make those decisions is you. You may have a financial advisor or mentor pushing you and acting as an accountability partner, but it’s up to you to lead your own journey.
This article also appears on Nasdaq.