My Meaning Over Money podcast co-founder, Cole, recently built a new house. He and his wife are about to have their fourth child, and they ultimately decided to get more space. They are living a common reality that many find themselves in: A more expensive house x A much higher interest rate than the prior house = Uh Oh!!!
He and I talked about the inevitable and dramatic increase in their monthly house payment. When I asked him how he knew they could stomach the increase, he gave me a fantastic answer: We tested it! Yes, yes, yes! This is a brilliant approach, and a throwback to some coaching advice I gave them nearly a decade ago.
Whenever we're considering a large financial decision that will materially alter our monthly budget, it's hard to conceptualize how that change will actually impact our lives in a broader sense. Sure, we know what something will cost, but our monthly resources are finite. Therefore, for every dollar more we spend on something, that's one dollar less we have to spend on something else. This brings me to a tactic I often encourage people to use before any major financial decision: Test it before you live it.
Here's how it works. I'll use made-up numbers, since I don't want to haphazardly expose Cole's finances. Let's say your current house payment is approximately $2,000/month. You've had this payment for several years, and it feels "normal." You're thinking about moving, and the estimated monthly payment on your prospective purchase will be $3,000. You also estimate an additional $300/month of other added expenses.
What are you willing to give up to increase your overall housing cost by approximately $1,300?
Less saving?
Less investing?
Less travel?
Less dining out?
Less _____?
It's one thing to say it, but another to do it. Before pulling the trigger on such a major purchase, test it before you live it. Each month, you'll budget an additional $1,300 of expenses. It obviously won't go toward your contemplated major purchase, but it needs to go somewhere: savings, investing, etc. That way, it forces you to make difficult choices to account for this new $1,300 expense. What gets cut? Can you actually cut it? Does it feel terrible to cut it? You'll know soon enough. Try it this month, then try it next month. See how this new expenditure fits into your financial life.
My clients are about 50/50 on this. Half the time, they simply can't stomach the added cost. They may still want to make this big decision, but they recognize the broader cost is too much to stomach. Then, the other half of the time, the test it before you live it principle only strengthens their confidence to pull the trigger.
Test it before you live it. Give it a shot next time you're thinking about making a big financial decision!
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