Family Economics

My idea of family economics is complex. Making financial decisions is not as simple as following one or two rules that apply to everyone and then sitting back and letting the financial success roll in. The most broadly applicable rule is to spend less than you earn and even that has exceptions in the short-term.

More direct questions, on the other hand, are not as simple to answer: Which car should I buy? Should I spend with a credit card, a debit card, or cash? How much house can I afford? And so on and so on. Each one of these questions can really only be answered by the family it applies to. Someone may be able to give them tips, but they cannot reasonably tell them, "you should, without a doubt, buy that house."

When buying a car, for example, should you get the luxury brand or not? Most likely not. There are typically additional features on the luxury brand over a regular brand, but paying an extra $10k to $20k for those few comforts is not worth it to most people - at least its not to me. $10k is a lot of money to me. I can think of a million better things to do with that money then get leather seats, an in-dash gps unit, and a fancy logo. However, I could see that if I had a LOT of money and $20k was small potatoes to me that I would willingly pay $20k for a little extra. Also, if I drove my car for hours everyday those extras would be more valuable.

The point of thinking about family economics is to generally understand the implications of a decision across all financial areas of your life. By paying $10k more for a car, where do I take that money from in my spending - assuming I can afford it at all. People giving you specific advice like, "buy a honda civic," likely aren't taking your specific needs and constraints into consideration.

In order to invest successfully, you have to have a good, big picture understanding of your finances. What ends up happening when you don't understand your family economics is you have huge holes in your finances and, as a result, you don't have enough money to invest properly.

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