Optimism is generally a good thing. It’s good to look toward the future with hope and confidence. Research shows that optimists tend to be happier and live longer than pessimists. Optimists are healthier and deal with adversity better than their pessimistic counterparts. That’s all great news but unfortunately, being too optimistic can be detrimental to your finances. How can something so good be bad?
When you’re optimistic, you tend to think that things will go your way, that you’ll be able to do anything you set your mind to, and that you’ll be able to weather any changes or negative events with style. And that may be. But it often isn’t. Optimism goes wrong when it leads you to buy things you won’t use or stick with. You may start out with the best of intentions, but if life or your true nature gets in the way, you’re stuck making payments or mourning money spent on things that you just can’t use. Here are some examples.
You start off with the best of intentions. You’re going to exercise five days a week and get in shape so you sign up for a yearlong membership. You know you can do it. But then you have to work overtime for a few days, the kids get sick, or you get hurt and you stop going for a while. Then a while turns into weeks and months. Your optimistic start cost you a full year’s membership fee and you only got two months out of it.
Going Back to School
Getting a degree will help your career and propel you forward, so you decide to go back to school. After getting accepted and tackling the first semester or two, you realize this isn’t what you want. The program isn’t a good fit, or it’s harder than you thought it would be. So you drop out, but now you’re out the money for books, tuition, and application fees.
Buying a Vacation Home or RV
You know that vacations will relax you and bring your family together, so more of a good thing will be great. This is a lifestyle you want to embrace. You go out and buy that timeshare, vacation home, or RV with the best intentions of vacationing frequently, but unfortunately life intervenes again. A job is lost and making the payments gets harder. You get a promotion at work which means more money, but less vacation time. The destination in which you own the timeshare or vacation home goes downhill. Or you decide that you really are a workaholic and vacationing isn’t as much fun as you thought it would be. Either way, you’re out big money.
Much like gym memberships, many people believe that they’ll have plenty of free time and energy to pursue a new hobby (or hobbies). That is until they get busy doing other things or they discover that they don’t enjoy it much, after all. Unfortunately, fueled by optimism, they bought too much equipment or too many supplies and now that money is gone.
Saving for Retirement
You really don’t think this can ever be a bad thing, but if you commit to saving more than you can really afford, you can get into trouble. If, in a fit of optimistic joy, you decide that you can contribute 15% to your 401K for the year, you may be in trouble if it turns out that you aimed too high. After a few months or if something bad happens, you may find yourself having to really cut your expenses to keep up with the contributions. Even if you can change your allocations mid-year to get you back to a more realistic level, that money you’ve already saved is all but untouchable unless you’re willing to pay taxes and penalties.
Some people begin a diet by purchasing clothes in the size they wish to be. It’s supposed to serve as motivation but given that most diets fail, those clothes are likely to sit unused in your closet for a while and will likely be out of style if you ever do reach the desired size.
The first solution to these problems is to temper your optimism with a dose of reality and honesty. Sure, you want to live your life a certain way, or save a certain amount of money, and your optimistic self tells you that you can. But be honest with yourself. Do you have enough free time to do whatever it is you want to do? Is it something you really want to do, or are you doing it because someone else said you should? Does your budget really allow for this activity or purchase, or are things so tight that you shouldn’t spend the money? Are you sure that you’ll enjoy the activity or lifestyle, or (like the workaholic who tries to vacation) do you secretly know that you’ll hate it? Think long and hard before you give into your optimism and agree to spend a lot of money.
The other answer is to start small. Don’t sign a long term contract or agree to payments unless you have not other choice. Pay monthly at the gym until you know you’ll stick with it. Take a few community college classes before committing to a full degree program. Pay for your vacations a la carte until you know that frequent vacations are something you can afford and enjoy. Don’t sink big money into a hobby until you’ve stuck with it for a while. Try things out slowly and don’t commit big money until you are sure.
Optimism is a wonderful thing to have. Just don’t let it lead you to spend more money than you can realistically afford. Before you jump into something, step back and think about how you can do this activity for less, or at least engage in it on a trial basis until you’re sure it’s what you want. Make sure your budget can withstand your optimistic nature before committing your money.
(photo courtesy of Loozrboy)