The Problem with “Long-Term” Financial Thinking

Last summer I wrote an article including the benefits of paying off low interest loans titled, You Should Pay Off That 3% Home Mortgage. I was surprised that many people totally missed the main point of the article; we must not have tunnel vision when making decisions.

Many of us make decisions using only one factor. When we do this, we often make the wrong decision for our circumstances. We need to consider all aspects and ramifications of a decision before coming to a conclusion. Isn’t that what informed consent is all about?

In the case of my article, many people were stuck on this one factor, “Which decision will lead to a greater amount in my bank account in 30 years.” All other important factors were disregarded, even when they were pointed out as being significant in the situation presented!

What would life be like if our only consideration in making decisions was ‘what would give me the largest savings account balance thirty years from now.’  What a joke our lives would become if this was our only concern.

We could never buy a car

Automobiles are one of our largest lifetime expenses. If a person purchased a $30,000 car every five years and financed or leased it (Because everyone knows you have more money in the future if you use other people’s money and car loans are always less interest than we could get in the stock market), here is an estimate of what it would look like.

Perpetual car payment/lease of $500/month = $6,000 per year

Insurance = $600 per year

Upkeep = $300 per year

Gas = $1,920 per year

Total = $8,820 per year

The IRS says it costs $0.655 a mile to use a car. At 12,000 miles a year that comes to $7,860.

Splitting the difference, it costs about $8,300 per year to use a car.

Most families of four have two cars so an average family’s car expense is about $16,600 per year.

In Eugene, Oregon, the second largest city in my state, an unlimited public transportation pass runs $540 a year for adults, $270 a year for kids and free to those over age 65.

In order for a family of four to use public transportation they would need two adult and two child passes, which total $1,620 per year.

Owning a car is almost exactly ten times more expensive than using public transportation.

Since we are smart long-term thinkers, and always make the decision that creates the largest bank account in 30 years, we would pick using public transportation over using automobiles because the difference between these choices is $14,980 per year. Investing that saved money in the market with an 8% return would yield an account balance of $1,832,741 in thirty years. It’s a no brainer!!! Only an idiot would buy a car instead of using public transportation!

We could never go on a vacation

Last year the average physician income was $352,000. So, the average income is $6,769 per week. My family took modest vacations by physician standards which ran about $3,000 a week for the family. This would probably be more in today’s dollars.

The average physician contract allows 5-7 weeks of vacation each year. If we skip our vacation and continue to produce an income for those weeks, we would earn an additional $6,769 for each week of vacation we didn’t take. Using the average of six weeks a year of vacation, that comes to an additional $6,769 x 6 = $40,614 of income for the year. Let’s say 40% of our income goes to taxes, that leaves us with an additional $24,368 in our pocket each year. When we add the $3,000 a week we didn’t spend traveling, we have another $18,000. For a total of $42,368 a year we can add to our bank account. 

So, if we skip our vacations, and we put the $42,368 each year into the market getting an 8% return, in 30 years we would have an extra $5,183,550!!! Skipping vacations is a no brainer for us long-term thinkers! Only an idiot would take vacations at the lifetime expense of $5M! 

The Problem with long-term tunnel vision

I’m sure you can see how silly it is to make decisions with tunnel vision. There is more to making a good decision than which choice will accumulate the most money over the next 30 years.  Tunnel vision is usually dangerous.

We also need to consider the convenience a car creates. That extra cost buys us time. Having a car eliminates the need to walk to the bus stop, wait for the bus, then walk from the second bus stop to our destination. That flexibility and convenience is worth a lot of money, yet there is no way to put a dollar figure to it.

What about the power of now? If while on trauma call for the hospital I got called to see a trauma victim, but I had to wait for the bus, how long would I keep my job? They need me at the hospital right now, not based on the bus schedule. 

What about the safety factor? How many women don’t feel safe riding the bus at 11pm? Or walking home from the bus stop in the dark? How much is that safety factor worth? There is no way to put a dollar figure on feeling safe.

What about the need for rest and recovery? Those two things are ignored if one gets long-term tunnel vision. Skipping all vacations because we will have more money in the bank is a path to a burnout disaster. It is very important to take time off from earning money to recover so we can keep on earning money.

We could take the vacation issue farther by saying we will work seven days a week to have even more money in 30 years. It is interesting that none of the people who suggest we should never pay off a 3% loan because we will have more money if we keep the loan, are not also working seven days a week because it will also make them more money. If doing what makes the most money is always best, then working less than seven days a week would be incongruent thinking.

I don’t know how many times I have heard the misguided argument that goes something like this: “The only advantage to paying off a 3% mortgage is to feel good about being debt free. Feelings are not a part of financial decisions. If you want to feel better, get a puppy, don’t pay off your 3% loan. Put your money in the stock market instead. That’s a no brainer!”

Why don’t they use the same logic and work every night and weekend, never taking a vacation or owning a car. 

When we have a decision to make, such as paying off a 3% mortgage early, please remember to weigh all the factors you need to consider, not just one. How will our monthly cash flow be affected? What will it do to our budget? Which choice will let us sleep better at night? Which choice lessens our risk of bankruptcy?  How long will we live in this house? How will it affect our retirement date? And many more issues. Weigh everything and make all financial discussions with your spouse. 

As physicians we understand the concept of informed consent. I would never let a person make the decision on their healthcare based only on the single factor of whether they will lose their hair. I want them to weigh all the issues the decision touches on. After looking at all the pros and cons, all the risks and benefits, then they can make an informed decision.

Think about informed consent the next time you tell yourself “But I’ll make more money if……”

Don’t get stuck in long-term return tunnel vision. Your bank balance in 30 years is only one factor, and it is not likely to be the most important factor. 

If you are on the fence about paying off debt, check out The Doctors Guide to Eliminating Debt and learn more things to consider when making these financial decisions. 

Share this article:

1 thought on “The Problem with “Long-Term” Financial Thinking”

Leave a Comment