One of the ideas I learn from I Will Teach You To Be Rich (my review) is the importance of focusing on the big wins. Focusing on the big wins means focusing on things that make the most difference. Instead of spreading your effort on many different things, you should focus only on things that give you the most return.
In personal finance, one way to apply it is by focusing on the big expenses (like the interest you pay for your mortgage) instead of the small ones (like the three-dollar latte). Many people do the opposite by focusing on the small expenses instead of the big ones. As a result, they lose money more than they save.
But why don’t people naturally focus on the big wins? Isn’t it clear that we should focus on things that make the most difference?
Unfortunately, that’s not case. One reason is that the big wins are often not obvious. You can’t see them right away. You can immediately see that you save three dollars by not buying latte, but the amount you save on mortgage interest can’t be seen immediately. You can only see it by looking at the big picture and thinking long term.
That’s why it’s important to see the big picture when it comes to finding big wins. See how things will be in ten or twenty years. Think long term. What seems like a good deal in the short term might actually be bad in the long term. On the other hand, things that don’t give you immediate return in the short term might give you great return in the long term.
One more important thing to keep in mind is that not only should you identify big wins to get them, but also you should identify big losses to avoid them. If you focus only on the wins then there is a danger that one big loss could wipe them out. You need to be aware of potential losses as well so that you can avoid them before they hit you.
I learned this from personal experience. A few years ago, I went overseas with my family. Since I’m a book lover, I was happy to find used book stores that sell good books at discounted prices. So I bought many books. Only at the airport was I aware that all those books made my bag overweight. I needed to pay a hefty overweight fee that wiped all the savings I made from the discounted books. I loss money, in fact.
So don’t forget to look at both sides of the coin.
Photo by BombDog