Interdependent Financial Decisions

Interdependent Financial Decisions

Each category of our finances is interdependent, not independent of one another. This means that every decision we make in one category really does impact the other categories, whether or not we realize it. Examples of Financial Interdependence How? If I were at fault in a serious automobile accident and did not have adequate insurance, I may be required to liquidate a significant amount of my investments to satisfy a judgment. The court may also decide to garnish my wages for several years, which might require me to wait much longer to retire or prohibit me from ever retiring. It may also reduce my current standard of living or increase my debt. So what does car insurance, which on the surface appears to be only a protection decision, have to do with my assets, liabilities, and cash flow? Everything! Let’s say I’m the employee of a large corporation and I’m asking my HR director whether or not I should sign up for the company’s 401(k) retirement plan. The HR director probably would not even be allowed to ask about my mortgage payment, liquid savings, credit card debt, or taxes. However, would these questions be relevant to my decision whether to invest in a 401(k) and how much to contribute? Absolutely. What if I only have $1,000 in liquid savings and my monthly mortgage payment is 30% of my gross monthly income? I may be better off putting the money in a liquid savings account to cover unexpected emergencies or unemployment, because I may not be able access my 401(k) for these purposes without significant penalties. What if I have...