Using First-Order Thinking to Visualize Spending Decisions

One of my favorite strategies for getting down to the core of something is to use a trick I call the “five why’s.”

Basically, I use this technique whenever I identify a problem of some kind in my life, or when I’m trying to dig into the core of an idea. I’ll take that problem or that idea I’m trying to understand and I’ll ask “why?” Then, I’ll take that answer and ask “why?” again. I’ll keep asking why until something interesting or valuable emerges; it usually takes five “why’s.”

Let me share my favorite example from the old article:

We often wind up with a large backup of laundry, then find ourselves doing several loads on a single weekend day.

Why? Our laundry routine doesn’t work.

Why? One big problem is that our laundry room is literally as far as possible in our home from our bedrooms, plus the laundry room is back in the corner near the guest bedroom. Out of sight, out of mind. As a result, we often don’t even think about the laundry until the evening, when we’re just about ready for bed. Then, in the morning rush, we walk right by it.

Why? It’s more convenient to just ignore it in the morning and we’re too tired to deal with it in the evening.

A solution presents itself. Fill up a laundry basket in our bedroom in the evening and place it right in front of the door so that we’ll trip over it in the morning if we don’t deal with it. Then, when we go downstairs in the morning, we carry the basket down and we’re pretty much ready to drop in a load of laundry on our way out the door. I’ve started doing this and it actually really works.

The five why’s — in this case, it was just three, but you get the idea — actually led me toward figuring out a more efficient pattern for doing laundry, one that’s more in line with the energy I have throughout the day. I will often come downstairs in the morning with a laundry basket of dirty clothes in hand which goes straight into the washer.

What I want to talk about today is another similar tool that I use in situations that are almost the opposite of this situation, where I have a core idea and I’m trying to figure out the impact of that idea. Imagine that I’ve actually got the answer to the five why’s, but I want to move in reverse back up to the problems and benefits it might cause in my daily life.

I simply ask “and then what?” over and over again, usually about five times.

Let’s look at a clear example of “and then what?”

Let’s say I’m considering a major life change of some kind, like moving to a new house.

So, I start off with the idea of a new house. What are some really obvious things that will result if I buy a new house like what I want?

We’ll have a bigger kitchen.
We’ll have at least one guest bedroom.
We’ll have space out back to build a small exercise shed.
We’ll have a bigger yard.
We’ll have higher property taxes and insurance.
We’ll be a little closer to where Sarah works.

Some of those are positives and some of them are negatives.

For each of those, though, I’m going to ask “and then what?” Let’s start with having a bigger kitchen. Okay, I have a bigger kitchen, then what?

I’ll likely cook more meals at home.
We’ll probably refresh a lot of the items that are in the kitchen.
It’ll take more time to keep it clean.

For each of those, I’ll ask something like:

“Okay, we’ll likely cook more meals at home, then what?”

The kitchen will be messy more often.
We’ll probably spend less on food.
We’ll probably make more interesting meals.

Again, I can ask the “and then what?” question about some of these.

What I’m actually digging for are specific things that actually matter to me. What spending changes will this new house cause? What time use changes will this new house cause? How will our daily routines and activities be changed? What will be the actual quality of life improvements? What are the actual quality of life drawbacks?

The more answers I have to those questions, the more clear the positives and negatives of having a new house become. I can start assessing a lot of the conclusions and then make a much better decision regarding a big choice like that. For me, it usually becomes clear after a while whether the answers add up to a positive or a negative.

So, for us, although we used to dream of having a big house in the country, the “and then what?” exercise actually led us to realize that it would have more drawbacks than benefits, so, for now, we’re not really considering that move anymore.

I do this exact same exercise when evaluating a new major goal that I’m thinking about. I do this to try to weed out some of the potential pitfalls of a goal in advance so I can decide if I really want to jump on board with that goal or if there are problems with the goal that I can fix in the planning stages to increase my chances of success.

For example, my biggest personal goal that I’m looking at right now is achieving a black belt in taekwondo. Figuring out how I can get there, to be fit and flexible enough to be able to excel at tests and to know enough techniques, means that I developed a daily training plan to get there, and repeatedly asking “and then what?” helped me to revise that daily training plan to the point where it made a lot more sense in terms of something I can stick with.

The “and then what?” question is just a model for first order and second order thinking — and beyond.

The real secret behind the “and then what?” question is that it nudges you to go beyond first order thinking when making a decision or a plan.

Okay, so what’s first order thinking? I like the words of Noah Pepper when describing this:

First order thinking is the process of considering the intended and perhaps obvious implications of a business decision or policy change.

Since first order thinking expands to all decisions and changes a person might make, I’d reword it like this for our purposes:

First order thinking is the process of considering the intended and perhaps obvious implications of a personal decision or plan.

Great, so what’s second order thinking? Again, in Noah Pepper’s words:

Second order thinking is the process of tracing down and unraveling the implications of those first order impacts.

And, thus, third order thinking is the process of tracing down and unraveling the implications of those second order impacts, and fourth order does the same to third order, and so on.

So, in the above example with our consideration of building a new house, the initial observations like having a bigger kitchen and having a guest bedroom were examples of first order thinking, and then when we delved into the bigger kitchen, we were engaging in second order thinking, and when we delved into the ramifications of more meals at home, we were engaging in third order thinking. You can keep going from there as deep as you want.

For me, I find that I stop when it’s clear that the firm conclusions I’m reaching are pointing me toward a particular plan or a particular decision. If I’m still unsure, I keep digging deeper with more “and then what?” questions.

The decisions are like a giant tree.

One thing a person can’t help but notice here is that you’re creating a giant tree of thought. If you list out the first order thoughts about a particular decision or plan, you’re looking at the big thick branches coming off the trunk of a tree. However, the second order thoughts are like thinner branches coming off of those thick branches, and the third order thoughts are like even thinner branches, and the fourth order thoughts are like twigs. It’s a giant tree!

If you have ten first order thoughts, and each first order thought gives you five second order thoughts to think about, and each second order thought gives you three third order thoughts to think about, and each third order thought gives you three fourth order thoughts… right there, you have 450 things to consider. That’s… overwhelming.

So what value does this really have? I’d point toward three key things.

First, almost always, this process makes my decision or plan better. It will nudge me toward the increasingly obvious best decision when making a choice or it will help me continually refine a plan such that it’s more likely to succeed.

Second, I usually only delve that deep on major decisions or plans. I delve down to fourth and fifth level stuff only with really big decisions. Should we move? Should I switch careers? What about this big multi-year goal I’m considering adopting? I usually do this on paper and write all of this down, page after page after page, just to make sure I’m committing to something worth committing to and something that’s optimized for the best chance of success.

Third, I will sometimes delve this deep on smaller decisions and plans, but usually when it’s something that will come up again with some regularity. For example, I’ll go this deep with things like weekly routines. There are a lot of regular tasks in my life for which I have checklists, and I’ll definitely go this deep when writing such a checklist, because I want that checklist to be correct. I’ll sometimes go fairly deep on small decisions that seem off to me.

Outside of that, I don’t go that deep with decisions, except for giving some depth to decisions that cost money and particularly repeatable ones. Most decisions for me are instantaneous, but they often rest on having gone a little deeper at some point in the past. For example, I’ll give some real thought, going two or three levels deep, about something like which kind of milk to buy at the store, but then I can just draw on that thinking to make a reliably good snap decision next time, and it’s worth it because it’s a decision I’ll be making over and over again.

In other words, the tree of the decision is only as big as you want it to be. When a clearly good choice becomes apparent, it’s time to go with it rather than endlessly going down tinier and tinier branches. Only do that with the biggest decisions in your life, and even in those cases, I stop with just five levels.

Applying “and then what?” to real financial decisions is easier than it seems.

Let’s look at “and then what?” questioning as applied to a real financial decision.

You have a 401(k) plan at work. When you first started, you contributed a tiny amount — say, 2%. After a year or two, you started reading more about personal finance and now you’re thinking you should bump that up to 5%, as your employer matches your first 5% of contributions dollar for dollar.

So, you might initially think of the following benefits and drawbacks:

  • You’ll have a lot more money for retirement
  • You’ll have a little smaller paycheck

Let’s apply the “and then what?” question.

You’ll have a lot more money for retirement, and then what?

  • Retirement will be a lot more comfortable when you get there
  • You’ll worry less about retirement as you approach it
  • You could potentially use that money for other things in a real emergency.

You’ll have a little smaller paycheck, and then what?

  • You might have to cut down on some of your treats
  • You might feel a little less financial flexibility

Those are the second order issues. Let’s go through the third order ones, too.

Retirement might be a lot more comfortable when you get there, and then what?

  • You can actually do some things in retirement that you’ve always dreamed of doing
  • You will have a much easier time visiting and spending time with any children and grandchildren you may have
  • You won’t have to live a life of poverty in retirement

You’ll worry less about retirement as you approach it, and then what?

  • You won’t have to make huge last minute contributions to retirement to try to catch up
  • Your life during your 50s and 60s will be less stressful
  • You can use the resources you might have had to throw into last minute contributions for other things that are important to you

You could potentially use that saved money in your 401(k) in an emergency, and then what?

  • You’d survive that emergency a lot more efficiently.
  • However, you’d then be back to having less in retirement than desired, so you’d be making catch-up payments
  • Having that option available, however, reduces worries about the future even a little more

You might have to cut down on some of your treats in the short term, and then what?

  • You’ll probably end up missing some of the things you cut and not some of the others
  • You’ll likely end up adjusting a little
  • This might make you feel unhappy for a while

You might have a little less financial flexibility, and then what?

  • You may have to learn how to be more frugal in some areas of life
  • Some of those things might be almost invisible, while others will be frustrating
  • You might feel unhappy for a while as you figure it out

So, let’s tie all of this together.

Some of the downsides of contributing more to retirement would include cutting out a few of your treats, some of which you might miss a little (but others you won’t). You also may have to try being more frugal in some areas of life, like maybe cutting your cable or eating at home a little more. These changes might make you feel unhappy for a little while as you adjust to minor lifestyle deflation.

On the other hand, contributing more now means that you’ll avoid a lot of stress later in your career because you won’t have to make big last-minute contributions to retirement. You’ll give yourself financial flexibility then, and even more flexibility when you are retired. You’ll be able to have the flexibility to take on new adventures without financial worry and not have to face restricted options due to poverty.

Digging into third order (and deeper) elements helps a person see what the real consequences are for their choices, and when you look at it from this lens, bumping up your retirement a little so that you’re still comfortable in your current life while bringing all of those benefits into your future seems like an obvious choice.

If you don’t look deeper, it’s easier to get caught up on that slightly smaller paycheck, but while it looks like a big issue with first order thinking, it looks a lot smaller when you dig in a few layers. The reverse is true with retirement savings — you begin to see that having money in the bank will benefit you much sooner because you’ll avoid stress later in your career thanks to those savings now.

Of course, if you’re already saving a ton, you might do this same experiment and conclude that more savings won’t really bring many benefits, but it will add significantly to today’s hardships.

“And then what?” is helpful throughout your life, at any level

The more you apply “and then what?” to the important decisions in your life, the better your decisions will be and the stronger your plans will be. The key, however, is to avoid going too deep with it, because “and then what?” can lead you to analysis paralysis where you keep evaluating.

Stop regularly and look at what you’ve figured out. You may just realize that what you’ve learned is strongly pointing you toward a decision, and when that’s clear after digging through a few layers of this, you’re virtually always looking at the right answer, so just go with it.

Ask “and then what?” Ask it again. Listen to the answers. They’ll usually tell you what you should be doing.

Good luck!

Trent Hamm
Trent Hamm
Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

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