If you read financial blogs or news sites, you’re no doubt reminded often that “personal finance is personal.” But often, those writers then go on to talk about the “right” decision or the “best” option, as though there is one singular financial truth.
There is not.
And anyone who tells you differently is selling something.
Once upon a time, I knew someone who was prepared to pay off their mortgage. They had had a windfall plus an income boost, and realized they could knock out the mortgage in under a year, and promptly ran to tell their financial advisor about it. That advisor took one look at the numbers and said, “You’d be so much better off just continuing to pay the mortgage on time, and instead invest that money each month.” So the mortgage payoff plan was called off, and this person went down the “invest more” path… at first. Human nature being what it is, it became increasingly hard to actually make that investment each month, what with the temptation of all the places in the world one could travel to on that money instead. A few years went by, and it was time to sell the house, but thanks to calling off the mortgage payoff plan, coupled with not following through on the investment plan, this person essentially broke even at sale time, walking away with a few thousand dollars, and not the full value of the property.
Certainly there are several things we could point to as failures in that story, especially not putting a system in place to invest automatically (something the financial advisor offered no help on), but my point in telling it is: Simply because the numbers say one thing does not make that the “right” answer. Because there is no universal right answer when it comes to our money.
Sometimes the “personal finance is personal” line hints at an idea that there IS a right answer but you’re allowed to not follow it, because we’re all imperfect beings with our own baggage, forced to own up to our imperfections. I disagree.
That universal right answer doesn’t even exist. But acknowledging that is incredibly freeing, and it’s about time we did so!
Psst! New York area friends! Mark and I are having a meetup Wednesday, December 5, at 7 PM in Midtown Manhattan, location TBA next week. Join us!
Emotions and Money Are Not Opposites
Nearly any time I end up in a group of financial independence-focused people, someone will say something like, “I know that was the emotional decision, not the best money decision,” often referring to something like choosing to pay off the mortgage instead of investing more.
And I nearly always jump in and remind them that emotional is not the same as irrational. An emotional decision can be an entirely rational one, and moreover, why do we carry around this persistent belief that emotions are not worth making decisions around, especially because we consistently demonstrate that we don’t even live by that rule? Marriage, by far the biggest financial decision many of us will ever make, sure had better be based on love, and not based solely on who is the best financial partner. And charitable giving is generally spurred by compassion and empathy, not strictly a focus on return on investment (because you, as a donor, will generally not directly see one). Examples of emotional money decision-making abound in our lives, and yet the societal narrative is that that’s a lesser way to make choices.
It’s not, so long as those emotional decisions are also rational.
Which is entirely possible, because emotions and money are not polar opposites.
Guaranteed Vs. Probable Returns
One of the best illustrations of the “right answer” myth, and also the emotions and money as opposites myth, is any discussion around a decision based on guaranteed vs. probable return. Let’s go back to the early mortgage payoff decision, because that’s a big and common one.
Plenty of smart people will tell you that you’ll generally come out ahead investing the money you would have spent paying down the mortgage, because the markets these days generally yield higher returns than mortgage interest rates. They are right generally about those returns, but during any given period of time, you could also do worse investing vs. paying off the mortgage early, because we can’t predict how the markets will do. The best we can do is make educated guesses.
Plenty of smart people will also tell you that you’re better off paying off the mortgage early, because that’s a guaranteed return on your investment of your mortgage interest rate, which is likely to be higher than any other guaranteed return out there. Which is true. But again, during any given period of time, you could do worse paying off your mortgage vs. investing that money.
So who is right? Neither is.
Which means that both are. Because both options are great ones to have, and being in the position to make either one means you’re already way ahead of most people. And if you want guaranteed returns, mortgage payoff is a great choice, while those happy to chase probable returns will find more comfort with a plan to invest that money instead.
Everyone Needs Something Different Out of Their Plan
Another fact that renders supposed financial “truth” worthless is that not only are we not all seeking the same things financially, but we also don’t need the same things out of our financial plans. A more conservative early retirement plan may not even need massive market growth. (Hi.) And so listening to someone who tells you that you must have more than 80 percent or more of your assets in stocks, while that might be good advice for others, might be terrible advice for you. (And it might stress you out unduly, which is why it matters.)
Not just the best answer for you, but the actual right, true answer for you should always be based on what you need to get out of the financial machine that you’re building, and not just based on what experts say you’re supposed to get out of it.
Everyone Values Different Things
The absence of financial truth extends equally to how we spend our money. The early retirement community can be especially guilty of professing to know the right answer about what is acceptable to spend money on, but that – again – is not the truth, because there isn’t a right way to spend your money that’s universal, or even a “right way for most people with approved list of alternatives.”
We know someone who wants to pursue financial independence, but also really loves driving a fast car. To this person, that felt like a disqualifier, because surely FIers are only “allowed” to ride a bike or drive a car that’s at least a decade old, right? Nope. If you value a particular car as an essential component of your happiness, then just budget around that and find other places to cut. No need to explain your decision to anyone.
The Value of Peace of Mind
The biggest component of financial planning that I see consistently undervalued is peace of mind. Which makes sense on one level, because it’s incredibly hard to put a price tag on. But it’s worth a ton. And making a decision because of the peace of mind it will provide you is just as valid as any other metric you might use to make a decision, and every bit as valid as any “logical” approach. (Logical in quotes because very often, so-called logical decisions are just emotional decisions propped up by a lot of rationalization. When there’s no need to prop up the decision at all. It’s fine to place value on our emotions and to assert that affirmatively.)
Paying off our mortgage early was 100 percent a peace of mind decision, and while I can share plenty of other reasons why I’ll always argue it was a good choice (guaranteed return, hedge against sequence of returns risk, loss of tax benefit from mortgage interest once our income plummeted post-retirement and we stopped itemizing, etc.), it’s silly to try to justify it as both focused on peace of mind and rational when peace of mind is itself a plenty rational explanation.
You’re allowed to make choices because those choices will let you sleep better at night. That’s as good a reason as any!
Best on Paper Vs. Best for You
As the story I began with – the person who could have paid off a mortgage but didn’t, based on financial advice, and ended up worse off for it – illustrates, just because something is the “right” choice on paper doesn’t mean it’s the right choice for you. (I’d of course argue that it’s not even necessarily the right choice on paper if it doesn’t also account for human nature, market uncertainty and a person’s specific goals.)
So your job as a person who cares about your money is to educate yourself, but to do so always remembering that there is zero unbiased advice out there. There is zero advice that’s right for everyone, or right for every situation, or true 100 percent of the time. None at all. Even if you hear the same things over and over again, that doesn’t make them any more universally true or right, except perhaps that truism about death and taxes. (But even that line, of not entirely settled origin, is about how nothing is certain.)
For those of us seeking an alternate path in life, that’s great news! It means we’re truly free to craft our lives and money as we see fit, not just according to established financial doctrine, or according to the “approved list” of expenses that certain frugal folks have deemed acceptable.
It’s your life. And your money. And you owe no one else any explanations.
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