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.”
Related post: Aligning Your Spending with Your Values Vs. What You Value
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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Categories: we've learned
Yep, so true. I just had a post called “Why Your Way Is The Best Way” about this exact point. If you can get to FI and also enjoy expensive SUVs because you like them, well you’re still doing better than most. By far.
When to take Social Security is another good example. All people hear is “delay, delay, delay,” but it doesn’t always make sense for certain people.
Congrats on paying off your house. Every choice that one faces in this kind of planning seems to open the door to more choices and decisions to make. Some of them are actual math problems, so we can assume mistakenly that all of the choices have one optimal choice and several wasteful ones to avoid. The writers who seem extremely certain about every choice they make, with the math behind them, can be compelling to read but there are other factors to consider for your situation, like what is right for your unique spouse, your current job, your life expectancy, etc., etc. etc. Often, there is no clear door to choose and you have to go with “good enough” and “the odds are,” then hope the self-doubt quiets down.
A-men! I needed to read this after having some doubts about our own mortgage pay down plan. When I ran the numbers for my recent 401(k) post, I about fell off my chair thinking about how much money I was leaving on the table (potentially) by paying off the house rather than investing more in the employer sponsored plan. Well, too dang bad. I’m going to crush the mortgage and crush it good, by golly. And then I’ll max out the 401(k).
Exactly! Do what is best for YOU. (48 with kids starting college in a three years) We paid off our ridiculously low 2.5% mortgage last year and haven’t regretted it for a second. The extra payments would have grown more if invested, but paying off the mortgage brought great emotional peace. Its so amazing now to not even think about a mortgage and only focus on growing investments going forward.
I Love this! I often read other’s magic formula’s to reach FIRE and its so hard as no one really is the same as the other. Even if I read a blog where they only have one person working they couldn’t possibly provide the magic solution for us! Unfortunately!
The best way is absolutely the one you’re most likely to follow. We aren’t paying off our mortgage early for NOW, but I should have started down that road after paying my student loans off. Not because it was the best return, but because too much of our money disappeared to useless stuff until I wrestled back control of it in the last year and a half.
This post has been bookmarked in my short list of resources about money and investing! I had never thought of the fact that emotional does not mean irrational; but it’s true. I didn’t marry my wife for financial gain; it was emotional and logical at the same time. :)
When I got a mortgage several years ago, I calculated present and future value calculations and pitted 30yr and 15yr mortgage terms against my ‘projected future index fund returns’ based on the mortgage payment differences. To my surprise, the difference was a whopping $88k in favor of the 30yr and putting the payment difference in an index fund. Given a long of a time horizon utilizing ‘projected’ investment returns, I came to the conclusion that mortgage vs investment for me was not a big difference maker in my long term financial goals. Discipline in saving one way or the other is the kicker. Just don’t take the investment route on payment spreads and then not invest.
Furthermore, I took out a 2yr 0% furniture loan when I had the cash ready to deploy (interest fully retro-active if the loan not paid in full at the 2yr date @ 12% btw). Invested the cash in my taxable account during this last bull run, saved some more cash over the two years, paid the loan in full at 22 months w/ no interest and came out WAY ahead.
The main thing is just to stay disciplined in saving and play investment spreads w/ a lean towards logic and a dose of your own investing tolerance. Whether in your investment accounts or your house, Tonja is spot on in that both are approaches can be right.
I’m the same way about financing things with 0% interest. If I have the cash to pay for it up front, and you’re offering to let me finance it for free? Yeah, I’ll leave that in my savings account earning interest, thanks. I’m a fan of liquidity. I’ve done that with furniture, artwork, and (sort of) with my car–I technically could pay it off now, but my car loan is 1.9% interest, and my savings account is 2.05% interest (I did not have the money to pay cash for the car up front though, it’s just gotten low enough since I’ve had it to pay it off early, if I chose to). I just make sure to keep track of what that money is earmarked for and pay it before the retroactive interest kicks in. You’re braver than I am though–I leave money that needs to be used relatively quickly in my savings account instead of investing it.
What matters is that you know yourself and what you’re comfortable with, and act according to that. Which it sounds like you do! It would stress me out to have to carry around that mental list of which money is earmarked for what debt, but that’s why I’m in the pay-off-debt-ASAP camp. ;-) Doesn’t mean everyone needs to or should agree with me!
Totally agree. We each make our own decisions. Study, ask around, and then figure out what suits you best, including the emotional side. We paid down our mortgage, then buckled down and saved enough to buy our next (forever) home in a different state – before we sold (and moved) from the current one. We tried that investing thing. My nerves can’t handle it. One thing the 401k and all the other retirement money – can’t touch, do not look at fluctuation. But monthly investment on pure cash? Thanks, no thanks. 1.5% MM did the trick. And a lot of frugal living.
Totally. To take it a step further, your feelings about your plan and path may also change. And that’s cool too. External circumstances, internal needs and wants and anything in between may cause you to rethink and tweak.
I also think it’s important to keep our minds open to other perspectives and ideas and perhaps even consider those other perspectives. Ultimately you may not decide to follow that idea, but it may lead you to slightly change your own approach. For example, when you wrote about points, I went from spending my points when I had them to saving a bunch by embarking on an experiment to see if I could accumulate a certain amount of points in a certain time. It forced me to think differently about how I handled them but then go off in another direction with a “let’s see how easy or hard this is to do” mindset. The end result is that I have a tiny bit of a strategy now on my point accumulation/travel hacking experiment and I have had the points available to travel at very low costs the past 17 months coinciding with my retirement. Is it completely optimized and efficient? Heck no! Do I want to spend tons of hours trying to figure out how to optimize it all and use them more efficiently? Double heck no. Can I accomplish the travel I want at a low cost? YES!
On another note – the pictures on the post. They are amazing! I absolutely love them.
Yes. I paid off my mortgage first, even though I dimly realised that the numbers would probably have dictated otherwise. But when you start off single life in your 30’s with 4 kids and $60 cash, security becomes incredibly important.
I know I could probably have retired by now if I followed that other path, but knowing that the boys and I always have a secure place to lay our heads is worth more to me than having to work a few more years.
This is so smart.
We want to get to FI – at some stage, and sooner would obviously be better. BUT we enjoy having a life at the same time, and have decided to focus on paying off our mortgage first with a small amount of investing (a couple of hundred dollars a month) until we’re debt free.
You could always get another mortgage if you don’t enjoy having it paid off : )
I assume, however, that not many people would do that because the house probably feels a little bit different when it is paid off. Instead of the bank owning the kitchen or the upstairs, you actually own every part of the house! It must be a magical feeling! I’m not quite mortgage free yet, but I should be within two years or so!
Paying off the mortgage early is not a decision we regret…AT ALL! We were both going though a period of frustration with our jobs at the time we made the call and it brought us a great deal of peace even though we fully understood that we might be missing out on future investment returns. Knowing that if/when hardship (in the form of a job loss, a medical crisis, or another unforeseen financial burden) comes our way, we will have a roof over our heads is priceless to us. We have invested that “mortgage payment money” since retiring the loan three years ago and have zero second thoughts about the path we chose.
Why would you invest a windfall monthly? Invest it all at once. It isn’t exposed to compounding until it’s actually in the market, precisely as the story points out. You invest monthly, because you get that money monthly and need to get it into the market pronto to start generating returns, instead of letting it languish in a bank. When is a good day to invest? Why today! I don’t believe in paying off tax advantaged leverage “early” when there is more money to be made investing in America by investing that money early.
Paying off my mortgage faster was one of the best decision I made. Same as Frogdancer, being a single mom with three kids, I needed the peace of mind. Best ROI ever:)
We all need to do what is right for US. Great post.
If you have seen one financial plan….you have seen one financial plan. It is definitely not a one size fits all world. Read many blogs to get a cafeteria of menu options and settle on one that works for you.
Agreed! We regularly have this conversation with our teenage daughters as well…different people can value different things, and that OK as long as you’ve got a plan to deal with those priorities. In the MSW household, we prioritize travel as a family, because we truly enjoy it and still talk about the trips we take. At the same time, we don’t value expensive cars or houses because to us, they’re just a means of transport or a place to live. Often it’s what you don’t spend money on that matters most. (Of course, our kids – like us – are naturally contrarian and don’t really care what their peers think. Very proud to have kids with that kind of confidence 😁).
Oh, and on the pay off the house thing? We paid ours off when we had the chance. Totally worth it to us to be able to not pay much attention to the day to day gyrations in the market, which I’d probably be obsessing about if I still had the mortgage and invested. (Especially nowadays with all the down markets!).
As someone who basically lives paycheck to paycheck, a lot of personal finance articles out there have made me feel like a failure because I can’t follow their “truths”. Sorry, I can’t max out my TFSA or RRSP when I can’t even afford a full tank of gas. I can’t “pay myself first” when I can’t even pay my bills. I got to do what’s right for me, even if not what I’d like to do.
So true. Implicit in many of these “best approach” assertions is the idea that you have to maximize the financial return. Once you realize that the return is just one of many factors to consider, then you can choose the approach that makes sense for your situation.
Exactly! My husband retired at 55 and we began taking his Social Security payments at 62. Of course, everyone told us to wait. We had no debt, but we were paying for our own health insurance. The social security payments gave us breathing room and we didn’t have to use our retirement fund at that point. We had a wonderful retirement going, and then my husband passed away in his sleep at the age of 64. No one knows what tomorrow will bring, so live your life the way that is best for you!
I swear this is how I feel about our path: we own zero debt and buy properties with cash for rentals. It is so not typical but I wouldn’t go for investing with mortgage, better slower but certain path for me. We put in 401k, and have some stock investments but the only ones that bring certain yields are properties. And we don’t have to sell them to have our salaries for early retirement paid out: we get them each month… (50 months to go!). I read that a lot that this is not a typical path, but it sure is our own.
Anyway, great reminder to all.
We have always said that “this is what works for us”. Everyone has a different path to take – even when they share the same goal.
My truth is that I hate risk. I paid off my mortgage early after watching my 401K sharply decline in value from 2008-2010. When I earned back a financial cushion, the mortgage went away. And my thinking came down to this: I alone had the power to reduce my interest payments in paying off my mortgage. For my money to increase in the stock market, I have to cross my fingers and hope that the actions of the market/company executives (I’m old enough to remember ENRON, which also took down Arthur Andersen)/weather/etc. don’t negatively effect my holdings – there are too many ifs in the latter part for my own comfort.