I used to hate making financial decisions. I’d like to say it was just the big, scary financial decisions that frightened me, but in truth even the teeny, tiny ones could stop me in my tracks.
I blame my hesitancy on being a perfectionist. It wasn’t the bad choices that concerned me. I knew enough to avoid those most of the time. It was the fear of making subpar choices that kept me stuck.
Why are monetary decisions so difficult to make? Shouldn’t the ideal choice always be obvious? In a perfect world shouldn’t we always choose the option that provides the highest income, the highest rate of return and the biggest bang for our buck?
The Beauty of Math
When we think about financial decisions we typically think about math. We all know that 3 + 3 = 6 and 2 + 2 = 4. There will never be different answers than that.
We also know that 6 > 4. If you have the choice between six of something or four of something, which will you choose? Well most of us favor more, so we’ll choose six.
That’s math. It’s not always easy to calculate, but the answers are always clear. Unfortunately, when it comes to financial decisions we often need more than math.
Financial Decisions Aren’t Math
Most of us try to resolve our monetary decisions with math. If you don’t believe me let’s take a quick look at Google. A two-second search for financial calculators reveals one hundred and fifty million results.
That makes perfect sense. It’s necessary and important to run the numbers when calculating your financial options.
But here’s the thing; math and finances are not the same thing. In a mathematical equation we combine two numbers and review the sum. We have no emotional connection to those numbers. They are simply digits on an otherwise blank page.
When we make decisions we focus on those same numbers. We run those same calculations and review the sum, but this time we perform an emotional check.
Financial decisions don’t exist in an emotional vacuum. We don’t run every financial scenario and consistently choose the option with the biggest sum. Why not?
The math is easy, but handling the emotional weight of each financial decision is not. What is best for our money is often not what’s best for our mind and heart.
Question: Buy or Rent?
Let’s start with a relatively easy financial decision: Should you buy or rent? Actually it seems like an easy question to answer. How much does rent cost in your area and how much would a monthly mortgage payment cost each month?
Is one significantly higher or lower than the other? Shouldn’t we always choose the option that leaves us with the most cash in our pocket?
According to the math we will always have a clear winner, but what about all of the other factors we are ignoring in favor of math?
For example, how do you feel about dealing with a landlord? How long do you intend to live in the same area? Do you have time to maintain your property? What about your desire to complete home improvement projects?
Home buying enthusiasts focus on equity and tax advantages. Rental enthusiasts focus on the high cost of closing costs, repairs and property taxes. Both parties have valid points, but the decision is a very personal one and it involves a whole lot more than math.
My Story: Buying a House
I’ll use my personal story as an example. My husband and I bought our first house in our early twenties. The value of our home has more than doubled in value. On paper it looks like the perfect decision, right?
It wasn’t. Owning a house is a ridiculous amount of work. I wasn’t prepared to spend my weekends cutting grass, trimming bushes, raking leaves, painting walls and spending hours cleaning an entire house.
As a twenty-two year old I was facing responsibilities none of my other friends faced. Those activities required a lot of time and energy. In fact, my husband and I fought about it constantly.
Did we buy when the markets were low? Yes. Could we sell it for a ton of profit? Yes. Would I recommend buying versus renting? Maybe, but then again maybe not.
I would ask a lot of questions before I provided anyone with a recommendation. What looks good for your financial picture might not feel great in real life.
Question: Pay Off Your Home Early or Invest in the Stock Market?
Let’s take a look at another common financial question. Should you pay off your mortgage early or invest your excess savings in the stock market?
How should we begin to solve this financial dilemma? By performing calculations, filling in detailed spreadsheets and comparing the options side-by-side, of course.
Mathematically speaking the conclusion is always the same. When mortgage rates are low and investment returns are high we should plow our money into the market.
That sounds great and many people will make this decision. Some of us will buy stocks, ETFs or mutual funds and give ourselves a nice pat on the back.
But some of us will still choose to pay off our mortgage early? Why? Are we bad with money? Mathematically speaking investing is the clear winner, so why don’t we follow that path?
The answer is simple; some of us crave security over returns. Deep inside we feel a much greater emotional benefit from being debt-free. Could we earn two or three hundred thousand more dollars by investing in the market? Possibly, but we could also lose our jobs and not be able to pay our mortgage while the market is simultaneously tanking.
Simply put some of us are willing to take on the risk and some are not.
My Story: Paying Off My Home
I refinanced our two homes nine times over a twelve-year period. Running the calculations was super simple. I used an online calculator to compare my current mortgage amount, interest rate and loan duration to projected terms and rates.
We started with a thirty year mortgage, but quickly downgraded to a 15-year mortgage two years later and a 10-year mortgage a decade after that.
Was signing up for a 10-year mortgage on two properties a good idea? Of course it was. I mean I saved a boatload of interest, but was it the best decision? Probably not. I could have earned much more investing in the market and possibly twice as much if I purchased a rental unit.
But you know what? We are five months away from paying off our mortgage and it feels great. I can choose to return to work or continue to stay-at-home with my children. My husband can cut back on his hours or find a more enjoyable job that pays less.
Could we have done the same if we invested the money and then pulled it out of the market? Yes. The market is unbelievably high right now, but that wasn’t a guarantee when we started paying off our home eighteen years ago. In this case we chose the safe bet and I don’t regret it.
Question: Choose the Highest Paying Job or Pursue Your Passions?
What if you knew you could earn six-figures doing something you liked or make half that amount doing something you loved? Would you attain a degree in a higher paying field or would you choose to follow your passions?
What do the numbers tell us? Well they clearly tell us to choose the highest paying job. If financial decisions were just about monetary gain we would all reach for the best paying positions and leave the other work to someone else.
Forget about pursuing your passion to teach young children or to become a social worker to those in need. Yet, we all know people who choose to follow their passions rather than pad their pocketbooks.
Why? Because they cannot imagine a life strapped behind a desk or because their hearts yearn for more than the typical 9-to-5.
My Story: A High Paying Job
I worked my tail off when I was young, eager and full of energy. I worked for twelve years after college as a highly paid software engineer. My husband did the same.
Did I love my job? Not all aspects of it. Could I have found a lower paying job that filled my soul? Most definitely.
This financial decision was not just about money, but money was a huge factor in my decision to pursue software engineering. This time I followed the numbers. My decision paid off and our accounts grew well beyond my beliefs.
Question: Push Hard or Slow Down and Take a Break?
If we rely solely on the math would we ever quit our jobs? Wouldn’t the numbers tell us to keep working forever? Who would willingly walk away from a six-figure income? Who would decide to become a stay-at-home parent or take care of aging or ill family members?
We can throw ourselves into our careers or we can take a step back, pursue other interests, decrease our hours and even become stay-at-home parents or switch professions all together.
None of these decisions make financial sense. We won’t earn more money but we might just gain a more balanced life.
Some people are unwilling to give up their income, because they are well compensated for their efforts. Some people stay because they simply love their work. Others don’t love their jobs but have no choice but to stay the course.
The rest of us have a choice and decide to leave despite the loss of income. We happily choose to ignore the math.
My Story: Take a Break
My husband and I put all of our energy into our traditional 9-to-5 careers. By the time we reached our early thirties we were multi-millionaires. Then we had children and I became a stay-at-home mom.
What if I had children earlier in life? Would I have pushed through those twelve years to reach financial independence or would I have quit my job to spend more time with them?
We all know saving money faster is wiser, right? Because the sooner we save it the sooner we can begin to invest it. Obviously working your tail off for the first decade is the wisest financial decision, but that doesn’t mean it is the best decision for you to make.
Some times our hearts pull us in different directions than our wallets. In this case I’m not sure if my heart would have overridden the math.
I gave up $3 million dollars by choosing to quit my six-figure job, but I don’t know if I would make that same decision at a different point in time. I know plenty of people that wouldn’t give up that much.
The Influence of Age
Math is an important part of the decision making process, but most decisions require a lot more analysis than that.
In fact, I think age is a more important factor than math. Our decisions change, as we grow older. We may face the exact same decision point with a completely different perspective than we did just a decade ago.
Your perspective will change as you grow older. Run the numbers and check in with your emotional state, but go easy on yourself. Your decisions will change over time.
Let Go Of The Perfect Choice
Most importantly, remember that mostx decisions can be altered and changed. Keep that in mind so you don’t keep searching for that one perfect decision to make.
Over the years I’ve learned to let go of my perfectionistic ways. I’ve realized there isn’t an ideal choice. Some options will be better for financial reasons and some will be better for our souls. Throughout our lives most of us will choose a mix-and-match combination of both.
Sometimes we will run the calculations and look for the best return. Other times we will run the numbers, listen to our hearts, and blatantly ignore the math.