How Do You Make Financial Decisions?

For the last week, I’ve read a lot about Apple vs. the U.S. government regarding the request of the government that Apple build a back door into the phone of one of the San Bernadino killers. The case is very controversial and I understand why both sides feel so strongly. The government wants to break into the phone to see if there is evidence that can help understand and track down anyone who might have helped the killers. Apple is concerned that an important part of their products, a strong encryption that makes them very secure, could be no longer a strength if the encryption code they would write gets into the hands of the wrong people. Both sides have strong arguments, and I will keep my opinions out of this. 

While this case has pretty big implications on many fronts, the concept of two opposing viewpoints competing is nothing new. I was speaking to a couple recently and they were on opposite ends of a financial decision. He wanted to keep ~$100,000 in their savings account at the bank. She wanted to withdraw $100,000, pay off the mortgage (which had a balance of just under 100k) and then save on a monthly basis what they had been paying on the mortgage (on top of their normal level of savings).

His point: If the money stays in savings, they can ride out an injury, illness, job loss or other emergency for quite a long time. They can continue to pay the mortgage and all other expenses even without income for 18-24 months.  And they get a bit of a tax deduction for their mortgage interest.

Her point: Without a mortgage, they could re-evaluate their retirement projections and perhaps consider retiring earlier. Their goal was to have the mortgage paid off prior to retirement. She also pointed out that their savings is earning less than 1% and their mortgage is at a 4% rate, so they are actually losing 3% on their savings. And within a few years, they would be able to replenish their savings, which would last even longer because they wouldn’t deplete it later to pay the mortgage.

Neither was willing to concede ground and both firmly thought they were right.  (Coincidentally, they were on opposite sides of the Apple debate as well.) They asked me which one of them was right! I wasn’t going to get in the middle of that so I took the diplomatic way out and said that they both made very compelling points and that neither was wrong.

They are going to review their tax returns, which they have not filed yet for 2015, to see how much money the mortgage interest deduction is saving them in real dollars. They will enter everything except that amount into their tax software and see how much their refund is. Then they will add the mortgage interest to see how much the refund increases. They will compare that to the differential (interest paid on the mortgage minus the interest earned on savings) to see if they could improve their situation.

The good news for them is that they were choosing from two very good options. They will be financially secure regardless of the decision they make on this issue. They have had a lifetime of fiscal responsibility and have made great decisions regarding how they manage money. They are going to go home, do a quick comparison of interest paid vs. interest earned, the real impact of tax savings and then come to a conclusion based on the facts, not their feelings. They will decide this case with evidence and facts, trying to keep emotions out of it.

When you are faced with a decision, do you take the time to seek help, figure out which facts are relevant and meaningful, and have a decision making process? Or do you allow your emotions to take over and make decisions that may lack a factual basis? From my experience, those who have a process for making decisions tend to make good ones. Make sure you are part of that crowd…

 

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