The Best Financial Decision Isn’t Always the Most Obvious One

July 27, 2017

Let’s suppose you have sufficient emergency savings and are maxing the match in your 401(k). You now have several options of what to do with your extra savings. One is to pay down a student loan with a 3.7% interest rate, the second is to invest more for retirement, and the third is to pay down a mortgage with 3.85% interest rate (2.81% after factoring in the tax deduction). Which would you choose? This is the real life scenario of an employee I recently spoke with, so let’s explore the options.

Option 1: Pay down 3.7% student loan

Her initial instinct was to pay down the student loan because it annoyed her the most and she was worried about having that debt if she were to lose her job. But making payments towards the debt wouldn’t actually make her more financially secure until it was completely paid off. In the meantime, she would actually be safer having more in savings and investments that she could use to make the loan payments in case she found herself in between jobs.

Option 2: Invest more toward retirement

She could reasonably expect to earn more by investing her savings than she would save in interest by paying down the loan early, as long as she invested for longer-term growth and wasn’t too conservative. (My general rule of thumb is to pay off debt first if the interest rate is 6% or more, invest if the interest rate is below 4%, and go either way depending on how aggressive an investor you are if the interest rate is between 4-6%.) Of course, she could still decide to pay the student loans for emotional reasons, but investing would likely give her a better return on her money.

Option 3: Pay down 3.85% mortgage

In the end, we decided that it actually made the most sense for her to pay her mortgage down. At first, that didn’t seem to make sense since the mortgage interest rate is even lower than the student loan after the tax deduction. (Her income is too high to deduct the student loan interest from her taxes.)

However, it turned out that she had to pay PMI (private mortgage insurance) until she had 20% equity in her home. When we calculated how much she would save each year in PMI payments as a percentage of the mortgage balance she’d have to pay down, it was 6%. When you add that to the 2.81% interest rate, she would save a guaranteed 8.81% on the money she put towards getting that 20% in equity!

The moral of the story

When deciding between alternative options, first figure out what the expected return on your money would be, either in savings by paying down debt or earnings from investments, but be sure to factor in ALL the possible savings and earnings. (A qualified financial planner can help you do this so long as they aren’t biased towards one choice or another.) Finally, don’t forget the “happiness factor.” If, after looking at the numbers, she decided that paying off the student loan would make her happier overall, that’s fine too…as long as it’s an informed decision.

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When “None of the Above” Isn’t an Option

June 17, 2016

As I type this, Hillary Clinton is giving a speech after winning the California and New Jersey primaries and becoming the Democratic party presumptive nominee. This is merely weeks after Donald Trump gave his speech after wrapping up the Republican primaries as their presumptive nominee. Most people I’ve talked to and seen commenting on my social media accounts wish that they had a “D – None of the above” option like there is on standardized tests.

I don’t think I’m going out on a limb by saying that, as a country, we should be able to do better than these candidates.  A lack of great available options isn’t just an issue in politics though. It’s a problem in the financial lives of many people that I’ve talked to recently.

If you are confronted with a bad situation, there are some things you can do. First, try to think of as many potential solutions as you can. Consider consulting with people you know and trust or an unbiased financial planner for ideas. You might be able to come up with a better solution this way. If not, make a list of pros and cons for each potential solution and prioritize what’s most important to you.

For example, one person I talked with was in a bit of a financial jam, and my goal was to help her find a way to a better place.  She had recently gone through a divorce, and her budget included receiving child support from her ex-husband. He has chosen to change jobs and now works “under the table” for cash so that it is not reportable. If it’s not reported, she can’t collect, and now her living expenses exceed her income.

The child support would have been deposited into savings for her kids’ education and for emergencies. Instead, she taps into savings for about $100/month to maintain her current lifestyle. We talked through a few options:

  • Sell the house and downsize. Reduce the mortgage by several hundred dollars per month so that there is wiggle room. (She just refinanced when she bought the ex’s portion of the house, so a simple refi is not an option.)
  • Get a part time job and work when the kids are with their dad in order to generate some income to cover the gap.
  • Cut the cord and get rid of her high end cable package.
  • Get rid of her car with a $500/month payment and get something less expensive.
  • Hire an attorney or investigator to track her ex-husband’s financial life and then go to court in order to get child support dollars flowing in.
  • Suck it up, hope for the best and continue to grind forward as is.

Each option has its downsides and she viewed all of them like many Americans are viewing Trump v Clinton. But just like in politics, there is no perfect solution, and trying to find one can prevent you from choosing a good one or at least the “least bad” one. I don’t know which option she’ll end up picking, but she’s now in a better position to make a decision. After all, sometimes making no choice can be the worst choice of all.

 

 

Follow These Steps To Stop Making Bad Decisions

March 25, 2016

In a world where things can “live forever” on the Internet, we all need to be careful when posting things to Facebook, Instagram, Snapchat or any other social media platform. A funny, in a not very funny way, example of that happened with the rapper 50 Cent before he appeared in bankruptcy court recently. He posted a photo of himself sitting on the floor with stacks of money spelling out “B-R-O-K-E.” His creditors were NOT amused. (Note to self – when trying to show impoverishment, it’s best to not have a flamboyant display of wealth posted to social media.)

We’ve all made mistakes or put our foot in our mouth or done something to help someone else point out the error of our ways, but this is one of my all time favorites. It’s not quite as colorful as a story in my local paper when I was a kid about a guy who tried to rob a gun store at knifepoint (I’ll let you do the math and figure out how that ended) but the concept is the same. I wonder if at any point before having that photo snapped, 50 thought “this just might be the worst idea I’ve had in a long time?”

Again, we all do silly and not brilliant things from time to time, and I’m no exception. I’ve pushed myself too far too fast when recovering from injuries and ended up needing surgery. The worst part is I knew that surgery could be a result if I didn’t dial back, but I didn’t listen to the little voice in my head that said “this is really stupid!”

This week, I spent the majority of my time talking with people in financial coaching sessions and I heard a lot of people acknowledge that they made very dumb (their word, not mine) financial decisions when they KNEW it was a mistake before doing it. It made me wonder how often that happens and why we do it. Why do we make bad decisions?

I’ll let you read that article and hit Google to do more research, but regardless of the “why,” it’s something we humans do. And I’m noticing it everywhere now. The more people I talk to, the more admit to knowing before they made a bad choice that it was a bad choice. We willingly disregard our instincts and move forward to make regrettable choices.  My challenge to myself and to you:  STOP IT!!!

When you are about to spend way too much money buying something that you don’t really need – don’t do it! When you are thinking about reducing your 401(k) contributions for a short term reason – walk away from your computer and don’t allow yourself to do it! When you are about to buy a car and the payment is almost as much as a mortgage on a small house – be like Nancy Reagan and “Just Say NO”

Prolific business authors Chip and Dan Heath have a book about decision making. Decisive: How to Make Better Decisions in Life and Work is a great read. It goes into the “4 villains” of bad decision making:  1 – Our focus it too narrow  2 – We have confirmation bias 3   – Short term emotions get in the way 4 – Overconfidence hurts us.  If you can understand why you are about to make a bad decision (I recommend reading the book so you get a full explanation of each of the 4 villains), you’ll be less likely to follow through with it.

Where the book gets even better is when it moves from diagnosing why we make bad choices to building a good decision making process.  There are a few simple steps there that we can all use to help us make better choices in life. They call it the WRAP method:

W – Widen your options. Move from “this or that” to “this AND that.” Don’t limit your view.

R – Reality test your assumptions. Try to see the decision from your point of view, the points of view of your friends and family, and people who would disagree with the decision. The more angles you see, the better your decision becomes.

A – Attain distance before deciding. I love the 10/10/10 rule. How will you feel in 10 minutes, 10 months, 10 years about this decision?

P – Prepare to be wrong. Build in time for the unexpected. Anticipate problems and don’t let a bad decision linger.

There is a lot of info packed into each part of the WRAP process. (Here is a great summary of it.) If you are looking for a way to improve your decision making process, whether it’s already good (like I claim mine is!) or if it needs some work, head to your local library (trying to be financially sound) or hit your local bookseller to look for this book. Maybe it can awaken your inner “is this a good idea?” voice. When managing your financial life, slow down, take a deep breath, and try to listen to that voice.

 

 

 

 

How Do You Make Financial Decisions?

March 04, 2016

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.  Continue reading “How Do You Make Financial Decisions?”

5 Things to Know About Applying for a Mortgage

December 09, 2015

Even though interest rates are likely to begin rising again (haven’t we been saying that for a couple years now?) mortgage rates are still reasonable, and buying a home these days is still cheaper than renting in most areas, providing you’re planning to stay for a bit. Buying a house is more than just a financial decision, but if after considering all the factors, you’ve decided that now is the time to buy, prepare yourself for the mortgage application process. And I mean gird yourself because it is a royal pain. Here’s what to expect: Continue reading “5 Things to Know About Applying for a Mortgage”

How This Married 37-Year Old CPA and Financial Planner in Chicago Spends Her Money

October 14, 2015

When my colleagues, Scott and Tania, joined this Last 10 Buys Challenge on Forbes, I took a look at my spending and initially thought, “No way…this looks BAD!” But then I thought about how I actually like it when my instructor at the gym confesses to struggling with her diet so I figured I should bare it all with thoughts on how I could have done better. Here are the last 10 things I spent money on this week:

Continue reading “How This Married 37-Year Old CPA and Financial Planner in Chicago Spends Her Money”

Financial Lessons From The Game Of Thrones Season Finale

June 19, 2015

My apologies if you haven’t watched the Game of Thrones season finale yet. But if you haven’t and you’re a fan, exactly what are you waiting for??? I’ll take a few liberties with the show’s broader themes and hopefully won’t spoil anything that you haven’t already heard or watched. Continue reading “Financial Lessons From The Game Of Thrones Season Finale”

Finding Balance

March 20, 2015

I met with a young woman recently who had a few options in front of her and we talked through the choices in front of her.She had just graduated from business school and accepted an offer with her current employer. She is in a two year long leadership development program, and during that program, the company is paying for her living expenses. They do that so that she could maintain her home back in her hometown since that’s where she will eventually live again. This woman had just gotten married and her husband moved to the new city with her and he will look for a job there since he just finished school as well. Continue reading “Finding Balance”

Don’t Take Financial Advice From Pop Music

February 27, 2015

I was out with friends recently and a new song from Pitbull and NeYo started playing. The song created a rush to the dance floor and given that when I dance, people think I’m either having a seizure or in some sort of pain, I opted to grab beverages for our group instead of risking injury (mostly to others) on the dance floor.  As I was waiting for the drinks to be poured, I started listening to the lyrics of the song. Continue reading “Don’t Take Financial Advice From Pop Music”

Sometimes It’s Okay to Punt

October 06, 2014

Football season is an exciting time of year as fall has officially arrived and even the hot and humid southern states get some relief. Personally speaking, I am a college football person. Although I may be an unbiased financial educator, there is admittedly a great deal of bias when it comes to my allegiance to certain colleges and universities on the football field. You will likely hear screams of “Roll Tide,” “Go Tigers” (the orange ones from Clemson in the Palmetto State), and occasionally “Go Wildcats” (K-State- I have to support my grad school) if you are in my neighborhood on a typical college football weekend. (Yes, similar to my investment portfolio, I like to maintain a diversified portfolio of schools to support but also have the documents to prove that I am not a fair-weather fan of the first two programs on my list.) Continue reading “Sometimes It’s Okay to Punt”

Create a Financial Life Plan with a Few Simple Questions

July 22, 2013

Prior to becoming a full time financial educator, some of the work that I did with my clients fell into the realm of what is often called financial life planning. Financial life planning gives money more meaning and purpose and helped my clients do more than just focus on typical financial goals such as deciding when to retire, where they plan on living, and how much the expected lifestyle will cost. Rather than simply focus on money and wealth, it helps people decide what is really important in their lives. Continue reading “Create a Financial Life Plan with a Few Simple Questions”

We All Make Mistakes

July 05, 2013

My daughter and I took a trip together and I let her be our DJ and choose all of the music while we were in the car together. Well, almost all of the music. There are a few songs I had to ask to skip, I just couldn’t stand them!  Continue reading “We All Make Mistakes”

Actions Have Consequences

June 28, 2013

My daughter lives with her iPhone and if it isn’t working 100% correctly, I get a phone call pretty quickly. One day when she was in school, her phone fell off of her desk and the screen cracked. (Why it was on her desk at school is the subject of an entirely different kind of blog post…)  That aside, she is still walking around with her cracked screen and isn’t all that happy about it.  Continue reading “Actions Have Consequences”

How Some Financial Decisions Are Like Bounce Houses

December 07, 2012

I read this article about the increasing number of “bounce house” injuries and at first I thought it might have been a hoax. But then I remembered a bunch of kids’ birthday parties that I’ve attended and if my memory serves me correctly (and that’s not always such a sure thing!), there has been at least 1 injury at each party. One was particularly memorable because it was one of my good friends who was in the bounce house with her son and his head collided with her lower lip.  A whole lot of paper towels and a few stitches later, she had a fat lip for over a week.  Her son, to this day, jokes with her about the time he nearly knocked her out and made her go to the hospital.  (It was an urgent care center but he likes to embellish a little bit for an audience.)  Everyone loves the idea of a bounce house.  Not everyone loves the end result of jumping around in one.  They may look wonderful, but it isn’t all a 100% pure joy.  Continue reading “How Some Financial Decisions Are Like Bounce Houses”

Imagine Your Worst Case

February 17, 2012

Over the last few months, I’ve had the opportunity to learn a whole lot more than I ever knew about some “behind the scenes” things that happen before a soldier gets deployed overseas.   My girlfriend works as part of a dental team that goes to military bases on weekends and performs dental work on a ridiculously large number of soldiers prior to their deployment.  On a normal day in a normal private practice, she may see 8-10 patients.  Continue reading “Imagine Your Worst Case”

If It Looks Too Good To Be True…

February 10, 2012

Have you ever seen one of the infomercials about a workout routine, a diet program, or a piece of exercise equipment and said to yourself “that just looks too good to be true”?  Well…so did this guy!  In a video that has become an internet sensation, Furious Pete shows how he made a remarkable physical transformation (you have to check out the video to see just how amazing the transformation is) and took both before and after photos in only 5 hours as proof. Proof?  Yep!  Proof that his transformation was not completely legitimate. Nor was it the product of hard work, diet, or exercise.  Continue reading “If It Looks Too Good To Be True…”

Is Love Draining Your Money?

January 16, 2012

This is an extreme example. I’ll say that right up front but there are lessons here we can all take away.  Yesterday, I took a call to our financial helpline from a caller who was having trouble making ends meet.  She said that she made good money but was always scrambling at the end of the month to get her bills paid.  As I always do, I started asking her questions not only to get to the root of the problem but to tap into her strengths.  Building on people’s strengths is a much better way to achieve real behavior change than to focus on only the problem and the obstacles.  Anyway, long story short, the root of the problem soon emerged. Continue reading “Is Love Draining Your Money?”

When Should I Consider Having a Trust?

January 11, 2012

At Financial Finesse, we are often asked this very basic question.  It seems simple enough.  A trust, by its purest definition, is a form of ownership.  You can own assets in your name alone, you can own assets with someone else (e.g. jointly), you can own assets by contract (e.g. a life insurance policy), or you can own assets in a trust.  There are several benefits to having assets held in trust.  For example, when you have a trust, you can control who receives trust assets, when they receive these assets, and what these assets may be used for.  Consider the following example:

When I was a child, my father was killed in a car accident.  Prior to his death, he provided instructions in his will that basically said if anything ever happened to him, money should be set aside in a trust until each of my two brothers and I turned 18, after which the money would be used to pay for college. Continue reading “When Should I Consider Having a Trust?”

Helping Employees Cope with Medical Bills

January 10, 2012

Flying home last week from the wintry northwest, I heard lots of sneezing and sniffles from my fellow travelers.  Although we’ve been lucky to have such a mild winter so far, cold January weather usually brings with it the onslaught of cold and flu season.  In a typical year, 5 to 20% of the population in the U.S. will get the flu, according to www.flufacts.com , and some of your employees may end up with flu complications that may require a trip to the doctor or even hospitalization. Continue reading “Helping Employees Cope with Medical Bills”