One of my favorite sayings is that personal finance is so much more than just finance. For years, one of the core principles of our financial planning has been to encourage clients to pay off their debt when possible. This may seem counterintuitive. The prevailing wisdom in recent decades has been to invest this money. Low interest rates have led to the narrative that it is possible to make more money by placing additional payments on the stock market.
In general, this is true. Why pay a 3% mortgage when, on a long-term average, the S&P 500 returns more than 10%? Simple math will tell you that the smartest move is to put extra money to work in the market. But the best advice doesn’t have to be complicated math.
For many consumers, the comfort of knowing their first home seems like a better option. Often times, eliminating the biggest monthly expenses has paid big dividends in the support and trust department. Can you put a price on that feeling? The reality is that the “right” decision for the consumer has nothing to do with financial dollars and cents but the personal satisfaction of owning the place they live.
This past year has highlighted that even the “right” decisions don’t always work. Traditional investment advice may involve more risk than previously thought. Consider the long-held belief that a balanced portfolio of 60% equities and 40% bonds will help smooth out experienced market volatility. For believers in this approach, 2022 will be a difficult year. Both equities and bonds have seen their prices rise, but not always in a balanced way. Instead of reducing the volatility, this combination helped to increase the level.
It’s good to remember that there are no “right” answers in finance. We never know what will happen in the market tomorrow, next week, or next year. For us, that means giving more value to the personal side of personal finance. Questions like, “Will I be good enough?” or “Will I be okay?” gain a deeper sense of security, confidence and well-being. Generating a one or two percent higher return doesn’t really answer these questions or reassure one that one is on the right path forward.
A recent reading of George Kinder’s “Three Questions for Financial Life Planning” offered a framework for exploring deeper questions, one that I encourage you to try with your spouse or close friend. He encourages people to answer three questions:
First, imagine that you are financially stable. You have enough money to take care of your needs today and in the future. How will you live your life? Would you change anything? Dream; don’t back down. Define your full and rich life.
Next, imagine that you have just visited the doctor, and he tells you that you have 5-10 years to live. You will not feel sick or have a “notice” of your death. What will you do with the time you have left? Would you change anything in your life today, and if so, how would you do it?
Imagine your doctor calling and telling you what the day is; you have 24 hours to live. How do you feel when you face your mortality? You will ask yourself: What am I missing? Who am I missing? What could I not do?
These questions describe an environment where all your basic needs are met, giving you the opportunity to focus on what’s important. Spend some time really thinking about your answers and figuring out what’s really important to you. The answer may be surprising.
Questions like these allow us to get to the bottom of what’s important. Money is important but remember that it is a means to an end. What is your ultimate goal? Your sense of your finances, and your overall plan are more important than your statement balance. Money is emotional.
For example, a new client told us they bought a home in north Denver several years ago. The area that was destroyed by the mine is now a hot market, with development rising as the neighborhood is being recreated. They had a valuable house but no plans for it.
They were in a good financial position, but a recent cancer diagnosis left them with a simple wish. We encouraged them to consider their circumstances, their values, their goals, and their desire to simplify. In the end, they decided to sell the house and use the money to invest in a company that pays dividends. Could they have gotten a bigger return by holding on to the property? It’s possible. But their income was tied to rents that were fixed, while inflation sapped spending power, and property taxes and insurance increased.
This decision was more convenient for them and more closely aligned with their long-term goals and values. It reduced their investment in raising a large house to just opening an envelope every month. Their focus is on being together again. It was much more valuable than the property could have offered.
Personal finance is much more than just managing money.
Steve Booren is the founder of Prosperion Financial Advisors in Greenwood Village. He is the author of “Intelligent Investing: Your Guide to a Growing Retirement Income.” Forbes named him a 2021 Best Wealth Advisor in the state, and Barron’s 2021 Top Advisor by State. This column is not intended to provide specific investment advice or recommendations.