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One Size Fits Somebody...But Perhaps Not You

Few things in life are a given. Fewer things in personal finance are.  


But, history indicates that the personal preference is to forgo analysis, avoid doing the math and just follow some simple "rules of thumb." After all if we can withdraw 4% during retirement (maybe, maybe not), purchase 10x our earnings in life insurance and subtract our age from the number 100 to find out what percentage of our portfolio we should have in stocks....why bother to run any numbers?  The answer's right there for all to see, it involves no analysis or work. The "rule of thumb" must work, I mean if it didn't work, it wouldn't be a rule of thumb would it? 

Well time tested as it might be, the question of "should you pay off your mortgage" or save more money toward retirement instead seems to have finally gotten some air outside of the rule of thumb world.  

In a recent St. Louis Post-Dispatch article  the questioned was asked of a number of financial professionals who all had basically the same depends!! Yea! A vote for "it depends!"

It depends because, well, it depends.  As you might read in the article, much more debt exists post-retirement in America than we believe.  Paying off the mortgage has in many cases become a thing of lore.  

And, if you consider that we're about as near a bottom in interest rates as we're ever going to get, paying off your mortgage now should come with one substantive word of caution....the equity you create by paying down your debt may be equity you never see again. If you were to "leverage" your mortgage debt today, we could assume I think that at rate in the 3-4% range, after allowing for a deduction for mortgage interest, you're highly likely to arrive at a net lending rate that will be less what the reasonable projection for market returns would be.  That would seem to indicate that you can make more money by investing your money than paying down your debt. 

Math would then seem to indicate that if we get back to mortgages in the 7-9% range, we might not be able to get the same result.  That could mean that the equity you create today might not be accessible (at least and have it work mathematically later on) if interest rates cycles repeat.  And, as someone once said, "the future may not repeat itself, but in certainly rhymes." Last time that happened we went nearly 14 years before the interest rate shift made getting your hands on that money a worthwhile mathematical effort. 

So before take a leap of faith by following the rules of thumb, consider that some reasonable analysis might be a better way to chose your path.  

More on "rules of thumb?" Read my earlier blog post on this same topic here.  



4 Steps to Better Decision Making

Chip and Dan Heath, authors of "Decisive" have a great model for making better decisions.  What's most impressive about their view on the matter is the fact that if you sit back and think about it a bit, it's a universal tool. It works no matter what decision(s) you have to make be it at work or at home, in your career or about a project. Rejoice, the world gives out too few universal tools.  

So, what are the four steps; 


The authors use the acronym WRAP

  • Widen your options
  • Reality test your assumptions
  • Attain distance before deciding
  • Prepare to be wrong

Sounds easy, but we almost never do it.  

It's a discipline we can all benefit from learning, even if you have to force yourself at first.  

It's like going to the gym, easy to do, hard to stick with. Everybody can decide to go the gym and you're 100% guaranteed of success, because deciding to go to the gym is easy, actually going to the gym's the hard part. Someone once told me that in a minute you can quit smoking, it's continuously quitting smoking that's the hard part.  

And, contrary to what you might think, more choices are better than too few. There's research that shows that having multiple options, perhaps two or three are best, all in process at the same time allows for you to be less personally invested in the outcome. That will help to automatically widen your options and the multi-tasking part helps to keep the personal investment in any one outcome from getting so high that you can't give it up simply out of fear of personal upheaval if you walk away from what you "knew" to be true.  

Here's a tip; next time you have a decision to make ask yourself what you'd do if none of your current options existed? That just might set you on the right track to removing yourself from the harrows of narrow framing. After all, as Dan and Chip note; "focusing is great for analyzing problems, but terrible for spotting them." 

There are literally hundreds of examples I could site from the personal finance realm that span the decisions from, "I can't afford to retire today" to "which college should my child go to."  

Better decisions bring about better outcomes, starting making them by reading Dan and Chip's book but if you can't do that, start realizing that you can control the decision making process by changing how you make those seemingly "inevitable" choices.  

And if all else fails, get some help, narrow framing often resolves itself when someone on the outside is looking at the issues you can't see, it's that forest for the trees thing that's been talked about forever. And, it appears, with good reason.