I read a book the other day that asked the question: “What is the best financial decision you have ever made?”
I began to think about how this needs to be asked more by financial planners. Clients don’t readily think of it, but if you ask it as homework, the clients will begin to analyze the choices, both good and bad, they have made. It isn’t meant to be an exercise in beating yourself up, but rather illuminating hindsight in choices for the purposes of learning and setting a path forward.
Kiplinger is one of my favorite news sources. A lot of times they cover the quantitative side of personal finance; however, they do a wonderful job covering the qualitative side of personal finance. A recent article, by Bob Niedt, entitled “Financial Decision You Will Regret Forever,” discusses what people have thought were bad decisions. I can’t say these are always bad decisions, but it is important to ask yourself: “Is the best financial decision I can make given my life plan?”
Borrowing from your 401(k): It isn’t what the funds are used for necessarily, but how you pay it back. A lot of people who take the loans, reduce. or stop altogether, new contributions to the account. That’s not to say it is the worst decision, but is it the best for me based on how I want to live given my financial plan. Some people have borrowed from their 401(k) to help them fund their successful start-up.
Claiming Social Security Early: Claiming early means a lower payout than at full-retirement age, or later. For each additional year you wait, the payment increases by 8%. When you take Social Security depends on your particular situation. It may make sense to start withdrawals earlier maybe because the market is down, there is a health scare, etc.
Paying the Minimum on Credit Cards: Paying the minimum barely puts a dent in the principal owed. Sometimes that is your only option, though. A smarter way of maybe paying down the credit card using a small payment is finding a card that has a 0% balance transfer and start making the same level payment to the new card.
Putting off Saving for Retirement: The numbers do a lot of the talking. Save and invest early to position yourself for an easier transition to retirement planning. If you have debt that you feel suffocated by, you may feel better about paying off rather than saving. For making your life work, it may not make sense to save each and every year from your 20s through your 70s. Find the right balance that works for you as you might have to take some years off saving to pay down debt.
Bankrolling Your Kids: The common phrase always resonates: “You cannot borrow for your retirement living.” Although it may be a priority to provide for your kids, it is more important to provide for yourself first. If you can’t take care of yourself, how do you intend to take care of your kids? It might be important to you that your kids have a startup fund. Finding out how funding your kid impacts you is very important and could be a worthwhile venture if your kid is the next Bill Gates, Steve Jobs, etc.
Passing up Professional Advice when You Need It: This is important for more than just finance. Ever try messing around in your yard without calling the utilities service line? For most people, it isn’t worth guessing where the gas/electrical lines are. Why would you mess around with your financial life without consulting an expert? There is plenty of information available for everyone to make an informed decision, but not every professional is completely unbiased. Using professional advice from someone who has an incentive to put you in a specific product might be the time you pass up their advice. Whenever possible, try to take professional advice from those you trust and have your best interests at heart.
Avoiding The Stock Market: You may hate risk, but you take it every day. It surprises me when I hear people say they want to keep their money safe and the stock market is not safe, yet they drive their cars for 30-40 minutes every day to work. Statistically driving is more deadly than skydiving. It is all about perceived risk. Over the long-term, the market is usually up. Instead of thinking of the value of your account, think of the cash flows your portfolio can provide. However, if you invest in yourself, that is an easy way of avoiding the stock market. It is much riskier than the stock market, but it can be much more rewarding.
Quitting School: This could be great for a variety of reasons, including realizing a trade is more valuable to you. I would argue that quitting learning is much more detrimental. Anecdotally, I know enough people who only graduated from high school, but continually learned their profession were far better off than those who graduated college and stopped learning in his/her job.
Financial decisions should always be viewed through the lens of what you want your life to look like, not just financially. If not, any decision you make could certainly be one you regret. So anytime you are making a financial decision, be sure to ask yourself: “Is this the best financial decision I can make based on my life plan?”