Personal Finance Rule #1: Be Honest with Yourself (and Your Partner)

Financial decisions are inherently complex. As much as we try to execute financial decisions based solely on reason and logic, emotions will always play a role. When we neglect to acknowledge our emotions, we run a greater risk they will cloud our judgement.

Understanding our emotional reactions to various choices can help us make better informed decisions. Addressing emotions can also help us identify what aspects of a decision are most important to us and why.

Understanding and addressing our emotional wants and fears as a critical step in financial decision-making will lead to less stress, reduced strain on relationships, and better financial outcomes

The following are true stories of why it is important to be honest with yourself.

(Certain details have been changed to protect privacy.)

“I’ve got a tack weed problem.”

Arthur came to me one day and said, “I need to buy a new home.” I asked Arthur to explain the situation, to which he replied, “Tack weeds. There are tack weeds in my lawn and I need to move.” We talked for a bit and I suggested possible solutions to the tack weed problem, but the longer we talked the more agitated Arthur became. I was naïve in my attempt to help Arthur solve his tack weed problem. Finally he blurted out, “I don’t care about tack weeds! I just don’t want to live there anymore!” 

Once Arthur admitted he wanted to move for purely emotional reasons, we were able to have a great conversation that ended with a good laugh and sound solution. He had felt bashful about admitting his true motivation, even to himself, so he invented the tack weed argument.  Once his true feelings about the decision were addressed he felt much better. He no longer needed to use excuses to justify his choice. In the end he found peace because his motivations were aligned with his expectations.

“I don’t want to invest in the 401k because reasons.”

Charlie and Becky wanted to discuss how how they might invest some of their extra income for retirement. We discussed increasing their 401k contributions, opening ROTH IRAs, or simply investing in an after-tax joint account.

Charlie was eager to reduce their high taxable income by making additional pre-tax 401k contributions, then making ROTH contributions with any remaining surplus.

Becky was frustrated with this plan and expressed the desire to simply invest in an after-tax joint account. She was unimpressed with any of the special tax benefits of the alternatives. “I don’t care about the taxes. Let’s just invest in our joint account. It’s just as good,” was her reply.

As the conversation progressed, Becky and Charlie were becoming quite frustrated with one another. Finally, Becky revealed she had another funding goal beyond saving for retirement: she wanted to set money aside for a big vacation. She feared that diverting all of their income surplus to long-term retirement vehicles such as 401k and ROTH accounts would place that money out of reach. With this concern out in the open Charlie eagerly proposed splitting the cash-flow surplus between retirement savings and savings for the special vacation. They did this and were able to save for retirement in the most tax-efficient manner while still satisfying their short-term vacation goal. 

Conclusion

In both of these instances acknowledging the true motivations led to the best possible outcome.

Working as an advisor, I occasionally encounter a client going to great lengths to rationalize a choice they have made; and I have found that a choice made with a hidden motivation rarely leads to the desired outcome. Correct choices generally do not require much convincing. If you feel the need to explain your decision and convince others it is right, I recommend asking yourself these questions:

  1. Am I seeking validation because a part of me feels this choice is wrong?
  2. Are there emotional factors involved in this decision that I haven’t addressed?

Taking the time to ponder these questions and having the courage to uncover the answers enhances our ability to make rational choices, find peace, and secure our desired outcomes.

Ben Messinger, CFP®

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