One of my favorite sayings is that personal finance is much more personal than finance. For years, one of the core principles of our financial planning has been to encourage clients to pay down their mortgages when possible. This may seem counterintuitive. The prevailing wisdom of the last decade has been to invest that money. Low interest rates fueled the narrative that more money could be made by placing additional mortgage payments in the stock market.
Overall, this was really correct. Why pay a 3% mortgage when, on a long-term average, the S&P 500 returns just over 10%? Simple math would tell you that the wisest course of action was to put extra money to work in the market. But the best advice isn’t always driven by cold, hard math.
For many customers, the comfort of knowing their primary residence was paid for seemed like a better option. Often, having your biggest monthly expense eliminated has paid huge dividends in the relief and confidence department. Can you put a price on that feeling? The reality is that a client’s “right” decision had nothing to do with financial dollars and cents but the personal satisfaction of owning where they live.
This past year highlights that even the “right” decision doesn’t always work out. Traditional investment advice may present more risk than anticipated. Consider the long-held belief that a balanced portfolio of 60% stocks and 40% bonds will help smooth out experienced market volatility. For those who believe in this approach, 2022 has been a tough year. Both stocks and bonds have seen values rise and fall, and not always in a balanced way. Rather than reducing volatility, this combination has contributed to increasing its levels.
It’s worth remembering that there are no “right” answers in finance. We never know what might happen in the markets tomorrow, next week or next year. For us, that means we put more weight on the personal side of personal finance. Questions like, “Will I have enough?” or “Will I be okay?” gain deeper feelings of security, confidence and well-being. Generating a return that’s a percentage point or two higher does nothing to answer these questions or reassure anyone that they’re on the right track.
A recent reading of George Kinder’s “Three Questions for Financial Life Planning” provided a framework for exploring deeper questions, one that I encourage you to try with your spouse or a close friend. He encourages people to answer three questions:
First, imagine that you are financially secure. You have enough money to meet your needs today and in the future. How would you live your life? Would you change anything? Dream; don’t hold back Describe a life richly and fully yours.
Next, imagine that you have just visited your doctor and are told that you have 5-10 years to live. He will not feel sick or have any “warning” of his death. What will you do with the time you have left? Would you change anything in your life today, and if so, how will you do it?
Now imagine your doctor calls and says today is the day; you have 24 hours to live. What are your feelings when faced with your mortality? You will ask yourself: what did I miss? Who did I miss? What didn’t I get to do?
These questions envision a world 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 exploring what is really important to you. The answers may be surprising.
Questions like these allow us to get to the core of what is important. Money is important, but remember it’s a means to an end. What is your ultimate goal? How you feel about your finances and the overall plan are far more important than your bank statement balance. Money is emotional.
As an example, we had a new client tell us they purchased a property in North Denver several years ago. What was once a blighted shipyard area has become a hot market, with development skyrocketing as the neighborhood reinvents itself. They had valuable real estate but lacked a plan for it.
They were in a good place money-wise, but a recent cancer diagnosis left them with a desire for simplicity. We encourage you to consider your circumstances, values, goals and desire for simplification. Eventually, they decided to sell the property and use the funds to invest in companies that paid dividends. Could they generate a higher return by holding the property? possibly But their income was tied to a lease that was fixed, all while inflation ate away at their purchasing power and property taxes and insurance costs continued to rise.
This decision was a better fit for them and more aligned with their long-term goals and values. It has dramatically reduced your time investment from caring for a large property to simply opening an envelope each month. Their focus is once again on spending time together. That is worth far more than anything a property could have provided.
Personal finance is much more personal than finance.
Steve Booren is the founder of Prosperion Financial Advisors in Greenwood Village. He is the author of “Investing Smart: Your Guide to a Growing Retirement Income.” He was named by Forbes as the state’s top wealth advisor in 2021 and Barron’s top state advisor in 2021. This column is not intended to provide specific investment advice or recommendations.