07 Oct Emotion vs. Fact in Financial Decision-Making
It all began with an article, dated February 15, 2004, titled “Should You Pay Off Your Mortgage or Beef Up Your 401(k)?”
To start, the title suggests there’s a definitive answer, but in reality, there isn’t. Without considering the full scope of data in everyone’s unique situation, the only reasonable answer is, “it depends.”
Every financial decision boils down to two key factors: the financial aspect and the emotional aspect.
Emotions are often swayed by marketing hype, sensational news, and societal pressures.
When people express feeling “comfortable” or “satisfied” with financial decisions, are they genuinely basing those feelings on careful evaluation, or simply aligning with preconceived notions they deem accurate?
Recognizing this emotional vulnerability can differentiate those who achieve financial success from those who fall short of their potential.
Financial success isn’t just a number on a balance sheet; it’s about achieving real results in line with your potential. The key question becomes:
Are your resources aligned with your values, maximizing your quality of life with minimal risk and maximum certainty?
Many people lack the time or resources to verify their decisions, so they rely on the “trusted advice” of friends or so-called experts. Unfortunately, this trust is often misplaced, as many advisors’ opinions are shaped by tradition, popularity, or unverified assumptions. As Robert Kiyosaki, author of Rich Dad, Poor Dad, pointed out, “The difference between the wealthy and everyone else is the ability to distinguish fact from opinion.”
Choosing to seek and embrace the truth means a lifetime of going against the current. Most people resist questioning their assumptions out of fear. If your sense of security comes from following the crowd, be cautious. The truth has its own rewards, but popular approval isn’t one of them
The goal of financial analysis should be to understand these underlying principles, not to find specific answers—like whether to pay off a mortgage or invest in a 401(k).
A useful way to evaluate any financial strategy is to ask:
What needs to go right for this to succeed? What could go wrong that might derail my plan? Here’s a partial list of potential variables to consider:
- Unemployment
- Inflation
- Higher taxes or tax law changes
- Interest rate changes
- Lawsuits
- Disability
- Premature death or unusual longevity
- Property loss
- Health changes
- Divorce or remarriage
- Fraud or misinformation
Financial strategies that aren’t resilient to these risks are less than ideal, and should be scrutinized.
Perfection should always be the goal.
Emotions can cloud judgment when making financial decisions. However, when you model the facts, emotions are balanced by the reality of the situation. Financial success comes from sound decision-making based on facts, not feelings. If you are not sure about your strategy, take the time to speak with us today!