Humans are a mass of contradictions, and nowhere does that play out more obviously than in the arena of personal finance.
In the effort to optimize to the nth degree, many otherwise rational beings fall victim to “overthinking” their finances, analyzing tactics that at the end of the day, have only a negligible effect on the ultimate outcome.
Worse still is overthinking ourselves into a poor financial choice. Often, we just can’t seem to let it be.
Why The Overthink?
I hypothesize three reasons why we ponder too long on some financial decisions, and it is worthwhile to explore these:
1. The fetishization of complexity. We like the idea of simple, but often not the actual practice of simplicity. Surely if something is laden with obscure terminology and complex equations, it must lead to a more profitable result.
2. Media hype. If the media is expending column inches (old school print journalism reference) on “X,” then, of course, this is what you should focus your attention on, right?
3. The human desire to exert control over the uncontrollable. Is there anything less emotionally satisfying than being told that whatever you do, the outcome is in the hands of the fates?
What are you possibly overthinking in your financial life?
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Your investment portfolio.
You know full well that reams of research exist demonstrating that low-cost broad-based index funds outperform actively managed funds and that individual stock picking is a losing proposition for most people.
You’re fully aware of the adage that what matters most for investment success is time in the market, not timing the market.
Perhaps you are even familiar with the research that shows that this year’s “hot” fund manager is rarely hot for the long term.
And still, you persist.
If you’re very wealthy, I give you permission to spend as much time as you like wallowing in this well. The rest of us need to get a life.
For example, yes, there are significant differences between investing for retirement in a Roth account versus a traditional pre-tax retirement account. If you have a crystal ball with a perfect vision of the future, you can quantify exactly which is to your best advantage. But you don’t.
I promise you that the difference between living comfortably in retirement and eating cat food will not be the tax efficiency of your portfolio.
The most critical determinant of your retirement success will be how much you save, not the tax treatment of your savings.
In fact, an over-emphasis on reducing the tax drag of your portfolio may lead you to overlook the possibilities of non-tax advantaged savings. This will be critical if you want to maintain the flexibility to change up your life before the age of 59 ½.
More insidiously, over-attention to tax minimization could lead you to make choices that are quite tangibly bad for your health.
People’s eyes light up when they hear the words “Health Savings Account” (HSAs) because of their undisputed and significant tax benefits. However, the entry price for having an HSA is a high deductible health plan (HDHP).
Recent research has found that persons with an HDHP are often reluctant to seek medical attention, especially mental health services because they do not want to tap into their precious HSA account.
Low Value Spending.
It’s great that you’re combing your statements to find unused subscriptions and streaming services to cut, but it’s unlikely that’ll move the needle much to bring you closer to achieving your financial goals.
Over-attention to small-bore expenses needs to be redeployed in the service of attention to the main drivers of a budget, namely housing and transportation.
For example, with the average price of a new car hitting $40,000 this year, aggressively challenging your deeply held assumptions about your vehicle needs could result in a high payoff.
So, what should you spend your mental energy on? What should you “overthink”?
Take Your Time Deliberating On…
The figure you should carry around in your head is not your weekly grocery budget.
The number to know is your savings goal and, importantly, how much you need to save each month to reach that goal by your intended date.
You can easily calculate that here.
There’s no metric for this, yet this should be the filter through which you view every impactful financial decision.
- If you buy a house, will the ongoing expense of ownership or high transaction costs if you need to sell, constrain your ability to pivot in your career?
- If you invest a sum of money and it quickly loses value, will you be forced to abandon a cherished goal or even change your lifestyle?
- Will the amount you borrow for college lock you into a specific job or type of employment?
Your personal behavior.
I am sorry to say this, but none of us can be trusted to always bring our best selves to our money decisions.
What are the shortcomings in your money behavior that lead to less than optimal results?
Spend time overthinking this question and then put in place tactics to overcome these deficiencies.
That may mean, for example, automatic saving and investing. In addition to your payroll deduction for retirement, does your employer allow you to split your paycheck between two bank accounts?
You need not look further than the multiple affordability crises of housing, healthcare, and higher education to appreciate that much of what determines our ability to achieve financial wellness is systemic.
This is an area where it would be extremely easy to give in to the emotion of “whatever I do does not matter.” And you would be wrong.
All of us can advocate and vote for policies at both the national and local levels, which can provide the foundation to build wealth.
Simply ignoring this entire personal finance arena is not only an abdication of responsibility, it’s shortsighted. Apathy is costly because it makes it less likely that you will benefit from broad policy changes.
Spend time understanding your money story and financial mindset and figuring out your saving and investing goals.