If you’ve been studying up on personal finances, I’m sure you’ve noticed some cardinal sins from financial advisors. It’s so easy to take these at face value, but the bottom line is that the general rule will not apply to everyone. There are always exceptions, so how do you know if you should be applying these rules to your finances or if making the “wrong” decision is actually right for you? Here are some tips to help you draw that line.
Moving investments or borrowing from your investments is a big no-no as far as financial advisors are concerned, but there is some gray area here. For instance, if you have high interest debt that is keeping you awake at night and a retirement account that is sitting there from an old employer, it may be the right decision for you to pay the debt with the proceeds from that retirement account despite the penalties it may cost you and the lost growth. It’s likely that if you were to calculate the actual cost of that move it would have been smarter to leave your retirement account in tact, however, there are some tertiary factors that may make this “bad” decision worth it. For instance, if you’re attempting to right your financial ship and need some motivation to get you started on repaying debt, this might get you started. It also might free up much needed cash flow on a monthly basis. If your budget is running a deficit every month this could be a huge help. While there is no right answer for every person, the most important thing is that you factor in the financial as well as non-financial factors at play.
Taking on Debt
Not all debt is bad. Some debt can even be seen as an investment in the right circumstances. I remember reading Suze Orman’s Money Book for the Young, Fabulous & Broke ten years ago and learning how buying a suit for a job interview on credit may not be the most damaging financial decision you can make. In fact, within reason, it can be considered an investment towards achieving financial security. The general rule would tell you never to spend money you don’t yet have, but this advice flies in the face of that. This is a fine line however, so this example may not work for everyone. Other good examples of this would be buying a home or getting a college degree. Once again these are investments in your future and future earning potential.
Have a Strategy
When you’re considering making a financial decision with significant trade-offs like the examples provided above, the most important thing to do is develop an overall strategy for your personal finances. Once you have that plan in place you can ensure that making this “bad” decision fits into that strategy. Consider what that decision can do to benefit your life overall and help you further your goals. Is the tradeoff worth the potential up front cost associated with the decision?
Know Your Pain Points
As financial advisors we can often forget that money is attached to real human emotions. Fear of uncertainty or risk are real things. Feeling hopelessly buried in debt can be severely draining on an emotional level. This human factor is something your financial advisor can’t price for you, but it’s something you should learn to factor into your decision making. Remember that it’s your life and it’s ultimately your decision how you choose to live it.
Written By: Lindsay Dell Cook
Lindsay Dell Cook is a CPA, finance writer, and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband and adorable daughter. When she's not working, she enjoys spending time with her family, taking their lovable mutt for walks, or reading a good book while buried under a pile of cats.