If You’re Getting Ahead, isn’t Splitting Hairs Counter-Productive?

At the risk of contradicting some of my earlier posts when pointing out the optimal way to approach particular financial scenarios sometimes it’s best to instead say, “Just Tackle the Issue Regardless! Worry about details later“.  When it comes to personal finances, if analysis paralysis sets in and you worry so much about finding the best way to do something, researching, setting up accounts, comparing options, etc., you may very well be losing valuable time on your core objective – you’re not seeing the forest through the trees.  Here are some common examples:

• Paying off a Mortgage Early -There are myriad articles out there on the pros and cons of pre-paying a mortgage if you had the excess cash each month to do so.  On one hand, the sooner you’re out from under that mortgage payment, the more flexibility you have in doing what you want with that monthly paycheck – and you’re avoiding a lot of interest.  Conversely, that interest is really just your current interest rate even if a 6-figure sum sounds large (i.e., over 30 years, of course it’s going to sound large and those include future dollars).  If your mortgage rate is less than 5% and you can earn more than that over a prolonged period of time, after factoring in your mortgage interest deduction and taxes on your investments, perhaps you money is better utilized investing the excess instead of paying down a low interest mortgage.  But Wait! Rather than doing either, are you sucked into an eternal loop of research and analysis and that extra monthly income is going nowhere?  Or worse, it’s being spent?  Would it be the worst thing in the world if you made additional payments on your mortgage for a couple months while you figured out what you really wanted to do with that excess cash long term?  At least you shaved a year or more off the total duration of the mortgage in the meantime and basically “earned” that mortgage interest rate minus the tax deduction.  By doing nothing, the money is either being spent or losing money to inflation!

• Which Debts to Pay Down First – There are various approaches to paying down debt that range from paying down the smallest balances first to wipe them out to focusing on the highest interest rate first to minimize net interest payments over the long term to focusing on paying secured credit first and non-secured last.  Regardless, rather than letting the bills continue to stare at you each day and microanalyze how your payments could be best put to use, start doing something!  People get themselves in serious trouble because they reach some sort of state of malaise where they are paralyzed by debt.  If it’s going to take a month to figure out which approach is best for you or whether you want to go for a 0% balance transfer or otherwise, at least make those minimum balance payments immediately and continue to tackle what you can.  By remaining paralyzed, late fees start to stack up and interest rates continue to rise (once they know they’ve got you, credit card companies tend to jack up the rates immediately).

• What’s the Best Way to Start Investing? – Young people are especially torn by this issue since they’re generally entering the workforce with no prior investing experience or accounts to speak of.  While they should certainly be participating in a company 401K or equivalent program, especially if the company offers a match, it’s not always clear where else to deploy excess cash.  Do you invest in mutual funds? Dividend Reinvestment Programs? Or open a trading account?  As evidenced by this example of the 25 year old investor who starts investing today vs. waiting 10 years, that 35 year old investor finds it virtually impossible to catch up, even if they continue to invest well past when the 25 year old starter ceases making investments.  It’s the power of compound returns.  Investors may even be split on which is the best online brokerage to start with.  Well, early on, the key is to just get started.  There are great deals out there now, like 100 Free Trades from OptionsHouse or a $100 Signup Bonus from OptionsXpress with only $500 funded.

• When to Wait? Well, in the event of an unanticipated windfall, it’s often prudent to do nothing.  There’s no harm in putting the money in a top online savings account or even a no-penalty CD for the higher rate as long as it’s below the FDIC limit, but this is probably an occasion where you don’t want to go throw the money into a shady real estate deal or go buy Apple shares because you think the iPad’s going to rule the world.  This is a situation that calls for planning and prudence.  The other situations above have existed for some time and you’ve known you can and should do something about them, but just haven’t yet.

What Are Some Examples You Can Think Of? How Have You Handled Them?

Tagged as: Personal Finance