Calculators are great. They give you an answer. Unemotional. Sanitary. 5 seconds or less. Heck, they don’t even need fingers for the tough arithmetic.
While a calculator is a tremendous tool and the extent which we can model financial situations is truly mind boggling, however one basic problem remains- it does not have a brain and if it does not have a brain (to my understanding) it cannot consider “feelings”. Sorry Watson.
Last week, a friend asked whether he should accelerate his mortgage payments because he had been reading online that it doesn’t make sense to pay off quicker because of current low mortgages rates and that a better return on his money could be achieved if he invested it.
I get this question often and my professional opinion is that it can be a deeply personal decision. Therefore, reading an article that suggests if your mortgage is 4% and you can get an 8% return from an investment, you should always pay the minimum mortgage and invest the difference is not only failing to consider the other variables that go into the equation, but more importantly, negates any input from the individuals’ personality.
A calculator could spit out a definitive answer (yes or no) based on whatever assumptions are used. It could take into consideration mortgage rate, interest rate, duration, assumed investment return, risk-free return and virtually any other assumption you want to work in. We can even trick the calculator into giving us the answer we want to see.
But the problem is two-fold:
1. Most of the inputs are assumptions. Put another way, they are guesses as to what will happen in the future.
2. None have taken into consideration the individuals disposition to risk or debt, nor does it consider other personal financial implications.
After asking my friend a few questions about his financial situation which included whether or not he even had the ability to invest more money or make principal payments on his mortgage, I came back and asked him what would make him sleep better at night.
It was something he had not considered. He was so caught up in trying to calculate if it made financial sense, that he forgot how much he despised debt and never considered the anxiety he feels watching the market gyrations.
Considering how you will “sleep at night” is completely underestimated when making financial decisions. Not every decision should be solely based on financial optimization because it’s not always the end all be all. Next time a situation like this comes up for you, consider the decision through the lens of life optimization. In other words, what would make you happier, or sleep well at night.