For Financial Decisions, Knowing Beats Guessing

For financial decisions, knowing beats guessing

“I’d rather be vaguely right than precisely wrong.” — Keynes

You’re considering a mortgage refi that will free up 100 bucks a month. You are in the process of purchasing some life insurance (finally) and wonder how much to buy. After all, you don’t want to be worth more dead than alive (a common and annoying phrase often heard in my line of work). You want to retire or go “work optional” at some point. Are you on track to have enough savings?

These are super-common questions that virtually everyone faces at one time or another, and many times people don’t really perform any kind of serious numerical analysis to find definitive answers. They do the best they can to figure it out on their own or ballpark it, based on their own knowledge and some semi-educated guessing. And the truth is, that’s not a bad approach for some questions.

For decisions that carry a significant impact on your financial future, though, it’s quite unwise. So the question becomes: When is the impact big enough to warrant the time and expense of consulting a subject matter expert? Over the years I have found that many people underestimate the importance of seemingly trivial financial choices like when to refinance a mortgage or figuring out how much term life insurance they need.

The answers may seem simple — and on the surface, perhaps they are. But what seems to be a straightforward choice can turn out to be a serious mistake if things don’t go quite the way you planned.

For example, how does the entire situation change if there is an extended bear market? What happens if you lose your job? Or say you’re paying for college, juggling cash flow through those years with current income plus a little savings in a 529 account…and it takes more years than you expected.

You’ll need to take some unplanned withdrawals from your retirement accounts. No problem, right? Maybe not at some points, but if the market happens to be down and you take the money out you’ll be years away from work-optional, and you really didn’t want to have to work well into your 70s. Oops!

The point is, you can’t anticipate everything that might happen — and you can definitely make…