Using Wealth Well
Before You Make a Big Financial Decision, Ask This Question
Almost every financial choice contains a tradeoff. The question is whether you've seen both sides of it.
The question
Before making any significant financial decision, ask: what does this make easier — and what does it make harder? It sounds simple. It is simple. But it's remarkable how often major financial decisions get made without a clear answer to both halves of that question.
Every decision has two sides
Paying off your mortgage eliminates a monthly obligation and provides psychological relief. It also reduces liquidity and may not be the most efficient use of capital. Investing more aggressively increases growth potential. It also increases volatility and the risk of a significant loss at the wrong time. Locking money into a long-term investment may improve returns. It also reduces flexibility. Every financial choice creates something and forecloses something else.
The side that gets ignored
Most financial decisions are framed around what they create: the return, the savings, the protection, the tax benefit. The side that gets less attention is what they foreclose: the liquidity that's given up, the flexibility that's reduced, the options that are no longer available. A complete evaluation of a financial decision requires looking at both sides — not just the one that makes the decision look attractive.
Why this matters more for big decisions
For small, reversible decisions, the tradeoffs are manageable. If you get it wrong, you can adjust. For large, irreversible decisions — selling a business, claiming Social Security, making a major investment, taking a large distribution — the tradeoffs are permanent. What the decision makes harder may be harder for a very long time. That's why the question deserves a careful answer before you commit.
Using the question
The next time you're facing a significant financial decision, write down both sides. What does this make easier? What does it make harder? If you can answer both questions clearly, you're in a much better position to decide. If you can only answer one of them, that's a signal to think longer before acting.
What does this make easier — and what does it make harder? It's one question. But it's the one that tends to reveal what you most need to see before making a big financial decision.