If You Still Think Personal Finance Is About Math, You Don’t Understand the Money Game
Reasons why personal finance decisions are not always about mathematics
When we think about making personal financial decisions, such as taking on debt, student loans, buying or renting a house, we immediately make mathematical calculations. And we all know that 2 + 2 = 4 and 1 + 1 = 2 because there will never be answers other than those.
This is basic mathematics. Although it is not always easy to calculate, the answers are always the same. But when it comes to personal financial decisions, we often need more than mathematics. We need to add the variable “Emotion” into the equation.
Reasons Why Personal Financial Decisions Are Not Always Mathematical
Math is an easy science, but dealing with the weight or emotional side of every personal finance decision is not. What is often best for our money may often not be best for our mind and heart.
To make this clearer, let me give some examples:
Buying Your Own Home in Cash or Investing Your Savings in the Stock Market?
Let’s take a look at a financial issue that is causing a buzz.
Should you pay off your mortgage early or invest all your savings in the stock market?
How should we begin to solve this financial dilemma or a little problem? By doing mathematical calculations, filling out detailed spreadsheets in excel (or whatever your spreadsheet is), and comparing side A and side B options, of course.
If you think about math, you can think of many variables and common denominators.
When mortgage rates are low and investment returns in the stock market are high, we should invest our saved money in the market.
This seems like a perfect choice, and most people would make this financial decision. Some will even buy stocks, ETFs, cryptocurrencies, or mutual funds. But some may choose to pay off their mortgages early. Why are we bad or amateurs with money? From a mathematical point of view, investing is the best option, so why doesn’t everyone do the same thing?
The answer is quite simple; some people crave security regarding profits or business returns.
Ultimately, not having debt is an emotional thing that many people yearn to experience. Could we earn $100,000 or $420,000 more by investing in the market? Possibly, but there is also the possibility that we could run out of our jobs and have no way to continue paying our mortgage while the market at the same time is crashing.
Simply put, the math doesn’t apply 100% here and some of us are willing to take risks in the market, and others prefer to play it safe.
Buying or Renting a Home?
Let’s take a look at another, more controversial financial decision: Should you buy or rent a house?
This question may seem easy to answer, but it’s really not. For example, how much does renting cost in your city, and how much would a monthly mortgage payment cost? Could rent cost more than paying the mortgage in the end? In this case, the ideal would be to choose the option that leaves us with more money in our pocket, right?
Trying to make this decision based on math may not be a good idea. For example, how do you feel about dealing with the landlord? How long do you intend to live in the same house or city? If you own the house, do you have the time to take care of the property?
Those who prefer to buy houses focus on the capital and tax advantages. Those who prefer to rent, on the other hand, focus on the high cost of financing or costs of down payment, paperwork, lawyers’ fees, repairs and property taxes, and a lot of other things that I would take another article to describe.
Both those who prefer to rent or buy have advantages, but the decision is very personal and involves much more than mathematics.
Working in Highest-Paying Jobs or Doing What You Love?
What if you discovered the formula to earn six figures doing something you love? Would you still get a degree in a higher paying 9-to-5 job, or would you just choose to follow your passions?
What do the numbers and history tell us? Well, looking at the graphs, choosing the highest-paying job is the best decision. If all financial decisions were only about mathematics or monetary gain, we would all seek the positions with the most privilege and leave the other work to someone else.
Many prefer to be doctors without borders, teach young children, or become social workers for those in need. They would rather follow their passions than fill their pockets. Why? Because they can’t imagine living tied behind a desk and their hearts yearn for more than the typical 9 to 5.
Personal Financial Decisions Are Not Always About Mathematics
Why are personal finance decisions so difficult to make? Shouldn’t the ideal choice always be the most realistic? Shouldn’t we always choose the option that offers the best long-term advantages, the highest income, and the highest return?
Of course, mathematics also matters in the decision-making process, but most personal financial decisions require much more analysis than calculations, digits, numbers, and graphs.
Ultimately, age is a more important factor than math.
Our personal, economic, and financial decisions change as we age. We may deal with the exact same decision point from a totally different perspective than we faced just a few years ago.
Your perspective on money and life will change as you get older.
Look at the numbers yourself and check your emotional state as they have changed over time, but go easy on yourself. Your decisions will change over time.
There is no mistake in changing your mind or thoughts. Make it clear to yourself so that you are not left looking for that one decision to make or the perfect moment to act.
Final Thoughts
Over the past few years, I’ve learned to turn off the “perfectionist modes”. I have realized that there is no such thing as a perfect choice or perfect time to act. Yes, some choices will be better for financial reasons, and some will be better for our souls.
At some point in our lives, we will have to combine the two ingredients. Sometimes we will look at the charts, do the calculations, and look for the best returns. Other times we will just listen to our hearts and completely ignore the mathematics.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.