Most financial advice assumes people are machines making objectively optimized decisions.
They aren’t. The best financial decisions I’ve ever made looked suboptimal on a spreadsheet.
When our company got acquired back in 2017, I ended up with significant assets for the first time.
I decided to use some of that money to buy a modest house in Beacon, NY. I bought it outright. No mortgage.
Any simple financial analysis would have said paying all cash for property was leaving money on the table. Buying the home with a mortgage would have allowed me to keep the difference invested in the markets. This could have resulted in tens of thousands more in net worth over the course of decades.
I was fully aware of the financial tradeoffs.
But what I wanted psychologically and emotionally from the purchase outweighed what the spreadsheets said.
I had been living in NYC in tiny apartments for more than a decade at this point. I wanted to evolve my lifestyle. I wanted space and the ability to access nature by train whenever I felt like it.
I had also been renting my entire adult life until this point. I wanted a portion of my assets locked into something that was mine no matter what happened to my job or to the markets.
Sheila had also just moved in with me and I wanted to start building a life with her.
Spending the next few years going up to Beacon gave us both experiences we’ll look back on fondly for the rest of our lives. It was exactly what we both needed at the time.
The price of something is not synonymous with its value. I think I underpaid for that home.
Nearly every client who comes to me with a major decision is navigating both the financial and emotional tradeoffs of the options they’re facing. Here’s a recent example.
I’m working with a family saving up for their ultimate dream home.
The cash they were able to put away each month meant saving up for that down payment could have taken seven or more years. That’s seven years of forgone memories and experiences.
One of them works for a Fortune 500 and had sizable amount of vested company stock options. The expiration date was still years in the future. The company’s stock had rocketed up in the past year and a huge chunk of their down-payment could be realized if they exercised their options.
Conventional financial models suggested continuing to hold the options would maximize their net worth ten years from now. We talked it through and modeled the potential tradeoffs and it was a no-brainer.
The certainty of locking in their down payment and bringing their dream up by five years was worth more than any theoretical money left on the table. Five additional years of a dream life they could be living now vs. a higher net worth decades in the future that would have only a marginal impact on their future selves.
Five years of living in their dream home is not a line item on a spreadsheet. Neither were the years Sheila and I spent going up to Beacon. The point was never financial optimization.
Nathan
Founder & Lead Advisor
Kangpan & Co.
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Kangpan & Co. is a fee-only, registered investment advisor specializing in helping people live off diversified portfolio income.
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