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Trade-Offs

Published by: Jeff Hall, CFP® Date: March 07, 2017

Economist Robert Merton has been quoted saying “Everything in life, individually or socially, is a tradeoff.” As my wife and I brought our fourth child home from the hospital a couple of weeks ago, this quote continued to resonate in my mind. Having kids definitely comes with tradeoffs. Accepting that I might never have a golf game, be out of debt quickly, or achieve a point where work is truly optional are all tradeoffs I’ve made in order to have experiences that money can’t buy. Furthermore, my wife and I have rarely heard a married couple say they had the right number of kids and most have told us they wished they’d had more. These observations led us to conclude that life really is too short and the things we may have to give up to gain the joy of a rambunctious, boisterous, sometimes messy, but always adventurous home life maybe aren’t that important after all.

Like growing a family, personal finance is full of trade-offs too.

A current example is the expiring terms of home equity lines of credit or HELOCs which were quite popular when home values were soaring 10 years ago. Those 10 year terms are now ending and if they’re not paid off, the monthly payment will likely be double what it has been due to the principal being added to the payment. What seemed like a solution to pay for a home improvement, college tuition or that new boat could actually be a tradeoff for a higher monthly payment.

There can be a tradeoff between saving your hard-earned money and choosing to spend it right now to increase your lifestyle. It’s a complicated balance between having what I want now or the promise of the future comfort of a larger nest egg.

There can be a tradeoff between avoiding short-term market volatility or outpacing future cost of living increases. Is my tolerance for risk high enough to stomach market ebbs and flows over the long-term with the promise of higher returns?

There can be a tradeoff with insurance between personally subsidizing a debilitating risk or paying a premium to another entity to take on that same risk. Do I want to “roll the dice” that any monies I can store away could be more than the possible cost of a catastrophic life event?

There can be a tradeoff with estate planning and the difference between leaving our assets to the whims of family and/or government or spending the time and resources to prepare a plan for assets and heirs to carry out our wishes.

Another economist, Thomas Sowell, made similar observations saying “There are no solutions. There are only tradeoffs.” However, with some intention and professional guidance, weighing personal financial trade-offs within the constraints of a long-term financial plan can help you find solutions to a complex and hectic life.

Jeff Hall, CFP® is a Partner and Senior Financial Advisor with Rather & Kittrell. He is available at jhall@rkcapital.com