When Six Doesn't Equal a Half Dozen
We live in a culture where everything is black and white. There's an absolute wrong, and an absolute right. The personal finance world is no different. It doesn't help when one of the biggest personalities in the financial space treats everything like you're an absolute idiot if you don't do exactly what he thinks you should do.
This is one of the reasons why so many people make poor financial choices. It's not that they are being negligent or dismissive, but rather because they are being given out-of-context financial advice from people with completely different situations. Context always matters.
I will regularly give seemingly conflicting financial advice to clients. Here's an example. One of my clients wondered if they should pause their 401(k) contributions while trying to pay off credit card debt. They absolutely should. Given their situation, not pausing these contributions would prolong this very painful debt payoff process by approximately 18 months. The very next day, I strongly recommended a different client not pause their 401(k) contributions while trying to pay off debt. The dynamics of their situation were far different, thus merited a completely different decision process.
Other times, decisions on the table seem like a six-of-one, half-dozen-of-another type situation. The decision can be seemingly inconsequential. Mathematically, that may be true. Behaviorally and psychologically, however, is an entirely different story.
Here's one scenario. One of my clients is a successful business owner. And like most business owners, taxes are a constant frustration. Each month, when they pay themselves from the business, they also take a chunk of cash and set it aside for taxes. They have a bunch of money sitting in their business checking account, and another block sitting in their tax savings account. Problem: they just realized they've undersaved for taxes and will owe more than they've already saved. This is causing a tremendous amount of undue stress.
If they had pulled more for taxes, they would be sitting with more money in their tax savings and less in their business checking account. Six of one, half dozen of another, right? It shouldn't be a problem.....but it is! Emotionally, it feels like a loss. Even though they are in the exact same financial situation either way, the psychological impact of having to "owe more money" for taxes is weighing on them.
Their solution was simple:
1) Immediately move a lump sum of cash from their business checking to their tax savings. That act alone relieved some stress.
2) Increase future monthly contributions into their tax savings account, to a degree that they will likely have excess after paying taxes.
While that's probably not the right choice for many people, this is an extremely wise decision for them. They understand their emotional and psychological quirks and have elected to manage accordingly.
As you venture through life, I encourage you to look through the lens of context. What's right for one family may not be right for you. Know yourself, understand the mission, and do what's best.