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Can I? Should I?

Often, my clients and prospective clients are facing a choice of some kind, like buying vs renting a home, leaving their stable, secure job to start their own business, or staying home for an extended period with a new child. These are enormous decisions with obvious impact on lifestyle and current and future wealth and lifestyle. But there are a dizzying number of smaller, routine decisions that need to be made through the years too: traditional or Roth? Do I need more life insurance? Should I borrow from my 401k? These seem less consequential and less urgent, and compared individually to the first group, they are. But it is just as difficult to evaluate the options in a systematic way for these smaller decisions, and often the result is to not do anything. This is how I help clients make these decisions.

There are really two things to consider: can I do it, and should I do it?

The first part is qualitative and factual. We begin by understanding the proposed action and modeling how it would fit into your current framework. It can be determined by asking further questions like:

  • Am I allowed to do it? You can’t contribute the maximum ($6,000 in 2020) to both a Traditional and Roth IRA, for example. Is what you want to do permitted within the rules?

  • Am I ready to do it? Do you have the cash flow or savings available for what you’re considering? You can’t consider purchasing or renting a home that is well beyond your current budget, for example.

Often, those answers are important but incomplete. You have the budget to buy or rent, so you could do either. But you’re still stuck: what should you do? If the answers to the above indicate that you can, we move on to the analyzing whether you should. And this is a deeper conversation relating to what you really want for yourself later, what kind of life you envision, what you value, and how the possible outcomes of the decision are aligned with that.

Another way to think about it is this: if we can illustrate the possible outcomes of a decision, large or small, and also illustrate the tradeoffs, in the context of your broader financial picture, the best choice becomes clearer. And I will stress that there is rarely one “right” answer provided by the numbers. But we can show what it will mean to take a particular course of action, and what you have to give up to get there. This will allow you to make a decision that is aligned with your values but is also informed: for instance, you might decide to go ahead with the home purchase, even though it will mean a slightly lower net worth later in life, because you love the home and community and want to raise your family there, and the tradeoff is worth it to you. Or you decide to contribute to a Roth IRA instead of a Traditional IRA, foregoing the present-day tax break in favor of more flexibility later, because you are eyeing early retirement and want to keep that option open.

The choices we are faced with seem daunting, I think, because we have a sense that a wrong move can be disastrous, and so we freeze and delay our own happiness as a result. But this is why it’s important to have a broad, deep understanding both of the technical aspects of your financial life and a sense of your future goals and what you want from it all.


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