Trading Off

Jonathan Clements

WHEN WE CHOOSE to do one thing with our time and money, we’re also choosing not to do countless other things. The purchases made and the possibilities forgone sometimes turn into lasting regrets.

That is, to a degree, unavoidable. We often misjudge not only what we want today, but also the wants of our future self. Still, I firmly believe we can all do better—if we avoid impulsive decisions and instead spend time thinking through life’s key tradeoffs. Here are 18 of the biggest:

1. Spending today vs. saving for tomorrow. Financially, this is the biggest tradeoff of all, one that raises issues of self-control, happiness and future financial security. Living solely for today isn’t the answer, but nor is excessive frugality.

2. Risk vs. return. This is arguably the next biggest financial tradeoff. Do we take more investment risk in hopes of earning higher returns, or should we favor a potentially slower but less treacherous path to wealth? This is partly about so-called risk capacity, which encompasses notions like time horizon and job security. But it also depends on our personal risk tolerance.

3. Retirement vs. other goals. We all have multiple goals: funding retirement, buying a home, paying for the kids’ college, driving a nice car, giving to charity, being prepared for financial emergencies and more. Which should take priority? To me, it’s no contest. Retirement should always come first because it’s life’s most expensive goal—and one day it’ll almost certainly happen.

4. Hire an advisor vs. do it yourself. An advisor could potentially save you time, money and anguish. Is the cost worth it? There’s no one right answer for everybody. Instead, much hinges on whether we have the temperament and intellectual interest needed to manage our own money. What if we don’t? For goodness sake, make sure the advisor you hire is legally obligated to act as a fiduciary and that you understand all the fees involved.

5. Indexing vs. active management. We can either buy index funds and collect the market’s return or we can try to do better—a route that may lead to far greater wealth, but probably won’t.

6. Invest vs. pay down debt. There’s an emotional aspect to this one: Some folks simply don’t like being in debt. But if the focus is purely on returns, the answer is usually straightforward. If the alternative is to invest in stocks, you should probably do that rather than reduce debt, unless it’s credit-card debt or other high-interest borrowing. What if the alternative is to buy bonds? Often, you’ll be better off paying down debt.

7. Take on debt vs. pay cash. We can borrow to buy what we want right away and incur interest charges—or we can wait and, in the meantime, save up the purchase price and earn interest while we’re at it. If the item in question is a college education or a starter home, paying all cash usually isn’t an option. What if it’s a new car or a kitchen remodeling? In that case, there’s more room for choice, and those who opt to borrow can end up paying significantly more.

8. More education vs. immediate earnings. If we get an undergraduate or graduate degree, that’s time when we could be in the workforce earning a paycheck. Yes, some folks manage to get a degree while also working a fulltime job. But that, of course, involves other tradeoffs, such as sacrificing time with friends and family.

9. Pursue passions now vs. later. To save enough for retirement, we might need to save diligently for three decades. But which three decades? Many pursue their passions in their 20s, and then turn their attention to making and saving money in their 30s, 40s and 50s. But I’d put in a plug for earning and saving starting in our 20s, so we can pursue our passions in our 50s, when we likely have a better idea of what’s important to us.

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10. Work vs. family. For many, this is a lifelong balancing act, as they strive to get ahead in their career without shortchanging their family. But this, I believe, is a false choice stemming from a foolish workplace culture: Too many managers equate productivity with long workdays, prompting many employees to stay later at the office than needed, despite the sharply diminishing returns from all those extra hours logged.

11. Buy vs. rent. More than anything, this choice should be driven by time horizon. Planning to stay put for a minimum of five years and preferably longer? Buying a home could make sense.

12. Bigger house vs. shorter commute. To get more space for the same dollar amount, many folks opt to move farther from where they work. But the result is more time commuting, which research suggests is a major source of unhappiness.

13. New, costlier car vs. older, less reliable model. I’m a fan of buying used cars. But while the price is less, there’s a greater chance of breaking down. On top of that, even many frugal HumbleDollar readers tell me they’re more inclined to buy newer vehicles—because they want the latest safety features.

14. More insurance vs. less. Insurance is a major item in most family budgets. My advice: Make sure you have all the insurance policies you need, while keeping down the total price tag by favoring higher deductibles, longer elimination periods and opting for term life insurance over cash-value varieties.

15. More emergency money vs. less. The pandemic and accompanying economic turmoil have been a wakeup call for many, who discovered they didn’t have nearly enough rainy-day money. Still, cash investments today offer the tiniest of yields, so there’s a huge incentive to keep your emergency fund on the small side—and consider alternative sources of cash, a topic I tackled recently.

16. Retire earlier vs. later. Delaying retirement is one of the most powerful financial levers: It gives us more time to save and collect investment returns, while shortening our expected retirement. That shorter retirement means we can spend down our portfolio at a faster rate, get more from any immediate annuity purchase and delay claiming Social Security. But there’s an obvious downside: We need to keep turning up at the office. Still, many folks get a lot of pleasure from work, plus working longer seems to boost life expectancy.

17. Smaller Social Security benefit at 62 vs. larger check later. This one is endlessly debated, and I’m not inclined to rehash it here. That said, if you’re claiming benefits simply because you just retired or just turned age 62, there’s a good chance you’re doing yourself a disservice.

18. Higher retirement spending vs. larger bequest. I always encourage retirees to enjoy their accumulated wealth. After a lifetime of hard work, that’s what folks deserve. Still, that will inevitably mean a smaller estate—and, for some, helping their heirs is also an important goal.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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Steve Spinella
Steve Spinella
1 year ago

If you put a five point scale on each of these questions, you’d have a great investor profile! Subscores might include risk, time, control, and self.

Frank O'Brien
Frank O'Brien
1 year ago

I always enjoy your financial longevity checklists as I find myself going…check, check, hmmm, gotta take a look at that one. One topic I would add is lifestyle choices as it relates to personal health: am I getting enough rest, exercise, nutrition and community to keep my waist line in check, mobility sound and mental state keen? Personal financial capital can’t be divorced from personal health capital as it seems obvious to me – we can’t enjoy retirement pay if we’re sick, broken or worse.
thank you

Last edited 1 year ago by Frank O'Brien
David Powell
David Powell
1 year ago
Reply to  Frank O'Brien

Great point, Frank, love this.

1 year ago

“The increasing complexity of the problems in personal finance with which one is confronted from day to day makes it imperative that one be as well prepared as possible to meet them.” This is the first line in the book Managing Personal Finances by David F. Jordan and Edward F. Willett, 3rd Edition, 1951. (The 1st Edition was printed in 1936.) I’ve been collecting old personal finance books and this is from my collection.

Interestingly, just about everything that Jonathan wrote about above is included in the book, except Number 5, Indexing vs. active management.

It looks like simplifying your finances as much as possible is helpful. Putting things on autopilot helps. Then dealing with what needs to be managed along the way. Oh, and avoid what appears to be increasing complexity over time. I wonder what Mr. Jordan and Mr. Willett would think about personal finance today?

1 year ago
Reply to  SanLouisKid

amen to simplicity. You can drive yourself crazy trying to optimize everything and end up with a web of strategies that may reap higher financial rewards, but demand more management time and cognitive ability than one will have as they age. Sometimes “good enough” is.

Last edited 1 year ago by CJ
Charlie Warner Jr
Charlie Warner Jr
1 year ago

Looking back from age 68 I realize, time not money is my biggest asset. I’m blessed to be in my 6th year of comfortable retirement. I must remind myself everyday that I have the time to do what ever I want…..I do not have the time todo everything I want.

Jack Hannam
Jack Hannam
1 year ago

I second that. I’m the same age, and while I manage my portfolio with an expected time horizon of 35 more years, I have no idea how much time I have left, so I remind myself to spend my time liberally on activities I value now.

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