Ask Better Questions
I am the first to say that there is no such thing as a dumb question; we learn by asking questions. There is such thing, however, as a wrong question.
A wrong question is a question that is so narrowly focused that any response would fail to consider the full range of possibilities. A wrong question is one that presupposes a state of nature, or an assumption, that either does not hold true, or does not need to be true. Because a wrong question commences its journey at the wrong point of origin, the answer cannot help but arrive at the wrong destination. And in personal finance, I see it all the time…
Typical Question: How much should I save for my child’s education when I don’t know if they will go to private, in-state, or out-of-state school?
Better Question: How much can I afford to save for college, after I have taken care of saving for my own retirement?
Do I have to even explain this one? How much you should save for your child’s education is not a function of how much you believe schooling will cost. The starting point must be how much you can afford to set aside, after you have taken care of the necessities. And that means your own retirement.
Could you prioritize college savings over retirement savings while your child is young, and then power save for your retirement later? Well, sure that could work. But it is sadly typical for this reasonable sounding plan to fail miserably: Often, there simply are not enough years between the college years and the retirement years to make up the difference. Or extra debt taken on for tuition (co-signing student private loans, Parent Plus loans or HELOCs) saps the ability to ramp up savings.
Typical Question: Should I work for a few more years or retire now?
Better Question: I want to retire now; how can I make that work?
It is a mathematical fact that working longer will make retirement financially easier; the calculation will always favor another year or two or three in the workforce. A better starting point is determining what the action is that you really want to take…and then work the plan from there.
Of course, it is possible that the thing you really want to do — retire immediately — will not be as comfortable as you desire. And at that point, you can then calculate if working longer will make retirement substantively more comfortable. Alternatively, you may decide to change your definition of “comfortable.” But either way, your jumping off point for planning is the goal that you are trying to achieve.
Typical Question: The stock market is up/down; should I buy/sell?
Better Question: My investment goals have changed; should I buy/sell?
The key difference between the “typical” question and the “better” question is that the better version makes no reference to the performance of the S&P 500. Because unless something in your life has changed, and that life change has led you to reevaluate your investment goals, you have no reason to buy or to sell regardless of what Wall Street might be up to.
Please keep asking questions! But don’t be afraid to challenge the premises upon which your queries are based.
(Hey, I’d love to be in touch regularly. My free newsletter contains this blog, as well as other articles written by myself and others. Please consider subscribing by visiting the MoneyByLisa home page.)