Personal Finance Is Personal

J. Money of Budgets Are Sexy often showcases emails from readers regarding their personal finances for the community to weigh in (with the readers’ permission, of course).

The most recent one featured a couple who was considering whether to use extra savings to pay off a huge chunk of their mortgage.

They’re already paying extra on their mortgage, maxing out their 401(k)s, investing in a taxable account, and saving. On top of all of those things, they make $350,000 per year. (Killin’ it all around!)

What did the community recommend they do?

Most of the comments broke down into paying off the mortgage or investing the money.

Some people felt that they should invest the extra money because the interest rate on their mortgage is so low. Some thought they should invest so they can keep the money liquid in case of an economic downturn (both of them are in sales).

Others thought the idea of a paid-for house was freeing and encouraged them to pay off the mortgage first.

There were also suggestions between the two extremes.

One person suggested a “loan pool,” meaning they’d put money aside in a savings account until the balance was greater than the mortgage. Then, they could use that money to pay it off all at once. The upside is the money would be liquid during that time in case of emergency.

The right answer: “It depends…”

In law, we are notorious for couching our answers to seemingly simple legal questions. “It depends” is a common refrain for lawyers everywhere.

That’s one thing that law and personal finance have in common: the right answer often is “It depends.”

In the discussion on Budgets Are Sexy, none of the responses were right or wrong. Just different.

It really depends on the individuals involved.

We’re all different ages. We have different goals and dreams. We’re at different stages in life. Different stages in our careers.

There is no one-size-fits-all money approach with so many variables coming into play. Personal finance is personal. What I believe and recommend may be different from others, and that’s okay.

Don’t set yourself up for failure trying to follow what everyone else thinks you should do.

Snowballs and avalanches

One classic example of that shows up when people are choosing their debt payment method.

The most popular methods people use to pay off debt are the debt snowball and the debt avalanche.

In the debt snowball method, you list all of your debts from smallest balance to largest balance, and you pay them off in that order without regard to interest rate. The advantage of the debt snowball method is that you end up seeing quick progress so you are motivated to keep going.

In the debt avalanche method, you list all of your debts from highest interest rate to lowest interest rate and you pay them off in that order. The advantage of the debt avalanche method is that you end up paying less money overtime.

Ultimately, the best method is the one that works for you and that you’re going to stick with.

I personally like the debt snowball method better. My husband and I used this method to pay off nearly $50,000 last year, and we’ve already paid over $35,000 so far this year. (By the way, follow our progress here.)

Pay off debt or invest

Another way this comes up is in deciding whether to pay off debt or invest first.

Some people believe that if the interest rates on your debt are lower than what you could earn in the market, paying off debt should come second to investing. Others believe that paying off debt should come first. Still others think that you should do both at the same time.

I’ve already told you about the importance of paying off debt before investing. For me, investing is important, but the risk associated with the debt drives me to want to pay off the debt first.

Some people thought I was crazy to recommend paying down debt when there’s money to be gained in the market. The time value of money, you know!

Keep in mind, though, that some of us are more risk-averse than others. *raises hand*

While some people compare the interest rates on their debt to the interest they could earn in the market, others feel the weight of their debt and prefer not to have it hanging over their heads any longer than necessary. *raises hand again*

Let’s just stop pretending

Personal finance is more than just math. There’s psychology involved. There’s risk tolerance to consider. There’s a lot of emotion. There are a number of external factors at play, as well.

We can’t just crunch some numbers and come out with a cookie-cutter plan for everyone to follow. What works for you may not work for me and vice versa.

It’s how a simple question about what a couple should do with excess funds generated five or six different plans. None of them was wrong. Each of them reflected what the respondent would do if put in the same situation.

Everyone has to take the advice they receive, books and blogs they read, podcasts they listen to, etc. and figure out how it all fits their lives. Maybe this part works for you, but that part doesn’t.

Take what works and come up with a plan that moves you toward your goals and that you can stick with. Use the things you learn as guidelines, but feel free to deviate where necessary.

I’ve mentioned before that our plan to pay off our debt is inspired by Dave Ramsey’s teachings, but we don’t follow his plan step-by-step. Some of his philosophy just doesn’t jive with ours. That doesn’t make him or us wrong.

One thing is for sure, if you’re making progress, you’re moving in the right direction. (Now, if you’re digging yourself deeper into the hole every month, you probably are doing something wrong. :))

There is no one-size-fits-all solution to your financial problems. As I’ve said before, personal finance is personal.

Figure out what works for you to get the results you want. Remember: whatever works is what’s right.

How do you feel about one-size-fits-all approaches to personal finance? What’s something you do with your finances that others may disagree with?