Doing These 3 ‘Wrong’ Things With Your Money? I’m Not Worried

When it comes to money matters—and life—people tend to fall into one of two camps: optimizers and satisficers.

Optimizers love to obsess over details and data in an effort to make the best possible choice given available information. In the investment world, optimizers are the ones building Treasury Inflation-Protected Securities ladders and determining precisely how much of their IRAs to convert to avoid bumping into the next tax bracket. If you’re a regular visitor to the Bogleheads forum, it’s a good bet you’re an optimizer.

Satisficers, by contrast, aren’t looking for the best investments, best portfolios, or the best anything, really. They’re mainly focused on what’s “good enough,” and, with respect to their money, taking reasonable financial steps to hit their goals. I’ve written before that I’m on Team Satisficer, and my satisficer leanings have gotten even more pronounced as I’ve progressed on my financial journey.

One thing I’ve noticed is that optimizers who dispense advice to others—financial advisors and pundits who make their opinions known—spend a lot of time and energy on certain financial decisions that frankly, I can’t get too worried about. Here are some of the big ones.

Paying Off a Mortgage Early

I’ve seen a lot of scolding on this one. And, indeed, paying off a mortgage may not offer the best return on mortgageholders’ capital at the moment, with interest rates on certificates of deposit and high-yield savings accounts currently above the interest rates on mortgages secured several years ago when rates were lower. I’d also agree that younger people with long time horizons should invest the lion’s share of their investable capital into higher-risk, higher-returning investments like stocks; they tend to need less of an allocation to safety, whether that safety comes in the form of mortgage paydown or buying CDs.

But one reason I’m blasé about whether someone prepays a mortgage—or buys a home with cash versus financing it—is that those aren’t the behaviors of financially unwell people. Sure, there might be outside cases of people paying off their homes or buying houses with cash even though they don’t have adequate emergency reserves or enough money in their retirement accounts. But my experience from living in the world is that most people who pay off mortgages have their ducks in a row elsewhere in their financial lives, and their mortgage payoff is a peace-of-mind allocation that they’re entitled to make. I’ve yet to meet anyone who told me that paying off their mortgage kept them from other important financial goals.

Holding Extra Cash

This one falls under the same general heading as mortgage paydown; a conservative, peace-of-mind allocation that I just can’t get terribly upset over. True, cash has underperformed bonds and certainly stocks over long periods of time, and over the whole of modern US market history going back to 1926, cash has edged out inflation by only a hair. If a younger person is sitting on a pile of cash while also having limited exposure to longer-term securities, especially stocks, that’s almost always terrible. But more frequently, I’ve seen heavy cash stakes in portfolios of people with a different profile: Those over 50 with ample portfolios who simply prefer the liquidity, stability, and convenience of cash over bonds. (I’ve mentioned that this has been one of my own “failures” in investing, at least on paper.) Might such individuals be forgoing returns by choosing cash instead of bonds? Probably. Will a large allocation to cash likely see the bulk of its interest production gobbled up by inflation? Yep. But I’d argue that the greater good in this common scenario is that individuals have made an allocation to safety rather than having everything tied up in the stock market. (In the words of author Bill Bernstein, “If you’ve won the game, stop playing.”) And if their financial plans are otherwise in solid shape and they’re maintaining a decent allocation to investments that give them long-term growth and returns that will keep up with inflation (stocks), a little extra cash isn’t something I’m going to fret about.

Making Traditional Tax-Deferred Contributions Instead of Roth (or Vice Versa)

Here’s another one where I’m not too stressed out about someone making the “wrong” decision because the investor is getting the big picture right: Making retirement plan contributions, period. And if we’re being honest, the “right” type of IRA or 401(k) contribution is always going to be a guess. That’s because investors are missing some crucial information they’d need to make an optimal choice—they don’t know if their tax bracket in retirement will be higher or lower than at the time of contribution, and they don’t know what will happen to tax rates on a secular level, either.

My advice: Save as much as you can afford to and give it your best guess on the contribution type. (A perverse fact of life: By the time you realize that Roth contributions would’ve been a good idea because your tax-deferred accounts have grown a lot and/or your tax bracket has crept higher, it’s usually not a great life stage to make Roth contributions.) I’ve also come to be a big believer in tax diversification, taking advantage of traditional tax-deferred, Roth, and taxable contributions during your accumulation years. That way, when you begin pulling money from the accounts in retirement, you can strategize about which accounts to spend from in an effort to limit your tax burden as retirement unfolds.