Money management can get really complicated — if you let it.
People ask me all kinds of nuanced, nitty-gritty questions:
- “Should I invest in Company XYZ, given that their price-to-book ratio is not up to recommended standards?”
- “Which of these five developed-market small-cap value funds do you recommend?”
- “Should I pay an early-withdrawal penalty to get out of an 18-month CD that pays 1.75 percent and use it to make an extra mortgage payment?”
My advice: Don’t sweat the small stuff.
Sometimes, it’s better to think less about percentages and more about actual dollar amounts.
We’re taught to conceptualize money management as a game of percentages: make sure you’re saving 20 percent of your income, make sure your pie of wealth is sliced in an age-appropriate way.
But sometimes people spend so much time thinking about percentages that they miss the fact that, at the end of the day, all that effort will yield them an extra $5 bucks.
Example: Say you have $2,000 in a 12-month Bank CD paying 1.75 percent. You realize that this will barely compensate for inflation, so you want to withdraw it and apply the cash toward an extra mortgage payment on your house.
Great idea. But here’s the problem: at the end of the day — after debating whether or not to do it, then going to the bank, meeting with a banker, filling out paperwork, closing the CD, paying the penalty, and writing the check to your mortgage company — you might not save that much.
If you’ve got 15 years remaining on a $100,000 fixed-rate mortgage at 5%, and you apply that extra $2,000 payment, you’ll save an extra $168 over the next 15-year life of your loan.
Does $168 sound like a lot? Then consider this:
- Your effort probably took at least 3 hours.
- You paid an early-withdrawal penalty. Let’s say that penalty was $18 (a little less than 1 percent). That means you saved only $150.
- Based on historical inflation data, $150 today will be worth $101 in 15 years (based on 1994 – 2009 inflation data)
- This means those 3 hours you worked will save you an inflation-adjusted $6.73 per year. And it’ll take you 15 years to get fully paid.
Would you really go through all that effort to save an extra $6.73 per year?
This is why you should not sweat the details.
At the end of the day, you’re better off spending your time investing in yourself, by:
- Working on an entrepreneurial side-hustle
- Exercising or cooking healthy
- Spending time with family, friends, or spiritual activities
- Doing something that MOVES the needle