#62: When bad financial decisions are good

When we discuss financial principles on The Fat Wallet Show, we try to make them a rule of thumb. More often than not, debt is bad and saving is good. Most of the time, retirement and tax-free should be where your money goes first.

Of course there are exceptions to these rules. There are as many unique financial situations as there are people. Sometimes a set of circumstances leads to an opportunity. Other times you do everything exactly the way you’re supposed to and it still doesn’t work out.

This week’s question from Vee M got me thinking how a “bad” rule-of-thumb decision can be a great decision in certain circumstances. Another case in point is Simon borrowing against his bond to buy shares during the 2008 financial crisis. Would I tell my best friend to do that? Hell no! Did it work for Simon? It did.

If you are honest about the risks and possible outcomes, you have your financial base in place and you are a fiscally responsible individual, odds are you’re in the best position to make a call about your finances. Ask for input and advice by all means, but never forget that the success or failure of your financial plan affects you and your family. Whether those you consult agree with you or not, you have to live with the decision.

What I loved about Vee’s question is that she had the following information:

•   Exact amounts owed on all her debt
•   Exact amount of tax payable should she cash in her provident fund
•   Exact amount of interest she will pay should she decide not to settle her debt
•   Exact amount of cash she would free up should she pay off her debt

This information enables her to:

•  Assess her net worth by comparing her assets (provident fund, fixed deposit savings and home) to her liabilities (debt on buy-to-let property and car)
•  Compare the once-off tax liability to the accrued interest over time. Being able to do this makes a complicated decision as easy as, “Which is greater?”
•  Decide what is important to her. Is the current debt stress better or worse than the stress of providing for her future? Vee understands how quickly she can rebuild her retirement annuity because she knows how much she’ll be able to invest every month.

Data is power when it comes to financial decisions. Data overrides the fear and greed of financial decisions. Vee hit the nail on the head.

Links

We built a spreadsheet to help you work out how long it will take you to make up the penalty you have to pay to move your RA. Click on the link to download it. Moving your RA

Chris de Jager sent a link to a forum discussion on estate duty. The discussion follows on the discussion we had with Candice Paine about investing abroad.

Danie de Waal sent shared an article on how index funds can affect the market. Read that here.

P.S. Our Fat Wallet Listener Love index took a beating at the time of recording. Hopefully by the time you read this things will be looking up!

Kris