photo credit: sparkle_lavalamp
Have you ever seen one of those ultra close-ups of an everyday object? No matter how hard you look, you just can’t figure it out until you back away to see the entire object. Sometimes financial decisions can be like that; you only get clarity by looking from a different perspective. One way to do this is a method called “reversing the question”. Hopefully, these examples can help.
To Invest or Not Invest
You don’t know whether to invest for retirement or make bigger payments on your credit cards. The reverse question is, “If I did not have any credit card debt or retirement savings, would I borrow money on a credit card in order to invest for retirement?” Most people would immediately say, “of course not”, but keeping your credit card debt while investing for retirement is exactly the same thing. The rephrase helps you “think with your gut”, intuitively considering the risk factor, which is often overlooked when simply crunching numbers. You just “know” that generating credit card debt is risky, even if it means investing more for retirement.
Time To Sell?
You don’t know whether to keep a stock or sell it. A simple reverse question is, “If I did not own this stock, would I buy it at this price?” If not, you should sell it because continuing to own it at that price is effectively buying it at that price.
Rent or Buy?
You have bought another house in another city and have not yet sold your previous dwelling. You are struggling with whether to sell this house on the market or put it up for rent. Your reverse question would be, “If I did not own a house in this particular city, would I buy one so I could become a landlord?” If your answer is “no”, then you should sell it. If it doesn’t sell right away and you need to lower the price, keep asking yourself the same question, but now insert that price, “Would I buy this house in this city for $$$$ amount so I could become a landlord?”
Now for some disclaimers:
I realize there are many variables in the decision making process and sometimes the reverse doesn’t cover all of these. Example 1 becomes a bit more dicey if your company is giving you a match for your 401(k) contribution. Example 2 may need to figure in tax implications, whether the fund was front loaded or not, etc. Example 3 becomes problematic if the homeowner desperately needs the cash flow a renter could provide. In these cases, I still challenge you to insert these factors in your reverse question. Hopefully, you will find the clarity that you are seeking.