Broker Check

Financial Peace is a Myth

| January 24, 2018
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British Prime Minister Neville Chamberlain stood outside of 10 Downing Street in London and declared to those gathered,"I have returned from Germany with peace for our time." A year later, Hitler's Germany invaded Poland. The rest is history. Fast forward to 2004, as Condeleeza Rice testified before an investigative panel. She was asked to explain how and why America had suffered a surprise attack on September 11, 2001. Her answer, "And, tragically, for all the language of war spoken before September 11th, this country simply was not on a war footing."

I bring up these two points in history to illustrate a point. Today, many are seeking financial peace for our time. It's a worthy endeavor to achieve financial peace, but I fear the term financial peace has been ill-defined and oversimplified. Too often, media gurus and financial planners paint a utopian picture where the simple tenets they present will create an autopilot approach to personal finances. While their advice may be wise, it can also foster a sense of complacency.

Let me give you an example of a well-intended advice that can create unintended stress. Several pundits promote the importance of being completely debt free. First, their followers pay off their consumer credit card, student loan and other debts. They save the mortgage on their personal residence as their last debt to pay off. The reason is that the absence of mortgage debt will give a peaceful state of mind. This Neville Chamberlain, peace at any price, approach to your personal finances can be disastrous.

I can think of several reasons that a large, long-term mortgage can be a financially wise decision. In fact, to learn more you can read this blog about the benefits of a mortgage. But let me give you an example that I see often: refinancing from a 30-year to a 15-year mortgage.

The basic idea is that if you have a 15-year mortgage, you will be debt free sooner. However, there are some negative aspects. First, the cost of refinancing. That's a cost, here and now. Second, the payment on a 15-year mortgage will be higher in most cases. That means every single month you have a higher fixed cost with no flexibility. Wouldn't it be wiser to simply pay an excess amount towards principle when times are good, and you are flush with cash? When times are tight and Murphy's law strikes that excess can be diverted to the emergency at hand.

Without belaboring the point, the simple peace-focused personal finance advice misses the mark in several arenas:

  • Buy and hold investment allocations
  • Restricting certain investments
  • Favoring debit cards over credit cards
  • Avoiding attorneys for estate planning

We should make personal finance as simple as possible, but not simplistic. Further, we should realize that there is no financial Shangri La unaffected by moth or rust. It's difficult to write a book about achieving financial peace that applies to everyone. It's easy to write a book about the ongoing financial war and how to achieve victory. Because that's where we are. We are on a war footing, staying nimble, flexible and aware of the ever-changing battlefield. If you would like to find out how I can help you during this time, please click here.

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