Facts Don’t Always Matter

facts

“When dealing with people, remember you are not dealing with creatures of logic, but with creatures of emotion, creatures bristling with prejudice and motivated by pride and vanity.” – Dale Carnegie

Sometimes facts don’t matter. Some people believe in “alternative facts!” One conclusion that can be drawn from this phenomenon is that people are humans and often times our decisions are dictated by our emotions rather than by logic or facts. Facts don’t matter as much as emotion does. Stirring up strong passionate emotions like anger, fear, outrage, and on the more positive side, love, inspiration, and hope will often trump facts, logic and math.

A friend of mine, who taught a financial literacy class, talked about Dave Ramsey’s snowball method of paying off debt to his students. With this method, you pay off the debt with the smallest balance first and then move on to the next one with the smallest balance. “The math doesn’t make sense,” I argued, and countered that you should pay the account with the highest interest rate first to save on the interest you pay. My friend explained that while math may be on my side, his experience told him that paying off small balances motivated people to continue on the path to debt freedom. What good are facts and logic if someone gives up on making those extra payments because it seems like such an uphill battle? We need to win the small battles to win the war.

In a similar financial debate, many often ask whether you should pay off debt first or invest. In a recent post from the Big Law Investor, Josh asked whether you should pay down an auto loan of 1.9% or invest. I always thought my decisions to be fact-based, rational, and logical. I always came down on the investing side and wondered why others chose to pay off low interest debts so quickly. If you look at the math, it would seem pretty easy to beat a 1.9% return.
In the comments section, one reader said, “In my experience, most folks don’t actually invest the difference and /or increase their lifestyle since they have the low-cost debt.” Josh replied, saying that lifestyle creep occurs without you even realizing it when there’s “extra cash sloshing” and that you’re probably tricking yourself into thinking you’re actually “investing the difference”. I started to think about what was said and realized that this was true with me. I had been tricking myself into thinking that I was investing the difference when that wasn’t really the case.

My student loan interest rates are low and I haven’t made any extra payments to them since paying off the high interest ones. I also recently bought a car with an auto loan even higher than the rate posed by Big Law Investor’s blog post (It’s at 2.9%). I didn’t pay it off either, but am I using that extra money that I have to invest? Not really. I keep thinking I will use that money to invest but just haven’t done it yet. Maybe I’ll buy another rental property, but maybe I won’t. However, in the 10 years that I’ve had my student loans, did I invest the difference because I didn’t put many extra payments towards those loans. I would say yes, to a certain extent, but it’s hard to say how much extra I invested. And I think it is highly likely that much of that excess cash also went to lifestyle creep instead.

After this realization, I think I’ll be taking some cash I have on hand and combine it with my tax refund this year to make extra payments on my auto loan. Speaking of tax refunds, as I input my taxes into TurboTax, I remember thinking that how it was silly for people to want big tax refunds. Getting a large tax refund was giving the government an interest free loan right? And having money now is better than getting the money later, so why not take the money now by increasing your withholding? It made sense, but when I owed money to the IRS a few years back, I was very upset. But shouldn’t I have been happy? The government had given ME an interest free loan, and I just had to pay it back. It didn’t feel like a win to me and I had to allocate some savings to cover the tax bill. With my higher paycheck throughout that year, did I save and invest that money? I’m pretty sure the answer to that is “NO.” After that painful lesson, I changed my withholding and have been getting a tax refund ever since. And now, every year after I get that tax refund, I make contributions to my Roth IRA account as well as my wife’s IRA account, contribute to our son’s 529 plan, pad our savings or make extra payments towards debt (mortgage/student loan).

Money is more about emotions than the numbers. And as disciplined and logical as I may think I am, I am still human. I’m not a robot analyzing every decision, inputting the numbers and running an algorithm to determine the best and most optimized choice. I have to remember that when making financial decisions and in giving financial advice to others.

32 thoughts on “Facts Don’t Always Matter

    1. livingrichcheaply@gmail.com Post author

      Yes, I didn’t realize how much emotions play a part in finances. It absolutely is a big reason why people have a hard time getting out of debt. Logically, it should be relatively easy.

      Reply
  1. Brian @ Debt Discipline

    Great post Andrew. So very true. If we are not focused and intentional each and everyday our emotions, and impulses can get the very best of us. I knew we were heading down a path of spending beyond our means for years, but didn’t want to say “no” to my wife and kids, even knowing it was the wrong thing to do. Once I flipped that thinking we made quick work of our debt.
    Brian @ Debt Discipline recently posted…Interview Series: Mustard Seed MoneyMy Profile

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    1. livingrichcheaply@gmail.com Post author

      Thanks Brian, it is hard to be focused and intentional everyday. It’s much easier to have things automated and to keep our emotions out of it.

      Reply
  2. EL

    Hey thats great you realized what works for you and can adjust things. Some people don’t even analyze things, and just continue doing the same patterns when it comes to finances. Finance talk is so taboo people will not even have the talk with the person in the mirror. Head in the sand syndrome is real my friends. I’ve lived with CC debt, car debt, and school debt. Its a far easier life without any debt. The sooner you’re free the better.
    EL recently posted…Wearing Yeezy Sneakers is not Financially SmartMy Profile

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    1. livingrichcheaply@gmail.com Post author

      Yep I know a lot of people who seem to put their head in the sand. They’re in denial about their financial situation.

      Reply
  3. Kristin

    I immediately thought of the tax refund thing as I was reading this and then you went and hit the nail on the head. I think when you’re in debt maybe the “interest-free loan” argument makes more sense. But to make a logical argument against that, if you incur a penalty from not paying enough taxes throughout the year, that kind of offsets any potential return you might make. I’m kind of just ranting here, but it seems like what happens is people learn what a tax refund actually is, get all excited about learning this new information, but then don’t stop to think about how big of a difference that’s actually going to make on their finances.

    Reply
    1. livingrichcheaply@gmail.com Post author

      Yes you freelancers have a tougher time figuring out how much to pay throughout the year. Easier for us with W2 income.

      Reply
  4. DC @ Young Adult Money

    This is a reality I have had to deal with as well. You and I approach personal finance the same. It all comes down to interest rate to me. When we pay off extra student loans, we are paying off the ones with the highest interest rates, not the ones with the lowest balances. I also can’t stomach putting an extra dollar towards our 3.25% mortgage – it’s just not going to happen! But ultimately I do think you need to accept that money is a very emotional thing for a large majority of people, and the facts – or math – don’t matter.
    DC @ Young Adult Money recently posted…10 Websites That Will Pay You Referral BonusesMy Profile

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    1. livingrichcheaply@gmail.com Post author

      Yea we have a similar mindset on this, but I’ve been straying off of it lately. Money is an emotional thing for everybody, even the most disciplined…of course the amount of emotion varies with each person.

      Reply
      1. DC @ Young Adult Money

        I have one loan I really want to knock out but I am fairly confident that it would go against the interest rate “rule.” I think long-term we’d be much better off holding the loan as long as possible, but I’m really tempted to just pay it off! So I definitely understand where people are coming from who want to get rid of all their debt regardless of interest rate.
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  5. Chelsea @ Mama Fish Saves

    The emotional side of money is something we don’t commit enough time and attention to. Emotion is what gets most people into debt, and certainly what keeps them there. As far as paying down debt or investing, I have found that unless we set an exact value on what “the difference” we are going to invest is, it is too easy for some of that extra money to slip away in day to day spending and we end up in a worse place overall. Math only gets you so far! Thanks for the great post Andrew, really enjoyed it!
    Chelsea @ Mama Fish Saves recently posted…More Money, Same Problems: Breaking the CycleMy Profile

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    1. livingrichcheaply@gmail.com Post author

      Thanks Chelsea! You’re exactly right and probably something I have to do…put an exact value on that difference, otherwise, I’m only “mentally” saving and investing that difference.

      Reply
    1. livingrichcheaply@gmail.com Post author

      You’ll have to create that app! It’ll make you millions…don’t forget to give me a cut =)

      Reply
  6. Erik @ The Mastermind Within

    There are literally infinite possibilities when it comes to personal finance… it’s about asking the right questions and figuring out your goals. I just went through this… it’s an iterative process.

    At the beginning of your path to financial freedom, it’s an interesting one. Pay down debt? Invest? Save Cash? How much of each? Again, the possibilities are infinite….

    Thanks for sharing, looking forward to your future content.
    Erik @ The Mastermind Within recently posted…Pay Down Debt and Invest? Erik’s 2017 PlanMy Profile

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  7. Amanda @ centsiblyrich

    Great post! “Money is more about emotions than the numbers.” Isn’t this the truth!? We don’t pay extra on our mortgage – we have a low interest rate, and choose to save/invest instead. But it’s easy to say it and not actually follow through – we’ve definitely been guilty of that in the past. We’ve really tightened our financial ship this year and to ensure that extra money does get saved and invested.

    We love our tax refund – it is earmarked specifically for IRA contributions! :)
    Amanda @ centsiblyrich recently posted…How to create a meal plan that will work for youMy Profile

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    1. livingrichcheaply@gmail.com Post author

      Yes, I say it all the time but wonder if I always follow through! Great that your tax refund is earmarked for IRA contributions…that’s a good place for it.

      Reply
  8. Done by Forty

    All great examples at how behavior trumps theory sometimes, especially with personal finance. I, too, have come around to the idea that a small refund is better than owing, and that for many of us, the motivating factor of paying off debt (mortgage, student loan, whatever) gets us much better results than the delta in interest rate would suggest.

    We ought not make the good the enemy of the great here. If someone really wants to get out of debt, or save up for a downpayment, then that’s probably the thing they should do even if it’s not “optimal” because the results may very well be the optimal ones for that person.
    Done by Forty recently posted…Backloaded Traditional IRA?My Profile

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    1. livingrichcheaply@gmail.com Post author

      I love that saying about making the good the enemy of the great. It is so true. I find myself trying to optimize everything but sometimes it might backfire.

      Reply
    1. livingrichcheaply@gmail.com Post author

      Just read your post about it. Loved it…you make great points about how our emotions play a big part in our finances.

      Reply
  9. Joe

    You’re right. It’s difficult to be completely logical about money. I think as long as you’re making forward progress, you’re doing well. Paying off debt or investing are both good things. These are much better than taking on new debts.

    Reply
    1. livingrichcheaply@gmail.com Post author

      That’s a good mindset to have sometimes. We should always be making forward progress…we don’t have to stress about optimizing every single thing.

      Reply
  10. Jacq

    I will owe the IRS thus year, because I didn’t expect to make that much teaching yoga last year. I thought I would just teach sporadically and then I got a weekly teaching opportunity. Knowing I’d owe, most of the yoga money went to savings to earn interest until I have to give it back. This year I am saving it in a specific savings account and plan to create an llc.

    Reply
    1. livingrichcheaply@gmail.com Post author

      Sucks that you’ll owe money to the IRS and awesome that you made more money than you expected. Good idea saving the money since you know you’ll have to pay taxes.

      Reply
  11. Biglaw Investor

    Not sure how I missed commenting on this post Andrew! Glad I was able to convince you. As someone who reads and writes about personal finance, I figure we’re the most likely to be “by the book” when it comes to making sure we invest the difference. If we’re not doing it (or more likely, we’re not sure if we’re doing it because it’s hard to tell), then I suspect many people will be allowing lifestyle inflation.
    Biglaw Investor recently posted…Do You Need Disability Insurance?My Profile

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    1. livingrichcheaply@gmail.com Post author

      Right, I always thought that I was “by the book” and that I’d make sure to invest the difference…but who am I kidding, I’m human after all!

      Reply
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