Why some personal finance decisions you take need not be objective or right, but emotionally satisfying

Sometimes personal financial advice can appear cold. What seems like the right thing to do might not be acceptable for emotional and sentimental reasons. Human behaviour is not always rational. Sometimes the motivation for making a decision may require understanding, and it may be tough to convince all the parties to agree.

A widowed mother and her son subsist on pension and their limited savings. The boy is diligent and has secured admission to a top private university, which requires him to stay in a different city. The cost of education is high, and if she were to include the expenses on boarding, lodging and incidentals, it is a substantial sum. She feels that he could study instead at a highly ranked local college.

The boy argues that going to a better college will provide him a better placement opportunity and hone him to be competitive. He sees himself as inheriting the wealth from his mother and feels there’s no harm in utilising it when he needs it the most. The mother is unwilling to risk what might amount to half her accumulated savings over the next four years. Nor is she willing to let him take an education loan.

An elderly gentleman, who just turned 90, lives by himself in his flat in Mumbai. He loves his routine and neighbours of many years, and is not afraid of being alone. His children live abroad and visit him once a year, taking turns to look him up multiple times during the year.

On his 90th birthday, they proposed that he sell the flat and move into an elderly care facility. They think that living in a managed facility will make it safer, ensure prompt medical attention, and reduce the upkeep responsibilities for the flat. It would also be better to sell the property while the father is still alive. To the elderly man, the flat holds memories of his life with his spouse. He does not see any risk in living alone in a familiar set-up. He thinks a registered will, bequeathing his property and wealth to children after his time, is adequate.

A young wife found that her husband had been losing money in his business and had been hiding it from the family. He was propelled by the need to be as successful as his brother, who was much better off. He remained adamant about continuing to invest in the losing business, staking a portion of their wealth, g and property. The wife saw it as irresponsible behaviour. The husband was confident he would turn the business around.

To him, allowing some time was adequate to establish himself; to her, the risk of losing everything while they had not even begun a family was scary. He felt that her employment and income provided the buffer needed to take the risk that would generate great rewards in the future. She remained unconvinced.

When logic & persuasion fail

We know of many such instances around us. In everyday life, we routinely see logic being set aside to accommodate sentiment and emotion. We buy an expensive gift, knowing that it may not have a lasting or resale value; we borrow to incur an expense that we understand to be frivolous just to avoid an argument; and we invest in a stock market tip, knowing full well that we are taking a chance with our hard-earned money. We may be propelled by the need to please, stuck by the inability to say no, or taken in by momentary greed. The emotion rules.

Does bringing a third party into the picture help? Not always. The mother, in the example above, remained unconvinced even after other relatives and friends intervened on behalf of the son. She held that he would be free to make his decisions after he finished studying and got a job. She was unwilling to let go or take risks before that milestone. The elderly gentleman understood the risks of staying alone, but was keen to take them despite persuasion by relatives and friends. The husband felt that he was not being supported by his wife in pursuing an opportunity that he believed would work over time. She involved her parents and close friends, but the opinions were mixed.

Time to compromise

Sometimes, there is no choice but to let go. There may not be space for negotiation or meeting in the middle if the parties involved take diametrically opposite positions, unable to convince the other to see their point of view. The stakes may be very high. The downside of things not working out, as envisaged, could be high enough to break the relationship, or create long-standing resentment. The monetary losses may be significant enough to cause regret and disappointment. However, if both parties do not see merit in giving up their positions, stalemate ensues, and one side gives up reluctantly.

Not all personal financial problems are resolved with time-tested rules and strategies. Nor are we able to place a limit in terms of money or time. We may set a limit on how much wealth the young man or the businessman can access for his education or business that the mother or spouse is comfortable staking. The elderly gentleman can try living in an assisted living facility for a short period before making up his mind. These limits may be unacceptable, or simply not honoured, or may seem inadequate.

Sometimes, we knowingly make sub-optimal financial decisions. We are aware that we cannot choose what appeals to our sense as fair, right, optimal and equitable. We might lose money and opportunity making those decisions to appease a loved one, whose emotions we care about. We live with these compromises, even if we resent them.

The Author IS CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING