Penny Foolish and Pound Wise

Do you spend more time mulling the difference in cost of products at the grocery store than you do figuring out whether your home has enough insurance coverage? (Guilty as charged.) When it comes to making financial decisions, we need to keep our individual quirks in mind when it really counts -- not in terms of pennies, but in pounds.

That's me. That's all of us, in fact. To compound the problem, we're hard-wired to make snap decisions, regardless of the scale of the consequences, as an evolved survival mechanism. Read Malcom Gladwell's "Blink" to learn more about this human characteristic.) All of his books, for that matter, like "The Tipping Point" are not only good reads, but fascinating in what they reveal about us.

But learning about how we operate, and doing something about it, are two different things. My point is not that while we humans are goofy and often counterproductive in our financial actions, we need to keep our proclivities in mind during those few occasions where it really matters -- not in terms of pennies, but in pounds.

For example, recently I found myself at the drugstore poring over the minute differences in cost between two off-label shampoo brands. Of course, what brand I buy it makes little difference to my overall financial picture, and it certainly doesn’t seem worth the time and effort I routinely put into the selection of such things. I note this because earlier in the day I made a bunch of hasty financial decisions concerning an overdue rebalancing of my IRA, the scheduling a vacation and my long-neglected homeowners insurance coverage. What's wrong with this picture? As a reasonably responsible adult and a writer of a financial column, for goodness' sake, how can I accept this logically inverted behavior? Pennies over pounds, it would seem.

The rationalization is this (and let me know if you've had a similar experience): My penny-wise shopping is a brainless, relaxing task while I catch my breath after a long Nordic walk to the drugstore. It also results in a bit of personal satisfaction because my attention to petty costs harks back to the ingrained habits of my parents, Depression Era folks who taught me the value of a dollar. To this day I still can't leave a room without turning out the lights (thank you very much, Dad). Whether I save a few pennies worth of electricity or shampoo, I temporarily quash the remembered pressure of my parents’ endless admonitions and feel a sense of virtue in doing so.

On the other hand, the relatively little time I spend on financial decisions of much greater scope and import, such as managing my IRA or homeowners insurance, were not actually spur-of-the-moment choices. Sometimes, we do act prematurely even on important matters to allay anxiety at being unprepared and/or being pressured by people and events to make a decision on the spot. I'd like to think that these seemingly snap decisions on critical financial matters were the filtered result of a lifetime of learning coupled with recent, specific preparation on each subject. (It's kind of a metaphor of medical decision-making, that.)

I am reminded of the story of the patient who was referred to a surgeon for some thorny problem. After the appropriate investigation, the surgeon said, "I conclude that you do not need surgery. That will be $500." The patient replied, "I am glad that I do not need surgery, but how can you ask for $500 when you did nothing?" The surgeon smiled and replied, "For doing nothing there is no charge. But for knowing enough to do nothing, that will be $500." (The patient paid.) Preparation pays in the end.

The point here is that judgment builds after long experience and applied learning. One article, one book, one hour with a CPA or a lawyer is invaluable, but inadequate for financial competency. Necessary, but not sufficient, as the logicians say. Our medical training and experience are a reasonable analogy to this approach to financial planning and decision making. The sooner you start, the more data you accumulate to help you make good decisions and, sometimes more importantly, avoid making really bad ones.

That's part of the reason why I cringe when I hear a young, or worse, a mid-career doctor, off-handedly say something like, "I'll worry about that stuff later," or "I'll leave that stuff to others," when it comes to financial matters. That "stuff" is the fabric of our lives, and financial affairs are woven through everything we do personally and professionally, even if you find it emotionally comforting from time-to-time to claim that it is not.

Even so, I am not immune to the tendrils of irony that float around me as I have gone through this exercise. One does have to maintain some sense of humor about our vagaries to get along. Now please excuse me while I research 15 cent razor blades.