Rational or Reasonable? Either can work when it comes to money

Rational or Reasonable? Either can work when it comes to money

When you’re standing at the top of Tower Bridge (like I was recently), looking out over the glass walkway, it’s rational to consider the sheer amount of engineering expertise and extensive health and safety checks that the whole structure has been through.

It’s safe. It’s secure. It’s tried and tested.

But when you think about stepping out onto that glass floor, with a 150 foot drop beneath you, it’s reasonable to wonder if you really do need to cross a see-through walkway just to say you’ve done it, especially if you’re terrified of heights.

Your rational brain knows it’s completely safe, and nothing is going to happen. Your reasonable brain wonders if it’s really worth the risk.

That tussle between rational and reasonable often takes place when it comes to decisions about money.

Investing your money, what’s rational, what’s reasonable, what’s right?

We’re humans, not robots. We’re emotional, as well as rational. We don’t just think, we feel.

When our rational and emotional sides collide, it can cause us to get stuck especially when it comes to making important money decisions.

Here’s a few common ones:

Pay off your mortgage or invest for long term growth

When you have spare money, should you pay off low-interest debt – like your mortgage – or is it better to invest that money elsewhere for long-term growth?

The rational option?

Invest. If you expect the potential gains of an investment to be higher than your mortgage costs, all said and done you should be financially better off overall in the long run (and you’ll have better access to your money).

The reasonable option?

For many of us, a mortgage is the biggest debt we’ll ever have hanging over us. And while it might be financially optimal to invest, there’s a great sense of relief and well-being at paying off a mortgage earlier than planned.

It’s perfectly reasonable to put spare money towards the mortgage if it helps to ease any ingrained financial anxiety you have around debt, or your personal goal is to be mortgage-free before retirement.

Invest right now, or wait for the ‘optimum’ time

If you’ve decided to invest your spare money, the next question you have to ask yourself is: when? Do you start right away? Or, if the market is looking a bit choppy and uncertain (like now for example!), should you wait?

The rational option?

Invest now. Markets move up and down all the time and it’s impossible to predict short term rises and falls. But we know that over the long term, markets and economies tend to grow – and so will your investment.

You’re investing for long-term financial security, not speculating to make a quick buck, so the exact day or price you invest isn’t important in the grand scheme of things.

The reasonable option?

Split the difference. Invest some now, and some later.

If you invested a large sum of money and then watched its value fall overnight, how would you feel? If you know it would cause you to lose sleep, the reasonable decision is to hedge your bets.

Divide your investment amount and buy into the market at different prices over a few weeks or months (“pound-cost averaging”).

It can dilute short-term market volatility but could also reduce your early returns. It might not be the optimal investment choice in hindsight, but it’s a reasonable course of action and will certainly help you sleep a little easier at night.

DIY financial planning, or work with a financial advisor?

So you’ve established that you need to get your plan moving, it’s natural to ask yourself whether you’re going to go it alone or work with a financial advisor.

The rational choice?

Speak with an advisor. They’ll align your money with your goals and handle all the technical details relating to investments, pensions and tax.

They can help coach you on matters you’re not clear on, and keep your plan on track so that you’ll always have confidence in your finances whatever life throws at you.

Although it might cost you a little more than self-managing, there’s every chance you’ll achieve better financial outcomes in the long run, not to mention peace of mind.

The reasonable choice?

Speak with an advisor. Even if you like the idea of self-managing your financial plan, there’s no harm in speaking with an advisor to see how they might be able to help.

An initial conversation or consultation doesn’t commit you to anything and you might pick up a few things that can help if you decide to go it alone.

If you like to be fully in control, and you can accept your plan might not be optimal and will take up time and energy, then self-managing is the reasonable decision for you.

Reasonable doesn’t have to be perfect

Ultimately, what’s rational or reasonable comes down to your circumstances, personality, goals and outlook on life.

Weigh up the emotional and the rational and see where you land. What feels right to you? What makes sense?

And if you need help and advice, just ask!

You don’t have to prove you can walk across a glass walkway in the sky if the thought of it scares you to death.

Take the reasonable option and walk across the bridge at street level.

It might take a little longer, but you’ll arrive at near enough the same place.

Simon Ben-Nathan

The value of an equity investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.