Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
Sometimes in financial planning, people have to make a decision between two competing actions. For example, everyone has a limited amount of income and assets (some more limited than others') and money that is used to fund Option A is unavailable to use for Option B. It is simply not possible to pay for everything, at least not all at once. With other financial decisions, personal factors come into play and there are pros and cons to alternative actions. A decision that is right for one person might not be the right choice for someone else.
Below are eight common situations where the best decision often depends on the circumstances of the situation:
- Prepay Mortgage Principal or Keep Monthly Payments on Schedule? The best decision depends on where the money used to prepay principal would, otherwise, be invested. Prepaying principal may not make sense for moderate or aggressive investors who can potentially earn a higher return than their mortgage interest rate. Still, many people have a strong desire to be mortgage-free by the time that they retire.
- Pay a Real Estate Agent or Sell Your House Yourself? Many personal factors will determine the best solution here, such as a home seller's time availability to market and show their home. In addition to hiring a traditional realtor or going it totally alone as a FSBO (For Sale By Owner), there are online platforms that market sellers' homes for a flat fee. Some experts recommend advertising a 2% to 3% commission on these platforms to entice buyers' agents to show your house.
- Withhold Income Taxes Accurately or Over-withhold for a Large Tax Refund? A benefit of over-withholding is “forced savings,” although this is also possible via automated credit union deposits or checking to savings account transfers. Disadvantages include less income available throughout the year and the possibility of having the refund of a large amount of your income held up through tax identity theft.
- Save for College or Save for Retirement? Most financial experts recommend that, when money is limited and you cannot afford to save for both goals concurrently, that retirement savings gets the nod. There are potential scholarships and student loans for education but no such thing as a “retirement scholarship.”
- Pay Cash for “Big Ticket” Items or Finance Them? Paying cash does not add costs for interest and fees. In addition, people who pay cash typically spend less for items than those who swipe plastic. A drawback is the “waiting time” necessary to save up the cash to buy something. An alternative strategy is using 90 or 180 days “same as cash” credit offers and making payments after you buy something within the designated period. Another strategy is saving up the money and then using a credit card solely for rewards points.
- Buy Index Funds or Exchange Traded Funds (ETFs)? Mutual funds are typically advised for people who make regular deposits at regular time intervals (e.g., $100 on the first of every month), particularly no-load funds without any up-front or back-end expenses. ETFs, which are traded on stock exchanges, are best suited for investors who will make ETF purchases infrequently or those using low-cost discount brokers.
- Borrow or Lease to Buy a Car? Buying makes sense for people who plan to keep cars for up to a decade (or longer!) and look forward to periods without loan payments. Leases appeal to people who do not mind permanent payments, want to avoid repair costs, and want to lease luxury cars they cannot afford to buy.
- Claim Social Security at Full Retirement Age (FRA), Earlier, or Later? Benefits claimed before FRA are permanently reduced and subject to an annual earnings limit, while those claimed between FRA and age 70 earn delayed retirement credits. Key factors driving the decision of when to claim benefits will be plans to continue working in later life, health status, a spouse's income and benefits, and financial need.