Reasoning vs. justification
When you are looking to making an important financial decision, one important thing to do is to separate reasoning from justification.
For instance, with us looking to buy a house, some of the justifications include:
- Owning something
- Building equity and stability
- Tax break (including staying in a lower tax bracket)
These are benefits that come from purchasing a home and only from purchasing a home.
Some additional reasons we’d like to buy a house include:
- No neighbors to bang on the walls.
- No neighbors smoking downstairs.
- More space
These are added benefits to home ownership, but getting them is not exclusive to buying a home. To get away form neighbors or apartment life, we could simply just rent a house. We have multiple options available to us for these, so we have to be careful not to use them as justification.
The reason I feel it is important to separate the two is because you should clearly know what your deciding factors are and what are added benefits, but ultimately could be satisfied other ways. With buying a home, we should not pressure ourselves into thinking we need to buy a house now simply to get away from bad neighbors or get more space. We could take care of those in other, less financial intensive ways. By knowing the actual deciding factors, when it comes down to the final dollar amount and we sit down to determine whether the cost is worth the gain, we will have much clearer minds as weighing the values. Getting away from the neighbors is good, but we shouldn’t let it tip the scale and allow us to ultimately get into a financial decision that we wouldn’t have gone for if we hadn’t “talked ourselves into it”.
I can be very guilty of this at times, where I talk myself into something, making up some artificial reasoning. Using it to buy a CD or video game is one thing, but should not let it affect you when looking at $300,000 houses.
The process to determine your deciding factors is quite easy. Take a situation you have coming up. Anything, financial or not. List out all the reasons to do it and not to it (important to list reasons not to, as it the inverse of the process is just as important). Then cross off the ones that are not unique to the outcome at hand. For instance, deciding whether to do a camping vacation or a cruise. You list “relaxing” as a reason. If you can relax at either, cross it off. If you list exercise, you can consider that unique to camping (could go hiking… no one works out on cruises, only drinking and eating).
