Do You Suffer From Financial Dysfunctions?

Frequently we meet people who exhibit financial behavior that prevents them from achieving their financial goals. Bert Whitehead, a Midwestern financial advisor, calls these behaviors and activities financial dysfunctions. At a recent professional meeting, Bert gave a few examples of dysfunctions he has recognized. They include:

  1. Mortgage Aversion.
  2. Inappropriate Risk Reaction: either fearful or fearless about investments.
  3. Compulsive Spending/Excessive Debt.
  4. Poverty Mentality: Inability to spend money.
  5. Miser Mentality/Obsessive Saver.
  6. Acute Financial Paranoia. Usually accompanied by an all cash or all gold portfolio.
  7. Windfall Woes: Usually as a result of lottery winnings, inheritance, divorce settlement, Internet stock or other gambling gain.

Each dysfunction has roots and causes which are treatable. To give an example, let us look at the first malady on his list: Mortgage Aversion.

Mortgage Aversion is actually very common. It is often found among the children of people whose lives were affected by the Great Depression. If someone says to us, “The sooner my house is paid off, the more interest I save,” we know we are in the presence of someone who has this dysfunction. We all have beliefs about money. This kind of person subscribes to the following philosophies:

  1. “Neither a borrower nor a lender be.”
  2. Paying off a house mortgage demonstrates responsibility and financial success.

In fact, this person has an emotional need to pay off the house as a “safety net.” We can’t deny his or her need. We have to help by explaining some financial facts.

In Maryland, the approximate cost of a 7% mortgage for someone in the 28% tax bracket is about 4.5%. Over time, stocks in your 401(k) return about 10%, bonds about 6%. In short, you may earn more on your money if you put it in retirement investments than if you pay off the mortgage.

Real estate agents like to call houses investments. But, they are really “use” assets. We “use” them. We don’t liquidate them or get income from them until we are old, if at all. And, is home equity really a good investment for the long term? In many neighborhoods, it may be difficult to sell a house 15 to 30 years from now. Not simply because of the changes in technology, building materials and tastes in the future, but also due to unfavorable demographics. The population of potential home buyers is actually declining in the years aheadĀ . After the “baby boomer” bump, there are really not enough buyers for houses in subsequent demographic groups, except in the group which demographers call the “echo boomers.” These are the children of the boomers. It is quite possible that these fresh faces will not want to buy a house in your neighborhood or mine. Right now these kids are in their early twenties. Do you want to count on knowing their tastes and housing needs in ten years?

So, is your home equity the best place for you to invest right now? Is Mortgage Aversion always a virtue, or can it be a dysfunction? Does your mortgage help you accomplish your financial planning goals? Or, even if it does, does the underlying “comfort” of not having any debt against your house feel so good that the financial aspects seem unimportant?