When one of my co-workÂers was buyÂing a house, he listÂed 10 homes in which he could live. His plan was to go down the list, makÂing offers beÂlow the askÂing price. If one said no, he was on to the next one. He endÂed up buyÂing the seÂcond house on which he bid. I can conÂfiÂdentÂly say that I know virÂtuÂalÂly no one else who would proÂceed with a maÂjor life deÂciÂsion in this way.
But he framed buyÂing a home as loÂcaÂtion matÂterÂing more than the strucÂture, price over ameniÂties, and inÂvestÂment beÂfore aesÂthetÂics. His home-buyÂing procÂess matched his criÂteria frameÂwork.
While most of us claim to be raÂtionÂal with our monÂey, it is alÂmost imÂposÂsiÂble to not have our hearts sway our deÂciÂsions. One of the most imÂportÂant ways to come to reaÂsonÂable conÂcluÂsions is to creÂate an apÂproÂpriÂate decisionmaking frame.
The deÂciÂsion to buy long-term care inÂsurÂance, for inÂstance, has very little to do with the numÂbers. Policy costs are not guarÂanÂteed and the beneÂfits are typÂiÂcalÂly only paid if you meet cerÂtain criÂteria. While some of us will benÂeÂfit from the poliÂcies, many of us will die beÂfore ever using these beneÂfits. For those who need to go into a faÂcilÂiÂty, uÂsuÂalÂly the sale of their home can deÂfray much of the costs. So what is the frame for ownÂing a long-term care polÂicy?
ReÂmovÂing the nebÂuÂlous fiÂnanÂcial reaÂsons, long-term care poliÂcies proÂvide two emoÂtioÂnal beneÂfits: 1) They are an inherÂitance proÂtecÂtor for your offÂspring since monÂey that could have gone to long-term care costs will be preÂserved through polÂicy beneÂfits. 2) They can help reÂlieve spousÂal careÂgivÂer faÂtigue beÂcause ownÂing a polÂicy may make it easiÂer to justiÂfy hirÂing a nursÂing or asÂsistÂed livÂing supÂport. These are legitimate reaÂsons for some peoÂple to own a long-term care polÂicy, so by framÂing the isÂsue in this way, you can deÂcide what price to pay for peace of mind.
AnÂothÂer area where apÂproÂpriÂate framÂing helps is around proÂvidÂing supÂport for chilÂdren. For some, helpÂing chilÂdren is not a fiÂnanÂcial opÂtion. For othÂers, the choiÂces seem arÂbiÂtrary. How we ask the quesÂtions will lead to difÂferÂent anÂswers.
The first frame to underÂstand is whethÂer you are proÂvidÂing help for yourÂself or for your child. If the thought of your child going withÂout health care creÂates unÂnecesÂsary stress in your life, then finanÂcing this may put you at ease. If you don't want your chilÂdren to move home, you may proÂvide rent supÂport. Our hand-wringÂing ocÂcurs when we conÂfuse our perÂsonÂal moÂtives with enÂabÂling.
The enÂabÂling frame ocÂcurs when you broadÂen the defiÂniÂtion of neÂcesÂsities and help chilÂdren with things that they could hanÂdle on their own. One of our daughÂters got her first job at a comÂpany downÂtown where they proÂvide a free bus pass. The best deal she could find for parkÂing there was around $200 a month. Her deÂciÂsion to take the bus deÂrives from not wantÂing to spend her monÂey on someÂthing that is not as valuÂable to her as othÂer things. If we felt that takÂing the bus was not safe, we may have choÂsen to pay for parkÂing, but enÂabÂling ocÂcurs when you creÂate a stoÂry to match your acÂtions rathÂer than creÂate a more acÂcuÂrate frame that matchÂes your values criÂteria in the beÂginÂning.
SpendÂing deÂciÂsions reÂquire frames. For those who spend too much, their frame tends to be around what they deÂserve. The probÂlem with the "I deÂserve" frame is that there is nevÂer any cloÂsure with it. With this frame, monÂey ulÂtiÂmateÂly owns you beÂcause you buy housÂes larÂger than you can afÂford or get into situaÂtions where you may not be comÂfortÂaÂble. A quesÂtion to ask that may help reÂset the frame is whethÂer a pendÂing deÂciÂsion will make you anxÂious if you do it or reÂgretÂful if you don't. SomeÂtimes it does both. WorkÂing through the reÂgret asÂpect may help creÂate alÂterÂnaÂtives that give you more breathÂing room; if someÂthing is too much of a stretch, the anxÂiÂeÂty asÂpect may nevÂer disÂapÂpear.
As cliÂents get ready to reÂtire, their frame ofÂten turns to the risk of their portÂfoÂliÂo going down. But they igÂnore othÂer risks such as inÂflaÂtion or lonÂgevÂiÂty. The aÂmount of monÂey that you can spend from your portÂfoÂliÂo in reÂtireÂment is a funcÂtion of three things — how much you want to leave as legÂacy, how long you want the monÂey to last, and the perÂcentÂage you own in stocks vs. bonds. If you plan on livÂing a while and want to spend more, then you will need to own more stocks. This means that your inÂvestÂments will exÂperiÂence marÂket ups and downs.
The way to frame this is through thinkÂing cookÂie jar, matÂtress and burÂied treasÂure. When cliÂents are livÂing off their portÂfolios, they have three pools of monÂey: short-, meÂdiÂum- and long-term. The short-term cookÂie jar is filled with cash that will covÂer two to three years' worth of exÂpensÂes. The meÂdiÂum-term matÂtress helps you sleep by beÂing filled with bonds that will maÂture or you can sell when the stock marÂket turns nasÂty. The treasÂure chest grows by ownÂing stocks that you sell to reÂplenÂish the cookÂie jar when times are good or you hold for reÂcovÂerÂy when things are difÂfiÂcult. FramÂing things in this way helps you get through the ups and downs.
Ross Levin is the founding principal of Accredited Investors Inc. in Edina.