Financial planning often focuses on achieving financially optimal outcomes—maximizing returns, minimizing risks, and ensuring a stable financial future. These objectives are undoubtedly crucial. However, it’s worth embracing a new approach that places greater value on psychologically optimal outcomes. These outcomes prioritize overall well-being and satisfaction over sheer financial metrics, ultimately leading to a more fulfilling and authentic life.
Understanding Psychologically Optimal Outcomes
Psychologically optimal outcomes are not just about subjective well-being and emotional satisfaction. They also underscore the empowering significance of aligning financial decisions with personal values, goals, and emotional needs. This perspective acknowledges that money is not merely a means to an end but a powerful tool for attaining happiness and quality of life.
I recently watched an interview with Morgan Housel on the Knowledge Project Podcast, where he suggested an inspiring concept to improve the chances of succeeding in life and being happy. First, define and understand the game you want to play. This idea resonates the most as many struggle to stay on their financial journey because they get distracted by success and the games their peers play. The lack of definition and understanding of the game you want to play leaves you unsatisfied with your progress.
Money is personal. What works for others may not work for you. We all develop our own unique 'money flavours' through our experiences. The key is maintaining financial and psychological health as you navigate your financial journey. For example, in particular economic environments, it may be financially optimal not to pay off certain loan obligations such as mortgages and instead invest in the long term. However, if you're averse to debt, the psychological benefit of not carrying debt may outweigh the financial benefit. It's essential to carefully consider each decision's long-term impact to strike a balance between psychological and financial optimization that works for you.
Balance for Authentic Living
Financial stability provides the resources necessary to pursue passions, invest in personal growth, and support loved ones. It reduces stress and anxiety, fostering a sense of security for mental well-being. When we manage our finances wisely, we create opportunities to live a life that reflects our true selves rather than one dictated by financial constraints.
Psychological well-being is a critical factor in making sound financial decisions. It ensures that our choices are not driven by fear or societal pressures but by our values and aspirations. It encourages us to value experiences over material possessions, leading to more meaningful and satisfying choices. Understanding our emotional triggers and biases allows us to make intelligent financial decisions that resonate with our deeper desires and aspirations.
Striking a balance between these aspects means integrating financial planning with personal fulfillment. It's about setting financial goals that mirror what truly matters to us and help us steer clear of the pitfalls of living paycheck to paycheck or accumulating wealth without purpose. By clarifying your game and the lifestyle you desire, you can operate at a level of financial and psychological well-being never experienced before. You cease to rely on your peers as guides and become your own compass. Achieving clarity in personal values brings authenticity to your life, providing a solid foundation for your financial decisions.
While financially optimal outcomes are essential for stability and growth, psychologically optimal outcomes offer a deeper, more fulfilling approach to financial planning. You can achieve a more prosperous, more satisfying life by aligning financial decisions with personal values, prioritizing emotional well-being, and focusing on long-term happiness.
Don't hesitate to meet with us if you’re wondering what an authentic life looks like.
