Millennial Money: Making 'good enough' choices can pay off
Sometimes good enough is good enough.
In a world of information overload, it's common to feel angst when making choices. You never know whether you're making the best one.
Call it optimizer guilt. And it can be especially prominent in choosing financial products, which can be opaque and confusing: Do I have the best credit card? What 401(k) investment will give me the best return? Where should I open an account to save for my kid's college expenses?
Besides adding stress, optimizer guilt can keep you from making important money decisions that need action now.
The solution may be the theory of "good enough," or what academics have called "satisficing." Make a decision based on the best information you can reasonably gather at the time, and then get on with your life. In many cases, you can revisit the decision later, if necessary - refinance your mortgage, move your retirement funds or choose a different 529 college savings plan.
"The truly great thing about 'good enough' - and the reason it is so powerful - is that it allows you to get to the starting line in a way that waiting for the ultimate, best possible result does not," writes financial expert Jean Chatzky in her book "Make Money, Not Excuses."
HOW SIMPLIFYING CAN HELP
You may have heard the same problem called "paralysis by analysis" and the solution as, "Don't make perfect the enemy of the good," or the acronym KISS: "Keep it simple, stupid."
"Good enough" is not just a financial well-being thing, it's a happiness thing.
Having more choices is good only up to a point because of the accompanying pressure to optimize, argues psychologist Barry Schwartz in his book "The Paradox of Choice: Why More is Less."
"As the number of choices grows further, the negatives escalate until, ultimately, choice no longer liberates, but debilitates," he wrote in a research paper with Andrew Ward, a fellow professor at Swarthmore College. "Learning to accept 'good enough' will simplify decision-making and increase satisfaction."
If you get an adrenaline rush from plotting your credit card points on spreadsheets and poring over price-to-earnings ratios of individual stocks, this concept may not be for you. You're a die-hard optimizer who crunches numbers for sport.
The theory of good enough is for those who feel overwhelmed, thinking they should optimize their money life but feeling shame because they don't have the time or desire. If that's you, consider decluttering your finances. Simplify by combining financial accounts, save with automatic deposits, and skip low-value retail loyalty programs and coupons.
Here are a few specific examples of good enough.
- RETIREMENT INVESTING. Too many choices in a company-sponsored retirement plan, like a 401(k), can lead to making no selection at all. If that sounds familiar, a good-enough decision would be to contribute enough to get all of your employer's matching contribution and invest the money in a target-date index fund, a fund that invests based on what date you expect to retire. Is that optimal? Maybe not. But it gets you started. You can raise your contribution percentage and research other funds later. Meanwhile, your nest egg has started growing.
- REWARDS CREDIT CARDS. If you pay your credit card balance in full every month, you're a candidate for a rewards credit card, but how to choose among the thousands available? To get started, a good-enough choice is a flat-rate cash-back credit card that pays 1.5% or higher. It gives you a fixed amount of cash back no matter what you buy. You can always get a complicated points or miles card later. Until then, you'll be earning rewards on everything you charge to the card in the best rewards currency: cash.
- COLLEGE SAVINGS. You gain tax advantages by squirreling college savings in certain types of accounts, but it can be dizzying trying to choose among them all. A good-enough option is to invest in your own state's 529 savings plan and potentially reap a state tax break, too, depending on the state. Choose a target-date fund, based on when your child is likely to attend college. Later, you might move the money to a different state's plan or start a different account. The point is, you started saving.
For big-money decisions or unusual circumstances, you might want to put more effort into making an ideal choice, or you might seek professional advice. But for many other decisions, settling for "good enough" can end up being optimal.
This column was provided to The Associated Press by the personal finance website NerdWallet. Gregory Karp is a writer at NerdWallet. Email: firstname.lastname@example.org. Twitter: @spendingsmart.
NerdWallet: How to pick the best credit card for you: 4 easy steps http://bit.ly/nerdwallet-steps-picking-credit-cards
Barry Schwartz TED Talk on "The Paradox of Choice" https://www.ted.com/talks/barry_schwartz_on_the_paradox_of_choice