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When Freedom Binds You

by Shawanda Greene

The other day I stumbled upon a man whom I found myself surprisingly attracted to. It took a minute before I realized what was appealing about him. Was it the salt and pepper hair? Maybe I found his wrinkled t-shirt alluring. The half calf socks were kind of doing it for me.  Was it the way he tilted his head down to look over the glasses that rested at the tip of his nose?

Nope. I was digging the overall nerd package. I love a man that makes you think. Too bad Dr. Barry Schwartz is married.

But you’re not here to listen to me wax on and on about the sensual mannerisms of Dr. Schwartz. Although his lecture took place at a TED conference back in July 2005, the passage of four years won’t stop me from talking about a topic that is eternally relevant to human decision making, and, thus, your money.

According to Schwartz, modern, industrial societies operate on the premise that the best way to maximize the well-being of individuals is to maximize freedom: the freedom of choice.

Now who’d argue freedom is undesirable? Everyday I strive for a bit more freedom, a few more choices. Even if I ultimately decide to choose to stay exactly where I am, I shall forever pursue a lifestyle that’ll produce more options which will inherently result in more freedom.

The insatiable desire for complete freedom is, quite possibly, the only reason I’m frugal.

But Schwartz makes the case that a multitude of options have three negative effects on you.

Instead of liberation, paralysis overtakes you, and you refuse to make a decision.

It’s not the only reason, but one reason I haven’t restarted retirement investing is because I don’t want to make a bad decision. There are a lot of questions that need to be answered first.

  • Do I want to pay taxes on my retirement contributions now or later?
  • Should I contribute to both my 401(K) and IRA evenly throughout the year?
  • Does it make sense to max out the IRA, then turn my attention towards the 401(K)?
  • Would it be better to invest in a no fuss target date fund, or should I create my own portfolio of low cost funds?
  • Under which circumstances are ETFs (Exchange Traded Funds) a more cost effective way to invest than index funds?

All of these questions require research and self reflection that I don’t want to make time for. And so, I do nothing. I let my savings peaceably flow into my ING account which is currently paying a dismal 1.30% annual interest rate.

Once you’re beyond the stage of inaction, and finally make a decision, you end up less satisfied with your choice than you would’ve been had fewer options been available.

I don’t doubt that any investment option I make is better than a long-term strategy of socking away money in a short-term savings account. But I’ve already indicated I’m afraid of making a bad decision. What I probably should’ve said is I’m afraid of making a decision that isn’t the best.

Instead of looking at whether my portfolio returns more than 1.30%, I’ll compare it to the highest performing investment vehicles available. Then I’ll try to fight off feelings of inadequacy and shame when I realize my returns are less than the best.

Your expectations escalate as you obtain greater access to more choices.

Although highly unlikely, what would happen if my portfolio outperformed all the rest. Would I be satisfied? Absolutely not, I’m never satisfied. I’d venture to guess that you’re never satisfied either. In a world with so many options, one has to be perfect.

Although Schwartz makes a compelling point for the limitation of choice, I still want more choices. At least then, I could choose to eliminate some of those choices.

What do you think? Do you have any examples of when you’d have been better off  if you had fewer choices?

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{ 11 comments… read them below or add one }

Money Funk December 3, 2009 at 11:39 PM

"Instead of liberation, paralysis overtakes you, and you refuse to make a decision. " Now I understand why I feel this way. Yes, I would be happier with fewer choices. My blog style would forever stay the same if I had fewer choices to tweek it, but I am given ultimate choices and therefore, will forever be slave to my blog coding.

If women were still only given the choice to be housewife or nurse, then I would not have been burdened with the forever asking question, "what do I want to be when I grow up". Instead, I never finish anything because I am afraid I am making the wrong decision or that something better will come along.

So, the next post will be… how to overcome paralysis in the face of many decisions??? ;)

Being frugal, without clutter will give me minimal choices to be faced with. Therefore, I will become free. I'm with you!

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@TheyCallMeCheap December 4, 2009 at 11:53 PM

While writing this post, I thought about a conversation I had with a friend regarding why the divorce rate is so high in the United States. According to my friend, relationships were much more stable when gender roles were clearly defined. And thus, life was better. The woman stayed at home and took care of the kids, while the man went out and worked. Back in the old days, women didn't have many options. So it's quite possible they were content with the lives they had because they didn't know any better or they were miserable and couldn't leave because they didn't have a choice. I'm sure there was some in between, but I'd opt for an infinite number of choices. If being a stay at home wife and mother was something I felt called to do then so be it, but I still want to be the one making that decision.

I change my mind a lot too. At some point, we have to force ourselves to make a decision, to ignore all the noise, and focus. It's not getting any easier. Especially with the introduction of social networking. There are so many distractions to overcome.

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Jason @ Dyalogues December 4, 2009 at 8:05 PM

I dig the geekiness, too. :)

I'm a vegetarian and am used to eating the sole vegetarian option on a menu or maybe picking between two options. At vegetarian options, sometimes I'm overwhelmed with all the choices and am the last one that manages to place an order!

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TheyCallMeCheap December 4, 2009 at 11:59 PM

I feel like that at Chinese restaurants. This is an area where too many options are stressful and frustrating. You only have a few minutes to make a decision!!!

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ctreit December 6, 2009 at 8:59 PM

I know that I am happiest if I have options. I don't ever want to be in a position in which I cannot choose. So what if I make a bad choice? As far as I am concerned, choosing is still better than having no choice. But I can see Schwartz's point: too many choices can indeed freak us out.

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Joeie January 22, 2012 at 12:05 PM

At last some rationlitay in our little debate.

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savvy December 9, 2009 at 2:49 PM

Baby steps. You don't have to make all those investment decisions at once. Just make the most important one…to start investing. FWIW, I say contribute to your 401k up to any company match, then max out your IRA, then go back to the 401k. That way, you get the best of both worlds – tax-deferred and after-tax accounts.

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Shawanda December 13, 2009 at 7:22 AM

If the company I worked for provided a match, I'd have never stopped contributing to my 401(K). Passing up on free cash isn't my style. I actually have the choice of a Roth 401(K) as well. The best decision does seem to be maxing out a Roth IRA first, then going back to either the traditional and/or the Roth 401(K). That way, I'll always have complete control over the first $5K invested. Plus the fees on any fund I'd invest in outside of a 401(K) would definitely be lower than those within.

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Deb December 11, 2009 at 8:48 PM

If women had been happy with limited choices, the feminist movement would not have happened. Just had to throw that out there. But life definitely seems more complex as a result, doesn't it?

Too many choices can absolutely be paralyzing! The shampoo isle at the store, the e.l.f. cosmetics site, the used book store – the choices are definitely overwhelming.

With my finances, I really try to keep it simple. I no longer chase rates, I keep my Roth diversification simplified with index funds (no control over my PERS retirement, but my employer funds that at 10% of my income!), and I use ING Direct for my cash efund & laddered cds. The most important thing to me is to keep the savings wheel rolling. And whenever unexpected $$ comes, that choice is simple – it goes into savings.

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TheyCallMeCheap December 13, 2009 at 7:38 AM

Nice. Glad you brought up the feminist movement. Here's a little fun tidbit of semi-relevant info from the Truth About Deception:

"Men are more likely to cheat than women. But, as women become more financially independent, women are starting to act more like men with respect to infidelity."

I like the keep it simple mantra. That shampoo aisle can be a beast.

I haven't tried laddering CDs, but I likely will once rates go back up. I love ING, but the 2.0% 12 month CD deal they're offering at the moment isn't worth the risk of interest rates rising.

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TheyCallMeCheap December 13, 2009 at 8:08 AM

I've had a good experience with Vanguard thus far. One of the problems I have with them is the high minimum of $3K on many of their funds. As a result, it might take some time to invest enough cash necessary to craft what I'd consider a well diversified portfolio.

The other part of diversification is tax diversification. As I mentioned to Savvy, I still have the choice of a Roth 401(K) after I max out an IRA. Although our government is currently on a spending spree, no one knows where tax rates are going to be decades from now. So, I'll likely allot an unscientifically derived percentage of my retirement contributions to a tax deferred retirement account.

Target date funds tend to have higher expense ratios, so there's a case to be made to take the time to do the work yourself of selecting low cost index funds and rebalancing them on a periodic basis. But I still think they're better than doing nothing.

I've always been concerned about the trading fees related to ETFs. They're definitely not worth it if you're investing relatively small amounts. Paying $4 to buy and $4 to sell a share of stock when all you're investing is $100 doesn't make much sense. And many brokers charge well above $4.

But all my fretting may be for naught, Charles Schwab now offers commission free ETFs. I'm happy with the service I've received on my High Yield Investor Checking Account, so I'm definitely going to give those ETFs a closer look. If this news is new to you, perhaps you'll want to check them out too. Sorry for the long link.

http://www.schwab.com/public/schwab/investment_pr

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