How to reduce anxiety over financial matters?

To many people, financial matters are extremely complex. They cause great anxiety over our lifetime. The following are several simple rules that simplify our financial decision making. They can help reduce our anxiety over financial matters.

1. Don’t invest before paying off debts

More and more people accumulated debt over their lifetime. That is often a source of great anxiety. At the same time many people invest heavily in the stock market. They will be better off to pay off debt first. In that way, they greatly reduce the number of financial transactions. They neither have to worry about debt nor the fluctuation of the stock market.

Some might say that the cost of debt is lower than the return of the stock market. So it makes sense to invest in the stock market while accumulating debt. But if we include the fees and the taxes, the results may be different. From the law of one price, it is unlikely to expect the return from one asset class to be much higher than the other. Most people cite statistics from the US market. United States is the largest stock market. Japan and China are the second and third largest stock markets in the world. When we use Japanese or Chinese stock market returns to measure investment performance, we probably won’t reach the conclusion that stock markets provide fantastic returns, even over long term.

Borrowing and investing simultaneously involve two rounds of transaction costs. But from the perspective of financial institutions they involve two rounds of income. That is why financial institutions will recommend borrowing and investing simultaneously.

Pay off debt before we start investing. This greatly reduces the number of financial transactions and the related costs. This greatly reduces the complexity of financial decision making. 

2. Don’t accumulate credit card debt

Interest rates on credit card debt are very high. But over time, people are carrying or “managing” more and more credit card debt. Some think using debt will increase our spending power. They don’t. High interest payments quickly erode our ability to spend.

It is better to pay off all balance each month than to “manage” a debt with high interest rate.

3. Don’t worry about retirement before fulfilling other obligations 

Financial advisors often advise us to save for retirement as early as possible. If you start saving at 25 and withdrawing at 65, you pay service fees for 40 years. That is great for financial advisors but not necessarily great for you. When you have a mortgage or other debts, pay down the debts first. If you are mortgage free, even if you don’t have much other retirement money, you can always draw down your home equity. 



There are more ways to reduce anxiety over financial matters. The key is to reduce the amount of financing. The use of financing is necessary for large capital investment, such as house and car. But financing for routine expenses will constrain, not free our life.

The above suggestions are to reduce complexity and anxiety over financial matters. They are not aimed at wealth maximization. To maximize wealth, people often take the opposite route, to utilize financing extensively. But isn’t maximizing wealth the main goal in life? Darwin made the following observation many years ago in his book, The Descent of Man. 

The very poor and reckless, who are often degraded by vice, almost invariably marry early, whilst the careful and frugal, who are generally otherwise virtuous, marry late in life, so that they may be able to support themselves and their children in comfort. Those who marry early produce with a given period not only a greater number of generations, but ... they produce many more children. The children, moreover, that are born by mothers during the prime of life are heavier and larger, and therefore probably more vigorous, than those born at other periods. Thus the reckless, degraded, and often vicious members of society, tend to increase at a quicker rate than the provident and generally virtuous members. Or as Mr. Greg puts the case: “The careless, squalid, unaspiring Irishman multiplies like rabbits: the frugal, foreseeing, self-respecting, ambitious Scot, stern in his morality, spiritual in his faith, sagacious and disciplined in his intelligence, passed his best years in struggle and in celibacy, marries late, and leaves few behind him. Given a land originally peopled by a thousand Saxons and a thousand Celts --- and in a dozen generations five-sixths of the population would be Celts, but five-sixths of the property, of the power, of the intellect, would belong to the one-sixth of Saxons that remained. In the eternal ‘struggle for existence,’ it would be the inferior and less favoured race that had prevailed --- and prevailed by virtue not of its good qualities but of its faults.” 

Like most other people from upper class, Darwin has low opinion of lower classes. However, he is an honest scientist. He observed that “The children,” from lower classes “are heavier and larger, and therefore probably more vigorous.” 

In doing anything, the concept of economy need to be applied. The best environment parents can create for their kids is to have more siblings. If we exhaust ourselves with even one child, it is unlikely that we will have many kids. I think the biggest problem in modern society is the over consumption, physically and mentally, on each individual. This makes it impossible to have more kids in an average family.