Optionality is King

Optionality is King

When I give financial advice to clients, I find myself leaning more and more on my personal beliefs. I’m guessing those beliefs formed after observing thousands of financial situations; after a while, all that observation crystallizes into a set of principles. One of the biggest: optionality is king.

Life is wickedly unpredictable. As they say, man plans and God laughs. When I’m facing a hard decision or one with an unknown outcome, I’ve found that maintaining as much optionality as possible goes a long way. That isn’t to say you don’t make decisions — rather, you make the decision that preserves the most flexibility. That approach tends to hold up well against life’s uncertainties.

An Example

Let me give you an example.

Mr. Client comes in with a large bonus of $200,000 after tax. He’s fired up, and we start discussing what to do with those funds. His instinct? Pay off the $200,000 mortgage and be debt-free.

On the surface, I’m sure many of you reading this think that sounds perfect. Huge stress relief. Nobody can take the house. Done and done.

Now let’s look at what that decision takes off the table. Can those funds pay for his kids’ college? No. Will they compound and grow into something much larger by the time he retires in a decade? Also no. Can he access them in an emergency or redirect them toward an opportunity he can’t see yet? Not really.

Those funds are gone, permanently locked into the walls of the house. The decision may feel right, but he’s lost optionality, and with it, control.

Rewind

Let’s rewind the meeting.

“Mr. Client, I hear you, and paying off the mortgage is certainly an option if it truly feels right. But here’s what I’d do and why. I’d take those funds and invest them in your joint account. You’ll likely pay off the mortgage in ten years anyway when you retire. In the meantime, those dollars should grow and compound appreciably. They’re accessible in a matter of days if you need them. And if five years from now you still want to pay off the mortgage, you can liquidate from what should be a much larger balance and do it then.”

What have I really told this client? Maintain optionality. In most cases, they’re probably better off financially because of it. My thought process is simple: optionality lets you bide your time and gather more information. Leaving dollars accessible lets life play out. Optionality equals knowledge, and knowledge equals better decisions.

I am firmly in the camp of making the most informed decisions possible — in life and in finances. Maintain optionality, and you give yourself the best shot at making truly smart, flexible, educated decisions. That’s a winning formula.

Stay wealthy, healthy, and happy.