Levin: Why emotions often overtake personal financial analysis

I was talking to a friend who was considering buying a cabin.

"The house is an A-plus; the lot and location are C's."

As he talked, he continued to get more excited about the house. But here's the thing: Are you really buying a cabin or a place?

In business, one of the things we do when we make decisions is go through a cost-benefit analysis. But in our personal lives, even if we do this, we tend to overweigh one side or the other.

Let's go back to the friend's cabin. There are certainly some benefits to jumping on this. It's a great house, the market is tight, and they actually found a place so are therefore able to enjoy it sooner. Interest rates are low enough for them to easily afford it, and they have a toehold on a lake where they believe they want to eventually settle. But with emotional decisions like this, we may overweigh the wrong things.

There are costs with this decision that are more difficult to estimate. They seek an outdoor lifestyle — being on the lake, bonfires at night, games on the lawn. The time that they will actually spend in their home may be far less than the time spent out of it.

This location means that they will not be close to the places that are already important to them, thereby creating a constraint on how much they can visit those places. Based on how little they will initially use the cabin, the cost of ownership translates into affording several weeks at the resorts that got them interested in owning in the first place.

And maybe most significantly, they can eventually fix a house, but they can never fix a location.

This doesn't mean they shouldn't buy this place, but it means that there are some steps that could be taken before they find themselves making a decision that they may regret.

With homes and cabins, the first step before you start looking is to set up a list of criteria in order of importance. Weigh each criteria 1 to 10. When you start looking, make sure you are considering only places that meet your highest criteria. This helps you from getting frustrated and suddenly just saying, "I'll take it," because you found a couple of things that excited you, even though they didn't check many boxes.

Next, consider your sense of urgency. Worrying that the market is going to get away from you is not a good reason to buy something you don't want. Your age and that of your family may create time sensitivity, but fear of missing out doesn't.

Then, consider what other potential alternatives that may not meet your long-term objectives but may better help you eventually end up with what you want. Our clients are selling their house and don't have a good sense of where they want to live. We encouraged them to rent for a year in the area that they are considering as a way to gauge their comfort.

There is no doubt in their mind that they will be buyers, but rather than potentially make a difficult to correct mistake, they are willing to tolerate the perceived inconvenience of renting.

Benefits almost always are easier to grasp than costs. You love where you work but are frustrated with the pay. A job offer comes along with a nice bump in salary. Sounds good?

There are a number of costs to consider before leaping. How do you determine whether the environment is one in which you are likely to be happy? What are the opportunities for growth in the new position? What are the switching costs regarding benefits such as profit-sharing?

If you are serious about changing from a job you enjoy with people you value, then you may want to risk talking with your current employer about what you discovered about pay. In companies with tight salary bands, they may not be able to do anything. Or, they may indicate that they don't feel it is in their best interest to keep you. But isn't that information you would want to have before you do something so life-altering, even if it means you hearing disappointing feedback?

How about college? The benefits of a private school may be smaller class sizes, a chance to be out on your own, potentially a certain amount of status. Yet, the costs may be student debt that prevents you from pursuing a field in which you are most interested or having to delay grad school, finding a mate that may permanently keep you far from home or ending up with a smaller list of contacts if you eventually move back.

Everything has costs and benefits. Accurately weighing them will lead to an A-plus life.

Ross Levin is the chief executive & founder of Accredited Investors Wealth Management in Edina.