To make better money decisions, try framing the issues

When one of my co-work­ers was buy­ing a house, he list­ed 10 homes in which he could live. His plan was to go down the list, mak­ing offers be­low the ask­ing price. If one said no, he was on to the next one. He end­ed up buy­ing the se­cond house on which he bid. I can con­fi­dent­ly say that I know vir­tu­al­ly no one else who would pro­ceed with a ma­jor life de­ci­sion in this way.

But he framed buy­ing a home as lo­ca­tion mat­ter­ing more than the struc­ture, price over ameni­ties, and in­vest­ment be­fore aes­thet­ics. His home-buy­ing proc­ess matched his cri­teria frame­work.

While most of us claim to be ra­tion­al with our mon­ey, it is al­most im­pos­si­ble to not have our hearts sway our de­ci­sions. One of the most im­port­ant ways to come to rea­son­able con­clu­sions is to cre­ate an ap­pro­pri­ate decisionmaking frame.

The de­ci­sion to buy long-term care in­sur­ance, for in­stance, has very little to do with the num­bers. Policy costs are not guar­an­teed and the bene­fits are typ­i­cal­ly only paid if you meet cer­tain cri­teria. While some of us will ben­e­fit from the poli­cies, many of us will die be­fore ever using these bene­fits. For those who need to go into a fa­cil­i­ty, u­su­al­ly the sale of their home can de­fray much of the costs. So what is the frame for own­ing a long-term care pol­icy?

Re­mov­ing the neb­u­lous fi­nan­cial rea­sons, long-term care poli­cies pro­vide two emo­tio­nal bene­fits: 1) They are an inher­itance pro­tec­tor for your off­spring since mon­ey that could have gone to long-term care costs will be pre­served through pol­icy bene­fits. 2) They can help re­lieve spous­al care­giv­er fa­tigue be­cause own­ing a pol­icy may make it easi­er to justi­fy hir­ing a nurs­ing or as­sist­ed liv­ing sup­port. These are legitimate rea­sons for some peo­ple to own a long-term care pol­icy, so by fram­ing the is­sue in this way, you can de­cide what price to pay for peace of mind.

An­oth­er area where ap­pro­pri­ate fram­ing helps is around pro­vid­ing sup­port for chil­dren. For some, help­ing chil­dren is not a fi­nan­cial op­tion. For oth­ers, the choi­ces seem ar­bi­trary. How we ask the ques­tions will lead to dif­fer­ent an­swers.

The first frame to under­stand is wheth­er you are pro­vid­ing help for your­self or for your child. If the thought of your child going with­out health care cre­ates un­neces­sary stress in your life, then finan­cing this may put you at ease. If you don't want your chil­dren to move home, you may pro­vide rent sup­port. Our hand-wring­ing oc­curs when we con­fuse our per­son­al mo­tives with en­ab­ling.

The en­ab­ling frame oc­curs when you broad­en the defi­ni­tion of ne­ces­sities and help chil­dren with things that they could han­dle on their own. One of our daugh­ters got her first job at a com­pany down­town where they pro­vide a free bus pass. The best deal she could find for park­ing there was around $200 a month. Her de­ci­sion to take the bus de­rives from not want­ing to spend her mon­ey on some­thing that is not as valu­able to her as oth­er things. If we felt that tak­ing the bus was not safe, we may have cho­sen to pay for park­ing, but en­ab­ling oc­curs when you cre­ate a sto­ry to match your ac­tions rath­er than cre­ate a more ac­cu­rate frame that match­es your values cri­teria in the be­gin­ning.

Spend­ing de­ci­sions re­quire frames. For those who spend too much, their frame tends to be around what they de­serve. The prob­lem with the "I de­serve" frame is that there is nev­er any clo­sure with it. With this frame, mon­ey ul­ti­mate­ly owns you be­cause you buy hous­es lar­ger than you can af­ford or get into situa­tions where you may not be com­fort­a­ble. A ques­tion to ask that may help re­set the frame is wheth­er a pend­ing de­ci­sion will make you anx­ious if you do it or re­gret­ful if you don't. Some­times it does both. Work­ing through the re­gret as­pect may help cre­ate al­ter­na­tives that give you more breath­ing room; if some­thing is too much of a stretch, the anx­i­e­ty as­pect may nev­er dis­ap­pear.

As cli­ents get ready to re­tire, their frame of­ten turns to the risk of their port­fo­li­o going down. But they ig­nore oth­er risks such as in­fla­tion or lon­gev­i­ty. The a­mount of mon­ey that you can spend from your port­fo­li­o in re­tire­ment is a func­tion of three things — how much you want to leave as leg­acy, how long you want the mon­ey to last, and the per­cent­age you own in stocks vs. bonds. If you plan on liv­ing a while and want to spend more, then you will need to own more stocks. This means that your in­vest­ments will ex­peri­ence mar­ket ups and downs.

The way to frame this is through think­ing cook­ie jar, mat­tress and bur­ied treas­ure. When cli­ents are liv­ing off their port­folios, they have three pools of mon­ey: short-, me­di­um- and long-term. The short-term cook­ie jar is filled with cash that will cov­er two to three years' worth of ex­pens­es. The me­di­um-term mat­tress helps you sleep by be­ing filled with bonds that will ma­ture or you can sell when the stock mar­ket turns nas­ty. The treas­ure chest grows by own­ing stocks that you sell to re­plen­ish the cook­ie jar when times are good or you hold for re­cov­er­y when things are dif­fi­cult. Fram­ing things in this way helps you get through the ups and downs.

Ross Levin is the founding principal of Accredited Investors Inc. in Edina.