You have some money. Do you pay down the mortgage, or do you invest in the stock market?

You can use math to make this decision, but math is not much help, because there is uncertainty.

• The stock market allegedly returns 8 percent, but sometimes a lot less.

• Your house will hopefully appreciate, but by how much? Nobody knows.

• And what are interest rates going to do?

• It also mostly depends on where you live in the country.

• There are tax implications to residential mortgages.

• At issue also is your risk tolerance—

• Your optimism about the economy—

• And your fear of the downside.

There is a third consideration. How much do you keep in cash? How much liquidity do you need?

Most personal finance people like to say this is an easy decision. But it’s not an easy decision. There is a lot of nuance.

The answer is likely to be a balance of the three possibilities, based on qualitative factors such as your opinion on the direction of stocks, interest rates, and real estate. And if your opinion is right, you will probably be right by accident.

There are no easy answers. There is no silver bullet. The point is to avoid getting too wound up about it. There are consequences to being really wrong, but there are no consequences to being a little bit wrong.

We are faced with hundreds of economic decisions like these throughout our lifetime. Some people are pretty good at making them. Some people are pretty bad at making them.

This is where education comes in. If you’ve been taught a little bit of personal finance, at least you can make these decisions from the right framework. Of course, some people will still make bad decisions, and we are powerless to stop them.

My point here—don’t spend too much time thinking about optimization. Spend any time on the personal finance blogs and this is where people get bogged down.

Stick to principles.

Principle 1: Avoid Debt

Debt is dangerous, and debt retards growth. Debt can also take you to zero, and make you bankrupt. It can screw up your life. Sometimes it is necessary, but you must have a healthy respect for it.

We talk about debt all the time.

You really shouldn’t go into debt unless you have a plan on how to pay it off—a good plan. Still paying off your student loans in your late 40s is not a good plan.

If you are going to borrow a substantial amount of money, you should have a plan on how to pay it off in 3-5 years. Maybe 10 years in the case of a mortgage.

You should also recognize that the more free cash flow is going to debt, the less free cash flow is going to equity. Most people never experience what it is like when the debt is gone and all the free cash flow is going to equity, and your net worth goes up fast.

There are a lot of people out there with a negative net worth. Including people who have a pretty good standard of living.

By the way, the median net worth in the US for people under 35 is around $11,000. The mean net worth for that age group is around $76,000.

One of the funnier things about the Google monster is when you type someone’s name into the search box and it suggests “net worth” underneath. We like to find out how rich people are.

Interestingly, people don’t spend a lot of effort trying to make their own net worth go up. An easy way is to pay down debt.

Principle 2: Save

I get sick of these personal finance jerks telling people to stop drinking Starbucks all the time. I get it—if you spend 5 bucks a day on Starbucks, it’s over $1,000 a year, and $1,000 a year compounded at 8 percent adds up to something.

Starbucks is still in business, so clearly not that many people pay attention to this. FWIW, I stop at Dunkin’ Donuts every morning and get an iced coffee. Even in the dead of winter. It costs me $2.86.

I have a different philosophy on this stuff. All the other personal finance people will tell you to stop drinking Starbucks coffee, because they believe it is the accumulation of small decisions that gets you to save.

I disagree. I think it is one or two big decisions that make a difference. Skipping the coffee doesn’t do any good if you then buy a Lexus SUV.

“Penny wise and pound foolish” is a really old and corny saying, but I see a lot of people get stuck on this.

If you get a $400,000 house instead of a $300,000 house, quitting Starbucks for a lifetime wouldn’t make up the difference.

You have to get the big decisions right: going to college, buying a car, buying a house. If you get those wrong, it’s going to be difficult to recover.

Principle 3: Manage Risk

I wrote a piece on the Bloomberg opinion page recently on the merits of the 35/65 portfolio. I suggest you read it before you go any further.

I spend pretty much all of my waking hours thinking about risk. My entire life has been a study in risk: as a deck watch officer, a law enforcement officer, a trader, and then a guy who thinks about risk all the time, whatever you call that. I know how much risk I can handle. I probably know how much risk you can handle better than you do.

I also understand that different people have different risk tolerances. Some poker players are weak-tight (they play fewer hands, cautiously). Some will go all-in on every hand. Is there a one-size-fits-all solution for risk? Actually, for the most part, there is.

We can measure this empirically. We spend an inordinate amount of time thinking about returns and not a lot of brainpower thinking about what those returns cost in terms of volatility. Another thing to teach in the personal finance classes.

I talked about this a bit in The 10^th Man 5 call I sent out to you guys earlier this week.

TLDR: People have too many stocks and not enough bonds.

And people are looking in the wrong places for the right balance. There aren’t many things I’m bullish on right now, but what I am bullish on is not being talked about all that much.

By the way, if you missed The 10^th Man 5 call, you can still listen to it by clicking this link. You can send in questions there, too—I encourage you to do so.

Geek Squad

I am doing my best at being a personal finance guru, but the collar is a little tight. I am allergic to spreadsheets—I suspect most people are. If you are working on some personal finance problem, and you can’t do the math in your head, then it probably isn’t worth doing.

You have to get three big things right. If you don’t succeed at this, it won’t be because you didn’t carry the 1.

These principles I laid out: avoiding debt, saving, and managing risk, are all character issues—who you are as a person.

That’s why personal finance is a mission of mine.

Yes, some people get themselves in financial trouble because they are unsophisticated and uninformed. So the goal here is to make people sophisticated and informed. But that’s just part of the solution.

It’s not simply about tips and tricks. It’s about being a better person—the best version of ourselves.

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