Simple Rules about Money You Can’t Ignore
People Don’t Fail Financially for Complicated Reasons
We need simple rules about money more than ever. You don’t need an MBA or certificate from the Canadian Securities Course to do well with your money. It’s not because you don’t know all the vagaries of the stock market that you end up with less than you need. Financial failure doesn’t automatically happen because you didn’t squeeze the last dime out of your income tax owed. Just because you missed the latest financial craze doesn’t mean you’ll be in the poor house. Sure, all of that can help but financial success doesn’t start there. It starts with ignoring the very basics of money management. In reality, most people in trouble don’t make it with money for the simplest of reasons. If you know some of these basics, you can make your job of achieving financial success significantly easier. You will help your financial advisor help you achieve more of your financial and life dreams. You will be well on your way as quickly as possible. Who Hijacked the Financial Planning Pyramid? If you want to see some pretty financial pictures, Google “Financial Planning Pyramid” and see what pops up. You’ll find pages of illustrations. Some are very professional. Some are just basic. But, there are a ton. To those who have never seen one, the idea is that there is a hierarchy of actions you need to take to success with your money. Routines, they start with the basics of cash in the bank, a will, powers of attorney and life insurance and end up with art and gold coins. Here’s where the trouble starts. Some well-intentioned but misguided advisors have decided that the whole pyramid has to sit on a base of a “financial plan.” Sounds good right? Wrong. The pyramid is the template for a financial plan. It is a financial plan. Start at the bottom, work your way to the top and you have built your money mountain. Saying you need a financial plan first is redundant. That thinking comes from “The Department of Redundancy Department.” You don’t need it. What you do need, and what your kids need are simple ideas anyone can keep in mind when dealing with their money. Build your money mountain on these principles and you’ll get to the top. 1. Accumulate money the old fashioned way -- SAVE IT UP. There is no magic here, just discipline. When you learn to live on 80% of your net income and keep 20% in reserve, you will naturally build your money mountain. You need a money mountain to work from. Unless you put it away, you won’t have it. So many of us get involved in living on cash flow, where your monthly income covers payments on purchases rather than paying for purchases that they never get ahead. The upshot of this losing strategy is that many end up living on about 120% of their net income. Then they put their faith in either “The Prayer or the Windfall Approach” to wealth building. They “pray” they miraculously catch up one day or they win the lottery in the meantime. Good luck. Once in this “program,” people can escape but the most frequent incentives end up being heart attack, bankruptcy and divorce. Believe me there are some lessons you don’t have to learn yourself and this is one of them. 2. If your gross habits exceed your net income, your upkeep will be your downfall. Catchy, isn’t it? So is the philosophy. Gross habits can be a killer. Instead, save the money you spend to impress yourself. Buying things just to make yourself feel better has it’s compensations to be sure. But the bitterness of having no money lingers long after the sweetness of having “stuff” is forgotten. Learn to live on less and live longer. Smart purchases fit into today’s world anyway. Frugality is in. The idea of “conspicuous consumption” – the practice of spending lavishly on goods and services mainly to display wealth and not fulfill need was “invented” by Thorstein Bunde Veblen in 1899. I say the 100 plus year run is enough. The debt incurred to display income is a huge killer of actual wealth. It makes taxes as an “eroder” of wealth pale by comparison. Compounding unnecessary purchases with overwhelming interest costs is a sure fire strategy for failure. You never want compound interest working against you. It’s like having someone eat while you sleep. It’s the best way to end up with nothing. Manage your gross habits and build your money mountain. 3. Success in investing has never been and never will be about rate of return. Want to have a big money mountain? Money success has always been and always will be more about the personal discipline of saving than it is about the rate of return you get on your savings. 10% of nothing is always nothing. The propaganda we see every day about investment options is all very interesting just not very important if you don’t put any money away in the first place. You need a rate of return on something, not nothing. You can’t make a mountain out of nothing. The only way to make compound interest work for you is to have money for compound interest to work on. Compound interest working against you is a freakishly scary effect. Think about negative compounding this way. Say you have a lily pond. If you remove a lily plus 100% compounded every day from the pond full of lilies, one day you have a pond half full of lilies, the next you have none. Compounding works powerfully whether it’s working against you or for you. Make it work for you. 4. “Peace of mind equals quality of life.” In choosing you investments and options, keep this stunningly simple idea in mind. Whatever you do, keep your personal, family and business peace of mind at heart. No amount of returns will compensate for a lack of peace of mind. Remember also the advice of Kevin O’Neill, a former coach of the Toronto Raptors. Once after a particularly bad run of losses, he said, “we’ve discovered that losing takes a lot more out of you than winning puts back in.” Translation: losses in the market have a much bigger negative impact on you than the positive impact of similar gains. Losses linger. Wins wither. Getting complicated in your investments can lead you to the top of the mountain but the price you pay in worry and “sweat equity” can take the edge right off it. As we have seen with all too recent happenings in the market and the succession of past events too, slow and steady isn’t that bad an idea. Turns out the tortoise had it right all along. The more complicated you are with your money, the more susceptible you are to luck playing a role – good luck and bad luck. As Dirty Harry said, “do you feel lucky today?”
Why not make it so you don’t have to be? Planning for peace of mind is always a good rule to remember. Being able to sleep soundly at night can never be overvalued. Regardless of what else you learn, keep the “World’s Shortest Financial Planning Course” in mind and you will reach your goals. Combine it with your financial planning pyramid and you will do it properly too.