The difference between a habit and a practice is awareness. If a habit relies on thoughtless performance, a practice relies on thoughtful performance. The behavior can be the same (e.g., locking the doors at night). Awareness makes the difference.
Conventional wisdom means that you do what everyone else is doing and think what everyone else is thinking because that's what they are doing and that's what they are thinking. Do the Behemoths that grow wealthy by convincing you to follow conventional wisdom want you to be more thoughtful? Of course not. Is there a more thoughtful way to accomplish what you want to achieve when it comes to creating wealth and managing your personal economy? Of course, it's called common sense.
The Seven Mysteries series aims to tear down the wall between conventional wisdom and common sense so you can thoughtfully grow rich without risk and create wealth without worry.
Mystery No. 1: Pay yourself first, but don't count your 401(k)
"Pay yourself first" is an axiom that's been around for centuries -- perhaps millennia. What it means is that your personal economy rests on the foundation of a personal savings plan -- as opposed to an investing plan -- and recognizes the need for a solid base of readily accessible capital.
The issue is not whether or not you need to put a capital acquisition strategy in place. You need to. The question becomes where you should put the money. Conventional wisdom from the debt paradigm say you should max out your 401(k). This is extremely bad advice for you, but great for the Behemoths.
The problems with relying on 401(k)s, IRAs and the like as your capital base are manifold:
- First and foremost, you give up control of your money: first to your employer, next to the investment companies that manage your money, and finally to the IRS.
- If you can get to your money at all, tax qualified plans restrict how much of your money you can use, and often restrict how or whether you can use it.
- The money you withdraw -- as opposed to borrow -- is subject to penalties and/or taxes.
- You have to repay borrowed money, plus any fees associated with any loans you take within five years, or pay the penalties and taxes referred to above.
- You normally have to ask permission or get approval to get your hands on your money.
- Your money is only available after much paperwork and then only on a restricted basis, should you need it for any other reason
Savings accounts, certificates of deposit, money market accounts and similar financial instruments have a place in your portfolio, but they, too, have shortcomings as base capital. To access the money in these funds, you must deplete them, and therefore lose their ability to earn interest.
Granted, the money in these funds is readily available if you lose your job and you need money to see you through to your next job or get a new business up and running. But, if the next job comes later rather than sooner, or the new business hits a bump in the road, your capital could be depleted and you would have no other resource to fall back on except perhaps by also depleting the 401(k) that you rolled into an IRA when you left your employer. And if that doesn't last...
Mutual funds, real estate and any other investments (remember, investments are based on pure unrelenting risk) are subject to market conditions (think 2008-2009), and may not be fully liquid. The only way you can get your money out of them is if you sell them or borrow against them.
Moreover, you have to beg permission from a lender to borrow against your personal assets. Add to this degrading process the fact that neither selling nor borrowing from others preserves your capital base, and both deplete your resources. Worse still, the costs of borrowing drain your pocketbook, while filling the coffers of some Behemoth.
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