Seven myths and seven mysteries of personal finance and economics, Pt. 6
By Jeffrey Reeves MA
As I discussed in my previous article, 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.
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. 2: You know best what's right for you
The Debt Paradigm preaches that you cannot fully comprehend your own personal economy. It implies that the professionals who subscribe to the Debt Paradigm are in some way wiser, more knowledgeable about your situation, better informed about your needs, and perhaps even cuter than you. Bunk!
You do not need a financial planner with an abundance of letters after her/his name and the logo of a big company on his/her business card1 and a sales oriented computer program to tell you what is right for you and your family.
In fact, the financial and investment professionals most apt to help you are most likely working with smaller firms and choose not to align themselves with just one financial advisory firm's products. It is also likely that they have narrowly focused practices and a broad understanding of the markets they serve.
Regardless, you need to equip yourself to direct the course of action. Only you should decide to incur the "pure unrelenting risk" of an investment. Your cousin Louie, golf partner, co-worker, or professional colleagues are always available with hot tips and enthusiastic advice. Ignore them. When you need advice, seek out an investment professional,2 be it in the stock market, mutual funds, real estate, commodities, foreign currency or any other potentially lucrative investment.
And remember, it's up to you to protect your capital base. An investment advisor is not compelled to do that.
Mystery No. 3: Don't risk what you can't afford to lose
Ask yourself the question, "What is it that I can't afford to lose?" This is a money question but the answer is not purely about money. Excessive consumer debt, job losses, family crises, medical expenses and long term care costs underlie most bankruptcies. However, all bankruptcies result from a lack of a capital. If you are trapped in the debt paradigm, you are at risk. You have saved too little, invested too much, and assured the success of some Behemoth, while critically damaging your own personal economy.
Your capital base is not secure or is non-existent. You are at risk because you are employing a set of strategies and practices that are not based on developing a capital base and thereby place your family and your fortune -- that which you cannot afford to lose -- in constant jeopardy.
It is only by having an adequate capital base that you are able to withstand and survive what Shakespeare called the "slings and arrows of outrageous fortune."3 You cannot afford to risk your capital base.
A better model of your personal economy relies on the steady accumulation of capital and the concurrent elimination of debt and guides you through a program that lets you control all of the money that flows through your life.
This leads us to the next mystery.
Mystery No. 4: Why debt = financial death
The foundation of all banking is debt. The bank borrows from you at 2 percent in your savings account and lends it to someone for a car at 8 percent or for some furniture at 15 percent, or on their credit card at 22.99 percent. The reason debt is not death for the bank is that the bank borrows to lend and for no other reason.
The reason debt is death for most Americans is that they borrow to spend. In fact, some put the interest paid out of every personal dollar earned as high as 36 cents. That is higher in some cases than all income and payroll taxes combined.
The average person will pay almost two times the purchase price of their home in interest, will pay enough interest on automobiles to buy an extra car every 10 or 12 years, and might pay their credit card companies up to 2000 percent of the principal balance before paying off the card. Is it a wonder that the savings rate is less than 0 percent? This is financial suicide.
Take the example of a $1,000 refrigerator. The manufacturer borrowed the money to build the plant and buy the parts to build it. The distributor borrowed the money to lease the warehouse to store it until s/he placed it in inventory and in the store. The trucker borrowed the money to buy the delivery truck. You borrowed the money to buy it.
Who's making all the money? You got it -- the bank. What reduction in cost would occur if each entity financed their part of the process, in lieu of borrowing from the bank? Obviously, you control only a small portion of that series of borrowing transactions, but if you could eliminate some or all of the 35 percent of your income that you pay to others as interest, your personal economy would work better for you and your family.
1Industry designations and accomplishments demonstrate that an advisor has acquired specialized knowledge about finances. It is not an indicator that he or she has skill and wisdom -- one can know all about sand castles and have the skill to build one but lack the wisdom to wait for low tide.
2Part of our practice is to identify and refer these kinds of professionals to our clients, when appropriate.
3Hamlet, Act III Scene I - William Shakespeare
*For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.