Nobody wants to pay more for something than they need to. However, there is a big difference between being an informed shopper and knowing fair prices than there is being consumed by paying too much for something. The key lies in the value. Is the item or service you are buying giving you fair value for the price you are paying? What happens in finance is that we are so focused on accumulating a large sum of money that the emphasis on rate of return and fees becomes an issue that actually gets in the way of other more important decision-making criteria. Yes, fees and rates of return are important, however, the ability of the item or service to meet your goals today, and in the future, and to provide significant return on investment to you during the period of time you plan to hold to get value from the item or service is far more relevant in the decision making process than rate of return.
Why? Because anything that keeps you stuck in fear, scarcity and lack will actually inhibit your ability to create wealth today and lifetime financial independence. When you start with a simple decision making hierarchy that begins with matching the item or service with your goals and priorities, start also to consider the time you will be receiving value, and when and how you will get rid of the item or service. And, finally, what tax implications there are, what the return is, and what the costs are for you to maximize the value to you for the item or service being purchased? This allows you to make decisions from a place of connecting your personal priorities with your financial transactions and maintaining control over your lifestyle from a financial perspective.
If something seems too good to be true, it could be, or it could not be. You need to find out for yourself by taking extra care, applying extra precaution, digging deeper and maintaining appropriate control. Under no circumstance is it ever appropriate or prudent to risk your entire net worth on any investment unless you also plan to live with any resulting negative outcome.
Why? Just because you don’t understand something does not necessarily make it bad. Just because your neighbor, group of associates, or person of respect has invested or participated in a particular financial strategy does not mean it is okay for you. The worst thing you can tell yourself is, “If it’s okay for so and so, then it must be good for me too.” Have the confidence to make your own decisions and ask your own questions. Someone else is not going to pay your bills or look after your household if something goes sideways. It’s your responsibility!
To focus on accumulating a large sum of money so you can withdraw it later will create stress. A more effective and empowering focus is to consider the purpose of the accumulated funds. For example, if you are working to set aside a sum of money (say $1 million) to support yourself when you leave work (i.e. when you retire) this number is not a number most people relate to. If you instead, focus on creating $5000 per month so you can leave work, it’s a more relatable, everyday number.
How do you figure out what this number is? Start with your ideal budget for your ideal lifestyle then work backwards from that figure. Stay focused on that monthly income number, rather than the bigger, off-in-the-distance number that doesn’t relate to day-to-day financial activities.
How can you reduce fraud risk & increase return potential without stressing about money? For every single financial transaction, write in your own words your expectations and understanding of the product, strategy or investment. This simple letter of understanding will assist you in communicating with your advisor helping you with the transaction; it will help you remember details later on; and it will help anyone who might need to help you with your financial matters if you weren’t able to. If you can have the advisor sign the document as well, even better, but understand this is not a legal document; it is for clarity of communication and understanding only.
Why take the time when a letter of understanding isn’t a legal document? First, by writing out your letter of understanding you, will ensure that you and your advisor are on the same page as far as communicating your needs and the product’s ability to fulfill that need. Second, for future reference, your reasons and details are not as clear after several years have passed as they are when you first purchase the financial product. The letter of understanding is a perfect summary of your expectations at the time of purchase. Third, if someone else is required to handle your financial affairs, they will understand what you have and why. For estate purposes, or for medical reasons, a letter of understanding can be an invaluable tool – to be kept with your record of affairs – that your executor, power of attorney or next of kin will use to process your estate.
What is your exit plan? Before you invest, you need to decide when and how you will get out. When you borrow, it’s the same thing: How and when can you pay this back? When you purchase something, how long will you have it, and when and how will you dispose of it?
When do you establish the exit plan? Every single financial transaction to spend, borrow, invest or insure starts with the end in mind. This means that before you sign to buy, you also know when and how you will sell, close, or exit the program. If you haven’t done this yet, then do it now. What are your overall financial goals? What are your priorities? Given the programs you have in place, when and how will you sell them or eliminate them from your financial life?
Sometimes a financial goal is simply to maintain your current status or to keep your options open. The rate of return on an investment or a loan is not the most important criteria when evaluating financial solutions. Flexibility is a goal that gets overlooked, yet is essential to provide the freedom to evaluate options, explore ideas, create a plan, and find some breathing room, all so you are confident in your money’s ability to support your personal lifestyle and goals.
Why? Complacency, boredom, fear, or even “busyness” can keep us from looking to the future or from setting goals. However, when you get comfortable where you are, even if it’s not really where you want to be, there is this idea that somehow you’re doing okay. In that case, a key significant goal has been completely overlooked – maintenance. You might be comfortable where you are, or not know where you want to go with your life. I guarantee you, however, no one wants to go backwards; no one wants to downsize their lifestyle; no one wants to feel trapped or stuck because they are forced into a situation where they must change because of outside circumstances. Remember that goals don’t have to be exotic to be significant. Maintaining the status quo can be a powerful motivator too.
When you get a new idea, or tip, or financial or business recommendation, is your first reaction fear and skepticism, or enthusiasm and excitement? If your answer is excitement, then the idea is something that resonates with some part of your goals, values or priorities. Maybe you want to be excited, but a voice in your head is telling you that you have never done that before – be careful, you don’t want to get ‘burned’. Maybe the voice is actually someone you know – like a close friend or family member.
What do you do when faced with a new idea that could help you financially, and you have to sort through the emotions to make a decision? There are obviously lots of layers and issues to sift through, so the place to start is with a paper and pen. Get it all in writing: your goals, fears and excitement – these are the issues that the idea is intended to help. Treat the decision with the respect any good business decision does, and document the facts and the questions until you have sequentially, strategically and systematically compared and analyzed the idea as it relates to what is important in your life.
Money topics tend to speak in terms of absolute numbers such as a $250k mortgage or 8% return, or a portfolio of $500k. It is helpful to break down the numbers into a monthly figure so they are relatable to day-to-day cash flow requirements.
When you are making a financial transaction, always consider what the monthly income will be from the investment − either while the money is invested or when you plan to access it. Likewise, consider what amount of income is required to maintain a loan, or was required to earn the money you are investing or paying out. The key is to ask yourself or your advisor to connect your transactions to an income variable for both today and the future.
Never say “can’t”, especially in the context of, “can’t afford it”. Instead say, “How can I…?” It’s never about the money. It’s about what money can or cannot do for you. Understand why money is an issue in your life, either positively or negatively, and what is really important beyond the dollars and cents.
Why? It’s amazing to me how many times and ways we stop ourselves before we even start. I spoke with someone the other day who was looking for work in her field. She started off saying she couldn’t live where she was living because the jobs did not give her enough income. We talked and replaced her “couldn’t afford it” reality with “how can she earn the dollars she needs working in her field so she can live where she wants”.
Giving is as important as saving. Even if you think you don’t have enough money to give, we all have people and causes that are important to us. Allocating an amount of money from every earned dollar for giving – as well as saving– needs to be established immediately even if you don’t know how it will work with your current cash flow or income situation. You can decide to hold off with the gift or save the money only for a short while until it’s needed (like the end of the month), but if you wait until you have $100,000 in order to give $10,000, it won’t happen. You must set aside $1 from the $10 earned to develop the habit.
When do you start saving and giving? Developing wealthy habits doesn’t happen overnight. Start with your children: when they earn $10, put aside $1 towards long-term savings and $1 that they can use for giving. For yourself, start the next time you earn any money. Transfer 10% into savings and withdraw 10% for giving. If you get to the end of the month and you need some for your already – established expenses, transfer what you need from savings and if necessary deposit the “giving money” back into your account. After a while, you will have established the habit of allocating money and you’ll eventually find that you don’t need all of what you have set aside for your current expenses, and it will indeed be money you have saved and are able to give away.
