Rules for Making Financial Decisions

We are here to talk about money... but before we can begin there must be some ground rules.

When making decisions (of any kind) and especially when making money decisions - ground rules are critical... or money just sort of has a way of, disappearing.

When I got home from living in Germany for two years, and was ready to go to work, and more importantly ready to get serious about finding someone to be my wife, my Dad explained that there was just 1 rule: There are no rules.

I think what Dad meant was that it was my life, and I could choose to live it my way. He explained that there would be people who agreed and disagreed with the way I chose to do things, but as long as I did what was right, the rest was up to me.

I propose that this be adopted as Rule #1: There are no rules.

For the second rule, allow me to share a story from an important favorite book of mine, Becoming Your Own Banker. The author, Nelson Nash tells a story about a cowboy in the old west who robbed more banks than any other... his name was Charlie. Finally one day the law caught old Charlie Thorpe, and questioned him. As the story goes, someone asked Charlie "Why do you keep robbing banks?", to which Charlie replied, "Because that is where they keep the money."

This is Rule #2: Where there is money, there are people who want access to it.

This includes YOU. I can honestly say that in more instance than one I have robbed myself of a terrific financial opportunity because I had earlier opted for something I wanted.

This also includes: ME, the government, financial advisers, attorneys, accountants, tax planners, estate planners, stock brokers, insurance brokers, real estate brokers, mortgage brokers, bankers, your friends, your spouse, your kids, and everyone else on the planet.

Now moving on to a critical rule that I have come to appreciate and cherish. I wish for some of you that the importance of this rule is unclear - because if so, your life is far simpler than my own. It seems that the more complex of a financial environment I work in, the more I come to understand the principal of INCENTIVE.

When I was young I believed that there were good people and bad people. That if I only surrounded myself with the good ones, that everything would be fine. I have since learned that there are in fact good and bad people, and that regardless of the people you associate with, people behave in their own SELF-interest 99.9% of the time, and the other .01% of the time they think they are, and are too dumb to know otherwise. (You will notice I said SELF-Interest, not BEST-Interest.)

The book Freakonomics by Steven Levitt is a terrific reference for scientific data that proves this to be the case. The book is entertaining, fun, and very important if you want to learn to understand incentives.

Allow me a quick example: A stock broker knows that the ABC Fund has averaged 8% for the last 25 years. He knows that the XYZ Fund has done 7%, and the 123 Fund has grown 9% the last 25 years. So which product will the stock broker sell you? The answer is simple: He'll always sell the fund that pays him the most commission.

Now for those of you for whom that example is a little too obvious and elementary, my next blog is a whole twisted web of changing incentives! I hope you'll enjoy.

To recap Rule #3: Good and bad people act in their own SELF INTEREST. To understand a deal you must understand the INCENTIVES of the people doing the deal!

And finally, our final rule - perhaps the most important rule of all. The founding fathers said that all men were created equal, and for the most part they are right.

There is one asset that we all have an equal share of for as long as we are breathing air, and that is TIME. Money, Land, Houses, Cars, they can all be replaced (or close) but TIME cannot be stopped.

Time and deals wait for no one. It has been said that there are 3 rules in Real Estate: Location, Location, Location. I will never forget meeting Mike Barnes at Market Street Broiler and having him say "You know what the REAL 3 Rules of Real Estate are, don't you?", and I suddenly felt a certain self doubt as I responded inquisitively, "Location, Location, Location?". Mike just smiled and said, "No, the 3 Rules are Timing, Timing, Timing".

How, and into What we invest our time is critical, but THAT we invest our time is EVERYTHING... because Time is the only asset that can never be replaced.

I see countless people SPEND their time at a job leading nowhere, teaching them nothing, only to come home and SPEND their time doing everything possible to avoid thinking about their job. How much better to INVEST time into the job leading nowhere, so they could learn the importance of INVESTING time, and develop themselves in their free time, to improve their income... and begin INVESTING their extra money.

Others I see do nothing while they wait for the perfect easy opportunity, only to watch it pass them by. This may not be SPENDING time, but it could be called sitting on time. No matter how or into what, INVEST your time. It is your greatest asset.

Rule #4: Time is the only asset that can not be replaced. Invest It.

Let's sum up:
Rule #1: There are no rules.
Rule #2: Where there is money, there are people who want access to it.
Rule #3: Good and bad people act in their own SELF INTEREST. Before you make a decision, understand the INCENTIVES of the people it will impact!
Rule #4: Time is the only asset that can not be replaced. Invest It.

If you will believe that there are no rules, and that you can do anything you want, and be aware that lots of people will want to access your money because it is in their own interest to do so, and if you will begin now putting your TIME into learning to make sound decisions, I believe you will become wealthy, and happier in every facet of your life.

I just hope I can do the same!