Today, let’s consider Ten Principles of Financial Success and Happiness.
- Spend less than you earn: This is the key that unlocks many other financial possibilities. If one always spends exactly, or, even worse, more than they earn, they will never save. (Someone is thinking: “Dr. Andersen, how can one spend more than they earn?” Well, it’s called a credit lifestyle, but I digress.) Saving is the foundation of investing, and the rich stay rich through their investments.
- Someone always wants to take what you have: It’s important that we safeguard our resources against those who would steal them from us. It’s not only important that we not leave our “financial doors” unlocked, but it is also important that we not open them to the many scams around us. Always remember the old adage: “If it sounds too good to be true, it’s almost guaranteed to be false!”
- For everything you get, you have to give up something: This is just another way of saying: “There’s no such thing as a free lunch!” Everything we do has a cost. That cost may not always be financial, but at the very least there is always a time cost.
- Nothing is guaranteed: Some would expand this principle to humorously be: “Nothing is guaranteed, but death and taxes!” While this certainly applies to death, there are those who don’t pay taxes. Anyone who claims, especially in regards to investing, that some action on your part is “guaranteed” to produce a certain result, is either totally ignorant or is lying. The point is that no one knows exactly what will happen in the future. The best we can do is to make informed decisions and plans for the future.
- Every transaction has risk: We often equate risk with something bad happening or dangerous behavior. However, for this principle, risk is related to the certainty of a desired outcome: Low certainty, high risk; High certainty, low risk. For example, what is the certainty that you will protect your principal if you put your savings into an FDIC-insured savings account? Because of the insurance, as long as you don’t exceed the insured amount, it is highly certain that you won’t lose any principal, so this is a low-risk transaction. On the other hand, how certain is it that your savings will generate a 30% return if you invest in the stock market? It’s very low certainty because the average rate of return for the stock market is about 10%. Therefore, investing for an expected 30% return is a high-risk transaction.
- Never invest your “bread and butter” money: That is, never invest money you can’t afford to lose. For most investments there is always a chance that you could lose the amount invested, or that the money is no longer liquid. If losing the invested money, or making it inaccessible, means that you and your dependents would not be able to obtain the basic necessities of life, then that is money you can’t afford to invest.
- Earn interest, avoid paying it: Interest is the price of money. Earning interest is an indication that you are using OPM (other people’s money) to increase your wealth. Paying interest indicates that other people are using your money to increase their wealth. OPM is almost always better.
For now, I will state the last three principles without discussion. Think about them, and share your thoughts.
- Be grateful for what you have.
- Be charitable.
- If money doesn’t buy you happiness, you’re not spending it correctly!
