How People Understand Money

What do “You” mean by wealth.

Surprisingly, it is not an easy question and the answer will change over your lifetime. You may find few who agree with your version.

Is It Money?

For some it is, but some people look a little deeper and see that wealth is having enough money to do the things they want. For them wealth is having options.

For others it is having time. They use money to take some of their duties away. Paying a local teenager to cut the lawn and using the time saved to take the children to the zoo makes sense for some.

For others, money is a measuring stick. A way to keep score. If the business made 30% more this year, that is proof that they are succeeding at a complex and challenging task.

Being rich is having money; being wealthy is having time. Margaret Bonnano

Money is a tool.

We use it to get more of what we want and need. Money by itself is sterile.

How do we get more.

Nobody wants to hear the answer. “Save more!” Investment manager and writer, Morgan Housel claims that 90% of money problems will go away if you save more. He is right in a way, but the idea overlooks something that people also do not want to hear. “Spend less”

Spending and saving are very closely related. For people who can adjust their income at will, I suppose, “earn more” is as good an answer as “spend less” but there are not so many people who have that option.

Understand what spending is

People who earn $100,000 a year and have nothing let at the end of the year did not spend $100,000. Taxes, government pension and employment insurance plans and debt payments, took a lot. Lifestyle is what remains. Consumption. Earn it today consume it today. Food, entertainment, housing, transportation, children, clothing, and dozens more.

Plan for continuing lifestyle.

You cannot save what you spend on something else. Dollars are only good once. You can have more to save by managing lifestyle and by managing debt. Some people can manage their tax bill too and that is valuable.

Make a decision about how your lifestyle balances over time and how spending and saving are related.

Once you save you learn to invest.

Investing is just a time machine that moves the ability to consume money from now to some time in the future. It has some side effects, like growth, that matter. You will learn to manage the side effects as you go. The first two lessons are the ones that should last forever.

The essence of investment management is the management of risks, not the management of returns. Benjamin Graham

You cannot later spend what you have lost. Learn to minimize risk. Having a long time frame is one useful way to look at it.

The second rule is from another financial writer. Jason Zweig, referring to the idea that 90% of problems can be solved by saving more.

 And the solution to much of the remaining 10% is “do nothing.” Which no one wants to hear either.

Investing is a process. Treat it like one and it will work for you. Frantic buy and sell loses.

The purpose of financial planning

Financial planning is an allocation problem. It is to allocate money you earn today in three ways.

  1. Pay for the past. Debt. Be wise about what you borrow.
  2. Pay for the present. Lifestyle consumption
  3. Pay for the future. Lifestyle when you have no money coming in from working.

To that add risk management so the income part is more certain.

Financial planning is balance. Taxes, investing, budgeting, saving, cash management, and tax management are ways to help. They are not financial planning by themselves.

Think balance and the rest will become more clear.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  866-285-7772

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