moneyFYI
Financial Freedom Is Merely Organized Common Sense
What Is ECOLACY?
Ecolacy is a word coined by environmental scientist Garrett Hardin. It has to do with being fluent in ecology. It’s meant to be like literACY and numerACY. The ability to understand the factors involved, identification of problems and opportunities that arise within the knowledge, and the skill to make sound judgements about what you observe.
I estimate my ecolacy to be 20% or so of what it should be. The problem, as Hardin described it, is this. People are aware of ecology, yet they are not wise about what to do next.
“If we are to correct the consequences of the world’s actions, we must understand the machinery that accounts for these consequences.”
That is a formidable obstacle. The machinery of the environment is a complex system, and as we saw yesterday, it is not an easy thing to make cause-and-effect associations. Worse yet, there is a political side to it, and the people involved there are happy to provide simple answers with a single driving element.
H.L. Mencken understood at a deeper level.
“Explanations exist; they have existed for all time; there is always a well-known solution to every human problem — neat, plausible, and wrong.”
The natural environment is not the only field where outcomes matter and the neat. Plausible, and wrong solutions are promoted.
Think about your financial goals.
These exist in a particular environment or context. What is the nature of the world you, particularly, live within? You should spend some time thinking about that. Over your lifetime, all of your financial plans will be altered by changes in that context.
Your mission is to understand two things:
- Your personal context, what you want out of life, when, and the resources you have to achieve the result.
- The nature of the financial world around you.
In the natural environment, we tend not to make the connection between ourselves and the world around us. In financial matters, we tend to think about our personal context. Or the external context. But have trouble thinking about both at once.
Wisdom is where we can connect the two because we understand both.
Start with you.
Have you ever made a written list of your ideal life and the factors you have or will have to produce the result? The simple idea is to have a vision and then answer the “W” questions. They will clarify the vision and make it something you can implement.
Who are you? Ambitious or lazy? Introvert or extrovert? Talented or not? Part of a network or not? Conventional or rebellious?
Who else is involved? Do they support the plan emotionally and/or financially?
Where will I be? Does the where match my ideal life. Big city or small town? Low tax place, or somewhere where friends and family live?
What do I want? There are likely several aspects. Retirement, successful children, a margin for error, leisure, and dozens more.
When do I want it? The “whats” will appear at different times. For example, children’s education tends to come before retirement. Each when will have different factors and should be addressed separately.
Why do I want this particular set of outcomes? Are they self-chosen or expected of you? Are you committed? Why is motivating and you must have a clear vision.
Why Not If you know why you automatically know a lot about why not. The things you won’t do because they don’t fit. Why not is a time-saver.
Finally, what resources do you have now or will have in the future? Each of us has several resources. They include time, skill, energy, attitude, and eventually, money. Money tends to be an outcome of others, so it is a mistake to focus on it early in life. Better to learn how to manage your time, build skills, gain experience, create a network, and acquire the ability to balance the pieces.
Balance is the goal
The mission is to balance your non-monetary resources over your lifetime to the monetary needs that appear when skill, time, experience, and attitude are no longer sold for money. When you stop working, your money must work for you. Doing it successfully means you must learn how to earn more, keep more, and transfer money to the future. That’s where the connection to the financial world comes in.
It is unsafe to go there before you know your own situation.
“If you don’t know who you are, the market is an expensive place to find out” by “Adam Smith” pseudonym for George Goodman, author of The Money Game.
The financial context has straightforward methods, and most are simple in concept.
Save some money you earn today so it can generate spending money later in life.
Understand non-financial risk. You could lose your job, become sick or die, or your life partner could die, become disabled, or leave. Children could disappoint, or you might just give up. Giving up is not so uncommon. Some people have trouble with the grinding cost of living. Some of the risks are insurable, and you should consider insurance in your risk management plan.
Understand debt. Both debt and investments are time machines. Debt draws your money from the future back into the present, so you can use it. The price of the transfer is the interest you pay. The interest you pay is a drag on future earnings and reduces flexibility in the future. Worse yet, the price might be adjustable. Generally, if it adjusts not in your favour, it will do so while other negative things are happening to you. Debt is risky unless it produces income or reduces expenses by enough to pay its own way.
Understand investment. This time machine moves money forward, and it involves an investment return to reward you for waiting to consume. Your problem is determining how to invest, so the balance between the risk of loss and yield is appropriate for your unique situation. In the end, you will discover at least 40 factors that come into play when you understand that your yield is someone else’s cost. They intend to minimize their cost, and you want to maximize your yield.
Think about how someone would pay more to have you commit your money longer, accept the risk of loss, or have an adverse tax position. Sometimes people would like their investment to be fashionable. The other side pays you with less money and more fashion. Some tax shelter investments, like movies, rely on that. If you are willing to live with illegal, you should expect to earn much more.
Understand investment risk. There are two kinds,
- Permanent loss. You did not get the yield and/or you didn’t get your capital back, and
- The value of the investment in the future is unknowable with precision. Variability.
When people talk about investment risk, they are usually talking about variability. This risk doesn’t imply capital loss because it depends on a point in time. If you want to convert your investment to money on that day, you might get less back, but variability means little to you if you don’t care about getting it back then. Think of this kind of risk as noise, like static on an AM radio station. You cannot learn much from the static, pay attention to the signal and see where it leads your thinking.
Most permanent loss of capital is easily seen in the beginning. If the possible win is big enough, people will sometimes risk their money. Most private equity deals include the possibility of total loss. If you make many investments carefully, you should be able to average out okay. Think venture capital. They invest in about 1 in 200 opportunities they see and expect to lose on half of those. They expect to break even or make a little on about 45% more, But the rest — !!! How many times could you lose on other investments if you were an early investor in Facebook, Google, or Amazon? It’s not about how many times you win or lose; it’s about how much you win or lose. The game is to lose a little when you lose and win big when you win.
Invest with your purposes in mind. Pay attention to what variables you can invest. Money is just one. Time is important. Tax factors matter. Liquidity if things change. Risk.
It’s like eating at a buffet. Make your investment spay you for all the things you can contribute to the deal over and above money.
The bits to take away.
Know your personal ecology
Know the environment you operate within.
Wisdom is finding where you can combine them to get what you want. At least cost and most predictably.
Whatever you begin with will be different before long. The world around you changes.
When you can see your purpose, the details work for you.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, 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. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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