Ten Important Things A Non-Finance Person Should Know About Finance

What are things about personal finance that someone without a finance background should know?

Here are ten of the most important:

1. The Nature of “Risk”

Risk is a bad word to most laymen. We are encouraged from an early age to avoid risk at all costs. We look to mitigate it in our lives as much as possible; buy insurance, avoid “risky” investments, jobs, etc. We try to avoid risk in our personal lives, too. We don’t ask the risky question, we don’t say the risky thing, we don’t speak up because of what might happen next.

What people in finance understand is that risk equals reward. You cannot gain something without the willingness to give something up.

There is a passage in the New Testament: “Whoever would save his life will lose it.” Whether you agree with the context of the passage is irrelevant, the wisdom is still there. If you hold so tightly to the status quo that you are not willing to see it change, then the status quo won’t change! You must be willing to lose the status quo to gain something better.

Try taking a risk in your career, in your investments, in your relationships. Of course, the definition of risk is that the outcome is uncertain. Each decision may or may not pay off. But, in the end, the person who lives a life of taking smart risks is the person you want to be.

2. Low Fees Does Not Equal Low Cost

When hiring an expensive, but well versed employee, or contracting the service out to a third party, the service may considerably less expensive, but probably not as experienced or concerned with a company’s well being as the potential employee.

The point: “Low fees do not mean low cost.”

Over time, bad decisions, mistakes and poor planning can add up to a higher cost than simply paying to have it done right in the first place. This doesn’t mean spending extra money just to spend it, his point simply expresses the importance of paying for value.

3. The Only Personal Financial Advice I’ve Ever Gotten From Really Wealthy People

One very big difference between the extremely wealthy and the rest of us is this: the world is malleable. With enough effort, time, capital—something—you can literally change the world.

This applies to your personal situation, too. It isn’t a given, it can be changed. You may need to be creative, or do tons of research, or put in lots of hours, but you can change your situation, dramatically.

Stop thinking of your situation as static. It is as big or little as you want it to be.

4. Money Is Not the Main Concern

Interestingly, the biggest concerns of the wealthy have absolutely nothing to do with money. Money is just a magnifying glass: everything great about you gets bigger, everything bad about you gets bigger.

Bottom line: money comes and goes. Wealth is more than money. Cultivate your relationships, family, friends.

5. You Can Be President, If

We are all taught in kindergarten that we could be president of the United States. You can be an astronaut if you want. You can be….

What they don’t teach you is that, yes, you could be anything you want to be if you are willing to make the sacrifices necessary to achieve it. The world doesn’t owe you anything. If you want something, you have to be willing to give up something. No one teaches that anymore.

6. How Markets Work.

We live in a golden age of investing. If you can dream it, you can do it. There is a tyranny in that choice. Furthermore, studies show over and over that individual investors are really bad at managing their money.

Gaining a basic understanding of what markets are and how they work can really go a long way in giving you a comfort level when you go to participate in them. It will also give you a healthy dose of cynicism.

Public markets were designed, first and foremost, to take money from the public. That doesn’t mean you can’t profit from them, it simply means that you must be very, very careful.

7. Cash is Not “Safe”

“Cash is safe,” we hear over and over again. In one way, yes, cash is safe. What you need to understand, though, is that no matter what, you are taking a risk. Every year, your cash loses about 2.7%. That means your $100,000 in cash is going to be worth $99,775 next month, then $99,550 the month after that.

See the point? Yes, your cash is “safe” in that it is predictable. But don’t be fooled, it is losing value. Cash has a role, but that role is not to maintain your wealth.

8. You Need to Know the Truth About Gold

Let’s be real about the role of gold in a portfolio. Yes, it can be part of an overall allocation. But, gold is not a replacement for a diversified portfolio.

The advertisers on CNBC are really good at making gold sound like the answer. Especially during times of crisis. “It’s the only real money!” I’ve heard it all.

But here is the hard truth about gold:

  1. Gold has lost value relative to inflation since 1981. Despite what gold proponents will tell you, gold is a terrible long-term hedge against inflation.
  2. Gold is three times more volatile than stocks. For investors fleeing the stock market because it is too volatile, gold is not the answer. It is a bigger roller coaster ride than the stock market!
  3. It’s all that matters in a failed economy. See my rant which follows: Here’s the deal. We can look at real examples of failed economies. Take New Orleans after Hurricane Katrina as an example. First of all, if you could get to your gold, you could have bought much with it. On the other hand, you could trade anything for a bottle of water or gallon of gasoline.

In the event of a zombie apocalypse, gold is not very useful. What matters in that environment? Guns. Water. Food.

9. Get Enough Sleep

It’s true. Getting enough sleep will help you make clearer daily decisions (which add up to big consequences), and help maintain your willpower, which is vital to sticking to a plan, budget and maintaining an appetite for risk. Sleeping is worth the time. Do it.

10. If You Don’t Understand it, Don’t Do It

This is simple, but true. You need to understand why you are doing something to do it properly.

This cuts both ways, though! There are many things in life that require you to wrestle with the knowledge in order to reap the rewards. In finance, knowledge really is power. The more you know and understand, the more you can leverage that knowledge into resources. Resources get things done.

Just because you don’t understand it, doesn’t mean it is scary or evil or terrible. It does mean that you shouldn’t do it until your learn it. So learn all you can, then you can do more.


Source: Forbes