Principle #5: Paying a High Price for Not Knowing the Rules

Financial Games of Choice As we have pointed out, every game has rules. The games we play in the financial world should not be games of chance; they should be games of choice. If you know that money is emotional and not mathematical, you will be less likely to take your money for granted and will give it the respect it deserves. If you know the rules about tracking your spending, you will begin to use your money more efficiently. If you know the rules behind properly “spending” into appropriate savings categories, you will not be blindsided by emergency and emotional events that are sure to occur in your life. If you know the rules about compound interest, you will become empowered to eliminate debt as quickly as possible and learn how to make interest work in your favor. Knowing the rules has all kinds of valuable consequences, especially in today’s complex world. It wasn’t too long ago that the world of personal finance was much simpler. Prices were similar between competing goods and services, taxes were easier to figure, mortgages and loans were structured with less complexity, and there were less consumer products from which to choose and fewer methods by which to buy them. But today we live in a very complicated and dynamic world economy. We have so many choices! There are thousands of vendors and literally millions of products we can choose to buy. What was once purchased at the corner drugstore is now available on the Inter- net. Not only can we evaluate products and services right in our backyard, but we can choose from those being produced on the other side of the world. All of this complexity makes understanding the following especially important: It’s no longer possible to simply assume the vendor or the lender have fully disclosed everything that we may need to know to make a wise financial decision. Today, more than ever, we must become fully informed about how our spending, borrowing, and tax-paying choices will impact our life over the long term. Historically, sellers of goods and services had the advantage over the consumer because these sellers knew more than the buyer. But today, the tables have turned. With all this available information, we are now in a position to structure financial decisions to best meet our needs, but only if we get informed. Learning the rules can help you become more efficient with the money you already make and shifts the focus away from trying to earn more money to learning how to use more wisely that which we already have. Unfortunately, we have found that the vast majority of people we deal with are more concerned with making money than with understanding how to be more efficient with the money they already have. Without seeing the value of efficiency and how that efficiency is tied to understanding the rules of the financial games they play, many people are losing those games. This is perfectly illustrated in an article entitled “What We Need to Know about Money” by Lynn Brenner. Brenner notes that a recent test sponsored by the National Council on Economic Education found that many adults and teens in the United States today don’t under- stand the most basic concepts about money. “The economy affects every- thing in our lives: how we earn a living, how much we earn, the availability, cost and quality of what we buy, and how we invest for our future,” says Brenner. “Unfortunately, its importance is the only thing many of us know about the economy.” The article further notes that 1,010 adults and 1,085 high school students took the National Council’s 1998-99 test of their knowledge of basic economic principles. “Both groups flunked resoundingly,” says Brenner. “Almost two-thirds of those tested did not know that in times of inflation money does not hold its value. Only 58 percent of the high school students understood that when the demand for a product goes up but the supply doesn’t, its price is likely to increase. Half of the adults and about two-thirds of the students did not know that the stock market brings people who want to buy stocks together with those who want to sell them.” Hard to believe isn’t it? Those findings are alarming, especially in the face of what we have already noted as a time of complexity and opportunity. Working the Game to Your Advantage Now, with that said, you may be thinking, “Well, the amount of information that is thrown at me on a daily basis is overwhelming. With everything else I have to do, I can’t afford the time to stay on top of all this, too!” When we hear such complaints, we like to point out to our clients that they cannot possibly afford not to become informed. In today’s world of easy credit and consumable goods, many people feel they are entitled to play a very complex economic game, like owning a credit card or mortgaging a house, with- out paying the price to learn the rules of that game. As they old saying goes: “If you want to play, you have to pay.” What we are required to pay is a little bit of our time and effort so that we will go into the game fully informed and on the same level as all the other players. Those who will not take the time to do this should not be surprised when they are unable to work the game to their advantage. It simply follows that without knowing what you’re doing when you enter the playing field, especially where there is a lot of risk involved, that you will probably be trampled by those who do. Following are some of the typical objections to Principle 5 and how we counsel our clients to overcome them. Too Much Information It goes without saying that we live in an era of information overload. There is so much coming at us each day that it’s impossible to take it all in. We are forced to choose between that which we will absorb and that which we will discard. So how can we possibly learn what we need to know without becoming overwhelmed? What we teach our clients is that they do not have to know everything, but it is important that they get on the road to knowing something. When people realize that there is a limit to that which they personally need to learn, they begin to relax and feel empowered by their new found desire to become informed and continue that process. This requires a commitment to continual learning while not requiring that a person learn about everything. We encourage you to make a commitment to continual learning. Doing so will help you learn a little bit about a lot of things so that you can deter- mine when you need to get extra help. Consumer affairs writer Carma Wadley offers some tips on how to start this learning process: “The important thing is not so much knowing all the answers as knowing where to find them.” She suggests keeping a list of resources handy to which you can refer, including favorite Web sites, government agencies, or a list of people you know who have expertise in particular areas. Another way to get on the road to knowing only that which you need to know is to get in the habit of reading all documents related to the product or service you are evaluating. Sources of information about the rules of that product or service are contained in the documents the vendor or lender provides you. Read all documents. The value of Principle 5 is that it motivates you to study all contracts. In addition to these ideas, we’ll discuss more ways to help you under- stand how to learn what you need to know at the end of this chapter. (Money Mastery also offers coaching services that can help; refer to Appendix A for more information on these services.) One of our clients, Maria*, learned the importance of knowing the rules and reading all documents after her coach helped her better understand tax forms and tax filing. When Maria received her tax forms from her CPA at tax time, she felt “comfortable” with the documents, but because of Principle 5, decided to look them over carefully. In the process, Maria found a $1,700 error in her favor. The CPA then refiled and instead of receiving an $1,800 tax return from the IRS, Maria got back $3,500. Knowing the rules and reading the documents in this case really paid off! Not Enough Time The second objection to Principle 5 is the notion that there’s not enough time to know the rules. What people don’t realize is that most of us are very close to knowing what would save us a lot of grief, but we don’t want to make that little bit of extra effort to find out the last little bit of information that would save us a lot of trouble. The amount of trouble you will save is disproportionate to the amount of time it will take you to avoid it. That’s because we have found that most people are within 30 minutes or $300 from getting all the information they need to make informed financial deci- sions. It usually takes no more than 30 minutes to thoroughly review a legal document. And, if upon examination of those documents you find that fur- ther advice is needed, a $300 fee will usually hire a knowledgeable attorney or specialist to review a financial decision to ensure that it is right. The following is what can happen when people don’t take the time to be responsible for making sure a deal is secured properly. Two very successful businessmen approached an accomplished CPA and asked for her help in accounting and tax planning to set up their new busi- ness. Approaching a professional at this stage of the game was a smart idea. They restructured their business from a sole proprietorship to a Sub-S cor- poration. The CPA said she had prepared everything required by the IRS that would let them operate legally as a Sub-S corporation, allowing them to receive a better tax rate. Four years later, they began working with Money Mastery coaches in order to more efficiently run their business. As they began getting organized by preparing wills and trusts for estate planning, they discovered their Sub-S election was never filed by the CPA, creating an additional tax liability of $47,000. After learning Principle 5, they understood the importance of taking the time and money necessary to unravel the problems created over the previous four years. They hired a tax attorney who was successful in reliev- ing $30,000 of the taxes due, but they still had to pay an extra $17,000. If these two men had just taken the time in the first place to do a simple review of the filing papers with a tax attorney, they would not have lost the $17,000. Trusting Others Instead of Taking Responsibility Another reason people don’t want to get informed is because they think other people should know the rules for them. They often trust their eco- nomic well-being to strangers because they assume that other people will have enough interest to take care of them as well as they would themselves. This is not so. Of course, as we go about making financial decisions, we are required to trust others to some degree. However, trust is composed of two elements: 1. Trust that the person or entity providing the service won’t try to cheat us. 2. Trust in the competency of that person or entity to deliver as promised. Our experience shows that people must be on guard in both areas. Al- though vendors are not generally trying to cheat the consumer, the biggest risk we take when interacting with providers of goods and services is the incompetence of those providers. Humans make mistakes, as in the case of Maria’s CPA. When you know the rules of the transaction in which you are engaging, you protect your dollars and your economic well-being.