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Nine points about money you won’t hear from your financial adviser…

 

…and you really need to know if you want to win the Game of Wealth.

Financial advisers can be very useful: we had one and he was very helpful when we were trying to decide what to do with a small private pension fund pot.

We thought that the best thing to do with it is to take it out and pay off some debt; yeah, this was about four years back when we still had close to £65,000 worth of debt.

Usually taking money out of your pension fund is irresponsible. In this case, this was a considered decision: the fund was small and after years of contribution was worth less than we’ve put in.

This is what I call ‘dead money’; taking it out and paying off a third of the debt would have brought it back to life.

And since taking money out of pension funds is not easy in the UK – you have to meet certain criteria one of which is age – we booked a session with a financial adviser.

This is how we met David: very knowledgeable, interesting and self-confessed conservative where decisions about money are concerned. David was also very helpful: although we didn’t manage to cash in the pension fund then we moved it so that at least it showed some growth.

So far, so good.

Still, we haven’t spoken to a financial adviser since.

And here is why. We were at the door seeing David off when I said:

“It was lovely to meet you and we’ll keep in touch; within two years we’ll need to talk to you about investing.”

“Are you going to win the lottery, then?” – he joked.

There you have it! With a single joke David demolished the good work he’d done with us, my trust in him and any intention I may have had to speak to him, or to another financial adviser, ever again.

With this one joke he told me that he is good operationally but has very little idea about the strategic aspects of money. He also told me that he lacks imagination and trust: the imagination to conceive of the less conventional money related solutions and trust that money feats are possible.

And this is not very good when making decisions about money; your money.

As I said, the joke was on our financial adviser: we did exactly what I told him we’ll do. Two years after we saw him we had no consumer debt.

Today, we have much improved house (bathroom, decoration, new roof and solar panels cost us about £25,000 but have increased the value of the house and our quality of life). We have also built some interesting investments and capital for investments.

Don’t misunderstand me: financial advisers can be very useful and helpful when making decisions about money. To take full advantage of their operational knowledge, you have to know some strategy.

Here are nine statements your financial adviser won’t tell you that will help you make strategic decisions about money.

1. Managing your finances is not about numbers

You know how everyone in personal finance is telling you to learn your numbers?

And so you should. You still don’t have to stop with the numbers. Thinking strategically about your finances needs you to think about ratios such as:

  • The ratio between your debt and you income;
  • The ratio between your debt and your net-worth;
  • The ratio between your income and your spending;
  • The ratio between your mortgage and the value of your house; and
  • The ratio between your different investments.

Main thing: don’t manage your finances by comparing your numbers with someone else’s. This usually doesn’t end very well.

2. Most decisions you make about money are emotional

Most decisions about money we make throughout our lives are based on emotions. I’ll go even further and argue that most decisions we make in our lives are based on one emotion: our strife for security.

This is why many of us pay off debt, pay off the mortgage and keep their money in savings accounts at below 1% interest.

Next time you are faced with a decision about money, try to get out of the emotions trap and just do the sums; or work out your ratios.

3. If you wish to be wealthy don’t focus on money

I don’t mean to say that money doesn’t matter; it does and it matters a lot. Still money is just the tool to build the life you really want.

When you want to make a piece of furniture you don’t focus on the hammer; you focus on the furniture.

It is the same when it comes to designing your life: you should focus on your life rather than money.

4. Life is for living

We have got ourselves in a situation where we spend all our time working, so we consume more, so we have to work even more.

Somewhere in this cycle of consumption we have lost sight of the fact that life is for living; that our sacred duty to ourselves and to all around us is to make sure that we lead the life we have and have all the joy we can muster.

5. If you have money trouble it is likely you have to earn more

When faced with financial trouble it is natural to try to save rather than think how to make more money. After we have all heard the saying ‘cut your coat according to your clothe’.

I’ll never condone waste as my regular readers know: after all, I’ve been working so hard on becoming a frugal artist. Still, I’ve come to believe that in far too many cases money management boils down to earning more.

I also don’t agree that cutting expenses is easier than earning more: I’d say this depends on how streamlined your spending is already. Earning more is not that hard when one puts their mind to it and it takes as much energy as cutting expenses.

6. Money makes money but it doesn’t contribute value

There is a reason why I’ve been shying away from investing in stocks and shares or playing around with one of the more complex financial instruments. (Although, John has been doing some of that.)

Most of these kind of investments are speculative; this means that money makes more money without creating value. It is a bit like the banks literally manifest money out of thin air by charging us a lot of interest for money they don’t actually have.

Only labour generates value. Is it better to have capital rather than stock? Who knows! Still, it is important to be aware.

7. There are different kinds of value

If you want to increase your income you have to learn to focus on value: what can you do that is of value so that people are ready to pay you for it?

It doesn’t matter whether you have a job, running your own business or freelance: the value you contribute is the key.

What many people don’t realise is that there are different kinds of value like utilitarian (this is about how useful something is), symbolic value (the value that comes from something becoming a symbol) and reputational value.

Reputational value is the highest earner.

Why do you think David Beckham was paid as much as he was? It was not for kicking ball with ten other men. It was because he was the best ball kicker in the world and everyone knew and agreed with that.

8. Investing is much more fun than playing games

It can be but it depends on how it is done. If when thinking about investing you think only about stocks and shares it can be rather mundane.

Look around you: can see any opportunities? Can you think of any small local business you may wish to invest in? Can you think of something to learn?

You see, investing ca be fun; you just have to lose your fear and roll with it.

9. Getting old is very expensive

The internet is awash with the experience of young people telling the world how they ‘retired’ at 25 because they saved half their income for five years and have reduced their spending by doing all they need themselves.

Okay, I’m exaggerating but only slightly.

I have bad news for people who are thinking of doing the same: getting old is very expensive. With age, your spending will jump up because visiting your doctor will become one of the highlights of your week, you’ll need medication and it is highly likely you’ll need to hire help.

This time I’m not exaggerating. You can do everything yourself when you are 30 and even 50. When you are 80 you’ll be lucky if you manage to cook a meal.

Think about it when you make plans to retire at 30.

Can you think of any other points that help us think strategically when making decisions about money?

4 thoughts on “Nine points about money you won’t hear from your financial adviser…”

  1. I liked that you mentioned life is for living. I believe a lot of people get lost into the idea of just living simply to make money to buy more things.

    Reply
    • @Alexis: Glad you like it. This is one of the mney principles that we live by here on The Money Principle. Life is for living and we shouldn’t confuse means and goals (money is just means to achieve other goals).

      Reply

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