Considerations,
October, 2019
“Change your words, change your world.”
Words matter. What we say and how we say things reflect and shape
our attitudes and behaviors. Meanings and intent change over time. Remember
when gay just meant happy? It still means happy. And more.
Here are three personal finance topics
whose meanings and intent need to change.
Expenses
People use expenses to mean
the money they must spend. But often it sounds like they’ve just had their pocket
picked-- that they’re victims or innocent bystanders. This makes it very easy
to excuse away impulses, poor money management habits, and thoughtlessness.
Let's call it what it is: Spending.
Spending
is something we actively choose. So, if we can choose it,
then we can exercise proactive control and responsibility over it. This makes
it more powerful than trying to figure out market or economic trends.
Emergency Fund
Maybe it’s just me, but demands on
my cash can seem notoriously random and unexpected. I could make the case for an
emergency happening nearly every month.
So, it's useful, convenient, comforting,
and even essential to have a cache of cash set aside to cover those things.
Call it a Reserve.
That way you don’t have to wait for an “emergency.”
The size of a sufficient Reserve will vary from
household to household. And because its key features are its Safety and
Liquidity, it’s never invested in the stock market. Reserves are found in savings
accounts, money market funds, CD’s, bond funds. Do your investing elsewhere.
Risk Tolerance
Investment ads and financial
advisors quickly get you thinking about risk tolerance. It’s essential
to talk about risk, but the “risk” they’re talking about is the wrong one. They’re
talking about tolerance for volatility. That’s not risk. Risk is…
·
The impact of your investment
capital losing its purchasing power.
·
The consequences of your investments
not growing enough to meet an important goal.
·
The destruction of capital through
confiscation, taxation, stupidity, or fraud.
Impacts. Consequences. Destruction. Those
are real risks. They are forever. There are no do-overs. Your tolerance for these
risks can easily be quite low.
Volatility is not risk. It's the
price we pay to avoid real risks. Don’t be swayed by attempts to minimize volatility
at the expense of failing to meet important goals. Your volatility tolerance
should be as high as you can stand it and your real risk tolerance can reasonably be
zero.
“Change your words, change your world.”
