Scarcity, Risk, and Wealth Transfers
Three Problems Magnified by the “Box” Approach to Personal Finances
Risk:
.
Competing demands on a limited money supply create tremendous pressure to cut corners and compromise on serious financial issues. For example, to save money, many people minimize auto liability insurance to some degree. Then they drive around every day, one mistake away from a million dollar lawsuit that would destroy them.
That is just one of many examples of what we commonly do to “stretch” dollars. Typically, we feel pressured to try to make our dollars do more than can be reasonably expected; a feeling that leads to dangerous choices. For example, many choose “aggressive” mutual funds in the belief that they provide a high return. The inevitable losses (that occur normally over time) diminish or destroy the hoped for results. Few see losses in the correct way:
Just to get even. |
Percent fall in share price. |
Percent gain required to get you back to even. |
10% |
11% |
20% |
25% |
25% |
33% |
50% |
100% |
75% |
300% |
90% |
900% |
Between minimizing protection factors (including the range and type of insurance plans that are chosen) and maximizing risk factors and debt, most people literally live in a world of risk. Because the “right” choice is often known only after “things” happen, we are really guessing on how best to use our money. As a result we are left at risk of financial ruin if the wrong thing happens (even common life events) or if things happen at the wrong time. Making it through 20 years (for example) without a major problem is not necessarily a sign of success. As they say, “it ain’t over till it’s over”.
How would you, or your family, handle the potentially catastrophic consequences of a wrong choice (guess)?
Sound economic strategy can create ways for your dollars to do two or more jobs at the same time. In economics this is called “velocity of money”. This powerful principle reduces the pressure to cut corners by creating increased financial performance with fewer dollars.
We can help you do this.
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To learn more about creating increased financial performance
with fewer dollars, please click here.
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