Three Financial Fallacies and What they Mean to You
Most people have received a wide variety of financial advice over the years. There is a particular brand of advice, supposedly dispensed by a semi-fictitious secondary parental character that has become particularly widespread. This
philosophy contains many key points, some of which have validity and merit.
However, one of the key things that all investors need to consider whether the advice they are receiving is a fact, or a fallacy. The unfortunate truth is that much of the advice being presented by popular authors and speakers as financial facts are actually financial fallacies. The thing that makes some of these fallacies particularly dangerous is that they appear to be valid, until they are examined in deeper detail.
For the purpose of this illustration, we will be examining three of these financial fallacies: 1) Work smarter, not harder, 2) Don’t work hard for money, have money work hard for you, and 3) Always hire people who are smarter than you.
1. Work Smarter, Not Harder
This sounds perfectly reasonable … instead of more hard work, substitute working smarter. This is the mantra behind many people’s ambitions to attend a university to study so that they can acquire the skills that are necessary for knowledge work. In many ways, this does allow people to work “smarter” since they no longer need to engage in manual labor. The problem comes when working smarter makes people think that they no longer need to work hard.
The truth is that the future will belong to those who work smarter AND harder. Working smarter is a fact of life in the new economic world … as is working harder. The level of work that people have grown accustomed to thinking is sufficient will no longer be adequate for those who wish to get ahead. There are many people who consistently seek easy answers, and come to convince themselves that with the right scheme, hard work will not be necessary. This is not just a fallacy … it is a fantasy.
2. Don’t Work Hard for Money, Have Money Work Hard for You
This financial fallacy represents the encapsulation of what financial freedom means to the majority of people. However, it also represents the primary basis of financial advice for certain prominent authors. The fundamental problem with this advice is that it is not practical for most people in the immediate term. Put another way, you cannot have money work hard for you until you have a lot of money. Everybody who does not yet have a lot of money (which statistically, is most of us) will be relegated to working hard for money until we can accumulate enough to invest.
Thus, for most people, it would be far more productive to learn about sound budgeting so that they can accumulate money for investment than to learn about an future investment theory. If we happened to have multiple millions of dollars in book royalties from selling financial strategies that most people are financial unable to implement, then maybe we could make money work hard for us. As it turns out, most of us must earn the money we wish to invest the old fashioned way … by working for it and saving it through disciplined budgeting.
3. Always Work With People Who Are Smarter Than You
This is another one of the pillars from popular financial advice. After all … why wouldn’t you want to always work with people who are smarter than you? The answer to this question is not why wouldn’t you want to work with them, but why would they want to work with you? If you don’t bring anything to the table, why should people expend their efforts to help make you rich?
The proper perspective is to focus on what you can bring to the table for the people you are working with. Similarly, think about what they will be bringing to the table when they work with you. Every team that you assemble should be beneficial to each of the people who are involved. This is the fundamental underpinning of the win-win principal … the notion that everything you do should create value for everybody involved, or there is no deal.
What all of this means to us as individuals and investors is that we need to re-think the way we do our planning, and the way we make decisions. We must understand that hard work will be required to accomplish our goals, we must understand that money must first be accumulated through disciplined effort before it can be depended on to support us, and that we need to seek a win-win in all of our relationships. By following these principals in everything that we do, it will place on the fast track toward long-term financial success.