Ten Nearly Universal Truisms of Personal Finance

We all make mistakes with our money as the deck is stacked against us.

I’ve engaged with lots of people about their personal finances — young and old, optimists and pessimists, richer and poorer, risk-seekers and avoiders, artists and engineers, spenders and savers, over- and under-educated, etc. Hopefully, they’ve learned as much from me as I have from them.

From this admittedly biased sample (that is, they were willing to interact with me), I’ve deduced a set of nearly universal truisms about how we manage our personal finances that cause us to make flawed decisions about saving and spending our money. Maybe you can learn something from this list.

1. No one is looking out for you.

When it comes to your personal finances, it’s you against the machine. You need to determine how much to save, how and where to invest, which mortgage best serves your needs, and why some complicated life insurance pitch is not in your interest. Good luck.

2. The financial services industry is extractive.

Paul Volker once joked that the only useful innovation in the banking industry in 20 years was the ATM. Matt Taibbi’s famously described Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” As metaphor goes, that’s priceless.

In my less colorful descriptor, I see the financial services industry as a gravity machine that imperceptibly but continuously pulls fees from consumers’ pockets and into a black hole of profits, bonuses, share buybacks, and bespoke suits.

3. We undervalue the future.

Our brains are just not wired for long term financial planning and thus, we over-consume in the present and under-save for the future. It’s hard to overcome this natural human tendency but you must if you don’t want to be full of regret when nearing retirement age and realizing you’ll have to reduce your spending, work longer, or both.

4. We don’t understand compound interest.

Similarly, we underestimate the power of compound growth over long periods.

Inflation is illustrative. Over short periods, we may complain a little when prices rise but the effects are mostly negligible on our day to day living. But, at a seemingly modest rate of 4%, inflation halves one’s purchasing power after just 18 years. That’s a big hit over less than the span of a full retirement for most people.

This is the danger of credit card debt. At an interest rate of 25%, a credit card balance nearly doubles every three years.

The power of exponential growth is hard to grasp but make it your friend (as a saver) rather than your foe (as a borrower).

5. Risk is subtle.

We all want the safety of bank CDs coupled with the high returns of the stock market. When I explain that you can have either but not both, most people understandably have a hard time deciding where on the continuum they want to be.

And, we over-insure affordable risks and under-insure catastrophic ones. People purchase extended warranties for phones and appliances and opt for small deductibles for auto and home insurance.

On the other hand, people often have insufficient life insurance for their present circumstances and too little liability coverage for a catastrophic claim.

We over-insure when the likelihood of a claim is high but its cost is small and under-insure when the likelihood of a claim is low but the cost would be catastrophic. We should do the opposite.

6. Life is a mix of luck and skill.

We fool ourselves in believing skill explains our lucky breaks in life but bad outcomes are due to being unlucky. As Molly Ivins said of George W. Bush, “He was born on third base and thought he hit a triple.”

We learn the exact wrong lessons from these experiences. Instead, when things go well, we should ask ourselves if we were merely lucky and when things go badly, we should reflect on any bad decisions we made to ensure we don’t repeat them.

Poker players are prone to this attribution error. Only the best ones are self-critical and reflective enough to learn from their mistakes. Instead, mediocre players presume wins are due to skill and losses are due to bad luck. I can fall into that mindset and that’s one of many reasons why I’m not a world-class poker player.

7. Shit happens.

Nearly every adult knows that shit happens in life. The when, what, and how much are unpredictable but not the if. Unfortunately, we’re under-prepared when it comes.

Adequate insurance, emergency funds, preventive maintenance are examples of ways to be ready but we’re reluctant because they’re costly and things are going just fine right now.

8. Things that sound too good to be true, always are.

This one doesn’t need much explanation.

9. It’s hard to get off the hedonic treadmill.

If your expenses always grow proportionally with your income, you’ll find yourself on a hedonic treadmill that’s hard to dismount. You’ll have more stuff but you won’t be happier.

Springsteen has a song lyric for almost any life situation and here’s his version:

Poor man wants to be rich
Rich man wants to be king
And a king ain’t satisfied
Until he rules everything.

Stay off the treadmill.

10. Keeping up with the Joneses is costly.

Similarly, many of us feel social spending pressure. I see this with:

• students who want to maintain a strong social network where it seems like everyone else has an unlimited entertainment budget
• wedding invitations in which it’s unaffordable to fully participate
• social engagements that are uncomfortably expensive
• children whose friends have bigger TVs, fancier houses, and better sneakers

These challenges are difficult but if you don’t wrestle them to the ground, they’ll bury you eventually.

Good luck navigating through these shoals of life!