Winning the battle, losing the war 2
How to make sound and long-term financial decisions
In the first part of this article, I introduced the concept of winning battles and losing wars and gave personal finance examples on the same.
Consider this scenario:
A family of three siblings has been stuck in a family wrangle for 15 years over the sale of 2.3 acres of land that was given as inheritance from their parents. When they finally come to an agreement and find a buyer, one of the siblings negotiates a deal with the buyer that makes her get a bigger share of the money. The other two don’t suspect a thing and walk away happy when they get their share. Two years down the line, the two find out about the shady deal. This betrayal makes them enraged and bitter. The two haven’t spoken to their sister for years. This selfish act messed up their family dynamics and broke trust among them.
One of the siblings is my friend. Her sister won a small battle by getting a bigger share of the money. But lost the war because she lost her family.
“It is much better to lose a battle and win the war than to win a battle and lose the war. Resolve to keep your eyes on the big ball.” — David J. Schwartz
1. Not creating money boundaries with relatives and friends
I’ve had my fair share of family dramas that involve money. Most of these stem from entitlement, not taking responsibility and being overly emotional when asked to pay back what they owe.
A lot of times, we’re angry at other people for not doing what we should have done for ourselves. — Rupi Kaur
A lot of people want a situation where as soon as you start earning, you start handing them your money. They won’t stop for a second to think about you, your future and their future. The truth is, when you do well financially, the benefits will trickle down to them. I’m a strong believer in the “Take care of your own and they will take care of you” principle from the Jewish Phenomenon book by Steven Silbiger. However, if you don’t set boundaries and create a system of giving, you will give away money that you’re meant to invest for your future.
If you give too much without a plan, especially if you give money that you should be investing for your future, you’ll all be poor in future. You’ll be in a situation where you can’t help yourself, neither can you help them. This is what Naval Ravikant refers to as zero-sum games.
I have a monthly budget for charity/black tax. I assess who needs it the most or what cause I care about the most and give towards that. When that budget gets depleted, I confidently tell people that I don’t have money. Saying no is hard, but we’ve got to learn how to say no and not feel guilty about it. I will do a different article on how to navigate this family-money challenge.
2. The ability to think logically-in numbers
In Garrett Hardin’s book Filters Against Folly, he writes;
The numerate temperament is one that habitually looks for approximate dimensions, ratios, proportions, and rates of change in trying to grasp what is going on in the world. Given effective education-a rare commodity, of course-a numerate orientation is probably within the reach of most people.
The ability to quantify, to explain things numerically is key for your financial success.
The reason we fall prey of pyramid schemes such as the recent Goldenscape Greenhouses scandal in Kenya is that we don’t do the work that requires us to understand basic Math and make a conclusion based on numbers. They sell us miracles and quick riches, and we’re happy for a while (winning battles) but we later realize we lost millions (losing the war).
I’m the type that will annoy my banker or anyone who tells me about an investment by asking numerous Math questions. I struggle with Math but that hasn’t deterred me from investing. I take time to understand and seek clarity. Additionally, I enrolled in an online basic accounting course.
The ability to read financial documents is key to understanding the claims of financial gurus and making decisions rationally.
3. Not paying back money loaned by friends and family
The best kind of relationship is the kind that doesn’t involve explaining yourself when you need to borrow money. You trust each other deeply so all you got to do is hit each other up with ‘hey, I need an X amount.’ It takes time to build this level of trust. The magic of compounding also applies to relationships. Having such relationships makes it easier to collaborate on big investment projects.
When you don’t keep your end of the deal by not paying the debt owed to friends or family, you break this trust and lose on key relationships that are fundamental to your success, therefore, losing the war. Sometimes the debt in question is usually a very small figure (small battle) that leads to bitterness, failed relationships and becomes a hindrance for future collaborations (losing wars.)
4. Not thinking independently
I have reread the prologue of the book Other People’s Money by John Kay about ten times. It’s a parable about people guessing the weight of an ox in a country fair. The great statistician Francis Galton observed that the average guess from the 800 people who entered the competition was very close to the real weight of the ox.
With time, since the weighing scales became unreliable and the costs of repairing them were high, the country fair organizer decided to use the people’s guesses to calculate the weight.
The weight guessing competition became popular and as is common with human behaviour, people began to cheat. Cheaters would go to the extremes of contacting the farmer who bred the ox to get insider information. The farmer was dinned and wined. This would affect the fair because people who were not cheating would drop out of the competition, therefore the average guess would not be reliable.
Rules had to best to curb this. The farmer was not to give anyone any information personally but was to write bulletins about the ox every three months and avail them to all participants.
Soon, analysts who would interpret the contents of the bulletins emerged and advised participants on how to arrive at more accurate guesses. With time, the game changed from correctly guessing the weight of the ox to guessing what participants would guess. And what analysts would guess the participants would guess. And so forth…
International companies were founded to set rules of the game yet there were already agreed-upon principles on weighing the ox. The farmer tried to voice in that all these had nothing to do with the art and science of rearing and ox. No one listened to him because ‘he didn’t know how the markets work.’
Mathematicians also came up with computer algorithms to know what the correct guess would have been since all these distractions saw fewer people participate in the competition. With time, a simple country fair became a whole industry with advisers, guessers, Mathematicians, analysts etc. Why not go to back to using scales? Some people asked.
When all this was happening, the ox died. They forgot to feed it.
This parable is especially important in the wake of the fear stock dumping that’s currently happening in the stock market. People will make a lot of major decisions based on emotions while others will capitalize on it. Where will you be?
5. Not moving past instant gratification
To be good with money, you have to master the art of delayed gratification especially if you suffer from emotional spending. To successfully save money for a short or long term goal, you have to deny yourself some pleasures. If you think of your finance only in terms of here, now and YOLO, you will lose the war of your finances. Delaying gratification is especially important when thinking about investing. Remember the magic on compounding interest? For it to work in your favour, you have to pick long-term investments. Investing in something for 5+ years takes a lot of discipline and sacrifices. It is deciding that as much I really want that new pair of sneakers now, I will put the money in an investment account because I need to secure my future.
To get good at delaying my gratification, I learnt a life hack from one of my favourite writers Shane Parrish. It’s a mental model called ‘second-order thinking.’ Most people make money decisions based on first-order thinking.
First-order thinking: I got paid so let me hit the mall and shop(without a budget).
Second-order thinking: I will create a budget that includes saving and investing for my future, and prioritize needs before wants. I will stick to it every month thereby making consistent progress.
Shane advises that to master second-order thinking, always ask yourself ‘And then what?’ before making any major purchases (or minor ones that accumulate over time). It will show you the long term consequences of mismanaging your money.
“A lot of extraordinary things in life are the result of things that are first-order negative, second-order positive. So just because things look like they have no immediate payoff, doesn’t mean that’s the case. All it means is that you’ll have less competition if the second and third-order consequences are positive because everyone who thinks at the first order won’t think things through.” — Shane Parrish
How can we learn to win wars instead of battles?
1. What are YOUR financial goals?
Focus on what you want to achieve. A lot of distractions will come at play from peer pressure, noise from the markets, expert opinions… If you keep changing your financial goalposts based on what everyone else is doing, you will keep losing.
2. Don’t risk the 4 basics
These are housing, food, transport, clothing. Don’t dare waste your money on crap before you’ve figured out these. Then advance to securing your future.
3. Focus on small consistent habits over big scary goals
It’s easy to get scared when we think of saving a million bucks within one year (big goal) as opposed to deciding how much from your budget you can consistently and comfortably save every month.
“Changes that seem small and unimportant at first will compound into remarkable results if you’re willing to stick with them for years.” — James Clear
4. Think of opportunity costs
Depending on what you value, every decision you make has an opportunity cost. Think of the consequences of ‘the road not taken.’
5. Constantly ask yourself ‘AND THEN WHAT?’
At the end of the day, “The goal is to win. Not merely to look like you’re winning.” Focus.
Originally published at https://www.thewealthtribe.com on March 12, 2020.