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What not to do if you want to solve your financial problems

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by Paul Kindzia in Happiness, Health, Personal Finance
September 30, 2022

Financial advisors get questions all of the time.  Most of the time, it involves a person asking technical questions to solve a financial problem;

  • Should I save in an IRA or a 401k?
  • Which credit card should I pay off first the one with the smaller balance or the highest interest rate?

I’ve learned that we all have a tendency to get wrapped up in details that have very little to do with solving the underlying problems that we are trying to solve.  I call this “trying to solve a fundamental problem with a technical solution.”

Here’s what I’ve discovered and implement into my financial practice (and my own life),

“You can’t fix fundamental financial issues with technical strategies.  You can only correct fundamental issues with fundamental changes.”

Let’s look at the examples above so you learn how to implement this into your own finances or your own life.

Example #1 – A person asks, “Should I save in an IRA or a 401k?”  A lot of advisors (including myself when I was younger) would start spewing out the myriad of details differentiating the two.  We’d list out the IRS rules, the contribution restrictions, the more investment options available within the IRA versus the matching component, and higher contribution levels within the 401k, etc.  But guess what I normally would discover if I just took the time to ask a few follow up questions?  I’d normally discover that the real issue is that the person is behind on retirement savings because they haven’t had the DISCIPLINE to save consistently for retirement or for building emergency funds.

We could talk about all the technical differences until we are blue in the face.  It often just leads the person to take action that just causes more problems because they haven’t fixed the fundamental problems within their financial processes.  Imagine what happens when a person gets anxious to get going on retirement but skips out on an emergency fund.  They contribute to an IRA.  A year later they get squeezed on cash and now liquidate the IRA paying taxes and penalties to free up cash needed for other problems.

Their issue isn’t technical, it’s fundamental.

First, learn to save (fundamental) then move on to various options (technical) that over the long run matter far less than doing the fundamentals correctly.  In this above example, it’s far more important to just save for retirement than to save using a technical solution.

I won’t even get into discussing technical options until I am convinced that they can execute extremely well on the fundamentals that are causing the problem.

Example #2 – Should I pay off the credit card with the lowest balance or the highest interest rate?  At this point, let me just see how you are progressing with this exercise.  If somebody asked, “Which credit card should I pay first?” what should you be thinking right now based on my previous advice?  You should be asking, “Is this really a technical problem or a fundamental issue?”  Answer: There is a fundamental issue that needs to be addressed.  Mainly, “Why all the debt?  Why the constant need for credit cards?  Are they really changing behaviors or are they just trying to keep their head above water by robbing Peter to pay Paul?”

I’d do the awkward and uncomfortable thing and go for the tough stuff which is based on a lack of ability to live by proven financial principles (the fundamentals of success).  Why can’t they live below their means?  Why can’t they save money?  Why don’t they have emergency funds?  Why can’t they control spending?  The fundamental issues are bad habits and behaviors.

If you don’t solve the fundamentals, you’ll never really get to the higher level of success.

It’s like if somebody asks a personal trainer at the gym, “Should I drink diet Coke or coffee if I want to lose weight?”  The fundamentals are more along the lines of;

  • Are you exercising each day and how much?
  • Are you getting plenty of sleep?
  • Are you burning more calories than you are taking in?
  • Are you eating fruits, vegetables, lean meats, and healthy fats?
  • Are you reducing stress?

If you really take the time to notice what successful people have in common you will find that they have developed and live by a set of principles (fundamentals) that are proven to be effective in what they want to achieve.  The rest is just details (technicals).

Principles (fundamentals) trump technicals.  Technical solutions often provide us with an illusion of progress.  Go back to the IRA versus 401k example.  Assume that a person really wants to end up wealthy and independent.  Ask yourself this, “Is it possible to become wealthy without ever contributing to either an IRA or 401k?”  Wow, mind blowing way to look at it because the answer is absolutely YES.  There are plenty of people that became very wealthy and it had absolutely nothing to do with whether they did a ROTH, an IRA, or a 401k (ask Bill Gates, Warren Buffett, Mark Zuckerberg).  As a matter of fact, if you really wanted to become very wealthy, you wouldn’t be spending too much time on technical issues like this.  You would be spending your time on building a business or increasing your skills that would lead to higher income.

Challenge yourself on this technique in other areas of your life such as health, happiness, relationships, and career.  Search for the fundamentals of success.  When you spend your time on the fundamentals and execute those better than others, good things will happen.

It can be applied to all kinds of situations.  Imagine a musician that is asking a mentor, how do I increase sales of my records?  Should I make flyers, sell them out of my trunk, put them on iTunes, hire a management company, change record labels, do more free concerts?  A well-established musician will normally respond along the lines of, “Why don’t you start out by just recording a catchy tune.  How about you write good songs?”  All the other technical stuff is just blah-blah that won’t mean anything if the fundamentals aren’t being addressed first.

Good habits lead to good behaviors.  Good behaviors lead to good decisions.  Good decisions lead to a good life.  Live by principles and choose wisely.

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