- Table of Contents
- What You’re Up Against
- Reading Reality
- The Journey
- Arrival & New Horizons
When it comes to managing our financial well-being, it is important to have a clear understanding of rules and principles, and the difference between the two. Rules are, for the most part, absolute, definite, clear-cut. For instance, as of this writing, a rule set by the IRS is that you can save up to $6,000 each year into a Roth IRA (Individual Retirement Account) without penalty. The limit is clear, the timeline is clear, the vehicle is clear. Rules are good, inasmuch as they tell you where the boundaries are located. It informs what you can and can’t do, or even what you have to do.
At the same time, rules are rigid. There’s a time and place for them, but you can’t just apply them in any old situation. They’re contextual, to be used and applied in a particular situation or occasion. What if you’re age 50 or older and are a bit more flush with cash, now that the kids are out of the house, and need to hunker down on your retirement saving? A new rule applies (again, at the time of writing): you can save $7,000 annually in your Roth IRA. The contextual reasoning at play here is that you have less time than the under-50 crowd to benefit from the passive compound growth of your invested money, so you need to actively boost the nest egg with cash infusions.
With too many rules, things get too rigid and unwieldy. And let’s be honest, you can’t create a rule for EVERY situation. Something new will always come up. You may have rules for yourself and your family, but at some point, you’ll find you need to bend the rules for a good, justifiable reason (perhaps the context changed?). This is where principles become handy. Principles are like a skyscraper. If you’ve ever stood at the bottom of one and looked up, you’ll be thinking, is that thing swaying? It’s because it IS swaying. The winds up high there are strong and so it needs to have some flexibility in the structure to keep it from cracking. Same thing with a bridge; you drive over those sections where it says “motorcyclists beware”, where it’s like interlocking fingers, and you’re quietly thinking “I’m passing over a gap… (yikes?)”. Those are for the bridge to expand and contract as the weather gets hotter and colder. In each case, the structure is adaptable to the condition, the context. This is how principles operate. They’re like a framework that give guidelines of how stuff should generally go, while allowing for some adaptability, given particular scenarios.
So, continuing with the financial savings theme, a principle might be to “save money for emergencies”. It’s good to have some cash stashed in a savings account, reserved and easily accessible for when something goes kablooey, like the water heater busts or you need a major car repair. (I speak from experience on both counts, sigh.) There may be some shifting how much you contribute to your home and car maintenance fund, depending on what other expenses are due in a given month or season, but you might generally strive to put $25 or $50 per month into that little emergency fund until it reaches, say $2,000. These numbers flexible and should be determined according to what’s realistic for you.
But more than these flexible numbers, or even the outcome, what’s important as the principle is THAT you are actively saving into it. Do you see the difference? You could have a personal rule that you have to save $1,500 for emergencies, and so you get the bright idea to use your next Dependent Care Flexible Spending Account reimbursement check that came in at $1,502.01 (sweet!), stick it in the account, do a little dance, and call it a day. Right? Nope. You missed the lesson. There’s nothing wrong with taking that chunk of money and holding on to it for a rainy day. By all means do it! But the principle (save money for emergencies) was larger than simply the outcome of an arbitrary rule (have $1,500 on hand). With principles, there’s more to them than what you see on the surface. To “save money for emergencies” has deep implications. There’s at least two key things going on here:
1) It’s behavioral. We’re implying that to “save” is an ongoing action, not a one time event. If you want transformation, it needs to be the little daily behavior tweaks that over time result in big shifts. So the intention is to develop a habit of saving consistently, steadily. You can only start with $2 a week? No problem. As long as it happens EVERY week. You may find that some weeks you can throw more at it, like when you get that Dependent Care reimbursement check. You’ve already developed the habit and routine of allocating money on a systematic basis. The muscle is developed. It won’t matter if you have $5 or $5,000 this week (this is the the context). You’ll put money into savings because that’s the behavior you’ve conditioned yourself to carry out. How much you start saving is irrelevant. That you start saving is the important part. It’s the only way the benefits will come and you will have the money on hand for the next crisis, whether it’s in 2 weeks or 2 years from now… and never again be stuck without the cash to pay for an emergency.
2) It’s a shift in mindset. You’re recognizing that there’s value in discipline and so are taking steps to be proactive. It establishes the framework for how your funds and therefore your life are to be carried out. On your terms. Vagaries of life? Bring ‘em on. You’re sea grass on the sand in a hurricane, holding your home, the dune, in place while the world whips about you. They’re a part of life and you’ve wisened up to what life is. Your roots – not your head – are buried deep in the sand. You know that there’s a reason meteorologists call it “hurricane season” — because that’s when the gales will most likely come. It’s a matter of when, not if. When the car breaks. When the kid gets an asthma attack. You’re no longer living in a state of defense and denial. You accept what is, and what will be, and think “How do I want this to turn out?” You put money in its place, as a tool, SO THAT you can focus on what matters: your relations, family, community, helping others, and tending to that little flourishing patch of dune you call home.
Rules are like lasers. They’re focused, and get the job done. Principles are like the sun. They illumine and guide. They might show different paths to the same end. They provide a path when none might be immediately evident. They show you where it’s dark and where it’s light. They’re adaptable to the context. They’re flexible. And they’ve got longevity. The IRS often updates it’s rules and limits every year. Tax code is constantly changing. Good, sound principles last. There’s a reason why “The Richest Man in Babylon” is still a popular personal finance guidebook today, a century after it was written. The lessons are, for the most part, sculpted as principles: Live within your budget, Save, Invest in what you know.
At the same time, our financial world is infinitely more complex than it was a century ago. Our personal worlds are more complex too. As conscientious folks, we strive to live up to standards of ethical conduct in our lives and are not out to merely amass as much fortune as we can for ourselves. We know there’s something called moderation (even if we’re still trying to find it in the right sized bowl of ice cream). We seek fairness and health and sustainability in our dealings. We consider the consequences, because we’re living the consequences of our elder’s choices. We can see quite clearly that we’re the first generation in recent financial history not to do as well or better than our parents. This isn’t by accident. It’s by the design and choice of those who wield influence in business and law. So while the old fashion financial principles are still worth hanging on to and referencing, there are limits to their ability to answer the how and why of what we do with our money in designing our economic lives. We need to bring some additional principles to the table, ones that answer the how and why, that can provide the guidance we need to construct a new future we haven’t seen before and to protect us from the pitfalls of materialism and vested interests.
The how and why are moral questions, spiritual questions. The reason we’re in our respective financial debacles is because the financial choices and principles at work were designed in a moral vacuum. How to continually increase the growth and profit of a company, how to increase the wealth of a family, does not inherently consider external consequences, especially when the focus is on quarterly profits. There is a moral dimension to every decision you make. For instance, we choose to apply moral and spiritual considerations when we decide to opt for the eggs that were gathered up in a field, rather than laid in a cramped industrial cage. To make these moral decisions consciously, with intention, is the key. The principles that follow are ones that are worth considering for inclusion in your own economic conceptual framework. The extent to which you can describe them, are clear about why you adopted them, and learn how to apply them, will shape the true richness, security, and prosperity of your lives.
This book is a work in progress and we’ll all benefit from your input and collaboration. In the “Leave a Reply” below, please post examples, comments, questions, and needed edits. By posting, you grant permission for inclusion of any content to become part of the book, now or in the future, in whatever form it may take. I’ll give attributions to the extent possible. I know sharing about our financial lives can be sensitive, so if you want to share anonymously, please use the contact form instead and I’ll honor your request.