Last week, we discussed boring investors and a lot of people asked what smart and exerting is.
In finance, the more excited you are, the more money you might lose. You should never be emotionally attached to certain products, lest you make losses and become broke before you know it. Check successful people, for instance; they don’t mind leaving or selling one business to the next person as long as they make money. However, poor people get too sentimental for nothing and generation after generation, live in poverty in the name of ‘emotional attachment’.
Like most people, while growing up, you were probably told saving money was a smart financial decision. Our culture is filled with positive little sayings about saving money like, “A penny saved is a penny earned,” “Rainy day fund” and “Another day, another dollar.” Our culture is also filled with phrases like, “Broke the bank,” “Cleaned out” and “Money burns a hole in the pocket.”
The truth is, for a culture that seems to value saving money, we don’t show it in our actions. According to analysts, the average personal savings rate was around 2.6% going into 2013, down from a high of over 14% in the 1970s. It’s not a coincidence that around the time the personal savings rate started declining was also the time the US dollar went from being on the gold standard to being a commodity - hope we all know the Breetonwood concept.
Even our Government doesn’t save, as we all know after each and every financial year, we hear of budget deficits. And in the USA just a couple of months ago, some smart financial analysts predicted that government’s shutdown. Yet, our leaders pay lip service to saving money.
In 2009, Obama said, “Even before this recession hit, the savings rate was essentially zero, while borrowing had risen and credit card debt had increased. More broadly, tens of millions of families have been, for a variety of reasons, unable to put away enough money for a secure retirement. We cannot continue on this course.”
The question becomes; if saving is considered such a good thing, why aren’t we encouraged to do it more through tax policies? If the Government thinks saving is such a good idea, why doesn’t it have tax breaks for those who save to encourage such behaviour?
Give me a break!
If you notice, you can get a tax break for buying a house and going into debt but not for saving money. Given that the Government uses a tax policy to encourage certain behaviour, it would stand to reason that since there are no tax breaks for saving money, it doesn’t actually want you to save it? Why?
I imagine one big reason is, banks see your savings as a liability. Why would powerful lobbying forces like our banks allow a law to pass that encouraged you to increase their liability sheets? Most policies are not geared to help you and me but the banks.
Another reason is that our economy needs debt to grow. That is why the Government doesn’t save money but rather increases its debt each year. It is also why when the Government talks about encouraging saving, what it really means is to encourage investment in debt by allowing people to get their tax refunds in the form of savings bonds.
Open your eyes
Most people have their eyes closed to the motives of others when it comes to their money. If you wish to prosper, you must learn to open your eyes. Once you can see and understand the motivations behind conventional advice, like; ‘Invest for the long-term in a balanced portfolio of stocks, bonds and mutual funds,’ you’ll be able to make smarter financial decisions rather than just following the conventional advice.
For instance, a person with open eyes might decide that rather than save money in the bank or invest it in an insurance (sic that’s if it is an investment), which have no real tax savings, they might invest in an asset like real estate or a business that allows for passive income and is taxed at the lowest rate to make more money.
That, in itself, is smart financial thinking.