A newlywed couple was walking down a dusty country road outside a little town they were visiting. While admiring the beautiful scenery, they came across a small, run-down trailer. Sitting on the porch in a rocking chair was an old man being fed by a middle-age nurse.
The couple marveled at the old man and quietly wondered about the life he had lived. With their curiosity being too much to ignore--and with no demands on their time--they approached the porch and greeted the man and his nurse. Upon hearing the visitors, he sat up and motioned for them to join him on the porch.
As they shook his hand, they realized he was blind. His skin seemed to barely hang on his bones and his voice was raspy and shaky.
“Sir,” the young man started, “we can see that you have lived a long and full life. What wisdom can you offer a young couple that is just starting out in life together?”
“Ah,” the old man replied. “You are wise to seek my advice, as I have much to offer. But seeing that my time is short, I will tell you the one thing you must remember to truly get the most out of life.”
“Always eat, drink, and smoke what you desire. I haven’t eaten a fruit or vegetable since I was little boy. I gave up water for alcohol years ago; and I’ve smoked 3 packs of cigarettes a day since I was 16. I’ve never been sick or gone to the hospital. It is only now--in my old age--that my body is failing me.”
“Now if you’ll excuse me, it is time for my nurse to carry me to my bed.”
The young couple thanked him and stepped off the porch, still processing what they had just heard. Just as the door was about to close behind the man and his nurse, the young wife ran back and called out, “Sir, if you don’t mind my asking, how old are you?”
The nurse stopped and turned around so the man could face the woman. “Why, I don’t mind you asking at all. I’m proud to say that last week I turned thirty-five years old.” With that, the door shut and the two disappeared into the trailer.
As absurd as this story may appear, I would contend that I regularly observe financial behavior that is equally foolish. Here are some generic examples:
Mistake: We should follow their advice (from a friend, neighbor, or family member)--or do what they did--because they appear to be wealthy.Truth: More often than you might guess, if someone appears to be wealthy, they’re not. They may have high income that supports their lavish spending, but they have little savings and still live paycheck to paycheck. Or they may even be going into debt to support their lifestyle. Regardless, you should never justify your financial decisions by someone else’s decision.
Mistake: We should follow his advice--even though it’s contrary to conventional wisdom--because he seems to know what he’s talking about and he’s doing it with his money.Truth: If something has been proven over time, perhaps it has some legitimacy, though it could still be a “one hit wonder”. But making a financial decision based on the persuasive argument of an unproven maverick is a recipe for disaster.
Mistake: That approach may have worked for the last 100 years, but this time is different.Truth: Disregarding time-tested principles to follow your own, revolutionary conclusions is likely dangerous and foolish. Proceed with caution and make every effort to limit the collateral damage to those around you.
There are five principles that transcend time, culture, class, and religion, and will help ensure you are moving in the right financial direction:
Spend less than you earn (common sense that’s not so common)
Avoid the use of debt, with limited exceptions (i.e. an affordable mortgage)
Build margin (save something with every single paycheck; no exceptions)
Set long-term goals (it will change your financial behavior for the better)
Give generously (counter-intuitive, but it’s absolutely true)
Certainly there are other wise practices that, when applied properly, can accelerate and/or protect your financial progress, such as diversification, an appropriate investment allocation, and having the right amount of life insurance, but their application will vary from person to person.
These five transcendant principles are as true and relevant today as they were 100 years ago, and they can be understood and followed by a child. If someone tells you to deviate from one of these, remember the story of the “old” man. Things are not always as they appear.