I have seen a trend developing as I work with my clients that seems to be getting more popular — that of turning the management of personal finances over to others. The idea of getting rich “automatically” through the automated deduction and deposit of appropriate amounts of money into and out of various debt reduction and savings programs is particularly compelling.
It’s an idea that’s garnering a lot of attention these days from individuals and families that are confused by what they need to do to manage their own money, and enticed by the idea that an entity other than themselves will do the work required to help them succeed financially. They assume falsely that other people should know the rules of the complex financial games they are playing and will be kind enough to share all of them.
They often trust their economic well being to strangers for several reasons:
1. They lack the knowledge they need to be confident in the financial choices they must make.
2. They lack the discipline to take appropriate action for themselves.
3. They trust that others, including insurance brokers, investment brokers, financial advisors, and financial institutions will do better at managing their money than they will.
4. They trust in a system that pays compounding interest on savings and investments without considering to what degree that system is subject to market downturns, inflation, taxes, fund management fees, and outright corruption.
5. They assume that other people will have enough interest to take care of their money as well as they would themselves.
What I have found is that all of these notions are extremely risky, and that it is always better for an individual to work to protect and grow his or her own money rather than trusting other people and programs to do so.
Of course, as you go about making financial decisions, you are required to trust others to some degree. However, trust is composed of two elements:
- Trust that the person or entity providing the service won’t try to cheat you.
- Trust in the competency of that person or entity to deliver as promised.
My experience shows that people must be on guard in both areas. Although the vendors that provide the financial products and programs you buy into (such as investments, credit card programs, insurance policies, etc.) aren’t usually trying to cheat you, the biggest risk you take in trusting others with your money is their own incompetence.
One of my clients I’ll call Maria, was an account executive from Miami, Florida and learned this lesson for herself when she filed her tax returns one year. She filed her forms using a CPA to help her and told me she had felt comfortable with everything the accountant had done, but she just had a feeling she should look over them before she mailed them. That’s when Maria discovered a big error, in her favor. Once that error was corrected, Maria received $3,500 instead of a mere $1,800 she would have gotten back if she had not decided to check the documents herself.
Another couple I worked with that I’ll call the Tamakis learned the hard way about trusting others to disclose everything they needed to know to make a sound financial decision. They decided to refinance their home in order to consolidate debt. Their credit was immaculate so they knew they qualified for the 7 percent interest rate (which was considered low at the time). When it came time to close the loan, they were informed that the best rate they could get was 9 percent. The Tamakis were shocked by this, but when they questioned the rate, the loan officer claimed that their were some glitches on their credit report that prevented them from getting the lower rate. Embarrassed, they asked no further questions and didn’t even check their own credit report; they simply began making payments.
A few years later, after I had begun coaching them and they had started applying certain financial principles, they decided to have their loan checked out by a mortgage specialist. The specialist discovered that the Tamakis were completely qualified for a 7 percent loan, but that the lender had charged the 9 percent rate in order to arrange an inflated brokerage fee of $14,000. Because he had disclosed the extra 2 percent up front and the Tamakis had not questioned it, he got away with $13,000 more in brokerage fees than he was entitled to. The Tamakis cried foul and the lender promptly revised the loan, negating nearly $11,000 in excessive fees.
Knowing the rules and not being afraid to question are vital in today’s world where many people will deal with you legally, but not always ethically. Remember, other people who know the rules will often take advantage of those who don’t. And while the notion of entrusting your money to automatic savings and investment programs seems enticing, and allowing others to take care of your taxes, retirement, debt elimination and other financial concerns seems easier than taking responsibility yourself, only you can ensure that you will keep the money you are already making, and have the opportunity to make much more.