As my intro for Bakerview states, “We focus on the people, not the Product” when doing planning for my clients this is the largest component of my practice. Any financial institution can do the basic accounts for a financial plan, but the real key is to understand the human element, especially when it comes to finances, and the planning. One of my favourite reads is a book “Becoming your own Banker” by R. Nelson Nash. While I won’t get into the details of his strategy, he does lay out the real human element in regards to finances and money. I will discuss them this week, and it may seem more like a psychology class, it is extremely important to understanding why people do the things they do when it comes to money. The following is the first law according to the human elements, with the following 3 to be released later this week.
C. Northcote Parkison was a British economist in the early 20th In his essay,” Parkinson’s Law” he states that the job entailed will fit the time allowed. If someone is given 3 days to complete a job, they will likely finish on the late on the third day… Likely the same if you give someone thirty days. He also states that “a luxury once enjoyed becomes a necessity”. If you think about cars that had air conditioning in the 80’s was a luxury, now it’s a necessity. He also said that expenses rise to meet incomes, and now become the new necessities. We, as humans must always strive to beat this law. If you can, you will win. This is where the majority of our disposable income is going, to spend on these new “necessities”. This new fad called “minimalism” isn’t new at all. It is a regurgitation of a 100 year old economic essay.
Now that you have whipped Parkinson’s Law and you are a psychological and financial genius compared to the remainder of people, you now have to face Sutton’s Law. Willie Sutton was a notorious bank robber, and when asked why he kept robbing banks he stated, “that is where they keep all the money”. Sutton’s law is simply “wherever wealth is accumulated, someone will try to take it”. Now if you think about taxation, and the rules created by the tax system, it is created to take wealth and redistribute it. When this happens there is generally push back from the population. In order to minimize this impact the government creates new programs, and credits to deal with this fallout… Examples of these programs are RRSP’s, TFSA’s, qualified pensions and other government sponsored systems. The government creates the rules on accumulation and distribution of these programs. In the book they use the analogy of “the fox guarding the hen house” . This is very true, and the addition of new credits and programs become costly and nearly impossible to enforce. Every year new rules are made, and replace the old ones based on the economic and political winds that are blowing. The system becomes bloated and expensive to manage. A good financial plan should be time tested and have a track record of proven success, and some of the concepts that we recommend are over 150 years old.
Stay tuned for the next Law in the Human elements of planning.