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Thinking Clearly About Money

Updated: Mar 9, 2022

Rolf Dobelli, in his 2011 book, The Art of Thinking Clearly, describes dozens of occasions when even though the truth is obvious, we let our emotions and dependency on the advice of other's get in the way of good decision making. For example, bankers often refer to car loans as investments when selling the loan to customers. For the banker it could be considered an investment as the bank will get a return on its money in the form of interest. For the customer, it is expenditure because they are buying a depreciating asset that will only cost money every day until the day it is sold (unless it is being used as a taxi of course). Not only does the asset value itself decrease, but it requires daily expenditure on insurance, road tax, petrol, maintenance and loan interest. An investment is something that generates income or long term wealth. Something that generates daily expenses and depreciates in value over time is a liability.

In the same way, when you borrow money to buy a house for example, you need to consider whether the capital value of the asset will increase by more than the total amount of interest and other costs you will pay over the term of the mortgage. Assume you were to borrow €450k to buy a €500k house over 20 years at 3.5% interest. Including the €50k deposit, you would end up spending approximately €944k on principal, interest, insurance, property taxes and other fees over the 20 year period, at the end of which you would own the asset and hopefully it would be worth more than €1m. €940k is the equivalent of €3900/month every month for 20 years but when you are taking out the mortgage, most lenders will never put it in perspective like this for you. Instead, they will offer you lower initial monthly repayments (for the first one, two or three years) of €1500/€2000 per month which you will compare to your current income and think "I can handle that".

Banks often present themselves as financial advisors but you have to remember that they are in business to make money from their dealings with you so any 'advice' that they give is invariably biased towards the sale of their own products. Neither are they 'partners' which is another favourite term they like to use when touting business. A partner is someone who invests in your business and shares the risks with you - banks don't do this. They do not invest in your business by buying shares in the knowledge that if the business fails they will lose their investment. They lend money and often look for personal guarantees from the owners or directors so that they can take your house in the event that the business fails and you cannot repay the loan. Banks are suppliers like any other supplier seeking to make a profit from doing business with you. They should never be considered as partners, investors, or independent financial advisors.

Society in general is often very negative about funding entrepreneurs and new businesses. Considering that 50% of new businesses fail within the first five years, this is not surprising but what people easily forget is the learning and experience that entrepreneurs get from initial failures. Very few successful entrepreneurs were successful with their first venture but became successful through trial and error and perseverance. Institutions in general look for a record of proven success in order to determine your eligibility for borrowing on the basis that past success is a good indicator of future outcomes. Yet, when you look at very successful businesspeople like Richard Branson for example, past failures were the basis of his future success. Even friends and family will often congratulate you for spending €50k on a wedding which is a single day out for everyone, but berate you for suggesting that instead, you put the money into a business venture that could generate millions on the basis that it might fail and you might lose all your money. Even if the business does fail, it’s very unlikely you will lose the money in a single day!

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