Smart people are significantly more capable of overcomplicating personal finance than their less-fortunate counterparts.
Additionally, because of their profound ability, they might overlook simple financial truths that, when neglected, have devastating consequences on their finances.
Take a look at some of these simple financial truths.
Which ones deserve more of your attention?
1. Behavior significantly affects the results of financial plans.
Even the most intricate financial plans are not immune to human behavior.
Unfortunately, it's really easy to be rational and reasonable on paper, but it's another story to be rational and reasonable in practice.
Financial planners understand this, as they have experienced firsthand how clients will often drift from the path laid before them – many times capsizing their lives.
While individuals are smart to seek the advice of a financial planner, they are even wiser to understand and overcome the intense onslaught of behavioral temptations that line the way to success.
Financial decisions can be made in an instant:
- A new truck purchased using retirement funds that results in a lifetime of undesired employment.
- Withdrawal of funds from a turbulent market resulting in a permanent loss.
- The purchase of a variable annuity resulting in horrible fees.
Desperate actions are often followed by sharp consequences.
Never avoid the simple financial truth that, even though you have a financial plan, you must use significant self control to see positive results.
2. Even the wealthy need a budget.
Smart people are often good at making a living – a great living.
But that doesn't mean they don't need a budget. Sometimes they think they don't, but they're wrong. Well, that is, unless they want to be severely ineffective with their funds.
Wealth brings with it a great deal of responsibility. Big mistakes with few assets results in few losses. Big mistakes with many assets results in huge losses.
Many wealthy people don't feel the need to create a budget because they are able to “out pay” their financial negligence. But that comes at a high cost.
Instead, if you're wealthy, you should truly consider the long-term benefits of creating a budget. By doing so, you should be able to identify several areas where you can save some money which you could turn around and invest. You'll also have the opportunity to prioritize your spending so you can make the most of your awesome income.
Get on a budget – regardless of your financial status.
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3. Money isn't what matters most in life.
Smart people are great a calculations. But sometimes they get wrapped up in finance so much, they forget the simple financial truth that money isn't what matters most.
Money is simply a means to achieve certain goals. It can't buy everything, and it certainly can't buy the most important things in life.
Think about your family. Think about the meaning behind your work. Think about your friendships and the way you help others. These are all more important than money.
However, money certainly can help your family. It can also enable you to embark on a new career path. And, it can help you go out to have a good time with friends or give to others in need.
Money can certainly help you in many ways. But it isn't the full story. Money never buys the best relationships or the most meaningful work. That's because money is a tool. But there's something deeper that allows the most important things in life to be realized.
Seth Godin explained that doing work that's important results in more happiness than merely profitable work. Behind this truth is another truth. That is, money shouldn't be your focus in life. It's a means to get you somewhere, but it doesn't help you reach the best destinations by itself.
4. Flexibility is as important as structure.
This might sound somewhat counterintuitive, but when it comes to finance, flexibility is as important as structure.
Imagine, for a moment, that you receive a medical bill in the mail. You open it up, take a look, and gasp as you read the total: $2,150.00. You don't have an emergency fund to cover this, and no category in your budget is relevant to this expense.
What should you do? You have a few options:
- Don't pay the bill because it wasn't in your budget. While this is the strictest way of handling the situation, and while you'd technically be sticking to your budget, there are legal and moral consequences for not paying a bill you rightfully owe.
- Give up on your budget entirely because it didn't work and pay the bill. This is the most flexible option, although it destroys your future budget in the process. However, it does meet your legal and moral obligations.
- Move some money from a few categories to another and pay the bill. This is a flexible method, but it's also one that involves some structure. This meets your moral and legal obligation while ensuring that you pay less money for something else while you're paying more toward something you didn't expect.
As you can see, the third option is the most reasonable. Going forward, you can also make sure to budget for medical bills. The extremes of absolute structure and absolute flexibility are dangerous extremes.
5. Some people have to learn about money the hard way.
Smart people often do a face-palm when they see someone else who is about to make a financial mistake. They will often try to prevent them from making the mistake, and rightfully so. The problem is, it doesn't always work.
If you're savvy with your finances, don't be discouraged when those around you make financial mistakes against your better advice. It happens. Some people just have to learn about money the hard way.
As a financial advisor, I see people make financial mistakes all the time. The best thing I can do is keep on proclaiming my message. If they take it, great. If not, I'll keep trying. You shouldn't give up either.
Being smart is fantastic. Just don't forget about the simple financial truths.
This article originally appeared on Credit.com.