Donald Rumsfeld famously tied us up in knots with his 'known unknowns' and 'unknown unknowns' - but we need to work to improve our knowledge our finances could suffer
I met a gentleman last week who told me he was great at making financial decisions, the only problem was that they were always terrible.
“I bought a house with my brother and we quickly started arguing over the mortgage and tenants, and as a result we haven't spoken for the last five years.
“I bought my family home in early 2007 at the near height of the property market and 12 months later, markets crashed as did the value of our house.”
“I’m embarrassed to say I was offered a tracker mortgage and I turned it down. I opted for a variable one instead.”
He wasn’t wrong when he said he made some poor decisions, a couple of humdingers, no doubt, but in fairness how would he have known markets were going to crash, or how his brother’s behaviour would change when they bought an investment property together.
While we were chatting, I was reminded of the saying, “you don’t know what you don’t know”; its meaning is simple but so true and applies to many other aspects of our lives.
A situation arises that could impact your life, and you’re not sure if it’s a great opportunity or a threat, and you don't know what to do, and no one close to you knows either. You're not sure what the potential outcomes are, because you don't know what you don't know.
Some people, like this gentleman, try to solve the problem by doing what others do, and adopt the follow the herd mentality (you’re mad if you don't buy an investment property because it's a licence to print money, you need to get on the property ladder because everyone else is doing it etc.) and this can be a very dangerous strategy, because if you get it wrong, it could take you years to financially recover from.
If you, are also in the habit of making poor decisions, there are solutions available which can help, and the first is getting advice from people with experience and knowledge who can talk through the options available, in an unemotional way. And that's exactly what this gentleman was doing when he contacted me. He had an opportunity to move employers, and the new offer looked good (higher salary, larger pension contributions etc.) but because of his history of making terrible decisions, he didn't want to get blindsided again.
Fear might keep you from making the wrong decision, but it will also keep you from making good ones as well, so it’s important you don’t ignore your finances just because you made some mistakes in the past.
We would go through the numbers in detail, numbers he couldn't even begin to think about, but yet so important, and numbers that would help shape his decision and give him the logic and reasoning behind it.
He was a textbook case of someone not knowing what they didn’t know.
He didn't know, how much more his pension fund might become with a new employer; he didn't know whether his hourly earning rate would increase or not; he didn’t know what impact his new salary would have on his monthly cash flow; he didn’t know what he could do with the extra amount he would be in receipt of; he didn’t know how much more tax he would pay; he didn’t know what the share options he was being offered were worth after tax; he didn’t know what tax had to be paid and when.
All big questions he needed to know the answers to, and when he did, he could add the financial impact of moving to the mix.
Recognising there are things you don’t know you don’t know is your starting point to making a decision. There are things you can do which will help, some of which are:
1. Taking your time – don’t rush into making any big financial decision. It’s easy to get caught up in the emotion of buying a car or house or making a decision following the death of a loved one and get carried away. You need to take your time and work through different scenarios like, what’s the best that can happen, what’s the worst, and am I okay if the worst does occur.
2. Do your research - the bigger the decision you have to make, the more research you need to carry out. Take a step back and evaluate all your options.
3. Get help – try and speak with someone who can give you that clinical, unemotional advice. But be careful who you get this advice from – do they stand to gain from your decision?
4. Improve your knowledge – remember, greater knowledge = greater results. You will make better decisions made when you have a better understanding of the subject matter.
5. Live in the present – you can’t change the past. Yes, you may have made some poor decisions, but it will do you no good. Continually beating yourself up about them, will keep you from learning how to make better decisions in the future so, move on.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie