Would you play monopoly without the game board?
Chess without a chess board? No way! It would be confusing
because you would not be able to see and plan
your next moves. Personal Finance is no different. To plan
effectively, you need a financial game board to visualize
and plan your financial future. The Financial Drawing
Board process uses a one page financial blueprint to help
you visualize and understand your personal economy so
you can plan your next steps towards financial security
Understand Your Financial Pieces
Financial products are like game pieces – each product
has advantages and disadvantages, strengths and weaknesses.
Deploying your financial game pieces at the right
time, in the right place and in proper sequence can make
the difference between winning and losing the game.
Understand the Rules of the Game
Every game has a rule book. If you ignore the rulebook
and start playing the game on instinct and reaction
alone, you will likely miss out on important strategies and
opportunities that can severely hamper your progress in
the game. Yet this is how most people plan their financial
lives – jumping from one financial product or strategy to
another without a game board, game plan or rule book.
Understand the Pitfalls and Traps
Most board games have pitfalls and traps that can knock
you backwards thwarting your progress in the game. The
game of personal finance is the same. Financial products
must be arranged on your economic model in a way
that will prevent you from falling prey to the pitfalls of
inflation, taxation, penalties, fees, planned obsolescence,
propensity to consume, technological change and other
economic erosions and traps.
Embrace a Definition of Financial Success
When playing a board game, you know exactly what
your objective is in order to win the game. Sometimes
this entails taking over the most property, having the
most money, or capturing the enemy’s King! In personal
finance, people often have no idea what their macro-economic
objectives are, so they pursue myopic, microeconomic
definitions of financial success such as saving taxes
or chasing after a good rate of return (see point 6 below.)
Is this all there is? Every consumer should be aware of the
master objectives of personal finance.
Understand That Money Does Not Behave Like Math
If you invest a $10,000 sum for a period of two years and
achieve an average rate of return of 25% per year, have
you made money? Perhaps, but perhaps not. Consider
this scenario. In the first year you earn 100% so your
$10,000 investment has grown to $20,000. But in the
second year you lose 50%. A 50% loss on a $20,000 investment
means your investment value has fallen back to
$10,000. So you did not “make money” over two years. Yet
math says you earned an average of 25% per year (100%
in year 1 – 50% in year 2 = 50% divided by 2 years = 25%
per year.) Beware of misleading financial math.