Which direction should your financial efforts take? Should you tackle large financial obligations first, or should you make small, and ostensibly easier, steps?
Cut Out Lattes or Pay Off Debt?
Halt all those lattes or pay off high interest credit card debt? Which is supposed to be the better first steps to take?
This question seems to confound financial bloggers, for you can find arguments for and against both approaches. In fact, the debate rages on.
Bah, humbug, I say: it is all a tempest in a teacup.
The answer
The answer is: pinning (and pining) one’s hopes on one strategy is not going to work. Or if it works, it is work. Hard work. And if it is hard work, it is likely not the right way.
Think About It
What is needed is to focus on one’s thinking.
One’s thinking is where the real work happens.
This concept is best demonstrated by a famous zen koan.
Two monks were arguing about a flag.
One said: “The flag is moving.”
The other said: “The wind is moving.”
The sixth patriarch happened to be passing by. He told them: “Not the wind, not the flag; mind is moving.”
— http://www.sacred-texts.com/bud/glg/glg29.htm
Without getting into a theological discussion as to why he said “mind is moving” instead of “your mind is moving,” we can look at the larger issue as to why the discussion moves from which (flag or wind) to what (how to think about the item in question).
Why?
The reason why, in my view, is that determining a direction because of some “either this or that” choice is not optimal. No one approach is always right. We can see this clearly in the financial world.
Looking at historical financial returns, we see that sectors rotate. Some years industrials do well, other years basic materials, other years consumer staples, and so on. No one sector does better at all times. Some years growth companies do best and other years value companies prevail. Some years interest rates go up, other years interest rates go down. So, in my view, putting all of my financial eggs in one basket is not necessarily the best way to go.
The point
The point here is that choosing one approach as “the solution” is likely limiting.
What is Optimal?
To start, focus on one’s thinking, not on behavior. Of course, in the end, one’s behavior results from one’s decisions. But one’s decisions should grow out of one’s thinking. To make decisions based on a belief system is, in my view, the most simplistic of short term thinking.
So, rather than deciding which approach to take–namely, tackle large financial obligations first, or cut out the small items like lattes–, a better way is to investigate and question all of my thinking, especially how I think about money. Everything from how I brush my teeth, and how I wash my hands, to how I use my credit cards, how I spend money. All of these areas are ripe for investigation. By looking into how I think, I have the opportunity to see clearly how I come to decisions and how I behave.
If I understand myself and understand my behavior and thinking, then when it is time to act, I can act clearly and without undue influence from one thought pattern or another, without allowing preconceived opinions to cloud my thinking and behavior.
In the realm of financial decisions, it is likely that a mix of approaches is best. Diversification is best in equities, for example. Therefore, logically it should be the best approach in how to think about what to do in one’s financial life.
It is from this clarity of vision that I can make the best choices. That’s my view.
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