Personal Finance and "The Rules"

I don’t know who first said it, but in developing almost any skill, the following stages apply:

  1. You don't know the rules. Practitioners in this stage perform poorly and don't seem to "know what they're doing". Their own experience is often one of frustration and struggle.
  2. You know the rules and follow them. Practitioners in this stage perform well. They and others enjoy their performance of the skill.
  3. You know the rules and break them. Practitioners in this stage perform exceptionally well. They break the rules in order to differentiate and individualize their performance and to enable others to enjoy it in unprecedented ways.
  4. You re-write the rules. Practitioners in this stage establish new structures and standards for their skill. They may be rejected by the mass of other practitioners and connoisseurs who are accustomed to the old structures and standards.

In personal finance, one rule is, “Avoid debt.” People who don’t know this rule may rack up exorbitant credit card debt and end up filing for bankruptcy. People who know this rule and follow it will typically enjoy debt-free life and slow but steady growth of their net worth. People who know this rule and break it will occasionally take on low-interest debt for necessary purchases so that their capital can earn higher rates elsewhere. Those who are experts can re-write the rule as, “Finance high returns with low-interest debt.” They actively manage risk and seek high returns on investments, financing those investments with low-interest debt if necessary.

Tags: Finance, Philosophy

Updated at: 12 March 2007 12:03 AM

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