The Business of Personal Finance

How to Improve Financial Wellness

Joseph Calandro Jr, John Hoffmire

• Publisher: Routledge
• Year: 2022
• Print ISBN: 9781032104577
• eBook ISBN: 9781000469707
• Topic: Personal Development
• Subtopic: Bookkeeping & Budgets

This book is no ordinary personal finance book. It presents, in a highly accessible way, how to effectively understand and manage personal finances, avoiding debt and building for the future, and using straightforward tools and techniques developed in conjunction with business economics.

Fun to read, the book leverages core corporate finance principles in a way that helps people become more financially literate in their personal lives. The premise of this book–that personal and corporate finance can and should be learned together to improve financial wellness and know-how–is considered a breakthrough. Using approaches that have been tried, tested, and proven to work with individuals and employees, the authors apply common business activities like "due diligence," and tools, such as "financial statement analysis," to personal finance. This connection has not been presented before, either theoretically or practically. And yet it has the power to both transform how individuals successfully manage their own finances, and, at the same time, informs and educates them in the important aspects of the financial direction of the organizations in which they work.

This is a must-have book for those who are looking for a credible reference tool for how to effectively manage their own finances and for organizations seeking to assist their employees in good financial management, at every level, both in work and at home.

1The “Ten Commandments” of Financial Wellness

DOI: 10.4324/9781003215417-2

We were recently speaking with someone about the personal financial challenges that we have observed over the years from a wide variety of people. Toward the end of our conversation, the person we were speaking with stated that, “You know, it would be very helpful if you could distill key personal finance ‘rules’ into a grand list that is easy to follow. Sort of like a set of personal finance ‘commandments.’ ”

We thought this was a great idea.

Thinking through all of the various personal finance “rules” that we know of resulted in the following list of “Ten Commandments” of financial wellness, which we offer in no particular order (unlike the original Ten Commandments):

1. The house you live in is your home, it is NOT a source of equity to “unlock” or an ATM-like repository of cash to spend. Your home is where you and your family live. Therefore, you should not use it as collateral for any loan outside of a first mortgage, absent some dire circumstance. To repeat, absent something dire, you should never put your home financially at risk.
2. Whenever you make a purchase, even a large purchase like a home or car, try to pay discount prices whenever possible. It will likely take time to find favorably priced assets and goods, but it is well worth both your time and your effort to do so. Sometimes a great “deal” will fall into your lap, but that is the exception rather than the rule. Normally, you have to work at it to find a discount.
3. Pay close attention to interest rates. This applies to both the interest rates that you pay (such as mortgage rates, car loan rates, and credit card rates) and the interest rates that you earn (from bank savings accounts, 401k plans, and individual retirement accounts). You should strive to earn more in interest income than you pay out in interest expense over time. The only way to accomplish this is to continuously work at it.
4. Limit the purchase of luxury goods and fund such purchases with cash rather than credit to the extent that you can. In general, you should only use consumer credit sparingly, and remember to watch the credit terms as well as the interest rates that you are charged when you do use it (as noted in commandment 3).
5. Saving money is important. The act of saving gets the power of “compounding” (or interest paid on interest, and investment returns that are earned on prior investment returns) working for you over time. Therefore, the sooner that you start to save, the better—even if the amounts that you save are small.
6. Don’t ever forget that there is NO easy way to become wealthy. This is particularly important to remember when you are dealing with someone who tells you that they have a simple or easy way for you to become wealthy. People who say things like this either do not know what they are talking about and/or they are fraudsters. Whatever else you do after reading this book, please do not ignore this commandment!
7. Size matters. So, absent some very compelling reason, you should generally only invest with large money management firms. Large firms tend to have large assets of their own, and they have large amounts of insurance coverage to protect those assets if they are sued. Having assets and insurance available to pay legal judgments will help to mitigate the risk of fraud or loss if something goes wrong. Regrettably, things can, and often do, go wrong with investments for any number of reasons.
8. Do not put all your investment eggs into one basket. To the extent that your savings portfolio begins to grow, you should generally diversify your investment funds across different money management firms and asset classes. For example, have one money management firm invest stocks for you and another money management firm invest bonds for you. You should generally never have just one firm managing all your money.
9. Ignore “the Joneses.” Many people feel under pressure to keep up with the spending patterns of family, friends, and celebrities. This is a mistake for a variety of reasons, primary amongst these is that the people you may be trying to keep up with may not have made well-thought-out purchases and/or may not have funded their purchases well. Therefore, you should fund the lifestyle that YOU want, not the one that you think someone else has.
10. If you come to be defrauded, contact law enforcement officials immediately. Do not delay because of feelings of embarrassment. You should never feel embarrassed, but rather take action quickly in the hope that you will get at least some of your money back, and that you will help to bring the fraudster to justice as quickly as possible.

These commandments are obviously not dogmatic commandments like the original Ten Commandments. Rather, they are a set of practical guidelines that we have found useful precisely because we have seen what can happen when they are not followed. Unfortunately, many of these commandments are frequently not followed; in fact, some people seem hardwired to act in directly opposite ways. For example, many people continue to use their homes as collateral to fund luxury goods, which they often buy at high-to-premium prices (in contrast to commandments 1, 2, and 4).

Similarly, many people do not track the interest rates that they pay, and many more do not keep track of the difference between the rates that they pay and the rates that they earn over time. This is contrary to commandment 3, which often prevents these people from putting the power of compounding to work (commandment 5).

We have found that once someone consistently breaks one or more of these commandments, a bad habit can form leading to personal financial issues over time. Significantly, everyone is at risk of having such issues, including the rich and famous, a few of whom who we will profile in the following sections.

Personal Financial Issues of the “Rich and Famous”

As noted earlier, bad habits are at the center of many financial issues. We define a financial bad habit as having two attributes: The first is recurrent violations of one or more of our Ten Commandments of financial wellness. The second attribute is that a violation causes a financial problem in someone’s life: personal, professional, or both. Significantly, a bad habit can worsen over time. For example, a person who consistently buys luxury goods may come to need the “rush” of shopping.

Another example is a person who, as a one-shot deal, mortgages their home to invest in a “sure thing” investment, which turns out to be a fraud. Anyone who has watched the popular television show, American Greed, has seen many examples of scenarios like this. Sadly, we know several people who thought they were investing in a “sure thing” who lost all of their money.

It is important to understand that everyone is at risk of developing a financial bad habit if care is not taken to prevent it. In fact, some of the most successful people across history have developed such habits. This is important from an educational perspective because we have found that many people are willing to acknowledge that they have a personal finance issue if they know there are others, especially celebrities, who suffer from the same kinds of problems.

What follows are two detailed vignettes about famous people who had significant personal finance issues. In each case, we identify the financial issues that are related to our “commandments,” which led to financial difficulties. We begin with one of the most magnetic and popular personalities of the 20th century, Winston Churchill.

Winston Churchill

Many political and military books have been written about Winston Churchill being a strategically effective leader. Therefore, we were both pleasantly surprised when we read a recently published book that chronicled Mr. Churchill’s life from a personal finance perspective, and in so doing profiled many of his financial warts.

David Lough’s superb book, No More Champagne: Churchill & His Money (New York: Picador, 2015), gets its title from something that Mr. Churchill once said regarding the need to cut back on his and his family’s excessive spending, especially alcohol-related spending. For example, Mr. Lough reported that Churchill spent approximately $158,688 per year (£104,400 at the time of Lough’s writing) on wine.

There is a great deal that can be learned from Mr. Lough’s book. Here are some of our observations that pertain to personal finance in general.

We live in an age of consumerism that strongly encourages spending instead of thrift. The life of Winston Churchill was in many ways a life of spending, and not just spending on wine. Churchill enjoyed gambling, trading risky stocks, and overspending on home improvements. Indeed, his luxury-based spending was so excessive that he had to go, and remain, deeply into debt to fund it throughout his life.

To try to control his spending, Churchill prepared numerous personal budgets. However, he frequently overestimated his sources of income and he underestimated his costs. He also did not exercise the discipline needed to successfully follow his budgets. Needless to say, budgets only work when they are as accurate as possible and when they are followed.

Churchill’s excessive spending habits and heavy debt-loads eventually generated financial distress. In fact, his financial position was so precarious on two separate occasions that he had to be privately bailed out to prevent bankruptcy. Celebrity and political success are simply no substitute for frugality and being fiscally conservative.

Churchill also occasionally sought “gifts” to mitigate his financial situation. Frankly, such behavior is not ethical. However, people under financial distress sometimes do things that they would not otherwise do. For example, we know of several people who “padded” their corporate expense accounts over a number of years to pick up a little extra money from their employers. While such padding may seem innocent to some people, it is stealing. One of these person’s thefts eventually caught up to him and he was fired. If you find yourself under financial pressure, you should sacrifice your spending not your ethics.

Like many people, Winston Churchill gambled. To the extent that gambling is approached as entertainment and budgeted for, it could have a place in a personal budget, although we generally discourage it. Many people delude themselves into believing that gambling is a source of income, instead of a cost. The science of statistics is very clear that only “the house” profits from gambling over time.¹

Churchill also traded stocks based on “tips” that he received from a variety of people, including preeminent traders of his day such as the legendary Bernard Baruch.² However, no one can trade successfully over time on tips: Churchill could not, we cannot, and neither can you.

One area of personal finance where Mr. Churchill clearly exceled was tax management. He worked incredibly hard to minimize his tax liability over time, which may sound surprising to some people given how long Churchill worked in government. Be that as it may, this is a very good practice that we should all follow. However, many people are not knowledgeable of even the most basic aspects of tax management, such as the mechanics of filing a tax return, and they do not have a basic understanding of tax terms and definitions. There are practical courses available from tax service providers on these subjects, and they are well worth your time.

We live in an era of ever-increasing amounts of government intervention and activity, so we should all have at least a basic understanding of how our governments—local, state, and federal—fund their activities, and how that funding impacts us via the tax code.

In closing this profile, the aspect of Churchill’s example that strikes us most is the difference between how strategically effective he was in politics, foreign affairs, and managing the United Kingdom’s military during World War II versus how strategically disastrous he was from a personal finance perspective. Skill in one area, even to the point of mastery, simply does not equate to skill in another area, and that includes personal finance.

Mark Twain

Like many people, we are Mark Twain fans. For one of us, though, this interest led to a recent trip to Hartford, Connecticut, and a visit to Twain’s historic home.

Browsing through the gift shop after the tour, the followin...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• Acknowledgments
• Introduction
• 1 The “Ten Commandments” of Financial Wellness
• 2 Spending, Saving, and Interest
• 3 Ownership and Open Book Management
• 4 Strategy and Prices
• 5 Risk Management
• 6 Cyber Risk
• 7 Financial Statements and Personal Finance
• 8 Small Business Finance
• 9 Your Home
• 10 Be Careful with Debt
• 11 Physical and Financial Wellness
• 12 Personal Investing
• 13 Other Kinds of Investments
• Conclusion and Five More Commandments of Financial Wellness
• Index