When trying to solve a problem I think most people will try to find the most effective solution for the least amount of effort. At a certain point any extra effort might be considered a waste. (see the Pareto principle, also known as the 80/20 rule – which says that, generally, 80% of the effects come from 20% of the causes). Sure, you could work a little harder and get a little bit better result, but chances are your life is filled with multiple challenges, all vying for your attention in the limited span of 24 hours.
On this here blog I talk a lot about how uncomplicated personal finance really is – once you actually make it “personal” to you and are able to ignore the other 99.9% of noise out there.
The issue is that a lot of people (myself included) start looking for financial advice when they have a financial problem they need to solve, like how to buy a house or how to pay off credit card debt.
Another way to ask this question is “How do I do the right things successfully?”
Effective Vs. Efficient
After some searching I found that effective solutions have all or most of the following characteristics:
- Meets stated needs/achieves goals
- Has acceptable tradeoffs
- Works within constraints
- Useable and applicable
Effective and efficient get tossed around and are easily confused. There’s a subtle difference though.
Being effective is about doing the right things, while being efficient is about doing things right.
So we want an efficient solution instead of an effective one, right?
Not exactly. When illustrated in a 2×2 grid we can visualize the tradeoffs of each one:
|Effective||Doing Right Things Unsuccessfully||Doing Right Things Successfully|
|Ineffective||Doing Wrong Things Unsuccessfully||Doing Wrong Things Successfully|
Obviously we want the solution to our problem to fall in the upper right box.
So how do we make that happen? And where does “simple” come into the picture?
A Search For Answers
I’m going to start with an example that involves paying off debt.
Say you have a combination of credit card debt and student loans. You’ve been making payments but haven’t made much progress. Frustrated, you do a google search on “how to pay off debt fast” and get a variety of calculators, how-to guides, success stories, and, of course, debt consolidation companies.
A lot of this information is irrelevant to you. Sifting through a lot of irrelevant information on a topic like personal finance (which is often taboo to talk about, personal and emotional, and easily complicated, among other things) is a recipe for frustration and failure.
So start from the beginning. Ask yourself the following:
What specific problem do you want to solve, and what does successfully solving that problem look like?
You might answer something like:
I want to pay off my credit cards and student loans in 5 years.
At this point we know how to do a few things:
- Define what success is (in this situation)
- Determine whether or not we’re actually pursuing success (Doing The Right Things Right)
But for some reason a lot of financial advice is different. Or at least the financial advice people seem to want.
Go back to the example of paying off debt. Student loans aren’t dis-chargeable through bankruptcy, like other debts, so the only way to get rid of them is to pay them back, have them forgiven, or die. Other quick fixes might include an inheritance or winning the lottery. But most of us will be paying down these loans for 5-20 years.
Of course, you can do things like refinance and calculate the difference between using the snowball or avalanche methods, but the reality is that it will still take time. Getting a second job or building a website or doing surveys online to make extra money can speed up the process, but those take time too.
In personal finance, successful solutions are rarely quick solutions. It’s why the word “scheme” usually comes after “get rich quick”.
There’s also usually not a “one size fits all” solution. A lot of advice – like have an emergency fund, pay down higher interest debt first, always contribute enough to get the 401k match – works well for MOST people, but not everybody.
Doing the right thing is easier when you can articulate what you think is right for you. Doing it right simply comes down to putting in the work.
Image by kittijaroon at FreeDigitalPhotos.net