Charlie Munger, Warren Buffett’s partner, has said “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
What he’s basically advising is to not make mistakes, especially the avoidable ones. Mistakes usually set us back, so by avoiding mistakes, we can continue to progress. While some mistakes are unavoidable, many are not, but when we inevitably make one, it is imperative that we don’t repeat it. Of course learning from other people’s mistakes is most efficient, since we get the lesson without the setback.
This is obviously applicable to one’s personal financial planning. The number one rule of financial planning is to spend less than you earn, but you’d be surprised at the number of people I meet that think they can circumvent that rule by investing through the use of leverage. To quote Warren Buffett, “The Stock Market is designed to transfer money from the Active to the Patient.” It’s amazing the lessons we can learn (and the mistakes we can avoid) by paying attention to what the smart people are saying.
Another mistake in personal financial planning that I see is not buying life insurance when young. Young and healthy produces the lowest premium and yet many prefer to put the purchase off, sometimes even decades. But if it’s ever needed, and it often is (I write about the same number of policies on people in their 50s and 60s as I do on those in their 20s and 30s in any given year), the premium is substantially higher.
I recently wrote a male, 58 years old, and the premium was 4.9 times the premium for the same policy on a 25-year-old. When I mentioned that fact to him he said, “Yeah but look at all the years I didn’t pay premiums.”
Well let’s look at it. 33 years (the difference between age 58 and age 25) divided by 4.9 equals 6.7. So if he keeps the new policy 7 years, he will have paid more than had he procured it at age 25. That doesn’t sound like a good decision.
This is not to say that it is not a good idea to procure life insurance at older ages. If you need it, you should get it, no matter what your age. Additionally, sometimes the need isn’t present until an older age, as is the case with a business that starts out small but grows substantially as the founder ages.
So today’s lesson is to learn from the mistakes of others whenever possible. And the lesson regarding life insurance is young and healthy is always the best time to buy. The second best time is today.