The Money Formula (No Math . . . Promise)

Does money make you crazy? It should, because you are human and humans aren’t very good with money. It’s the way we’re built. We’d much rather focus on staying alive and passing on our genes than following a budget or reading a credit card disclaimer.

Whether you like it or not, money is important. You have to know something about it. In fact, today everyone is “self-employed.” This means you are ultimately accountable and responsible for our own money success. No presure . . .

Like it or not, you have to know about money. You are the boss and that’s what bosses do. So what should you do?

I think we (the financial services’ industry) make this money “thing” way too complicated. Sure the products and services can be pretty complex–just read a mutual fund or variable annuity prospectus. In fact, if you let yourself get bogged down with all the features and benefits of the financial stuff your head will explode.

Here’s what I recommend you do–because exploding brains are not a good thing–focus on the “why” and not the “what.” Get out of the product mode and focus on the outcome. What do you value most in life? Why is money critical to what you value most?  What is important about money to you?

These are tough questions. Let me give you a formula to help–this looks more intimidating than it really is.

V(V) = (T + M + RoR) / B


“Big V” represents your most important life values. These are often intangible. The key is, if the values are not supported or accomplished, you will suffer emotional pain. A “Big V” value can be anything that is important to you–from opening a clinic for sick kids to having your ashes spread at the 50 yard line of your favorite football team. It doesn’t matter, as long as it’s an important life value to you.

“Little (v)” represents your tangible goals. This is the stuff you want to own–cars, house, vacations, and so on. Think of these as life-style things, and often consumable. Don’t confuse “Big V” values with “little v” values. They are different. When it comes time to stroke the check for the sick kids you’ll know if you got it right.

There are only four things you have to worry about to accomplish your “Big V” and “little v” values. They are time (T), money (M), rate of return (RoR), and behavior (B). That’s it. Simple isn’t it?

Time (T) is an important variable. The more time you have the better. Time gives you leverage because you can let your money compound–a very good thing. Unfortunately, you probably don’t have as much time as you think. Once time is squandered you can never get it back.

Money (M) is also important. Yes, you need money to make money. However, I bet you have more money than you think and the ability to earn more if you choose. Money is a life-style choice–which you have a great deal of control over.

Rate of Reture (RoR) is the money you make on your money–interest, capital gains, appreciation and so forth. Here’s the catch, you have no control over the rate of return. That is determined by the market for the stuff you own or lend. All you can do is decide how much to invest and where–the market does the rest. Ironically, the common wisdom seems to be that rate of return is easy to control. All you need is the right product, service, features and benefits–wrong. Billions have been lost chasing performance and the next “sure thing.”

Behavior (B) is the most critical variable to achieving what you value most in life. Do you know your money temperament–how you think and feel about money? You should. Do you know how you process information and learn–your money knowledge? This is also important. Remember, money is always emotional. You make money choices first with your feeling-emotional brain, then maybe your rational brain kicks in. Hope, fear, greed, and overconfidence are just a few of the things you wrestle with every day spending your money–and you usually don’t even know it. Understanding and managing your behavior is the tough part of money success.

Money is always about behavior.

Money Made Personal – Ted