Friday, December 10, 2010

Guest Post: The Art of War Applied to Personal Finance

Sun Tzu’s "The Art of War" has been referred to by military generals the world over for hundreds of years in order for them to plan and execute successful strategies in the face of the unpredictability that is battle. However, "The Art of War" can be successfully applied to non-military situations which are still equally treacherous, such as personal finance.

Approaching your personal finances with some of the principles from Sun Tzu’s work can help you wrestle back control over money and debts, understand how best to use your financial products and plan for stable financial future.

If you only know yourself, but not your opponent, you may win or may lose.
If you know neither yourself nor your enemy, you will always endanger yourself.

If you know both yourself and your enemy, you can win a hundred battles without a single loss.

One of the most recognisable passages from "The Art of War" you can apply its message to your personal finances in a number of ways. First you will need to make sure you know your opponent and in the case of your personal finances the one standing in the way of your victory, the one who wants you to fail is the inherent weakness in your life or your attitude which always trips up your best laid financial plans. Identify your weaknesses and once you know and accept them you will be able to conquer them, whether it is the mountain of impulse buying, the pointy temptation of a sale, or the seemingly unguarded savings balance which beckons you to attack, only to be trapped by the inevitable zero balance.

Secondly, you need to know yourself and where your weaknesses are your enemy, your strengths are who you truly are and want to be. If you see yourself as an organised person buy coloured notebooks and pens, or set up spreadsheets to track your budgets and spending. If you are motivated by goals and checklists set savings targets for all of your goals and reward yourself when you reach them.

Now, knowing both your enemy and yourself you can use your strengths to defeat your weaknesses. For example, use your organisational strengths to calculate exactly how much money you will need each time you leave the house and take only that amount.

One hundred victories in one hundred battles is not the most skilful. Seizing the enemy without fighting is the most skilful.

It is much easier to maintain financial security than to try and claw it back. Therefore avoid getting into debt in the first place by making a working budget and sticking to it. When you know how much you have to spend you can avoid spending on credit and you can also start a regular savings plan. It is also much easier to save regularly over the long term without conflict, rather than strike up a battle to furiously save at the last minute for a goal.

All warfare is based on deception.

Never will those who wage war tire of deception.

It is important to think of your financial institution as one who is waging war on you – they are not simply lending you money to buy a house or paying interest on your savings out of kindness, they are doing so to turn a profit. Your financial institution makes their money from fees and interest and making sure that you remain unaware of how fees and interest are applied so they reap the maximum charges.

Therefore, make sure you read the fine print on all of your financial products because you may find you don’t have the number of free transactions on your everyday account which you thought you did, and you may find that it is the compounding interest being charged on previous interest and fees which is making your credit card balance so hard to conquer.

Whoever is first in the field and awaits the coming of the enemy, will be fresh for the fight; whoever is second in the field and has to hasten to the battle, will arrive exhausted.

Another important reminder to be organised and prepared from the beginning because when you know the contents of your budget at all times, when you know your current account balances you can plan your spending and be ready and waiting to ward off an attack by your enemies – your weaknesses.

Also make sure you plan your spending, for example pay your bills in advance several days before they are due so you know the money arrives on time, you’re not rushed and you don’t forget.

Move not unless you see an advantage; use not your troops unless there is something to be gained; fight not unless the position is critical.
If it is to your advantage to make a forward move, make a forward move; if not, stay where you are.

Remember that you are making changes which are right for you and it is not about the products other people use or suggest. This means you shouldn’t just have a credit card for the rewards and you don’t need to pay extra for an offset mortgage if you can’t keep your savings balance topped up.

Also don’t make changes to your personal finances unless they are to your advantage. You may not have to change everything about your finances and some things can stay the way they are.

Indirect tactics, efficiently applied, are inexhaustible as heaven and earth... There are not more than five musical notes, yet the combinations of these five give rise to more melodies than probably can ever be heard. There are not more than three primary colours... There are not more than five tastes...

There are five essentials for victory:

He will win who knows when to fight and when not to fight.
He will win who knows how to handle both superior and inferior forces.
He will win whose army is animated by the same spirit throughout all ranks.
He will win who, prepared himself, waits to take the enemy unprepared.
He will win who has military capacity and is not interfered with by the sovereign

While many of these five principles are in the same vein as others already applied here, it is important that you fight with the same spirit throughout your ranks – uninterrupted for personal finance victory.

This means you need to apply these principles to all aspects of your life because your entire life is affected by money and the state of your finances. If you are in a relationship make sure you maintain control over joint and individual finances, always knowing that you are both working towards the same financial goals.

About the Author:
Alban is a personal finance writer at Home Loan Finder, a home loan comparison website.

1 comment:

  1. I really enjoy analogies and this one is quite clever. The book is a classic, very interesting comparison with personal finance.