With regular gambling, you are putting money toward something in the hopes that some random event (a flip of a coin, the toss of dice, the turn of cards) will bring good fortune to you. With insurance gambling, you are putting money toward something in the hopes that some random event (a natural disaster, fire, car accident) will not spell utter misfortune. Basically, it comes down to fear and greed , or rather greed and fear, once again.

So why is it that gambing is considered so financially imprudent, but insurance seems to be a requirement? Probably because fear is considered an appropriate emotion and greed is not -in most cases. (There are some cultures such as the Amish and Muslims who do not believe in insurance because it is considered gambling.) People are much more frightened to lose money than they are willing to risk it for a much larger prize. Even if the bet is irrational, people still fear losing more than they are hopeful of winning.

Most insurance companies know this bit of behavioral economics and want to take advantage of this by overcharging and underinsuring- because they can. And they are big business! They are the casinos that slide through as “good neighbors” that plaster our TVs with ads and who routinely turn people down for true claims. They want to scare you into insuring anything and everything, even if it may already be insured elsewhere under another policy. Double insurance is a huge drain on people’s finances because most people do not even know what their policies cover!  We have selective attention when it comes to insurance.

Insurance takes advantage of so many people, but we are not looking at this gorilla in the room…we are looking elsewhere. We’ve been told to pay attention to what could go wrong -to be fearful- instead of seeing the guaranteed loss when you pay too much for insurance.

I’m not necessarily saying that you should go out and cancel all of your insurance policies, but I am saying that more than likely you have fluff in there that you really don’t need, but that they charge you a lot more for.

For instance, I found in our home’s insurance policy that they had a calculated figure of over $100,000 for just our “stuff” our things inside the house like furniture, jewelry, etc. Well, we try to live pretty minimally and avoid collecting too many things so we have nowhere near this amount. But by using their standard formula, we are losing out.

They also have not adjusted any of our properties for the downturn in the economy, and most people should not have comprehensive coverage on their car. To remember this, tell yourself over and over again: cars are liabilities, cars are liabilities, cars are liabilities -all these old reliables (not new shinies) need is liability insurance.

And nobody should get universal/whole life insurance -that is a waste of money. It is only for people who do not have the discipline to save their own money (which admittedly is a lot of people, but still!). And term life or disability should only be used if you would not be able to take care of your family if either of these random events (death or disability) should occur. It should not be used for people who are already retired with plenty of money -what do you have to fear? Not much will change in their lives. Why are you gambling away all that money on the premiums instead of just saving that for when you depart?  

And health insurance? How much more corrupt can we get?

When I think of the insurance gamble, it is so very pessimistic. In a small way we hope something goes wrong so that we can at least get something for all the money we put in over time. At least with Las Vegas Reno, Atlantic City and Monaco there is a certain hope for the best -optimism. With insurance, really the only time you get paid out is if something bad happens. Insurance is a reverse gamble in an industry that is often corrupt and overlooked. Next time you watch TV, pay attention to the number of insurance ads. I think you will be surprised! And go do a full review of your insurance -cut out the junk. You will likely save hundreds if not thousands in premiums as long as you don’t let them scare you into spending more.

The balance between fear and greed is like yin and yang

This may be the case in a vacuum where there are no humans present. However, what we really see in action is a dynamic play between fear and greed. More than supply and demand, fear and greed determine the market actions and the financial decisions of individuals (which make up the larger market). Money is intimately tied to our emotional sectors of the brain because it is what we use to survive in this day and age (you can buy all your needs and desires with it : food, shelter, water, even sex).

This tug-of-war between fear and greed is exactly what happens at a casino when gambling. When you make a bet, you are doing so because of your greed -you want to walk out of there rich! You are dreaming of what you could do with millions of dollars. When you are “up” and winning you want to continue whatever it is you have been doing even if you KNOW deep down (rationally calculated) that the odds are stacked against you. (Having said that, most people have no idea what the true odds are of various games they are playing -including outside of the casino.) When you start losing, your fear kicks in. You want to make more than you started with -which is your greed, but you also don’t want to lose everything -your fear. Fear is what makes it so that you don’t lose ALL of your money and start betting your house or all the credit on your credit cards.

Sound familiar? This same type of thing happens all the time in the market, especially in ones that are designed just like a casino -the stock market for example! But really, any item can be pushed into a bubble because of the greed side of emotions and just as quickly can pop when someone calls the bluff and refuses to pay anymore.

If economics were a simple system of supply and demand, we would never have had more houses or cars or whatever than we needed. The demand was fabricated out of a desire for money-greed. And so the supply met that false demand. When the false demand finally came to be noticed, everything crashed and there was far too much supply.

So while supply and demand play a large role in economics, it’s not always driven by a rational desire for the products or services (demand). Generally speaking greed leads people to make, sell and broker more and more for as long as possible. When it becomes obvious that they will not be able to anymore for whatever reason (making a dangerous product that will be recalled, selling products during a bubble, legal issues, the trends change and demand is not there anymore) fear then leads people to want to get out quick, to save and to hoard.

And so this is the way the cycles of our economy play out. During the greedy bull times, people are buying and selling. People are spending. Times look great. But during the fearful bear times, people are saving. People want security. From the market’s point of view, nothing is happening. So the Federal Reserve and government in all its esteemed glory (??!) decide they need to kick start people out of the fear emotion by pouring in more money, bailing out failing and corrupt companies and otherwise encouraging spending.

But it’s not spending that people need to do when that is what caused the problem in the first place. Overconsumption and greed is not cured with more overconsumption and greed (no more than gambling loses are cured by more gambling). People spend money when times are good, but it isn’t the spending that makes the economy good; the economy is sound, so people feel safe and secure and are willing to let go of their money more freely.

 The economy is NOT safe and secure right now, so we should be encouraging saving, frugality and thrift! Saving is exactly what we need to do in order to get out of this mess in the first place. Not add another zero to our national deficit!

The opposing actions of greed and fear are necessary to regulate the market just as supply and demand are. The current policies are trying to take fear out of the equation, and that not only WON’T work, but it SHOULDN’T. When people go into a casino with no fear of losing their money, they are much more likely to lose all of it. There is no mechanism to put the brakes on spending/gambling.

We need to allow and actually encourage people to save. Once we have enough savings and the economy is indeed “safe” with “savings” people will spend money again. And in the mean time spending won’t stop completely; people still need to buy things to live, they are just being careful.

So how does savings lead to a strong economy? Well, when people have a large savings, they are more likely to take a risk, make an investment and so on because they feel more secure and less fearful. They see the chance to make their savings worth more (greed kicks in). And they have the reserves to cover any problems. They will still be able to eat and live if the gamble doesn’t pay off. And as more people do this, the economy will slowly come back to life. The savings will be tied to the saved or “reserved” productivity of our people, like a silo of grain would be.

Savings are not only a key component to individual personal finance, but should be a key component to any nation. It seems outrageous to me to think about an individual just living on credit card debt without ever paying it down. But even more outrageous would be to go on shopping sprees when you are in massive debt! But that is exactly what the U.S. is doing right now. We need to pay it down, cut back and  save! We need to stop the spending. We need to save so that we feel secure and safe when we do spend. We have plenty of greed, we need to learn to get our fear back.

The shopoholic, bankrupt gambler, alcoholic, drug addict and other people who have lost the ability for moderation also lost their fear of the repercussions of their actions. If the U.S. is known for anything, it is not our moderation, but rather to the contrary. It is only until we allow and encourage the moderating forces to balance themselves out that we will be on more stable footing.

Don’t let Faux Pas or Fox Paws stand in the way of financial freedom

I think a lot of this comes from the idea that if you are able to make direct investments, you must be more well-off than others and you don’t want to sound like you are boasting. I can understand this, and often keep my investment ideas/deals quiet around people who may not have the means to do some of the things I can. But when some people are boasting about the huge house or brand new wave runner or tv or whatever, should we feel comfortable talking about our latest “purchase” of a new rental property, side business or lending deal as well?

It is interesting that to “Keep Up with the Joneses” generally means to keep buying and consuming like the Joneses instead of investing. Why is it that that type of competition between people is so ingrained in our society, but talking about investments is not?

We have a few family members and friends who are doing investments and it is great to have someone to compare ourselves to and to work towards. Wouldn’t it be great if there were more people like this instead of the “Joneses”? Then people would be tapped into a group of people and a way of thinking that is completely different than the current consumption model.  You start thinking about how to make your money make you money instead of the funnest, coolest way to spend it.

Why do many people feel awkward talking about investments? Maybe this is because it is one of the hidden rules of class. In the middle class you just don’t talk about money. That in and of itself is a social faux pas. (And in poverty, it may be all you talk about because you don’t have hardly any.)  In the wealthy class it is much more common to talk about investments because you want the connections to make those direct investments work. You may not talk about your personal money, but you need to talk about your investments in order for them to work. You have to assemble your “team”.

So for middle class people, you may be trying to show your social “value” or “worth” through your clothes, vehicles, toys, entertainment, food, stores you shop in, etc. But by doing this instead of investing, it turns around and makes your actual monetarial investment dollars -and therefore opportunities- dwindle. There needs to be more discussion about investments in the middle class, and not just presentations about with mutual funds you should put your 401(k) or IRA. (Of course, I’ll say it again, first people have to be able to save.)

Don’t let faux pas stand in the way of your financial prosperity. Find like-minded friends and family -especially family! -and talk about these things. Once you start brainstorming investments you will see that they are everywhere and if you collaborate, you can do even more than you ever imagined before.