Paradigm Shift II December 5, 2007Posted by shaferfinancial in paradigm shift.
Tags: Finance, Mortgage, paradigm shift, Wealth
You might be asking at this point, what this all means to my financial life?
First, we need to look at why you need to be concerned about this shift to the investor/banker paradigm. The mortgage industry has suffered from bad press lately. And it deserves the bad press it gets because consumers have been hurt by bad mortgage advice and Wall Street firms have also been hurt by lax underwriting standards. But the naked truth is that the mortgage industry labors under the assumptions of the consumer paradigm. Remember, the underlying assumptions from the consumer paradigm are competition for a limited amount of wealth, and the need to overcome someone else for the limited resources. Hence the lenders set up a system that generally guarantees what is best for them is not best for their customers. And of course the customers react by not trusting, or even worse, hating the mortgage company so much that they do things that are counter-productive to their wealth building. This is in a nutshell what the consumer paradigm has come to for not just mortgages but for just about everything.
But on the fringes of the mortgage business are folks that have recognized the destruction of this way of doing business and have started to introduce different ways of doing business that break down the destructive cycle. In the finance world I call this the investor/banker paradigm.
The change it engenders for both the folks selling financial services and the folks on the consumer side is incredible. But first a little explanation as to how to put the general ideas outlined in my first post to work.
There are three intellectual/emotional changes that need to occur:
1. We need to change our understanding of what is financially important from income to net wealth. Let me give you a personal example of how this works. A couple years ago I changed careers. In that particular year I spent more money than I made to the tune of $30,000. Now the old way of thinking is that you should never spend more than you make. There are myriad of folks out there that ask you to track spending and compare it to how much you make. They insist that if you spend more than what comes in you are on the way to financial ruin. From the consumer paradigm this is a fact. However, for me I didn’t care. Why? Because the proper metric to look at is net wealth. Net wealth is the total worth of all your assets minus your debts. In that year my net wealth went up $50,000. Hmm, how could that be? Well, I control some real estate that appreciated. I control some stocks, bonds, and mutual funds that appreciated. So even though my income from work did not cover my expenses, the appreciation of my assets was so much that it drove my net worth up. I will take that kind of year any day over a year that my income and expenses were evenly matched, yet my net wealth stayed the same. Now the funny thing about net wealth is that you have a great deal of control over it, compared to income. Income for most people is controlled by a boss, a company, geographic area, education, career choice, etc. But you can design your assets any way you want to. And this is what creates wealth. From a practical view, you should always know what your net wealth is. This should be a part of your daily regime, calculating net wealth in your head for the day.
2. The mental image of ownership should be replaced by control. You don’t own your home,car,truck, etc. the bank does! How many times have you heard that? That is the consumer paradigm speaking loudly. Are you in competition with your mortgage lender over your home? With the bank for your car? Some people think so. The reality is you control your home, your car, or any other item that someone loaned you money in order to purchase. The lender doesn’t want it. It is a royal pain for them to get it back. They are in the business of selling money, not in selling distressed homes, or repossessed cars. The truth is that the bankers of the world are your greatest asset, not your enemy (not that they think this way). They make it possible to control assets without having the money to buy them outright. By controlling assets you get the benefit if they appreciate. You get the benefit of using them. And you share the risk of this control with the lenders. Personally, I care less whether I own assets, because I only want to control them so I can benefit from their appreciation and cash flow. Now here is where the hard emotional work gets done. The consumer paradigm has infused us with fear. We fear losing things that we own. But it is only things. What makes a home? Is it the brick, wood, cement, dry wall, and paint? Or is it the people that live in the home? I believe it is the people that make a home. If a hurricane came and wiped out the structure I live in, I could easily find another one. And it would become my home because my family would be there. My job would be to replace an asset that I controlled. It could be anywhere. Fear of losing THINGS we own is what keeps most people from obtaining happiness and security.
3. Victimization and scarcity are the keystones of the consumer paradigm. Currently there is much talk of mortgage companies who victimized consumers by putting them into bad loans. People are going to lose their homes because of these sub-prime or variable rate or interest-only or option arm loans. Earlier in the decade it was all those folks who got victimized by financial advisors who had their money in the stock market. Every few years it is a new set of victims. No discussion of why these “victims” knowingly entered into these mortgages. Nor is there any discussion of who and what was really lost. These “victims” are portrayed, somewhat accurately, as passive actors in life. Bad things happen TO them. They are blown by the winds of society to and fro. This can only happen to folks working under the consumer paradigm. Folks who have move beyond this are not victims because they understand there is no scarcity. Human beings all have the capacity to act upon things, to control our destiny, to create wealth. There is abundance out there for anyone to obtain. Move beyond victimization and scarcity and you begin to see it, understand it, and make it possible.
Next blog post I will drill down to the core of the investor/banker paradigm.