I was thumbing through a book about Albert Einstein in the bookstore the other day, and I came across an interesting quote that helped to explain a concept Einstein used to solve problems. The quote itself was actually from Abraham Maslow, the great psychologist that created the hierarchy of human needs concept. The quote was:
When the only tool you own is a hammer, every problem begins to resemble a nail.
At first glance, the meaning seemed relatively benign, but the more I thought about it, the more true it seemed. If you consider human nature, it is common for most people to work with what they know. Getting out of a comfort zone, or challenging beliefs is something that most people would rather avoid. So, it makes sense that if you have a tool at your disposal that is used to solve a particular type of problem, when you are faced with another problem, you will simply begin to think about how your tool can solve it.
We all have financial problems and goals we’d like to reach, and at our disposal is an almost infinite number of tools to help us get there. When it comes to investing, we have stocks, bonds, mutual funds, ETFs, options, 401(k)s, IRAs, brokerage accounts, not to mention the hundreds of companies that offer these products. If you look at saving money, you could use a bank, credit union, checking, savings, money market, CDs, online banks, money market mutual funds, and more.
The problem is that most of us become comfortable with a particular tool and then when a new problem arises, we simply view the problem in terms of how our existing tools can solve it. This type of thinking can severely limit your creative abilities to solve the problem by using what could be more appropriate tools. The vast number of financial tools at your disposal is what makes it possible to shape your strategies to best achieve your goal. If you don’t consider other tools, all you’re doing is shaping your problem so that the tool you have can do an adequate job in solving the problem.
For many people, one of the most common tools to save for retirement is the IRA. And where do most people open their IRA? That’s right, usually with a mutual fund company, probably a no-load variety such as Vanguard. There is nothing wrong with this, since you get great funds, very low costs, and presumably excellent customer service. Vanguard has now become a financial tool, and over time if you’re happy with the results, you’ll clearly want to keep using that tool.
But what happens when a new financial problem arises and needs to be solved? Let’s say that a child is introduced into the family and you’re thinking about doing some college savings. Great, so what do you do? You instantly think of the best tool in your financial tool belt and check with Vanguard to see what type of college savings plans they offer. You are pleased to notice that they offer a 529 plan, so immediately that confirms that this tool can be used to solve your college savings problem.
Being constrained by your single tool may cause you to completely overlook the fact that they don’t offer a 529 for your state. If you can enroll in any state’s plan, what’s the difference, right? Perhaps a 529 isn’t even the best savings vehicle for your situation, or if it is, maybe your state plan is more suitable. Well, it could cost you some additional tax breaks or impose restrictions on your plan, but you’re comfortable with Vanguard so you decide to go with them anyway. Again, taking this course of action isn’t a bad thing, and it is certainly better than doing nothing, but being restricted to one tool, you have just shaped your problem to accommodate the tool when it may not be the best solution.
Expand Your Arsenal
It doesn’t matter if your problem revolves around eliminating debt, increasing income, saving for retirement, or even giving money to charity, the ability to reach a solution is best achieved when you take into account all of your options. We all do it, but when we try something and it yields a positive outcome, we’re more than likely to use that method or product again. It just makes sense to do what has worked in the past.
Unfortunately, this narrow focus can cause you to overlook new solutions. Of course, using the tools you have may certainly be the right solution, but you’ll never know unless you make a point to educate yourself and add the other tools to your arsenal. When you can approach a problem from various angles you are more likely to reach an optimal solution rather than tailoring your problem so that your tool can solve it.
So, I challenge you to approach your next, or even a current financial problem with an open mind. Explore other possibilities and learn how they may or may not be able to help you solve the problem. The more tools you have at your disposal, the more possible solutions you can create. This should lead to increased efficiency in reaching your goals.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
I’m 21years old and I live with my sister (26years). We have no place to live, just because our parents are divorced many years ago, we were living whit our mother, are dismissed from our home, when my mother married with my step-father (4years ago).
My father was a member of the "Navy" of America, He died after a big financial defeat, and now we live in this great country (Iran) without any places to live.
We're living in peoples home within 4 years ago without to have any money to solve our problem, and no one of government departments doesn't help us too. Just because we’re christians!
My sister in the field of genetics and worked in the connections of computer hard wares, but we feel we’re changed to someone that doesn't serves someone’s purpose cause of the conditions we have, I feel dejected more and more day to day, and our connection breaks off from culture and technology.
We’re working now, but we’ve many charges to pay as little loans we got from my sister’s office (for monthly fees we paid to our friends, we were living in heir home), incommings for women is so little and the monthly fee for home is threefold of a girl’s incommings! and i can’t continue this way because we should pay the price they lent us and We’ve no money to pay for our basic problems.
We’ve not home & now live in a pension, & must to go out from here. I don't know that is there anywhere to accommodating me and my sister in this great world or not!
We seek your kindly and Urgent helps, in the name of “Jesus Christ”.
We need your help very emergency, only 30'000 € can change our life.
Thank you for mistime, and I’m waiting for your hopeful answer.
You're absolutely right. I need to know more about investing so that I can expand my options - right now, I pretty much only know mutual funds, so that's what I invest in. But I always feel like I'm just seeing such a tiny part of the big picture.
Well, I don't disagree with you, and all of your points are 100% true. But, sticking with the same tried and true methods versus exploring new ways of doing things is the difference between mediocrity and greatness.
Sure, you can stick with something you know, and if it works well, you can chug along just fine. That is like if I were to buy a couple index funds, invest in them regularly for 30 years, sure, I'd wind up with pretty good, yet average results. But would I have missed out on other opportunities, good or bad? You bet.
I think your last point sums it up quite well though, and that most people are simply lazy. Again, being lazy isn't bad as long as you're doing something, but for most people the energy to explore new opportunities just doesn't seem worthwhile.
Just to clarify, this post wasn't meant to strictly adhere to investing issues either as it should be applied to all areas of your life.
For example, a friend of mine is always complaining about needing to make more money. So, when I ask how he plans on doing that, the answers are usually "work more hours" or "ask for a raise", or even "apply for a higher up position". Clearly, this person is only thinking about one tool, and it is the one he knows best; his current job. Sure, those are valid ways to make more money, but maybe the real answer lies somewhere outside of that? But if you can't recognize there may be other ways to accomplish this, you will be stuck in the rut with the only tool you have.
Good article and a much needed observation, Jeremy. However, there are so many reasons why we use the same tools . . .
1. We want to go to our own garage and not take a trip to the home improvement store. Seriously, looking for a new tool takes a lot of time, a lot of effort and huge learning curve. Alot of people don't FEEL that they have the time to learn what tool would work, how it works, and who is selling the tool. Yes, if they take the time they MAY benefit from it (but what if they take the time and realize that one of their tools could already take care of that task.) Wouldn't that be time wasted?
2. Investors FEEL . . . and usually, we feel much more confident if we've dealt with that tool before and know we can depend on it. If we get a new tool we have to deal with the unease of FEELING, TESTING or trying out that tool until we feel it is dependable. Who wants to deal with the worry?
3. We are basically lazy investors (not all of us, but many of us). We didn't really want to invest anyway -- it's just a fundamental requirement if we want to be smart about our money and our futures. Now, if feels like school again where we HAVE to learn about new things. It's like when I realized after Algebra, I HAD to register into GEOMETRY and when I successfully passed geometry I HAD to register for TRIGONOMETRY and then my instructors expected me to learn CALCULUS . . . it was like someone duped me into Algebra and I was in the Math Mafia . . . I had to die just to get out of it. That's how investments seem to be to the new investor - once you get in it grows into a life of it's own. The expectations just never stop.
Just the point of view from a lazy investor. Sorry to create a posting in itself.