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.