Problems are good things.
They can be solved. When you can’t,
That’s called a constraint.

When I meet with people for the first time, I have two goals for that meeting:

1) I want to learn as much as I can about what is most important to the person, financially and in life in general.

2) I want to capture the person’s interest by introducing them to something meaningful that they can’t access on their own, or don’t know how to access on their own.

Goal #1 is relatively easy. The less I talk the more progress I make towards that goal. Unfortunately for me and, frankly, the rest of the world, asking me to shut up is like asking me to stop breathing. It remains a work in progress.

Goal #2 depends on some understanding of Goal #1. Hopefully I can get enough of an idea of a person’s acute needs or ambient concerns that I can introduce them to something they will want to learn more about.

Goal #2 is more complex because it often involves reframing a person’s entire mindset around some aspect of their finances. What often comes up is that people will have a highly negative mindset around a financial problem. The more negative the mindset around the problem, the more likely it is for the person to avoid addressing it.

In these cases, it is very important to remember something that we all inherently know, but don’t articulate:

Problems are good.

Problems give us something to do. They let us flex the muscles that differentiate us as homo sapiens: our ability to communicate, collaborate, learn through imitation, use tools, and quickly adapt to our environment.

In the process of solving problems, we will encounter some that can’t be solved: a boulder that’s too big to move, a mountain too dangerous to climb, a missed deadline that triggers a penalty.

When a problem can’t be solved, it’s no longer a problem and no longer requires the attention and energy that problems require.

A problem that can’t be solved is a constraint. Gravity is a constraint to anyone trying to dunk a basketball. The human respiratory system is a constraint to anyone trying swim underwater. The tax code is a constraint around literally every financial decision you make. Constraints are the rules of our environment.

Problems give us solutions to work towards. Constraints limit the range of viable solutions. This can help focus activity and problem-solving energy. A person constrained to a small set of viable options may spend more time in Solve Mode and less time in Decision Mode.

Every financial instrument has its own problems and constraints. The most basic of these, and likely the most important to understand for most people, involves the relationship between risk and growth.

The more you want to keep up with or outpace the rate of inflation, the more risk you must take. Not losing money requires giving up growth potential (e.g., checking and savings accounts), and potentially liquidity (as is the case with bonds, CDs, and annuities).

These are not problems. These are constraints. Growth = risk is a First Principle of Finance, and maybe life in general.

Another constraint to consider is your capacity for risk.

Risk capacity is not the same as risk tolerance. Risk tolerance is a subjective attitude towards money. Risk capacity is simply a math equation. How much money do you have? What is your income? How much do you spend? How old are you? Answer these questions and you will know your risk capacity.

If someone has a lot of money, spends less money than they receive every month, and is very old, they will have enormous risk capacity. Someone who has a small amount of money, no income, spends heavily, and is very young, will have a tiny risk capacity.

Someone can have high risk capacity but no risk tolerance. Someone may have no risk capacity at all and have extremely high risk tolerance. In fact, their risk capacity might be so low because of their high risk tolerance.

These paradoxical mindsets around money can be a problem or a constraint, depending on the person. A mindset that is flexible can have a problematic idea, let it go, and adopt a procession of new ideas until they the desired results.

A mindset that is rigid may have no ability at all to adapt to new information. This makes it a constraint. No matter what anyone says, or how much it might cost, a person will clench their fist around a terrible idea and never let go.

A rigid mindset is one of the most challenging constraints I’ve encountered in my work. The tax code is hard enough. Risk capacity is hard enough. Throw in an intractable opinion and it’s like having another tax code to deal with.

I once met a family who wanted their child to go to college and didn’t want to take on debt. They were invested only in silver and antique tractors and had zero interest in selling any units of either to help fund the college goal. That was a short meeting.

Viewing your financial life as an arena of problems bound by constraints can be an excellent first step in building a functional plan. By identifying what is a constraint versus a problem, then choosing the most meaningful problem to solve first, you will avoid wasting time fighting battles that can’t be won and hopefully make more progress towards what matters most to you.

If you want help identifying what parts of your financial life are constraints versus problems, we would love to talk to you.