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Learn to Calculate (#5 in Financial Independence Series)

5.  Learn to calculate.

The tensing of verbs has never been one of my strongest aspects when it comes to the English language; however, in this particular article, when I use the phrase “learn to calculate”, I want you to understand the tense of the verb as being an ongoing activity.  According to my assistant, that idea would technically be expressed in the present progressive tense (I am/you are learning).  That tense may not fit all my sentences as well, but my point is that learning to calculate is a critical skill for every investor, entrepreneur, real estate agent, etc.  It needs to start now and continue into the future.

I’m not just talking about mastering or having at least some familiarity with the use of a financial calculator so you can calculate payments and the various time/money calculations.  I’m also talking about a much more important calculation, one that isn’t just mathematical, but is based upon wisdom and experience.  This wisdom can be your own or can be gleaned from others.  I’m talking about calculating your risk.

For any investment you make, you need to calculate the cost for both the opportunity and the downside.  That cost must include not just the financial aspect, but the mental and emotional costs as well.  If an investment you want to make has such risk to it that you are constantly checking the value of the asset class, then perhaps the risk is far greater than you should be taking.  If an investment activity or business venture is going to keep you awake at night because of how much you have put into it and the degree of leveraged funds involved, it probably isn’t a good risk to take.  If, however, the upside is high and the downside risk is managed and low, then it is probably a good investment.

Too often, at the beginning of an investment, I see individuals who are all excited about the tremendous upside potential of a project, rehab or investment, but they scarcely take any time to think about what could go wrong and what they will do if that happens.  Face it, Murphy’s Law exists for a reason.  What can go wrong often does go wrong, and you need to be prepared.  I have discovered that preparation is one of the best forms of “Murphy repellant”.           

I’ll close by reminding you that “an ounce of prevention is worth a pound of cure.”  An hour of calculating the risk is worth weeks of trying to fix it.

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