Pimp Your Finances

There’s no shortage of financial advice in the media, but I have a problem listening to “experts”.  After all, they failed to see the economic crisis coming, so why should I listen to their advice on how to get out of it?

Looking for a new source of inspiration, I turned to a much older source of wisdom: J.R.R. Tolkien.  I just finished reading “The Hobbit” for at least the 10th time, and I found a new way to apply some of its lessons: to personal finance.

Here are 14 money lessons I learned from “The Hobbit”.  I chose 14, because stopping at 13 would (in the words of Gandalf) invite bad luck, or even worse, force me to dig coal for the rest of my life. 

1. Make sure to take advantage of unexpected opportunities

Bilbo neither desired nor sought adventure, but one fell onto his doorstep.  By being open minded about the dangerous quest, he was able to acquire a small fortune, as well as discover his true self.

He used his money to give presents to family and friends, and spent his days writing and visiting elves – two of his passions.  Even more important than the gold and silver he brought home was the fulfillment he found:

…he remained very happy to the end of his days, and those were extraordinarily long.

If we want to live happily to the end of our days, we must be prepared to take advantage of an opportunity, especially one like a down economy.  Now is the time to take more chances.  Not run and hide.

2. You’ll never get anywhere by following the crowd

Everybody wants a comfortable life, but most people just follow the crowd, and are disappointed when they end up like everyone else.

This happened in “The Hobbit” when Bilbo approached the trolls’ camp.  After he was captured, the dwarves came investigating one at a time, and all but one of them were caught unaware and ended up in the bottom of a troll’s sack.  No one did anything differently than the previous dwarf.

The lone exception was Thorin, who came with his sword drawn, and at least managed to put up a fight, even if he was captured in the end.

The lesson we can learn from this is that if you do what everyone else does, you’ll end up like them.  We all want to be rich and have an easy life, but most people spend more than they earn throughout their life.  It’s no surprise they end up in the poor house instead of on easy street.

3. Doing nothing is worse than doing the wrong thing

After the trolls had captured the dwarves, they just had to kill them so they could retire before the sun came up.  But thanks to the mischief of Gandalf, they got distracted and started arguing about how to cook them.  As a result, they didn’t realize the sun was rising, and were all turned to stone.

This is a dramatic example of inactivity, but it can be just as costly in real life.  Many people are often overwhelmed by options, and decide to do nothing out of fear of picking the wrong option.  This can be just as deadly if it causes you to put off something like saving for retirement.

4. Always remember there are those who are less fortunate than you

As Bilbo was escaping from the goblins’ lair in the Misty Mountains, all that stood between him and freedom was Gollum.  Bilbo was invisible, and could have easily killed Gollum as he tried to block the passage.

Bilbo was about to strike, when he decided that he couldn’t, as it was not a fair fight.

Gollum had no sword.  Gollum had not actually threatened to kill him, or tried to yet.  And he was miserable, alone, lost.  A sudden understanding, a pity mixed with horror, welled up in Bilbo’s heart…

The pity of Bilbo helped spare his own life (from the evil of the ring), and eventually came to rule the fate of many.

It’s just as important for us to remember that no matter what our situation is, there are always people who are less fortunate than us.  We have a responsibility to help others, and it could actually benefit us in the long run.

5. Be careful how you treat others throughout your life and career – you never know when you’ll see them again

At some point before the story of “The Hobbit” takes place, Gandalf rendered a service to the Lord of the Eagles by healing him of a poisoned arrow wound.

It is lucky that Gandalf did so, because he later needed the Eagles’ help.  Several times, in fact.

The Eagles saved Gandalf, Bilbo, and the dwarves when they were surrounded by goblins and wargs.  The Eagles then fed them, and carried them further along on their journey.

Later, the Eagles turned the tide at the Battle of Five Armies when they joined the fight, dislodged the goblins from the mountain sides, and freed the Lonely Mountain.  The Lord of the Eagles eventually became the King of All Birds.

This is an especially important lesson to remember.  Be careful to always treat others with respect, and don’t burn any bridges with co-workers.  You never know who may end up in a position of power, or decide your fate.

6. Once you make a plan – stick to it

Unfortunately for Bilbo and the dwarves, their path led through Mirkwood Forest – a “dark, queer, and savage” place, where food and water are scare.

The only way they could make it through alive was to stick to a little known path that led straight through the forest to the Lonely Mountain.  Before parting from them, Gandalf warned Bilbo and the dwarves:

Straight through the forest is your way now.  Don’t stray off the track! – if you do, it is a thousand to one you will never find it again and never got out of Mirkwood; and then I don’t suppose I, or any one else, will ever see you again.

In spite of the dire warning, Bilbo and the dwarves left the path when they were close to the eastern edge of the forest.  The worst part of the journey through Mirkwood was over, but under stress, they gave up hope.  As a result, they almost ended up dead and/or imprisoned indefinitely.

I know a few people that have done something similar with their 401K plans.  Before the economy crashed, they took the time and effort to make a plan.  They stuck to it in good times, but when the recession hit, “they had quite forgotten in what direction the path lay, and they were all hopelessly lost….”

They sold their stocks when they were at their lowest, and chased the profits and safety of bonds.  As a result, they sold their stocks before they had a chance to rebound, and bought into bonds when they were in high demand, and thus possibly overpriced.

As if that wasn’t bad enough, I know some people who halted contributions to their 401K , and others who pulled their money out altogether.

The best thing to do when times are hard is to stay the course.

7. It pays to have a network

As a result of straying from the path, Bilbo and the dwarves ended up at the mercy of giant spiders.  Thanks to Bilbo (the only one who was really able to fight back), all the dwarves were able to escape from their web-based prisons.

If any one of the dwarves had been alone, or even just travelling without Bilbo, they all would have been killed.  They survived because they had each other to depend on.

It pays to have a network of personal and business contacts that you can depend on, especially when times are hard.  Hopefully you won’t be facing death by giant spiders, but it’s good to have help if you need it.

8. No one cares about your priorities as much as you

After Bilbo escaped from the Misty Mountains by himself, and then twice saved the dwarves in Mirkwood, they had a great respect for the hobbit.  But they still didn’t have his best interests in mind.

When their attempt to find the secret door had sputtered out, the dwarves wanted Bilbo to take greater risks to help them win back their treasure:

What is our burglar doing for us?  Since he has got an invisible ring, and ought to be a specially excellent performer now, I am beginning to think he might go through the front gate and spy things out a bit!

Any attempt to go in through the front door of the Lonely Mountain would have certainly ended with a crispy, dead hobbit.  In their greed, the dwarves were beginning to forget about the well being of Bilbo.

No one cares about your health, wealth, or priorities as much as you.  It may be a good idea to seek the help or advice of money professionals, but they may just be trying to make a quick buck.  You’re trying to live your life.  Make sure you take responsibility for yourself and your money.

9. Pay close attention to your money

After Bilbo steals the great two-handled cup from the dragon’s hoard, Smaug realizes it as soon he wakes up:

Dragons may not have much real use for all their wealth, but they no it to an ounce as a rule, especially after long possession… He stirred and stretched forth his neck to sniff.  Then he missed the cup!

Had Smaug not realized the cup was gone, Bilbo may have been able to sneak down day after day, stealing bits of treasure one piece at a time.  But the dragon realized immediately, and was able to take action to try to prevent it from happening again.

It’s too bad that more people don’t take such a cautious approach with their bank accounts, credit cards, and even retirement accounts.  It’s easier to recover from fraud or identity theft when you discover it immediately.  By monitoring accounts on at least a weekly basis, you can help protect yourself from invisible burglars.

10. Be careful with your personal information

The second time Bilbo sneaks down to Smaug’s lair, he has a lengthy conversation with the dragon.  Even though Bilbo was learned in dragon lore, he almost fell under his spell.

While trying to answer Smaug’s questions without telling his true name (which is wise), or flat out refusing to answer (which is also very wise), Bilbo unwittingly gave away more information than he realized.

Some of it was nonsense to the dragon, but other parts made all too much sense.  As Bilbo became more proud of his riddles, he revealed that he was a barrel rider.  This immediately let the dragon know that he and the dwarves had help from the men of Lake-town.

Later that evening, Smaug left to obtain his revenge.  Even though he perished in the act, he still destroyed much of Lake-town, and managed to kill at least a quarter of the population in the attack (and many more that later died of sickness and hunger).

It’s possible that if Bilbo had refrained from his poetic boasting, Lake-town would have been spared.  Bilbo put himself, his companions, and his benefactors in great danger when gave away details about his identity to the dragon.

We should all be more careful with our info than Bilbo was.  It’s too easy to unwittingly share personal information, be it in the form of receipts, personal data that we throw away, or even stolen mail.  And then you have to be mindful of online theft, such as phishing scams, which mimic real financial institutions to steal your passwords.

11. Watch out for the effect of fees and surcharges on your wealth

As the conversation between Smaug and Bilbo continued, the dragon tried his best to work his way under Bilbo’s skin.  He nearly succeeded when he reminded the hobbit of the difficulty in taking the treasure home:

I don’t know if it has occurred to you that, even if you could steal the gold… you could not get it very far?  Not much use on the mountain side?  Not much use in the forest?  Bless me!  Had you never thought of the catch?  A fourteenth share, I suppose, or something like it, those were the terms, eh?  But what about delivery?  What about cartage?  What about armed guards and tolls?

Even though Smaug was trying to cause Bilbo to despair, his words were not far from the truth.  Had things have turned out differently, Bilbo could have lost a significant portion of his fortune in the act of transporting it home.

The same is true of expense fees andyour investments.  USA Today gave an excellent example, when they showed the effect of fees on a 401K  over the course of thirty five years.

The example they gave assumes that you have $25,000 in your account, and will be getting a 7% return on your investment.  If expenses are only .5%, you’ll have $227,000 in your account when you retire.  However, if the expenses are increased to 1.5%, you’ll only have $163,000 – a drop of  almost 29%.

When it comes to fees and expenses, even a slight difference can make a big impact on the amount of gold and silver you take home.

12. Don’t let pride be your downfall

If Smaug had been more careful, no one could have slain him.  But he was full of pride, and showed off his stomach to Bilbo without even considering that he may be giving away his one weak spot.  His folly continued in the attack on Lake Town.  He was:

…reckless in his rage, taking no heed to turn his scaly sides toward his foes, seeking only to set their town ablaze

As a result of his carelessness, the great captain Bard was able to piece his one weak spot with an arrow.  There is no other way that Smaug could have been defeated, and his victory would have been utterly complete if he had been more careful.

Don’t let pride be your downfall.  Avoid spending money carelessly, especially if you’re doing it to impress others or keep up with the Joneses.  It won’t work, and it could bring about your downfall in the form of bankruptcy or foreclosure.

 13.  Wealth is not a destination.  It is just the means to an end

The dwarves barely had a plan for how to reclaim their wealth.  Their plan for what to do if they succeeded was non-existent.

Against all hope, Smaug was defeated, and the dwarves were able to reclaim their former kingdom.  In spite of all the help the help they received from Lake Town and the suffering of its people, Thorin was not willing to share any of their wealth with the people who helped him so much.

In fact, the dwarves would rather starve than share their gold.  Even Roac, one of the wise Ravens who had the gift of language, could see this:

How shall you be fed without the friendship of the lands about you?  The treasure is likely to be your death, though the dragon is no more!

The dwarves should have realized that wealth is not a destination.  It is merely a tool used to achieve fulfillment – be it emotional, spiritual, or in the dwarves’ hungry case – physical.

Even if you have the best financial plans, you still have to figure out what makes you happy.  Having all the money in the world won’t help you if you don’t know what you want to do (or what you’re going to eat).

14. There are more important things in the world than money

I saved the best and more important lesson for last.  There are always more important things in the world than money.  As Thorin lay on his death bed, he praised Bilbo’s values and character:

If more of us valued food and cheer and song above hoarded gold, it would be a merrier world.

There is more to life than money.  Friends and family should be a priority.  It’s also important to live a life of honesty and integrity, while enjoying the simple things that it has to offer.  All that is gold does not glitter, so make sure you take the time to live a rich life, regardless of how much money you have.

I hope you’ve enjoyed this list as much as I enjoyed writing it.  J.R.R. Tolkien is one of my favorite authors, so it was truly a pleasure.

In closing, make sure you try reading Tolkien’s books if you haven’t already, and when it comes to your money, always remember to ask yourself: “What would Bilbo do?”