Benjamin Graham was the most successful investor the world has ever known. Over the twenty-year period from 1936 to 1956, he achieved a 20% annual return on his stock investments (vs a 12.2% return for the market overall). Legendary investor Warren Buffett was one of Graham’s proteges, and called him the most influential figure in his life after his own father.

Don’t worry, this post isn’t about investing or the stock market. It’s about a principle that Benjamin Graham wrote about in his magnum opus The Intelligent Investor that can be applied to virtually every area of your life (but most especially your financial life).

Graham’s philosophy of investing was radically different than most other investors of his time–as a matter of fact, it’s still the exact opposite of what most people do when they are trying to pick stocks.

Most people try to pick stocks that they think will go up in value. But in order to do that, you would have to make a guess about the future. That’s where the breakdown occurs.

Since no man can predict the future, Graham focused on picking stocks that were undervalued at that moment. See the difference? One kind of investing tries to predict the future, and the other kind tries to understand the present. And in Graham’s case, the results speak for themselves.

This is the principle I call becoming a student of current reality. Ignoring this principle is what originally got me into trouble with credit and debt several years ago.

Recently out of college and determined to become an all-star entrepreneur, I was working on business projects 24/7, thinking that one in particular was really close to paying off big time. If it worked, I would quickly make my first million and have a business empire all my own.

But in anticipation of getting that big payday, I spent too much money. And since I didn’t have a “real” job, I was burning through my savings and charging stuff on my credit cards at the same time. The balances were going up, but who cared? I was about to make enough money that a few thousand dollars in credit card debt wouldn’t matter.

Except, that payday never came. I maxed out my credit cards, and didn’t have enough money to eat, let alone continue funding my business ventures myself. Add to that mix the fact that my identity had been stolen, and you had a perfect storm that took me out of the game completely.

My mistake was to make my financial decisions based on what I thought would happen in the future (a big win with my startup) versus the current reality (I have no actual income and I’m depleting money it took a long time to save up).

You’re probably thinking that this was a stupid mistake to make, and you’re right. I even thought so at the time. But this is a mistake you can succumb to even if you spot it. It’s not like a math error where you can just fix the decimal place and be on your merry way: it’s a strategy of self-justification the serves to enable your bad financial habits, whatever they are.

I see this play out again and again in people’s financial lives. The way they tell their stories, they’re always just one big break away from having their finances together once and for all.

Client: “…as soon as we get that promotion/settlement/inheritance/winning lottery ticket, then we can pay off our debt and we’ll be fine.”

Or they will tell me how much debt they have, only to let slip later in the conversation that the real number is much higher:

Client: “Oh, the medical bill? Yeah, but we’re about to pay that off as soon as our son graduates and our income goes up.”

Me: “OK, but the current reality is that your debt is actually twice what you originally said.”

Client: “…well, yeah. I mean, I guess…”

This is human nature, and you’re not an evil person for having this strategy. That’s all it is–a strategy you employ, usually subconsciously, to keep yourself where you are.

A Better Way: Studying Current Reality

So if this is one of your strategies (and if you’re breathing, it is!), then you will benefit by becoming a student of current reality.

Unlike predicting the future, understanding the present is completely within your grasp. Incomplete information notwithstanding.

The ancient Chinese used a system of divination called the Yi Jing. It was based on the idea that everything is cyclical; an accumulation of one thing necessarily gives birth to its opposite. They observed this in their own history: a new dynasty would be established amid great fanfare, would implement reforms, and the people would prosper. Out of that prosperity, however, arose a tendency toward tyranny and oppression. When the oppression rose to a certain point, the people rebelled against the old dynasty and established a new one. The cycle repeated itself.

Central to their understanding of the world around them was the idea that it was of paramount importance to understand the forces in play around you at any given time. Where were they in the cycle? Who was strong and who was weak? Who was ascendant and who was falling? By thoroughly studying these kinds of questions, they gained the ability to balance on whatever changes they encountered.

To bring the distinction up to modern times, take a look at where we are right now. Who knows whether the stock market will crash, double in value, or undergo a decade of stagnation? Nobody. But what you can understand are basic facts about the current reality. The current reality is that the broad market is overvalued right now. That doesn’t mean a crash is right around the corner. It just means that current reality is that now is not the best time to buy.

This is the beautiful thing about becoming a student of current reality: you don’t have to be able to predict the future in order to make savvy decisions in the present. By understanding the forces in play around you, you can skilfully navigate the vicissitudes of modern life and secure prosperity for yourself and your family in the long run.

It’s Time for a Sober Self-Assessment

This distinction is so valuable that there’s virtually no time it won’t help you in whatever you’re trying to achieve. But it is particularly valuable for people taking on credit repair and getting their financial lives in order. Before you can get where you want to go, you first have to know where you are.

Here are some specific exercises you can apply as you see fit:

• Get ruthlessly specific with your current financial reality. How much debt do you have, down to the penny? Collect all the statements and documents related to each creditor. Make a separate file folder for each one, and sort them accordingly.
• Read every word in every document you have, paying special attention to the original contract/loan documents. Master everything in there so that you know at any given time the details for each loan you have outstanding.
• Which accounts are current? Which are in collections? What entity actually owns your charged-off debts? How many times have they contacted you? Again, collect any letters or documents you have for each collector and put them in separate file folders.
• Go even deeper with your debt. You should already know exactly how much you owe to whom. Now figure out how long it will take you to repay those debts. There’s a free Google spreadsheet in my toolbox (at the top of the right sidebar). Plug your numbers in and take a look at the different pay-down scenarios.
• Take an inventory of your monthly income and expenses. Use a tool like Mint (which is also in my toolbox) to see how much you spend every month for food, rent, auto, etc. Are the numbers different from your expectations? Get in there and really study your expenses. Master them. Get to know them inside out. How much are you really spending? And how does that differ from what you think you’re spending?

If you do these things, you’re well on the way to understanding your current reality. Reflecting on your answers to the questions above, if you were unable to recall those numbers off the top of your head, that’s a sure sign that you need to investigate those things in order to bring them into the light.