What Risks Are You Willing to Take?

January 31, 2014

One of the things that always astounds me is the behavior of people when there is money on the table. The bigger the pile, the more interesting the behavior gets at times. In my days working with clients of substantial means, sometimes their decision making would particularly puzzle me. 

A recent court case brought up a puzzling set of choices by an individual.  The creator of Beanie Babies was in court recently to deal with the issue of failing to pay taxes on $25 million in income that he had hidden from the IRS.  The part that leaves me shaking my head is that he thought he could do this without any consequences. It’s not like as a billionaire his tax returns don’t get a little bit of extra scrutiny. And, one of the reasons he isn’t serving jail time right now, is that he made a $20 million charitable contribution that the judge lauded.  So, he’s willing to make huge charitable contributions, which are tax deductible to an extent, AND willing to risk jail time to avoid paying taxes.

I don’t know about you, but if there’s one agency I don’t want to tick off, it’s the IRS.  If there’s anything I’m doing that could eventually lead to prison time, you can bet that I’m not going to do it. I just don’t think I’m the prison type! I have nothing against Martha Stewart, but it’s just not how I want my life to play itself out.

That leads me to a question that translates to a lot of different areas of life.  What risks are you willing to take on and what risks won’t you accept?  I won’t mess around with the IRS and I probably pay a couple dollars more in taxes than I could get away with were I to be more aggressive on my tax returns. Like I said, orange jumpsuits aren’t what I want to wear around all day.

But, I’m perfectly willing to jump out of an airplane or off a cliff with a kite attached to my back, or go deep underwater with an air tank and some flippers.  It’s not like risk is a foreign concept to me.  I guess I compartmentalize risk into different categories.  I like to pay my bills a little bit early so that I don’t risk late fees. I pay a bit more than the minimum on any debts so that I don’t risk long term debt problems. Yet, when people find out that I occasionally step onto a rugby field and run around getting hit by younger, faster guys, they consider that a crazy risk.

Take a look at your life.  What risks are you taking on currently that you might want to re-evaluate in order to live a life with a bit less potential for disaster?  Take a look at some of these questions and if you are doing some of these things, you might want to make 2014 the year you make a few small changes:

  • Are you “being creative” with your taxes? How big a difference is that creativity making vs. the potential penalty?
  • Are you walking around without health insurance?
  • Do you take advantage of company benefits like disability insurance?
  • Is your emergency fund big enough to handle a 3-6 month disruption in your income?
  • Are your auto, homeowners, renters, etc liability limits adequate?
  • Do you have enough life insurance for your needs?
  • Do you know where your money goes?  How much do you spend on a monthly basis and is it more than you can sustain while trying to reach other goals?

Ty Warner (the Beanie Babies creator) walked around taking the risk of earning millions in income that he didn’t want to report and pay taxes on.  It could have cost him several years in prison. That was a major risk to take for what (in proportion to his income) was a small amount of money.  The reward (smaller tax burden) didn’t seem nearly enough to justify a potential prison sentence.

That part is what intrigued me with his case. A huge risk was taken for a very small reward. That isn’t exactly brilliant. You’d think that he would make more balanced choices.

Are you doing the same thing with any of the questions above?  Are you taking a big risk only to have a small reward?  Take a few minutes to be honest with yourself and if you have some changes to make, be thankful that you won’t be making them in front of a judge and crowd of reporters!