One of the most important rules in your wealth-building toolbox is knowing when to break the rules. In this episode, we discuss a legal and economic theory called “efficient breach.” It highlights when you can break the rules in business, and when you should break the rules so you can start creating true wealth.
Welcome to Rich & Thin™ Radio, the only podcast that helps you get everything you want, and get out from under everything you don’t want.
I’m Kelly Hollingsworth and I’m very glad you’re here. If you were with us last week, you know that April 2019, this entire month, we’re talking about advocacy. When you advocate for something, that means you are supportive of it, and the reason I’m talking about advocacy all this month is because I have seen so many situations lately in which my clients are not advocating for themselves. Rather than supporting themselves, the quality of their own lives, and the level of their own profitability, they are actually advocating for someone else’s quality of life and profitability, to the detriment of their own.
So last week I introduced the topic of advocacy for this entire month, and I said that when we’re talking about advocacy, we are dealing with rules. Because if you’re advocating against yourself, it is because you have an imaginary rule in your brain that is causing you to act counter to your own interests. That’s what we discussed last week.
And I also told you that this week we would discuss breaking the rules, and specifically when it is okay and even advisable to break the rules, in your wealth-building efforts.
The idea that there are times when you can and should break the rules is something I want to discuss because lately I’ve also been seeing an insistence upon following the rules that are not necessary to follow, and specifically I’ve been seeing this in agreed-upon rules in our interactions with other people. In lawyer-speak, we often call these agreements “contracts.”
An example of a contract could be, “Yes, I will marry you and till death do us part.” That’s a marriage contract. You agree to marry your spouse, your spouse agrees to marry you, and that’s it. You have a contract regarding a lifelong arrangement.
Another example could be in employment. You agree to work for your employer for a certain length of time, and they agree to pay your salary. This is a lot like a marriage. You’re in your new relationship with agreed-upon rules. It’s not for life, but it is for a length of time, and that’s the deal.
This also can come up in a business context. For example, you could agree to go through a year-long business-building program and not change the niche that you select at the outset of the program as a condition of being in that program. If you started out in the program saying that you wanted to work with lawyers, and then you changed your mind and said that you wanted to work with dentists, that would be breaking the agreed-upon rules, as far as that your participation in that group goes. That would be breaking your contract and technically, it would put you in breach of contract.
The idea of being in breach freaks a lot of people out. They never want it to happen. They want to be “good people.” They never want to do anyone dirty, and none of us do, and “doing people dirty” is not what today’s episode is about. Today what we’re talking about is that often we get so freaked out about the idea about breach and never wanting to be in breach, that often we stay in situations, we won’t get out of them, even if leaving the situation would do no one any harm, nothing untoward would occur, and the reason we do this is because we said explicitly or implied that we would stay in the situation and we want to honor the deal.
And here’s the funny thing. That isn’t what we want as a society. There are times when we want people to breach their agreements. We want them to change the deal. If you staying in a situation is causing you to serve less than you could be serving, to serve at a lower level, or to serve fewer people, and in a way that does not bring all your strengths into what you’re doing, that would harm others obviously. You staying small doesn’t help anyone. And it also would harm your overall enjoyment of what you’re doing and your earnings. And we don’t want that as a society. We want no one to remain stuck in a role where they are serving at a lower level and earning at a lower level than they could be.
So we’ve created a legal concept called efficient breach. And what it says is that if it would be more efficient for you to renege on your agreement, to back out of the deal, to breach the contract, even though you said you wouldn’t, you are allowed to do that. You might even be considered applauded for doing that, and all you have to do is pay the other party damages that they may suffer as a result of your breach.
This is a general legal principle, you should not apply it to any contractual situation you’re in unless you’ve looked at the contract and seen what the damage provisions are, with the help of your own attorney and not a podcast host, certainly not me, but I want to highlight this concept to you as a coach, because from a coaching perspective, it highlights a very important idea that I don’t think a lot of us who aren’t schooled as lawyers are aware of, and the idea is that we want people to breach their agreements if doing so is better for everyone involved.
And often, it is better for everyone involved if you breach your agreement, because often, the other party suffers no damages when you breach, and might even be better off as a result of your breach. Today I want to share with you a couple of examples of that so you can see what I’m talking about, but first I want to tell you a story that highlights the importance of recognizing the fact that you always have the right to change your mind.
This may sound obvious. You may be thinking, of course I have the right to change my mind. But what happens in practice, with my clients who are struggling, is that in various financial and business situations, very smart, capable people often don’t realize in a particular context that they have this right to change their mind.
So here’s the story. I once coached a woman who was in a relationship with a very wealthy man and he wanted her to quit her job and travel the world with him, and he suggested that they get married. And she was game to quit working and go around the world for a decade or two or three, but she didn’t want to get married. She told me, “No, I don’t want to marry him, because if I marry him and then I want to leave, I won’t be able to.”
This was fascinating, because she had been married before and divorced before. So she knows that if you want to leave a marriage, there’s an exit strategy and it’s called “divorce.” In her first marriage, she had been accepted to a deadbeat, and when he left, she accepted all the debt. So her reluctance to marry again, wasn’t about, I just don’t ever believe in divorce, it’s nothing I could ever do. That wasn’t the situation at all. The situation was, she was thinking that if getting out of a marriage contract was financially advantageous, somehow that wouldn’t be allowed. It felt improper in that context.
And notice the perverse result this thinking got for her. She got married when it hurt her financially, but she wouldn’t get married when it would help her financially.
So essentially what was happening is she was looking at the marriage contract, “‘till death do you part,” and using that against herself. Because what happens when you marry someone, particularly in a community property state, where this woman lived? It’s not that you can’t leave. Every state in the union now offers its citizens a separation mechanism called no-fault divorce, so either way, married or unmarried, she could leave that relationship any time she wanted to. But if she was married to him, she could leave with assets, because everything he earned during the course of the marriage was community property, and half of it would have been hers.
So what was happening in this example is not that she truly believed, if you get married you’re stuck. She knew that wasn’t true. What happened was that she was advocating against herself and her financial security, and she was using, “I’m not allowed to break this deal. I’m not allowed to change my mind,” as the pretext for doing so.
So what did I tell this woman? I told her, “You always have the right to change your mind.”
And this illustrated to her that what she was doing was setting a ceiling on the money she had in her life. Her brain wanted to believe that it was a legal reason, but it wasn’t that at all. She was uncomfortable having money, and she was comfortable being on the financial edge, and the idea that she might not live on the edge at some point in the future was very unsettling for her. And so she was using this idea that she didn’t have the right to change her mind to allow herself to stay in that comfortable place of being on the edge financially.
And this is what I see my clients doing not just in their personal lives, but also in their business lives. I told you that story so you can see an example of how we use the idea that we’re not allowed to change our minds as a barrier to earning more and having more financial security.
Now I’ll give you a couple of business examples so you can see how we do exactly the same thing to ourselves there as well.
I have a client who is currently employed, and every year she signs a contract that says she will continue to work for the company for another year. This contract is usually signed several months in advance of the upcoming year starting. And the existence of this contract, and the idea that she can’t break it, is preventing her from thinking that she can go out and actually ramp up her business, because if the business does take off, then she’s stuck. She’s built up the business, it needs her attention, but she has to go back to work with the employer for another year because she signed the agreement.
It’s an endless loop. She keeps signing the agreement, because she doesn’t know if the business is going to take off, and then she holds back in her business, because she thinks she has to work for the company for another year.
In a situation like this, the most helpful concept I can teach you is a legal and economic concept called efficient breach. What happens in most contractual situations is that if you don’t do what you agreed to do in the contract (if, for example, this woman doesn’t go to work at the company even though she signed an agreement to do so), she is considered in breach of contract.
So what does it mean to be in breach of contract? Is it a big deal? It can be, but typically, it’s an utter non-event.
Generally, when a contract is breached, the other party has the obligation to mitigate their damages. If, for example, you lease an apartment, and you break the lease, you move out and don’t pay your rent for the rest of the lease term, but your landlord can go out and find another tenant to pay exactly what you paid in rent or maybe even more, there have been no damages. There was a breach, but the breach is really a non-event because if there aren’t any damages, your landlord has no recourse against you.
They could take you to court and sue you for breaching the agreement, but they wouldn’t be awarded anything in the lawsuit even if they win, because there were no damages. They might be awarded a dollar in nominal damages, that would say, Yes, technically you’re right. But there’s no damage so there’s no meaningful award for you in this lawsuit.
And it’s exactly the same thing with an employment contract. If my client signs a contract to work for another year, her business explodes, and she decides not to fulfill that contract, she is in breach. But if her employer can go hire someone to do the job at the same salary, the breach causes no damages. The employer may even experience benefits. They might be able to hire someone who works for less than my client does. The law considers this a win, and this is a great example of when the law wants you to break the rules. It’s an efficient breach because everyone is better off. The employer saves money, gets a comparable employee, the new employee gets a job, and my client, the exiting employee, gets to go do the things she really wants to do rather than staying stuck for one more year in a job that she doesn’t want to do. On balance, the employer could be better off because they have someone in the job who actually wants to do the job.
So what happened when my client realized this? Exactly the same thing as my client who was traveling the world with her wealthy boyfriend. She realized that she was comfortable with a ceiling on her earnings. And she was using that employment contract, and the idea, not the truth, but the idea that she couldn’t break it, as what sounded like a very reasonable reason not to make a killing in her business.
So efficient breach is a concept I would like for you to put in your back pocket. Sometimes breaking the rules is the exact right thing to do, and this is an important concept to keep in mind throughout all aspects of your life. Many of us have never signed an employment contract and never will, but we all operate under express or implied agreements, in too many aspects of our lives to count, and sometimes those express or implied agreements stop working. They start costing us money and they start costing us happiness, but we don’t want to change them, even though it is completely within our power to change the arrangement, and rather than admit to ourselves that we don’t want to change our minds, and we don’t want to change the deal, we pretend that we can’t change the deal. That sounds more palatable than, “Yes, I realize I could leave this unacceptable situation, but I’m not going to because I don’t really want to. I’d rather just stay stuck.”
Our brains will do anything to get out from under that kind of cognitive dissonance, and one way a great coach can help you is to show you how your brain is doing this kind of thing to you, and how it is costing you your money and financial security and long-term happiness.
Our brains are so interested in keeping us stuck that often we won’t change the deal that we’ve entered into with someone, even if the deal is over and the other person would have no idea that we are changing the deal. Here’s an example. I recently worked with a client who had gone through a business-building program where she agreed not to change her niche for a year, and then, way after she’d left this program, when she wasn’t pursuing her business in that niche, we were sorting through the thoughts that were preventing her from moving forward with her business, and obstacle that emerged was that she didn’t want to do that niche. It just wasn’t interesting to her, but she had agreed to do it, and she wasn’t going to change it.
And what was super fascinating about this is the other people would not have even known. She was out of the program, it was long over, and no one from that program would have cared or was even paying attention.
And maybe this client isn’t the best example of refusing to change the deal, because she wasn’t actually abiding by an agreed-upon rule in a current relationship. She was following an imaginary rule. We discussed those last week.
But what I’d like you to notice here is that this also happens with people who are in the agreed-upon situation. The get into a business-building program, they start working with the agreed-upon niche, what they said they would do at the outset they say they won’t change, and then, just because they said they wouldn’t change it, they refuse to change it, even when they conceive of a much better niche and a much better opportunity. They find a niche that is smack-dab within their super-power and that they’re super fascinated with and that they believe they can make a lot more money in.
Why don’t they change it? For the sole reason that they don’t want to change their mind, even though the other person in the relationship, the company that’s offering the business-building program, wouldn’t suffer one cent of damages as a result.
This kind of thing kills wealth and it’s so unnecessary. So what I have for you today is quite possibly the most important thing to know about agreements: If you are “locked” into an agreement, you’re feeling stuck to continue doing something because you said you would do it, 99 times out of 100, or maybe 100 times out of 100, this feeling of paralysis is coming from your head. The reason you’re feeling paralyzed is not because of your actual legal situation, but because of a thought in your head that says you can’t change the situation even though the law would give you an out, and maybe even applaud you for availing yourself of an exit strategy. And the reason you’re doing this to yourself is because on some level your brain is more comfortable advocating against you then it is advocating for you.
Advocating for yourself means always being aware of the fact that you can change your mind, and that changing your mind when it’s efficient to do so is the right thing to do. When something isn’t working, the most important thing you can do is get going on what will work. You don’t leave anyone high and dry. If they suffer as a result of you changing the deal, if they are damaged in some way, you compensate them for their damages. But if their damages are far less than what you could earn by breaking the deal and going your new way, that is exactly what you should do. At that point, it’s not about being a good person. It’s not about doing someone dirty, either. It’s just about the math. And if you can put the other person in exactly the same place they would have been, or maybe even in a better place, and put yourself in a much better place, and no one has been harmed, that is exactly why we have the legal and economic theory of efficient breach. As a society, we want to move forward, we don’t want people stuck in unproductive or less-than-optimal situations just because at some point in the past they agreed to be in the situation that eventually becomes unproductive or less than optimal.
I hope this is helpful for you. I can’t tell you how helpful it is for people to get out from under a situation that isn’t working for them anymore, and it can be a personal situation, too. Often we find ourselves doing things in relationships, with our family, our friends, our spouse, just because that’s what we’ve always done. And as you change, as you grow into the best you that you can be, the things you used to do may be things you don’t want to do anymore and that don’t make sense for anyone. You might want to start breaching implied agreements, or even express agreements, with people in your life as you change from who you were and become who you want to be. I’m definitely finding this as I’m making my Rich & Thin™ dreams come true this year, and I’m sure you will as well.
So that’s what I have for you this week. Efficient breach is a magical concept in your wealth-building toolbox. I hope this is helpful. I hope that if you need some help you will get in touch. Kelly@Richandthin.com. That’s Kelly with a “Y” at richandthin.com, or go to richandthin.com where you can access my calendar and set yourself up with a free but very valuable session to speak with me about what’s weighing you down, so that you can start getting everything you want and get out from under everything you don’t want. That’s what it means to be rich and thin and that is where we’re all going this year, so I hope you’ll let me know if you need some help, and I hope you’ll join me for our body episode later this week, where we will discuss breaking the rules in order to get the body of your dreams.