Poker has exploded in popularity across the world in the last few years. Online poker has become a multi-billion dollar industry, brick and mortar casinos are clearing away slot machines to make room for poker tables, and everytime you turn on the TV you’re bombarded with the World Poker Tour or the World Series of Poker or a Celebrity Poker tournament or a Celebrities’ Pets Poker Tournament, and so forth.

There’s a lot to be learned about not only finance but life in general from the game of poker. One seemingly odd truth about poker is that on any given day the best player could lose to a far inferior player. The reason for this is that poker is often a game of very small edges. The players who win in the long-term are the players who put their money into the pot when they have the edge, no matter how small. Over time, these small edges add up to significant amounts of money.

As with money–and life–those who succeed are those who make the best decisions. That may not be especially profound, but many people think that as long as they’re not making bad decisions they’re doing okay. But those who truly succeed are constantly and aggressively looking for edges to exploit. What specifically do I mean by “edges”? Let’s take a look:

• You’ve got $100,000 in a Roth IRA invested in an S&P 500 index fund. As with most index funds, the management fees are very low, say .20% per year. You’re flipping through a magazine one day and you read an article about a different investment firm offering the same S&P 500 index fund, but this fund only has management fees of .10% per year. You recognize, of course, that the one with the lower fees is a better deal, but with such a small difference you figure it’s not worth the hassle of moving the money into the new index fund. Later on that night you decide to crunch the numbers just to see what the difference would be in the long-term. You’re shocked to find that the seemingly insignicant .10% difference in management fees, assuming an 8% annual return, would result an extra $45,706 dollars by the time you’re ready to retire in 35 years. That’s gonna pay for a lot of Bingo. So you spend about an hour filling out the paperwork and soon your money is in a fund that will give you a much higher payout when you retire.
• You have a line of credit at an extremely low interest rate. You’re in good financial shape, so you have no need to draw from the credit line, but you notice that the rate you can borrow for is much lower than the return on a low-risk investment opportunity available to you. You analyze the cash flows, INCLUDING taking into account the default risk on your investment opportunity (don’t forget that) and you conclude that the risk-adjusted rate of return is still considerably higher than the rate you can borrow money for. So, you borrow from the line of credit and invest the proceeds. In a few years, you’ve made a nice profit for just a few hours of work.

Finding edges doesn’t always have to involve large sums of money. Like the poker player, finding and exploiting small edges will ensure that you come out ahead in the long-term.

Perhaps you’re a coupon guru; you take full advantage of all the double coupons and manage to save thousands of dollars each year, which, of course, you invest wisely. You turn what sarted out as 25 cents off of toilet paper into a significant portion of your nest egg when you’re ready to retire. Small edge, big results.

Or perhaps you realize that you have a couple of credit cards that give you anywhere from 3-5% cash back on select purchases. You use the cards to buy things you would purchase anyway and pay your balance in full every month so you don’t pay any interest. You do, however, get the rewards (that is very edge-alicious). This small edge adds up and results in a hundred dollars cash back every month, which you, of course, use to buy heroin. Just kidding, you invest it! (Sensing a pattern here?) Again, small edge, big results.

Or perhaps you realize that if you consolidate all of your bank accounts with one bank they’ll give you reward points that you can redeem for things you would have needed anyway, such as gas cards, Airline tickets, etc.

The point is that life is full of these small edges. And perhaps more importantly is that most of the time it takes very little effort to exploit them. Often the hardest part is identifying them. So keep an eye out! The more you practice spotting edges, the easier they are to spot.

Edges: They’re all around you.

Further reading: Finding your ‘latte factor’ for a savings plan