This curated post is authored by Jane Hwangbo, Founder, Mission Over Money, California
Ayn Rand was a ball-buster and philosophical mage. She once said,
Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.
In order to reach and sustain lasting success with your money, you must strive to know the terrain like a professional — where people typically hit bumps and flat out, an estimate of the time it may take to reach your destination, and of course, how the pros did it before you.
You need to become atypical in your habits and your mental fortitude. Finance rewards people who can work through their challenges and level up, one degree at a time.
Money is no different from everything else you know to be true. You can’t cram your way into sustained wealth, nor can you cheat your way to the top without paying a price.
Here are some rules of the road for a higher quality financial life.
1. The math cuts both ways.
The math in finance is simple — addition, subtraction, and multiplication.
If you get the concept of compounding, however, you’re 80% golden.
“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” — Albert Einstein
Your money grows like this when you assume a 5% growth rate, once a year for three years through the power of compounding:
1*1.05 = 1.05 after the first year;
1.05*1.05 = 1.1025 after the second year;
1.1025 *1.05 = 1.1576 after the third… the total is derived on a bigger and bigger base. Growth upon growth.
Investors look for ways to get paid with compounding. The math helps them.
People with debt get buried from the effects of compounding. The math hurts them.
It’s the same math. Use it to your advantage.
Accept that your path to wealth will never be linear. Peaks, valleys, zig-zags, and flattening periods of time may ensue, but your story will rarely be straight. Your success will depend on your ability to view your own victories and failures with some emotional distance.
The bottom line: Understand and apply the mathematical concept of compounding interest in your daily life, and it will change your trajectory with money.
2. Never follow the money.
This rule kicked me down. I worked for years on Wall Street as a top-paid analyst, until the lack of personal fulfillment wrecked me first on the inside and then so terribly on the outside. My whole life fell apart.
The irony is that “Follow the money,” was and is never true. In the 80’s, droves of people became doctors for the sake of glamour and financial security. Thanks to regulatory shifts in our health care system, being a doctor’s not as hot as it used to be (and it comes with a lot of debt).
In the 90’s, being a lawyer was hot, hot, hot. These days? Enrollment at law schools is dwindling. In the 2000’s, you couldn’t beat choosing computer hardware engineering as your profession. We kissed that goodbye after the the tech bust of 2001. Today, app developers are king. You get the drift.
Everything changes. Don’t mold who you want to be based on what you see today.
The only thing you can control is how skilled you become at whatever it is that you really want to do (your purpose). Set your intentions on what you love, and work your finances toward getting extremely good at whatever that is.
The dividends will be infinite vs. fleeting.
There is no surer way of living a mediocre financial life than deciding the path of your life based on the question of which way will make you the most money. Never chase the money.
3. Beware the silent killer.
When the price of everything you need to live a basic existence goes up by 2–4% per year, the money you make every year must increase by that much as well (or you’re getting poorer). The 2–4% rise in costs is called inflation.
It’s easy to miss the fact that you’re falling behind — first, because it’s painful to admit and second, an erosion of 2–4% is just small enough to fly under your radar.
Inflation is the silent killer of your wealth. In the 70’s, we had a bad case of this disease. Today, it eats away at your money at a steadier, smaller clip of a few percentage points every year.
Remember that inflation is a real thing when it comes time to ask for a raise. Flat means down in financial terms.
4. Super success requires second-level thinking.
We cannot solve our problems with the same thinking we used when we created them. — Albert Einstein
The most successful people in finance are second-level thinkers. I’ll explain with an investing example.
Achieving so-so long-term results in the market is simple enough and cost-efficient through passive investing vehicles such as index exchange-traded funds (“ETFs”). In fact, I would highly recommend this method for anyone at the beginning stage of their investing learning curve.
*Don’t stress if you don’t know what some of these words mean— “ETFs” are just an easy and cheap way to earn an average market return. Keep reading.*
For those of you who aspire for more than average, you need to understand that the market ultimately rewards second-level thinkers, a concept popularized by famed distressed-debt investor, Howard Marks of Oaktree Capital Management. Every professional investor you’ve ever heard of (Warren Buffett, Charlie Munger, and Jeffrey Gundlach) lives and dies by this psychology. What I mean by second-level thinking is the following.
First-level thinking says, “It’s a good company; let’s buy the stock.”
Second-level thinking says, “It’s a good company, but everyone thinks it’s a good company, and its future may not be as bright as the past. Therefore, the stock is over-rated and over-priced today; let’s sell.”
First-level thinking says, “I think the company’s earnings will fall; sell.”
Second-level thinking says, “I think the company’s earnings will fall far less than people expect, and the positive surprise will cause the stock price to rise; buy.”
First-level thoughts are exactly as they sound: simplistic and superficial. They’re quite seductive because the thoughts themselves are true.
Perhaps the companies you’re evaluating are good companies, but are not priced to be good investments. Great investors count on average investors to think and behave along first-level thinking, creating generations of average investor roadkill. The current market price of any security already reflects first-level thinking; it’s priced in. So if you’re buying shares of a company based on something really obvious — like, “Apple is a great company. I like Apple, and I think other people do too,” — the future price action of the security may surprise you in a negative way. You’re ignoring the part that others play in how prices change.
Is second-level thinking for you? Maybe, or maybe not. Investing this way is not for everyone. Be authentic about your answer and move on. (There are other options).
5. Mapping is required.
Achieving a different level with your money is akin to racing against yourself. You’ll want to know how much time it typically takes to reach your destination. These following rules can help you.
The 1/2000 rule: For every $1 per hour you make, you make $2000 in pretax money. Translation, if you earn $10 an hour, your annual salary will approximate $20,000.
The Rule of 72: Shows you how long it will take to approximately double your money given a certain growth rate. You take the number 72 and divide it by the rate.
Let’s say you’re growing your money at a 5% rate. You divide 72 by 5, and you’re left with 14.4 years. That’s 14.4 years needed to double that pot.
The Income Rule for buying a house: Never buy a home that costs more than two and a half times your yearly income. This rule allows you to live another day in the case of financial crisis.
All of these rules are only guidelines, nothing more. Know them so you can keep track of your progress.
6. Your success will depend on your capacity to be self-aware.
Lying to yourself will always be the biggest long term cap to your financial upside.
Ask yourself, what is true of you that you’re not willing to admit? Do you crumble under uncertainty? Do you get impatient and sabotage your own commitments? Do you get overly involved with people who refuse to help themselves?
Are you bad at keeping promises? Know yourself. Not just the sparkly great stuff about you, but the areas where you consistently fail.
Stay committed to your decisions, but stay flexible in your approach. — Tony Robbins
As soon as you stop bullshitting yourself about what you really want and what your strengths are in getting you there, you get to launch into a different realm of financial possibilities. The more realistic your plan, the more likely you’ll achieve it.
The trickiest thing about all of this
You can’t go after financial success directly. Well, you can, but most people become douche-bags in the process. Financial success is a by-product of knowing what else you want in life besides the money, and consistently applying these financial principles toward those goals.
If your financial picture has a tendency to look like periodic roadkill, it’s time to look at how well you’ve studied the terrain and understand what you need to do. Remember, your ultimate success will depend on how long it takes for you to become excruciatingly honest and aware of your strengths and your weaknesses. That moment marks your true starting point.
Never give up. Handicap your weaknesses, play to your strengths, and over time, you’ll create infinite possibilities with your money.
Call To Action
Learn how to manage money toward your individual purpose at www.missionovermoney.com. You’ll receive offers but no pressure to buy whatsoever. You’ll also get our bi-weekly newsletter packed with as much love and teaching as I can muster twice a month.
Our Mission Over Money individual coaching program is now open. This program is ideal for people who are aware of a deeply-rooted financial behavior that needs to be shifted.
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