…And Your Money

“That man is richest whose pleasures are cheapest.” – Henry David Thoreau

Money is an interesting concept and can mean lots of different things to different people. “What do I want?” Here’s what I came up with:

I want the ability to do anything I want, anytime I want, without having to worry about the money to finance it. 

Read that again carefully. Note that it doesn’t say I want to have lots of money. Just that I don’t want money to be an inhibitor to what I want to do.

In my family, we often talk about “rich” versus “weathly”. Rich means having lots of money. Wealthy means having enough money to cover everything you want to do. I often make the point to my kids that the wealthiest person I know is their great grandmother. Why? Rather than having the most money, she went the other way and wants the least of anyone I know. “Want to go on a cruise or travel?” “No, been there done that.” “Want new stuff?” “Why would I want new things? The stuff I have is perfectly functional.” The main thing I’ve seen her want to do is pay for or make big family dinners, which is well within her means. I can’t think of a single thing that she wants that money is preventing her from getting. That’s what it means to be wealthy.

Now for myself, I must admit that my wants are a bit higher than hers. I don’t need a private jet, but I do like to travel. I generally don’t need new stuff, but there are a few gadgets that I like and tend to buy.

In terms of an actionable strategy, I’ve done the following 4 step process and have found it very useful.

  1. Figure out what I want in life (see the “What do you want” posts).
  2. Determine how much income is needed to sustain that life.
  3. Determine how to achieve that income in the most effective way possible.
  4. If I can’t yet achieve that income, start over at step 1 and want a little bit less for now.

So where does income come from? Most people think “job”, but that’s only one of the ways. Particularly once you start to save and invest some money, other options become available.

Your goal should be to move up the ladder of these major income categories over time, with full passive income being the ultimate objective. If you make it there, what you do with your time is solely based on what you love to do and what kind of contribution you want to make to the world. I’m personally not there yet but continue to work on it. Here are the categories:

1. Full Passive Income: Financial agreements that guarantee you income, this includes pensions, annuities, and some government bonds such as TIPs.

2. Passive Ownership: Investing in a broad portfolio of assets, such as index funds, looking for both growth (appreciation in value) and dividends (actual cash that you get on a regular basis). You don’t do much work here, only decide on how to allocate your money at the highest level such as what percentage to stocks, bonds, or real estate.

3. Active Ownership: This is investing in a specific set of assets where you spend time thinking about them and specifically choosing them. In the words of Warren Buffet, try to invest in businesses that are “so wonderful that an idiot can run them. Because sooner or later, one will”. To do this well requires a lot of time and a love for numbers and digging into minute details.

4. Active Ownership & Management: Own and manage a business, such as a store, real estate, or other venture. As you can see, each of these levels requires more and more of your time.

5. Work for Hire: Get paid for your time. This is where most people start out.

I’ve also found several general pieces of advice that I think everyone should follow:

  • Protect yourself. Have an emergency fund to cover 6 or 12 months of expenses. Reduce your expenses until you can build up a cushion.
  • Invest in yourself. For any money you get (salary, gifts, odd jobs), save 10%, invest 10% and give away 10%. Live off the rest. If your emergency fund is full, invest 20%
  • Avoid fees whenever possible, so put the 10-20% investment into index funds.
  • If you can’t afford what you want, want less, or develop patience to wait until you can afford it.
  • Have the money in the bank before you buy something. Avoid all debt, especially credit card debt (a potential exception is a mortgage). Credit cards are actually a good strategy to protect yourself from fraud but be sure to pay them off every month.

8th Piece of Advice: Understand how money works. It can’t buy a successful life, but it can certainly help. 

Want to learn more?

Here are a few resources you can check out if you want to explore this idea further:

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