(How You Build Wealth, Part 1 of 2)
“If I lost it all tomorrow and had to start all over, I would be a millionaire again within two years.”
I used to proclaim that statement above with great pride. Not only did I swell with superiority when I said it, but I actually proved it true. Twice.
You might be thinking I’m sharing that experience with you to demonstrate a bigger point, perhaps showing how resilient I am, or to demonstrate the importance of the mental side of the prosperity equation. Or maybe to beat my chest a little, showing how brilliant I am in manifesting prosperity. If you were thinking that – you’re half right…
I am sharing that story to demonstrate a point. But the point I’m demonstrating is what a dumb fucking moron (DFM) I was.
Don’t be a DFM. I was dumb enough for the both of us.
Unbeknownst to me, when I was making that statement, I was practicing a common self-sabotage behavior which I have broken down in my next book. The behavior involves creating a more heroic “hero’s journey” for yourself, in a futile attempt to cover up your low self-esteem and/or worthiness issues. Think about how foolish my behavior was…
By branding the ability to lose everything and bounce back as a positive personality trait – I was actually assigning a winning connotation to a really foolish approach. It’s like bragging you could chop off your hand and still tie a tourniquet to prevent yourself from dying. Certainly, you’d be glad to have that skill if your hand ever did get chopped off. But to do it intentionally, you’d have to be a DFM. The purpose of telling you my epic saga of misfortune is to tee up the focus of this essay…
How You Build Wealth
This is the blog post I’ve been promising to write since forever, the one where I reveal the mindset, philosophy, and actual practices I use to build my own net worth. DISCLAIMER: This is not investment advice. I’m not an investment advisor, accountant, or tax expert, just a high school dropout who became a multimillionaire. This post is meant only to share with you some of the important considerations about wealth creation you should be thinking about, identify some of the tripwires to watch for, and to expose the conventional (herd) thinking that could keep you broke.
DISCLAIMER #2: This is not the cotton candy, abbreviated version for dimwits. It’s a deep dive into my philosophy for creating wealth. You may want to bookmark this page and reread this essay every month or two for your first year. If I wanted to play the clickbait game, I would have titled this essay “Investing for Dummies,” “The Secrets Wall Street Doesn’t Want You to Know,” or “Investment Hacks Your Broker is Hiding from You.” But I have no desire to write for dummies and there’s no need to hype the topic with manufactured mystery. Like most worthy endeavors, building your financial freedom is less about mysterious secrets and more about disciplined, common sense behaviors. So let’s not overthink this. Let’s begin with nine simple premises to build our discussion around:
A good way to think about your wealth creation activities is to use the same philosophy that venture capital and angel investors use when considering whether to invest in a startup venture. There are two important metrics they look at first: the “burn rate” and the “runway.” The burn rate simply means the regular monthly expenses: the amount of money that is burned through each month to keep the doors open. Your runway is the length of time you have before you will run out of money and have to close, if sales don’t improve. For example, let’s suppose you have a company funded with $200,000 to begin. The amount of your rent, payroll, taxes, travel, etc. is $10,000 a month. With that burn rate, your runway would be 20 months.
Now apply that concept to your personal finances…
You have a certain financial footprint required to live each month. This includes expenses such as your rent or mortgage, maintenance fees, groceries, auto upkeep, and utilities. Make sure you include things that occur only occasionally or annually like health care, gym membership, insurance, and income taxes. And don’t forget about expenditures that aren’t essential, but you’re making anyway, like cable or streaming services, hobbies, and vacations.
In my experience, most broke people have no idea what their monthly burn rate is, while most wealthy people know exactly what it takes to maintain their desired lifestyle.
If you want to create financial security, you have to know what your burn rate is and live on at least ten percent less than that. (Fifteen percent would be better.)
As a person, the runway is essentially when you would like to retire. But it could come into play sooner if your income is interrupted or stops because you lose your job, become disabled, or another emergency. Let’s say you retire at age 65, have $250,000 saved and your burn rate is $4,000 a month. Your runway is only five years and change. This means if you’re still alive at 71, you’re either sleeping under a bridge or relying on the kindness of strangers to survive. The technical term for this type of financial plan is ackeypoo. You don’t want to be a DFM and you never want your plan to be ackeypoo.
There are two important actions you can take to forestall either of these things from ever happening...
First, as mentioned in the title above, you have to beat your burn rate. Meaning that in your working years, you have to take in more money each month than you let out – setting aside a certain amount to invest for your future. Don’t look for loopholes and don’t make excuses. People all the time tell me things like, “I can’t get by on 100 percent of what I make, how can I survive on 90 percent?” Don’t be a DFM. In the world of creating wealth, there’s an important philosophy to live by: When you make hard decisions, you create an easy life. If you make easy decisions, you’ll end up with a hard life.
If you continue to live where you’re spending everything you’re taking in, you’re going to get exposed by a job loss, personal emergency, or pandemic at some point. This situation does not have a happy ending. Worse if you’re like most people, and actually spend more than you earn, financing the excess with debt, you’re building your own prison. And this situation has an even unhappier ending.
If you’re spending as much or more than what you earn, it has to stop now. (If you’re not willing to make this change, there’s no need to read further.) Either take on a part-time job or business to produce some extra income or make the hard decisions of what you can eliminate to reduce your burn rate. But you must get your burn rate to the point where you have some money left for investing in wealth-producing platforms.
Secondly, you need that money – think of it as your retirement or financial freedom investment pool – to be secure, and work for you when you sleep. Because this pool has to not only protect you from a financial calamity, but more importantly, also be building your wealth.
The speed with which your investment pool is building your worth is important as well. Your wealth needs to appreciate in value greater than the rate of inflation created by the financially illiterate people who govern us. (Don’t trust your financial security to your government. Just because they have titles doesn’t mean they have any money sense. Most public policy in finance is created by DFMs who happen to hold degrees in economics but know nothing about building wealth. They’re upside down on their BMW leases, financed their dining room sets and are saddled with credit card debt themselves. The laws they propose are passed by political grifters who are looking out after their own financial interest before yours.)
What I’m about to share with you is probably going to differ greatly from the conventional wisdom about money and wealth you see from the financial pundits in books and the media. I’ve never watched more than ten minutes of financial cable networks and haven’t read an investing publication in years. (Full disclosure: back when I was broke I read the WSJ, Forbes, Fortune and Investor’s Business Daily religiously.) I don’t give a fuck what level the Dow is at, whether the NASDAQ is up or down, and if my very life depended on it, could not tell you the difference between a bear market, bull market, or seafood market. Not only is that data irrelevant to me, but I believe it’s dangerous for you. Anything you get through that ecosystem is herd thinking, and most of the herd is broke. When you see that crazed guy on cable hyperventilating about a particular stock, remember that hundreds of thousands of others are watching at the same time.
A friend recently asked me if Rich Dad Poor Dad was my number one go to book about growing wealth. The poor bloke was almost traumatized when I told him that book wasn’t even in my top 100. I didn’t have a rich dad to model myself after. If I ever wrote a book on wealth building, the title would have to be No Dad, Poor Mom. What I’m sharing with you here are the lessons I’ve learned on the street: selling dope in middle school, starting companies, delivering newspapers, growing businesses, having my restaurant seized by the tax authorities, making lots of millions, and pissing away (almost) lots of millions. I have made the journey from poverty to being filthy rich spending money like a drunken sailor, to then learning financial literacy and creating security for myself. As laid out in this post, I believe it’s important you have an underlying philosophy about money, and some unshakable principles you follow.
If you’re a knowledgeable professional investor or have years of experience in the financial sector, this essay isn’t for you. It’s meant for the average person who doesn’t have time to learn how to study financial statements, do deep dive research into emerging markets, forecasting, and studying stock market filings. I believe a rideshare driver, hairstylist, or nurse can become wealthy – if they learn how to beat their burn rate and put their money to work for them.
So let’s look at how to do that, but once again make clear, this is not professional investment advice, but my personal street smart philosophy on how an average person can build extraordinary wealth. (Void where prohibited by law, your mileage may vary, notify your doctor if you experience moderate to severe plaque psoriasis, and don’t run with scissors.)
Begin with a big picture look at how you earn money. Do you have a way to earn that is leveraged, or do you need to trade hours for money? (If you’re not sure where you fall, you can learn more here.) If it’s the first option, you’re in a stronger place to start. But if you’re not, don’t give up. It just means that you need to work hard, trading as many hours for money as you feel ideal, then set aside some of that money you’re earning to put to work. As you make that determination, keep the following concept in mind…
You work for money. Or money works for you.
The more money you can have working for you the more opportunities you have to leverage your wealth building. Next, calculate your burn rate and decide what kind of runway you’re looking to create. Finally, determine what percent of your income you’re going to place each month into your retirement or financial freedom investment pool. Once you have the investment pool, you want to create a framework that will ensure you protect your money and also put it to work multiplying. This means establishing the ratio of what percentage of your portfolio goes into each risk categories. Let’s divide them this way:
After “losing it all” a couple times and being a DFM, I woke up and realized that I never wanted to put myself in a position that risked going back to zero ever again. You should be smarter than I was and just start with this philosophy from the get-go. For example, you might set up the distribution of your initial fund as 55% low risk/reward, 20% moderate risk/reward and 25% high risk/reward. That way you have your base protected, so you never lose everything and have to start all over again. You can make some investments in the moderate category which will grow your net worth faster than the low-risk portion. And you still have a chunk you can dedicate when a high-risk but possibly very lucrative opportunities come along. When you’re younger you can afford a higher level of risk than when you’re older.
The biggest mistake people make is dumping everything into the high-risk/reward category. That’s why so many people got wiped out in the dotcom bust, Bernie Madoff fiasco, or the great recession. They got seduced by the high yields they were receiving, and then took all their resources out of no risk and moderate risk investments and put them into what was hot at the moment. Don’t be a DFM and do that.
Your asset allocations should change as your life changes. When I began building my net worth, I went with a 50/25/25 percentage allotment. Now, the horizon in front of me is closer than the one behind me. At this point, I have a bigger nest egg accumulated so it’s not necessary to make a killing with anything; wealth preservation is more important at this stage of my life. My current ratio is 50/40/10.
Now let’s discuss some tactical strategy for you...
Rule number one of the “Let’s Get Rich Club” is don’t be a DFM. Rule number two is, don’t be a DF day trader. It’s not that day trading doesn’t work; it does for many people. But those are people who spend all day doing it. (And do all that research on companies, public filings, P&L statements, etc.) If you’re like most people, you don’t have the time or expertise for that. You’ll likely end up making investments based on whatever memes are infecting the herd thinking of the moment. The investors who break through zig when everyone else is zagging, and zag when everyone else is zigging.
You need a different approach, one that works for normal people in the real world. Allow me to suggest a five-module strategy for building wealth. The first two are strategic, the last three are tactical. That’s what we’ll explore next, but…
This is already the longest blog post I’ve ever written. In fact, it might be the longest post written since the earth’s crust cooled. For those reasons, I’m going to stop here, and post part two here. In that post, we’ll break down the five modules in the wealth building formula. Until then, please use the buttons up top to share this essay. And I’d love to see your thoughts below.