Financial Disasters in 10 Simple Equations

Even if you work a mediocre job and don’t see much room for large earnings you’re still going to save a large amount of money by simply avoiding disaster. Lets go ahead and take a walk through the math behind the vast majority of financial disasters people will make. If you can simply avoid catastrophe, you’ll be far ahead of your peers.

1) College Debt

We already covered this topic at length in our post on college. If you missed it check it out. If the debt you take out to go to school is not immediately paid off by *additional* income due to the degree, it was a waste. Debt in general makes it incredibly difficult to gain financial leverage in the future. You’re swimming up stream.

Equation to Remember: Additional 1 year annual income from education > debt load.

If you’re taking on $10K in debt but your gross income is increasing by $10K, again **due to the degree** then it would likely make sense the payback period is roughly a year. Taking on $20K in debt to increase your income by only $5K? Not so much.

2) Taking Unearned Time Off

If you are in your 20s and you feel like life is difficult and you need to “find yourself”… All you are going to find is a zero bank account, no employment opportunities and a couple of notches with 5s at best from your hostel adventures. Don’t be fooled, unless you’re building tangible skills, this decision alone will financially bury you for a multitude of years.

Equation to Remember: 1 year taken off = 4 years of earnings depleted

If you run the math it works out. Lets assume you save 20% of your annual *net income*. This means 80% is spent, 20% is saved = 4:1 ratio of spending to earning. With that ratio you see that 1 year off now implies a negative impact of 4 years working. Gets ugly very fast doesn’t it?

3) Getting Married

It is taboo to run numbers on anything emotional but it really doesn’t make any financial sense.

Equation to Remember: 50% zero financial impact and 50% losing half your assets

Simply put, you are taking on financial risk for no apparent reason. Since we are applying logic to an emotional decision, you can also apply emotional reasoning to avoiding this trap. If she loved you in the first place, she wouldn’t need a government contract to prove it. Getting the government involved never helps.

4) Excessive Drinking and Partying

Drinking and partying is great if you have a purpose. No one wants to be around the socially awkward guy who has worse game than an Atari. With that said, once you’ve gotten a good grasp of game (12 months maximum) it’s time to re-evaluate the value of your time.

Equation to Remember: One drinking session costs 2x your daily income

This formula naturally compounds. When you’re young, not making much and able to recover quickly, the cost of a hangover is relatively minimal. Once you start increasing your income… Even at the $150K annual mark, it becomes tough to justify. You’re losing $833 per session.

5) Picking Individual Stocks

Practically everyone believes they are smarter than average. In addition, even if they understand beating the market is near impossible they STILL buy individual stocks! Nonsense. Instead of trying to convince people to avoid picking individual stocks, lets simply convince them to avoid picking individual stocks when it will damage their financial future. EG. When they are young.

Equation to Remember: 1 year of 10% losses = 3 years of investment gains

Relatively simple, if your portfolio declines by 10% in a single year while the market was up 9% (the long-term average). You have to hit market returns for 3 years to be back to parody. Continuing with the basic math.

Person 1 goes up 9% per year = $109 in year 2.

Person 2 *picks stocks* = $90 in year 2… and doesn’t get to $109 until sometime in year 4-5.

Pretty simple, only invest what you can afford to lose. If you’re not financially independent you cannot afford to lose anything.

6) Location Lock-in… Buying a Home

We’ll never win over the real estate guys on this one. Unless you’re absolutely certain you’re going to stay in a single city for the rest of your life it makes no sense to purchase a piece of real estate. You’re going to lose out on mobility (see switching firms) which can cause major headaches for you unless you’re in the hub for your profession. We can even put this concept into an equation.

Equation to Remember: 15% * annual income > value of your city to you

This is much more fungible, but it helps. When you switch firms to a separate city the general rule is you’re paid at least 15% higher than your previous income (otherwise you wouldn’t switch in the first place). If you would switch cities for a 15%+ pay raise… Do not bother taking on mortgage debt. The 5% selling commission or managing a property remotely can be an enormous headache. Not to mention finding tenants

7) Compounding Cash Flow Management

No matter what anyone says, cash flow is king not “cash”. We explained this in a previous post and the long-story short is that you need a flow chart for your finances. If you simply put money away in a bank you’ve already lost out on ~35% gains over the past two years. Given a high savings rate, it is certainly not uncommon to double your net worth every 2 years with those market gains.

Equation to Remember: The Rule of 72

Its an equation you learned in middle school (or even elementary school!). Take your rate 72 and divide it by the interest rate to get your doubling power. In short, it takes 72 years to double your money in a bank account. In a bull market of 10% gains? Only 7.2 years. The difference is quite literally, a life time.

8) Living Beyond Your Means

 We have a short decent story on the use of credit cards and you’ll see that credit cards are your friends. 2% returns in cash on every single purchase! This is going to add up once your monthly bills exceed 4-5K a month. Now if you decide to live beyond your means… you’re going to lose the game as your credit score will get hammered, your savings rate will be zero and you won’t have a shot at becoming rich.

Equation to Remember: (Credit debt * interest rate) (1/ savings rate)

Any form of credit debt is an enormous problem. Even if you have $1,000… That number is growing by 15%+ per year and we have added an extra multiplier factor to give you additional reason to get rid of it. Long story short? No credit card debt period.

9) Being Paid by the Hour

In one of most popular posts, you’ll see a deep look at careers. In short, don’t work in industries paid entirely by the hour as you will never have leverage relative to time. So long as you’re pegged to a ticking clock you’re going to have a hard time accelerating earnings.

Equation to Remember: Earned income = hourly rate + (Event, Ownership or both)

For a simple understanding of this, your income must come in two forms (at minimum). If you’re being paid to work at a firm by the hour, that is fine… however you MUST work in a profession where you are also compensated by an *event* (sale, closing of a transaction) or you must have the option to build ownership in the firm (equity). For a drawn out answer please refer to our post on careers, but the equation above if the simplest to understand. No secondary component = time for money = leave immediately.

10) Networking Flat

When was the last time a poor person got you a new career position? That is right, never.

With that back drop, keep this in your back pocket when you send your next text message or email.

Equation to Remember: 1 email to equal or lesser for every 2 emails to someone of higher value.

Makes it a lot harder to communicate doesn’t it? That is the point. As you are well aware, you need to find ways to improve a person’s life to have someone higher than you help you out. In addition, it requires that you take a hard look at who you communicate with. There is some subjectivity here, but the equation works for life in general, it is quite difficult to get someone more powerful to help you so for every 3-4 people you meet, maybe one will befriend you. Such is life. At the same time, the messages sent to an equal or younger person you are mentoring will have a lot more productive conversation filling the void.

Lets make this even harder for the go-getters, apply this to your weekend schedule as well. Friday, Saturday and Sunday… You get one day to party it out, but the other two you need to spend around people better than you.

“If you’re the best person in the room, you’re in the WRONG room”

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If you think about it, these simple equations are easy to follow. Wall Street or not, every single person can follow the 10 equations above and see enormous results over the next 3, 6, 12 or even 24 months!

Are you above or in-line with these equations?

Our guess is the common pitfalls will be #4, #5, #7 and #10. These are certainly the more difficult ones to crack.

Comments

  1. James says

    Hang out where wealthy, or smart people hang out. Does your college town have a country club? Get a job there serving, bartending, or working cart barn. Upscale restaurants with bars? Probably. Hit up happy hour. Go play some golf. Learn to speak with people in their 30s, 40s, and older. Humility is my secret. And don’t ask them for anything too soon. Make associations and build a relationship and then when the time comes leverage what you can to offer them. Ask them what you can do for them… Prove yourself to them. Now it is acceptable to ask them for a favor.

    -a 22 year old 3 months out of college and clear $125 k a year with a 3.1 GPA. Because I did all these things in college.

    • Wall Street Playboys says

      Absolutely killer comment james.

      ***bonus points! notice that James is a clear and concise communicator getting straight to the pooint***

      • James says

        Thanks. Killer Blog. You guys are on to something here, wouldn’t be surprised to see your site traffic volume grow exponentially soon enough. Much better content than any other blog or book out there.

  2. Steve B says

    Quick edit: ‘parity’ not ‘parody’

    Maybe I’m part of the ‘real estate’ crowd, but I think #6 can be location dependent. I lived in an area with a great price-to-rent ratio and a constant stream of renters to the point where when I moved back east, it was easy to find renters and pay for a property management company.

    Not sure what Manhattan looks like, but I know I couldn’t do that In DC right now.

    #5 should be beaten into the brains of every single 18 year old before they go off to college. I’ve seen people’s lives ruined by betting on the next big thing as opposed to socking away savings into an index. It’s amazing that no matter how many studies, news articles, or interviews someone can read about diversification or timing the market, people still manage to screw it up.

    Emotional control and cognitive biases should be taught along with algebra.

  3. Pete says

    Great post.

    Re: #10. I’ve heard a lot about the Law of 33% (a third of your time with people below you to make yourself better/mentor them, a third with your peers to work among, a third with people above you to learn from). I feel like a good contrast principle can give better insight into problems.

    Thoughts?

    • Wall Street Playboys says

      Never heard of that rule but it is exactly in line with what we posted (1:2 implies 33%).

      Yes you learn quite a bit by grooming people becuase you need mastery of the topic to do so. Hence why you can grow at a faster rate by teaching part of the time

  4. Real Estate says

    WSP I respect your opinion because you’ve improved my life but what’s the deal with #6? What about purchasing multifamily houses to rent out? That’s ~2000 a month cash flow positive depending on the mortgage. And you wouldn’t have to live there especially if you have a property manager. Are you saying it is a bad financial move or bad because of stress?

    • Wall Street Playboys says

      We’ve covered in past, if you buy the ROI is only there if you intend to stay in the same place for 5+ years or so.

      If you have w great rental market feel free, from experience simply buying the S&P is less hassle. Yes there are risks to that as well.

      Long story short: 1) stay mobile, 2) only buy if you won’t leave

      If you have some sort of deal on property managers/know you will have perfect tenants, it becomes a different and unique situstion not applicable to everyone.

  5. Cattle Rustler says

    What’s your take on the trades?

    I’m planning on taking a corporate break and head to West Texas. It should be around 1,500 a week with free housing. The good thing is that I’ll be free from distractions and can focus on paying off debt, work out, and start SPYing.

    Also, mistake #11: Taking a break and not having a “start looking for a job” point.

    • Wall Street Playboys says

      Generally trades are In-between.

      If the trade pays a lot (oil sands, electrician, medical related) then there are reslly 3 ways I pay the option

      1) choose a trade where you can start a company from the skills later (electrician is plausible)
      2) choose one to save the most money and later switch to doing a new item (fracking)

      When you join a trade the key is to save a large amount AND build skills to leverage into a business at another time.

      If you choose with trade with a lot of downtime and no option to start a company from the skills, you need to learn while on the job to think of new business ideas.

    • Wall Street Playboys says

      Work backward.

      1. Get rid of any double negatives (debt or car payments) they are sucking your finances down.
      2. Once you have a solid routine/game plan for that (should take 2 weeks max) then go for the income route since your career is the biggest swing factor
      3. Work extra hours when young (if in 20s) to gain momentum
      4. Cut down partying to celebrate legitimate events. Of the lines listed in this post, becoming debt free, getting a new career/job are all meaningful events where you can drink/let loose. Until then work on getting back on track since time is never your friend.

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