We’ve taken the time to aggregate everything we’ve seen from the Q&A to go ahead and address common questions. While the Q&A will unlikely ever be opened to the public, the most common questions should be addressed here to 1) save time on redundant questions and 2) make things run more efficiently in the future. The most interesting thing we’ve noticed is the number of people who simply lack direction. This isn’t really a big issue if you’re under 24, but we’re shocked at the number of people juggling 100 different ideas at the age of 30. It just doesn’t make sense. So we’ll jump in.
Deciding Between Careers: We’re going to say this over and over again. Careers do not matter if you want to become exceedingly rich. Before we move on we will define these numbers and please take a look at our post on the Company man giving away his life.
As you can see in the post we linked to, you just won’t make it to $10M working at a Company. Please do not use “that one guy” in banking, tech or sales as an example, he is generally the exception to the rule and was built for that specific position. If you want to be exceedingly rich defined at ~$10M (eight figures is rich by any standards) then you *must* start a company to maximize the chances of this happening. This means most careers are not worth your time. Careers are nothing but cash flow generating machines to fund your real idea. It is similar to a company with several declining business models, they leave them up since they generate cash to fund the growth side of the business.
With that out of the way remember that all your decisions need to answer that first fundamental question. If you’re happy with ~$2-4M in net worth (age 35-45), you can focus more on your career and have a tiny side hobby. If you’re not happy with this and want $10M+ (age 35-45) you *must* start a Company of some sort, you need ownership. This fixes all of the career questions at once. If you want $10M we will always give you the same answer! Which is choose the Career with lower hours and ability to scale something else. If you want to get to $4M or so, then choose the one with the fastest promotion/move up the ladder features. This is because your number is lower in the second option so you’re going to be focusing a bit more time making sure you’re at the “top bucket” in terms of performance.
Making the Decision ($2-4M): In this section we will address the $2-4M seekers. This is not us. That said we will address it anyway. If you’re looking to get to this level your goal is to get promoted as fast as possible and start a basic side income of say $50K a year doing freelance consulting/basic real estate remodeling or something similar. Nothing crazy since an extra $50K a year is going to give you a massive boost to getting your net worth up. Why do we focus more on promotions? Well you need the cash flow as fast as possible. Investing say $100K at age 30 versus age 40 is a life changing difference. Even if it was only for one year, it would be worth around $400K by age 44 versus $400K at age 54. Not even in the same zip code from a Utility maximization framework.
This blog has been around for quite some time and we’ve already met several public figures who know our information is legitimate. That said, we still get the same “prestige” questions which are irrelevant. The only thing that is relevant in the prestige question is if you will be in a top performing group. We’ve noticed a massive sea change in compensation for “top groups” versus “bottom groups” but… at the end of the day you’re still better off being a Vice President at a mid-tier firm than an career associate at a top-tier firm since you can’t leverage your performance for bonuses that are multiples of your base salary. Long-story short, always remember to choose the one that gets you closer to the “final table”. Wall Street is a massive poker tournament and the goal is to get to the last table even if you are short stack since you get cashed out in a big way even if you fail there.
Making the Decision ($10M+): You’ve decided that you want to be rich. Congrats welcome. It’s brutal out here. Which means? You must choose the option that gives you the most free time to scale and grow your business. No juggling no nonsense like that. You will go full in on your idea. Most people who end up being ultra-rich don’t even begin with large amounts of start-up capital so there are literally no excuses. In fact, we’d say the more money your idea costs to start the worse it is. Airlines are probably the best example since they needed government money and nowadays make their money off credit cards not flights. Pretty simple decision making there, go for it if you want to be rich. There is no other option which is a good thing.
Asset Allocation: There are really three factors for asset allocation. As usual this is not legal or financial advice and should serve as an opinion: 1) net worth targets , 2) amount of risk you’re willing to take and 3) lock-up period.
When we look at these three, the most important one is probably your net worth targets. Surprisingly this is more relevant than risk since you’re going to automatically make this adjustment based on what you want. If you’re thrilled living off of $40K a year, and the current interest rate was 4-5%… You could probably just throw tons of money into CDs over and over and over again. You’d eventually hit your annual $40K a year of income target so there is no reason to take risk since it is unnecessary relative to your net worth target. Most financial advice says “take risk when young” which we do ascribe to. But. It’s not one size fits all. If you don’t need that much money to be thrilled with your life, then there is no reason to take on a ton of risk. You’re just adding stress to your life.
Hopefully, you’re looking aiming higher otherwise we don’t know why you’re on this blog. The problem with this is we’ll never know what number you’re shooting for so we can go ahead and work backward. If you’re aiming for $10M+ the only *real* investment that matters is the money you spend on your business. This will never change. As long as you can get a high ROI by investing in new product SKUs, new buildings etc. You should do that. No questions. After that since you’re looking to outpace inflation you should then look at our asset allocation in Triangle Investing.
Now we reach the lock-up period. As you get older you’ll realize that cash flow matters way more than net worth for living standards. So you’re going to have to create cash flow models for yourself. Stair step expiration of CDs, real estate payments, bonds, dividends etc. The basic outline is quite simple. Once you have hit your financial independence number (which is going to be below $10M), you make sure all your cash flows for the full year from investments only hit this number. Notice. We are not saying an exact number since we don’t know what yours is. For fun, if it was $10K a month, this means your cash flow generating items should clip out $120K a year (no business income, no career income).
For those that are interested in what we’re doing, we’ve officially gotten “old”. So more and more money is going into cash. This is because we’ve already benefitted from a 12 year bull market, and while the market could continue to grow the next couple of years due to Trump and all the positive policies, the risk free rate is becoming more attractive. Our guess is that 2019/2020 we will be moving heavily into CDs especially if the risk free rate is near 4-5% where that equates to $80-100K on $2M dollars. Not a bad return for no risk! So there is no confusion, when we say “more into cash” it means 50% of all income not needed for anything is going into cash. The other 50% goes into the normal items, RE, stocks, bonds crypto.
Not Worth Investing: This isn’t a complicated topic but for some reason it continues to pop up. Unless you have around $500K to $1 million or so (rough math no need to get fancy) investing essentially is worthless. It means you should be able to find higher ROI investments with your own business. Point blank and full stop, should be easy. That said, if you have *extra* cash and it would be sitting in a checking account instead, then yes just chunk it into stocks/bonds/RE etc. Not sure why this is difficult but it makes sense given the tilt of this blog. Unless someone has business income we will bet against them getting rich 99/100 times. Day in. Day out.
When to Go All In on Risk Free: This is a fun one that comes up. Since market returns are around 10% long-term and risk free rate today is around 3.0%, it says there is a 7 percent spread. Instead of doing the boring old, “it depends” answer we will give you the number we believe in. If your net worth is eight figures, we think 5% is the hurdle. You’d be making $500K a year risk free which is insanely attractive. If you’re in the low millions, you probably need 7-8%. So those are the two bench marks for going “100%” in. If you are in the $7-8M range the percent is probably around 6%, so on and so forth. Our entire math assumes that $500K in income is more than enough. It’s incredibly difficult to spend more than $30K a month ($360K) so we don’t have any idea how people would spend more than that unless they have some serious addiction issues, materialism issues or otherwise.
Efficient Decision Tree: Our book is named efficiency since we believe that’s essentially the key ingredient to life. You have to be efficient with your time. Looking at the paragraphs above, notice we force the reader to make a decision immediately. Do you want $10M? Do you want $2M? This is the question you have to answer. If you really want to become a billionaire or worth $100M, all of the stock market analysis stuff is essentially a joke, you won’t get rich that way. Now if you want to get to $5M and don’t mind working in a career for a large portion of your life, you’re going to take a very different path of lower risk for the trade-off of lower reward ($5M isn’t close to $100M). It’s interesting since most people cannot make this conclusive decision. We’re not sure why. But. It’s a common problem. Make this decision first then you can easily decide between careers and business ideas. Without this decision you’ll spin wheels in loose sand over and over again.
Saving Rates: One of the funniest things about frugality blogs is they don’t talk about the downside of living off of $24K a year. You end up being forced to watch your budget and can’t really splurge at all. We’re not going to argue for a good amount (okay we think $10K a month is pretty good enough for the vast majority of people), but the lifestyle of $24K a year isn’t going to be fun at all if you are in a fantastic city like New York, Miami or even Mexico City. If you really didn’t need money you could have just become a monk and they live a similar lifestyle in monasteries!
The problem with savings and most “career decisions” is none of them are really meaningful. If you make an extra $20K a year, that is only $10-13K after tax and isn’t going to change your life at all. Honestly it won’t if you’re gunning to be rich. Yet… the same questions continue to come up. People waste too much time and energy on things that don’t really get them to the bigger goal/picture. The bigger goal/picture is 1) promotions in a career and 2) the biggest picture is ownership of a company even if it is small to start ($40-60K annual is at least something). At the end of the day these two points come up over and over and over again and people expect a different answer. A different answer will not show up because smart answers rarely take more than a sentence to explain. To conclude this paragraph, always remember, that there is a floor to savings since you must eat and live somewhere and there is no cap to earnings. You could earn $100K or $100M in a year, just need the scale.
In terms of scale, if you’re trying to get to $5M net worth, you probably need to get to a point where you’re saving around $200K a year (after taxes). It’s definitely possible if you’re putting that kind of cash away for more than 10 years or so. If you’re looking at $10M+, it’s all about the valuation of your company and how much you could sell it for (exit multiple). Funny how dramatic it is! To get really rich you need to own and sell. You can sell your company you cannot sell your job. Period.
The Funny Thing About Money: Before we wrap up this post we’d like to ask a basic question to anyone reading. What is the point of the money? We have no answer for you, our own view is to make sure any family member has premium healthcare, work alone with no boss and have freedom to do anything with our time. That’s a good life. Now for the people saying the “must” have $100M our question is “why?”. Some people really cannot answer this question. In fact, we get crazy answers like fame (which is terrible) and to buy exotic cars etc.
Take a pause there. Unless you really have a massive idea like starting a new spaceship related company, $100M and $10M is very similar in terms of an individual life standpoint. The return on money definitely declines. We’re simply interested in seeing why someone would really need to get to this level. The good answers we have heard is 1) helping everyone not just their family have good jobs/lives – this is admirable and 2) a significant driving force to improve the world – in a serious way somewhat like Elon Musk. Other than that, it really is tough to justify tons and tons of money since money is just a tool. So. For those who weren’t able to answer the original question of how much they need we suggest working backward. “How little do you need to live the life you want?” You can now answer the original question.