We were hesitant on creating a book on this topic but decided to do so (popular demand). The funny thing about this book is that we can’t think of many products like it. If you’re rich it is actually quite easy to go broke (look at *most* professional athletes and lottery winners – emphasis on most to avoid the nit pickers). Maybe this is one of the reasons why no books are written on it. People simply assume that once they have the money, they will be “set”…. and of course… this ends in tears. The only competing products we can think of are related to frugality where people talk about maximizing every single cent. A terrible strategy for anyone who gets rich as they lose valuable amounts of time waiting to save a few dollars (waiting in line 30 minutes to save $20 should never be worth it).
In addition to the above paragraph we’ll happily admit that this was painful to write. We couldn’t think of a single way to organize it and there are no real viable competing products out there. Our three ideas were as follows: 1) organize by spending type – housing, food, entertainment etc. 2) organize by after tax income and 3) organize by economic cycles. All three would work but all three have repercussions (they miss the bigger picture). So what did we do? We decided to do all three and a bonus fourth where we tie it all together. This is the only valid way to do it (so we think!). If your business collapses or you lose your career, you have to adjust to a different lifestyle. If you end up getting a good chunk of money and suddenly have $3-5M to your name, your ability to spend goes up (essentially forever). Either way…. the point is clear… your ability to spend is entirely driven by cash flow visibility.
Cash flow visibility is knowing how much money you’ll receive per month. That’s not all. It also depends on how likely the cash flow will hit your account. By rank order the safest to riskiest is as follows *in our opinion*: 1) risk free yields, 2) career or business income, 3) Real Estate and 4) Equities/Dividends. We’re almost certain no one will agree with the rank order we just provided. That’s a good thing as no one reading this book is interested in “normal” opinions. So that’s how we’ll rank the cash flow items. If you’re looking for a trend, we value “forced” value creation the most – I.E if there are ways to use your own time and skills to generate money, it’s the safer one in the group (only exception there is the risk free yield that starts the list).
Unless you’re able to generate a living income off of risk free yields alone, there is always a discount applied to your earnings as things could go sour in a day, week, month or year. You never know. What you do know is that your principal should never be touched. Bonds, equities, real estate etc. The goal is to never sell to spend. You can sell to rebalance your book… But… You cannot sell to spend. That’s essentially the punch line before we jump into the details.
Three Segments for the Book: This was the only reasonable way to organize the product. The reader gets to choose how they view spending. If you view spending in terms of net worth, the second section will be better for you. If you view spending based on product category, the first chapter will be better for you. The key here is to maximize utility. While utility is a boring economic term it is the most useful as it encapsulates cycles as well. Utility gained by spending on luxury items in a booming economy is *lower* than utility gained by spending on luxury items in a recession. Utility gained on housing decreases rapidly unless you’re building a different lifestyle (house parties, family gatherings etc.). Utility gained on dining and produce actually changes based on your age and cash flow as well. So on and so forth.
General Life Framework: Before jumping in, this is probably a good time to remind the readers of our life framework. In general, we do not think you need to be worth $100M or even $20M to live an amazing life. We think the risk reward to get there is becoming difficult to justify. That said, we do believe that anyone can get into the $5-15M range without taking on significant “life risk”… I.E. missing out on many years of fun and potentially getting nothing out of it. Keeping it simple at $5-15M this means you’re generating $250-$750K a year forever *regardless* of location at a 5% rate of return. Even if you decide to have kids, this is not going to lead to a stressful life as the location independence part kills the cost of living argument.
How You Get There in General Bullets (No Particular Order)
- When you’re young you focus on making money as we assume you start with $0 to your name
- To avoid developing poor social skills you go out twice a week in cheaper venues (if you’re broke and young, being in shape and going to dive bars is completely fine)
- You kill off the biggest cash drain item which is taxes and housing, if you need to live with roommates to save serious money… You live with roommates, no exceptions
- You kill off taxes by building any sort of small side income while at work, if you don’t have two streams of income you don’t get to have much fun
- Rough math is you should focus on income generation until you’re able to save/invest half of everything you make (everything is calculated after taxes). Until then you’re not earning enough or you’re spending too much due to lifestyle inflation
- Take the amount you spend per year, multiply this by 25. If you’re happy with the amount you’re spending per year… Working harder and killing yourself for more money is a fools game
- When you get to $1M+ in net worth within 10 years… you’re going to be able to make the decision “Do I want to be worth $20M+ or $10M”… Rich people problems. We have no view on the choice, people have different life objectives
- Health is the only thing that is more important than money when you’re young. That said, working 60-80 hours a week between ages 21-27… Really doesn’t do anything to your health despite what unsuccessful people tell you. Working 80 hours a week past age 30 is something you want to avoid
- As a framework you want to utilize your “competitive advantage” by age band. Not having much money is fine in your 20s, not so much in your 40s. Making a lot of mistakes in your 20s is fine (you’re young) but making wild mistakes in your 40s, not so much. Think about what the world’s “perception” and you is and you can find areas to exploit the biases
- Avoid comparative analysis. There is no point in being jealous of people who go up the stack faster than you. Also avoid all *unnecessary* conflict. I.E. no point in participating in gossip/drama as it just leads to negative attention and a large time drain. You should have better things to do. The standard “What do I gain from this?” should be asked before doing anything. If it’s nothing positive and just an ego boost, better to skip.
- You have to live an “extreme life” by definition. If you’re going to get into the top 1% you’re by definition an extreme outlier. It is not possible to get there by following the crowd
- To wrap it up, we avoid all family/life decision type conversations as those are personal in nature. As long as you’re not risking everything you’ve worked for, there is no point in the debate.
A Quick Warning: We’ll also talk about performance enhancing products. Under no circumstances are these comments meant to be recommendations, the entire product is opinion based. Your average person has limited will power and self-control which makes addiction higher. There is no such thing as a magic substance that makes you “better than average” in a single day. Instead performance boosters are for people who want to remain in top shape. Two extreme examples will help: 1) if you take a wide variety of steroids, the chances of competing with pro-athletes is less than 0.01%… the only people who could take them and potentially get close are people who were “on the line” before taking PEDs – typically D1 athletes who were extremely close and 2) if you take a bunch of psychedelics, you’re unlikely going to become the next Steve Jobs. The typical person who takes psychedelics doesn’t use them properly (similar theme for PEDs for guys at the gym)
With the warning out of the way, our opinion is that you can use a lot of substances to make your life better. Yes we’ve started tinkering with some of them lately. It doesn’t “change you as a person” if you use them correctly. It simply allows you to run at full speed for longer durations when you need to.
Final Note on Money: One last item of importance. While the phrase “you can’t take it with you when you die” is true, that phrase is usually an excuse to spend everything… putting your health and well-being at risk later down the line. We take a different stance. You should earn aggressively which will cause you to save aggressively by default until you hit the “cross over point”. If you can easily live off of ~$5,000 a month (this is just an example and would include shelter, food and utilities), there is no real point in saving massive amounts of money beyond this level. At that point you can ratchet up the spending as you’ll never touch the principal in the first place.
For those that think the above is risky, there is yet another catch. After being intelligent and saving for almost a decade, you won’t spend all of the money you make anyway. Our guess is that you will still save around 30% of what you’re bringing in and the principal will actually grow significantly over time. In short, once you are completely free, your stress levels will likely come down and your spending will go up without any issues.
Table of Contents
Segment on Spending Type
Chapter 1 – Housing, the Highest Expense Item After Taxes
Chapter 2 – Food and Dining, the Third Highest Expense Item
Chapter 3 – Clothing, Shoes, Suits, Watches and More…
Chapter 4 – Travel and Vacations, Hint No Need for the Standard Europe Trip
Chapter 5 – Services, Focus on Improving Your Health and Performance
Chapter 6 – Events: Dating, Concerts and Parties
Chapter 7 – Adjustable Flow Chart and Overview
Segment on Ages…
Chapter 1 – Completely Broke and Starting from Zero
Chapter 2 – Able to Save 50% of Income without Feeling Uncomfortable
Chapter 3 – Millionaire Club with High Quality Cash Flow
Chapter 4 – Beyond the First Million
Chapter 5 – Set it and Forget It
Chapter 6 – Adjustable Flow Chart and Overview
Segment on Economic Cycles
Chapter 1 – Bear Market Cycle
Chapter 2 – Mid-Market Cycle
Chapter 3 – Bull Market Cycle