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Perhaps my greatest pleasure in life is attempting to come up with simple and useful concepts that solve important problems.
Few people understand or appreciate how difficult it is to come up with a good idea. When you see the concept, it’s so simple and intuitive that you don’t imagine it was difficult to come up with.
But to come up with a truly useful idea requires years of “skin-in-the-game” struggle and refinement. I think after ten years of making mistakes and intense reflection, I’ve managed to come up with a good idea of my own.
The observations are nothing novel. But I’ve managed to condense everything important I’ve learned about personal finance into a simple picture:
(Enable images in your email if you cannot see the picture.)
The green squiggly line is your account balance. It’s in a constant flux.
The red dotted line is your overhead–stuff you pay for on a regular basis to maintain your operations and standard of living.
The key to good money management is to consistently invest your surplus cash (i.e. the cash amount above your overhead costs.)
The implication is that by lowering your overhead, you have a greater surplus to invest (plus, you don’t have to work as hard.)
“Wealthy” is the point where the squiggly green line stays above the dotted red line without requiring you to trade your time for money. If become skilled with money, eventually you might be able to afford to live in luxury (but not when you’re young, and not if you screw around too long.)
It’s a simple concept, but it took me a long time to learn.
The so-called “American Dream” is an illigitimate shortcut to the rewards of wealth. It takes advantage of people’s low Financial I.Q. and works something like this:
Work hard to raise your income.
Raise your standard of living (overhead.)
Work harder to maintain the new standard.
Lose your job.
Take a pay cut.
Spend your old age broke and dependent.
Paradoxically, the key to wealth is to be happy with less.
“Do not toil to acquire wealth; be discerning enough to desist.”
Hopefully some of you guys find this idea useful.
‘Til next time,