About the Series…
When the topic of money management comes up, discussions often focus on tactics. Sometimes, the conversation will shift to strategy, but a critical component is typically overlooked—a broader perspective on enhancing our thinking and decision-making skills.
In this series, I aim to introduce first principles thinking into discussions about money. Welcome to the first installment!
A Quick Recap If you read the inaugural post, you know I’m excited to redefine the FIRE philosophy through four foundational pillars:
- Financial Psychology — This serves as the cornerstone of everything.
- Investing — Let’s be honest: you can achieve “FI” without necessarily pursuing the “RE” (Retire Early). If you master your mindset around money and invest in 401(k)s, IRAs, and brokerage accounts, you can lead a fulfilling life. Achieving the “FI” is essential for everyone; “RE” is optional.
- Real Estate — This acts as a blend of investment ownership and business management, making the “R” a perfect fit between “I” and “E.” It’s a compelling mashup!
- Entrepreneurship — Last on the list because it can be the most challenging, yet it holds immense potential. It’s advisable to focus on the first three pillars before diving into this complex realm.
Financial Psychology
Recently, we re-aired one of my favorite podcast episodes featuring behavioral economist Kristen Berman, who boldly claims that habits are overrated.
Wait—what? Habits are overrated? Aren’t they the foundation of everything?
Not according to Berman. She argues that while habits are a solid second option, automation is far more powerful. The best way to utilize your time upfront is to establish systems—think automatic transfers and deposits. Habits serve as a backup for anything that can’t be automated.
Automated systems are more consistent. They don’t falter when you take a two-week vacation. Your habits, however, can slip away during the holidays.
Automation relies on technology, while habits depend on human consistency.
In the end, technology often prevails.
Investing
Successful investors typically fall into one of two categories: those adept at generating returns and those skilled at preserving their returns.
The first group often takes significant risks, betting heavily on a few individual stocks or investing substantially in cryptocurrencies during their early days. Their high-risk strategies can pay off, leading to applause driven by survivorship bias.
However, this risk-taking behavior can ultimately backfire as they continue to gamble, potentially resulting in the loss of returns they once gained.
In contrast, investors who excel at maintaining their returns tend to adopt a measured, long-term investment strategy. They may take decades to accumulate wealth, but once achieved, they are generally better at preserving it.
SPOTLIGHT ON…
What are some excellent tools for financial automation?
One that stands out is Acorns, which automatically rounds up your purchases and invests the spare change.
For instance, if you spend $1.73 on a snack (can you still find a snack for that price?), Acorns will round your purchase to $2 and invest the $0.27 difference into your account.
You can choose from various investment styles (aggressive, moderate, conservative) or double your round-ups for a boost.
If I’m overspending, at least I’m also investing!
Check out Acorns here (and enjoy a $5 bonus).
Real Estate
Many aspiring investors often ask:
“I want to buy an investment property. Can I also use it for _ [insert personal use here] _ when it’s not rented out?”
Examples might include wanting to:
- Use it as a vacation home.
- Stay there for a couple of months each year.
- Allow family members to live there.
- Convert it into a home office seasonally.
- Provide shelter to friends or relatives in need.
While these ideas sound appealing, they don’t define a true investment property.
There’s a critical distinction between purchasing an investment property and monetizing a property during non-occupied periods.
The former hinges on cold, hard calculations, free from personal preferences. Decisions are driven by analytical assessments.
The latter, however, is fueled by personal desires. Every choice, from location to layout, reflects individual homeownership aspirations.
While the broader actions may appear similar—buying a property, renting it out, and handling maintenance—the decision-making processes for each type are fundamentally different.
Many homebuyers run into trouble when they fail to recognize which objectives they’re pursuing. They follow misguided cues, use incorrect calculations, and track the wrong metrics.
Ultimately, this misalignment may lead to selecting properties that aren’t suitable for their intended purpose.
In our course, Your First Rental Property, we guide students to clarify their property objectives, ensuring they aren’t misled by outside influences.
Entrepreneurship
Let’s keep it straightforward:
“Do I need business cards?”
No.
“Do I need a business plan?”
Just a simple outline is fine, possibly on a napkin.
“Do I need a suit?”
Unless you work in a formal setting, probably not.
Stop pretending; wanting to start a business by primarily printing business cards is simply child’s play.
Regardless of the business you’re launching—be it dog walking or freelance coding—you need just two things:
- A product or service.
- A customer who values that product or service enough to purchase it.
That’s it! Forget those business cards. Aim to focus on (1) defining the product or service you can provide and (2) promoting it effectively.
Remember, narrow down “the world” to your target audience—like telling Bob, if he’s a potential client for your services.
Congratulations! You’ve just completed Issue #2 of the First Principles series!
I hope this series inspires you to think critically, learn continually, and take robust action.
If you’d like to receive future insights directly in your inbox, click here for more thoughts and ideas on a new take on FIRE.
See you soon!
Let me know if you need any modifications or additional information!