Personal finance is made out to be more complicated than it actually is. If you work to earn, spend less than you make, and invest the difference you are well on your way to financial independence. Scott Galloway (professor of marketing at NYU) creates a good equation for wealth:
Focus + (Stoicism x Time x Diversification)
The focus portion of this equation is (for most people) in the form of a career. By focusing on your career and professional growth you will earn a paycheck, which can then be used to invest in assets that generate additional income. Unless you were born rich right out of the gate, most of us earn money through our careers.
The stoicism portion of the wealth equation is just as important as focus. If you fall into any societal trap (lifestyle creep, comparisons, keeping up with the joneses, etc.) you will sabotage yourself and end up in a worse position than if you just cared less about what other people thought of you. This is a very real risk. Data shows that 36% of earners making $200k+ per year are living paycheck to paycheck in the U.S. If your expectations increase faster than your income, it doesn’t matter how much you make. Your relationship between production and consumption will determine how wealthy you become, not your income.
Time is the most valuable resource on the planet. Lose money? You can always earn it back. Squander time? It’s gone forever. Rich is a relative term. One persons idea of rich may be to have a fancy sports car, large house, lake house, and flying private. Whereas another person may think being able to cover their rent passively using investments is the coolest thing in the world. You define what you value. Not society.
Diversification is incredibly important. Since it’s impossible to predict where the stock market will be 5 years, 10 years, 30 years from now, we want to remove as much unsystematic risk as possible. This can be done through diversification. The old saying “don’t put all of your eggs in one basket” illustrates the importance of diversification. Making all your money “in the form of a job” is not diversified. We want to spread out our risk so that we can sustain ourselves in the case of a job-loss.
Everything has a price
It’s important to know yourself extremely well. There are a million different paths that you can take in life, and you need to have a good understanding on what you do, and more importantly what you don’t want in your life. Everyone seems to want to earn more money, but very few people highlight the price you pay in terms of stress, anxiety, more student debt, more responsibility, and low job security. This tradeoff has led many people to work harder and longer hours for a prize that they later determined wasn’t all that important to begin with.
Financial Base
New graduates and regular people tend to build wealth slowly, and over long stretches of time. The average financial picture usually looks a little like this:
An IRA (Roth for young people, Traditional for some older individuals), a 401k plan offered through some companies (pensions in rare cases), home equity, potentially an HSA, and individual brokerage accounts.
The 26-year old tech bro that gets rich from employee stock options at a startup after an IPO is a rarity, not the norm.
What does financial success look like?
Have little to no debt? Make more than you spend each month? Have enough to save and invest the difference and maintain an emergency fund? In that case, you are in good shape!
Try and ignore the noise of influencers and other hustle culture promoters who treat life as a “race” that has to be won. They may have a lot of money from misleading people, but you can take pride in the fact that you aren’t nearly as obnoxious and vain as them!
