This has been sitting on my mind for a long time and I think it's rather important to people of all sort, so I figure that if this could help at least 1 person get their life on the path to financial freedom and wealth, then it's worth writing.
It's sometimes hard to sift through the "fake" knowledge out there nowadays, to find something that's genuinely written/recorded to help you rather than to string you along only to sell you some "snake oil" at the end. You see videos of guys driving exotic cars, walking around their huge mansions, headlines of some 15-year-old kid making millions because he remembered he bought some bitcoin in 2013. Then you scour the internet to find the "next big thing" that will make you an instant millionaire. "If I just buy the next bitcoin, then I'll be set for life and I can kick up my feet for the rest of my life!"
While I do believe there is a place for speculating on very risky assets such as cryptocurrency (I personally hold some crypto assets), I think this whole mindset of "If I could just buy that ONE thing that will make me rich..." is a very toxic and dangerous mindset.
The term "Investor" gets thrown around these days like a bag of popcorn.
--A college student who has always been interested in the markets makes their first trade. They invest $1000, make 20% on their position in a couple weeks and think "I'm an investor." Then they go and blow that $200 profit on a bar tab Saturday night to impress their friends. They continue to make trades here and there, spending the money sometimes, saving it sometimes. They are not worried because they know that college is the best "investment" they could make.--
--A valued salesperson at a computer company makes $100k yearly, a very decent salary. They have a 401k set up with their employer because "they're an investor", so they contribute 5% out of their paycheck and the company matches it. 100% of those funds are invested in an S&P 500 index and they consistently make 7-9% return on their money year over year and they genuinely believe they are taking the best and most effective steps toward saving for the future. But where does the rest of their salary go? This particular individual has a mortgage on a house that is way oversized for their needs and drives a $70,000 car, which they financed. On top of that, they regularly go shopping and don’t spend "too much" on their credit card, because they know they'll be able to manage the payment, and they have leftover student debt still looming over their head. After all is said and done and the books are balanced, this individual spends 100% of their remaining salary on their lifestyle and debt servicing. The only money saved is their 401k contribution and their company match as well as any equity built in their property.--
--An individual thinks of themselves as someone who is "very good with money." They make a modest salary of $40k yearly and have no credit card debt. They rent an apartment that is affordable and they don't live outside of their means. They have a 401k with their employer and invest in "whatever my broker says is best" and they manage to put away a little extra money into a savings account each month just in case of an emergency. This particular person rode a bike to work for years because it was just a few miles from their apartment and therefore did not have a car. They recently just changed jobs and work is a bit farther away, so they needed to purchase a car. They know they are "smart" with money so they know they will look for a cheap, reliable, fuel-efficient car, and they will purchase it with cash in full. They buy the car with the extra money they've saved and have basically depleted their savings account.--
I described these examples to illustrate a very misunderstood concept. You might consider the people in all of these scenarios to have a plan that's "not bad" or even GOOD for saving and investing for the future.
You might say, "Sure the college student doesn't take their profits and reinvest to build their account, but they're going to college, so they'll have a good job in the future." Or "Well, of course, the salesperson makes a lot of money, let them live an extravagant lifestyle because their 401k contributions are large too! They'll be just fine when they're 65." And "Obviously the person with a modest income is making great decisions with their money because they save it and they don't incur any debt on anything. They save for emergencies and they have a 401k that is managed by their broker, so they're right on track for retirement."
While these may seem like examples of people who "invest" and save for the future, these are actually horrible examples.
-In 5 years, the college student will end up where the salesperson is because they'll be paying off that huge college tuition debt while trying to live a large lifestyle.
-The salesperson will always be trapped in their sales job because they have to afford the hefty mortgage payment, car loan, student loan debt, and the pesky credit card bill.
-Surely the third one can't be a bad example you say! But alas, the person that lives within their means spent ALL of their savings on the car that they needed. They don't have any debt, but the money they were saving wasn't earning them any interest all of the years they were saving it, and now it's all gone, and all they have to show for it is a liability.
Let's first define and then redefine what I mean when I say "Investor." A TRUE Investor.
The dictionary defines an investor as:
in·ves·tor
/inˈvestər/
noun
a person or organization that puts money into financial schemes, property, etc. with the expectation of achieving a profit.
However, I don't think this definition goes deep enough in today's society. Each person in the examples above all had a "plan for the future." For the college student, it was the great job they would have when they graduated. For the salesperson, it was their 401k and their house. And for the modest living individual in the third example, it was just their 401k and emergency fund.
I believe a true investor is not just someone who puts money into something with the expectation of achieving a profit, but rather someone who has a long-term strategy to build on top of that profit to create immense wealth.
How does one develop this "long term strategy" you ask? Great question, because the answer is so stupid simple, you'll wonder why you didn't start doing this earlier in your life. This long term strategy is not WHAT you should invest in over the course of your life, rather it's a way of tracking your HABITS to help you determine whether or not you're behaving like a true investor.
It’s so simple in fact, that I can tell you the whole strategy in 4 words.
TRACK. YOUR. NET. WORTH.
Some may initially think this to be very ostentatious or conceited. But this isn’t for anyone else. This isn’t for you to brag to people about. This is for YOU. This is about recognizing what you’re doing in your financial life that is making you stay poor. By tracking your net worth, you will very quickly realize how good or how bad you are at making financial decisions because the strategy has one rule to follow. And it is this:
Net Worth MUST Increase
Yes, it really is that simple. You can implement this strategy by doing the following.
#1 Start by filling out a personal balance sheet.
This is how you will track your Net Worth. A balance sheet lines up all of your assets and all of your liabilities and takes the difference between the two. This will give you one dollar amount which is your Net Worth. I have created a personal balance sheet that I have added to over time. I have included a link for you to download this balance sheet for free. It has other interesting and useful calculators off to the side of the sheet that I think you will find handy. You can find the Excel file here:
#2 Fill out this balance sheet regularly
I recommend filling it out every time you regularly get paid and at even intervals of time. Most employers pay you every two weeks. This is a perfect interval of time to fill out the balance sheet. I fill out mine every two weeks.
#3 Discipline yourself to find a way to make your Net Worth graph go up
By making a new copy of the balance sheet in the excel file every time you fill it out, this will populate your Net Worth graph over time, and show you exactly what your performance has been. If the graph has gone down, you need to make some adjustments. What is your biggest liability? How much is it costing you every time you fill out the spreadsheet? If it is going up, even by a little bit, you’re on the right track. If it is increasing rapidly, (very steep, exponential looking lines) then you are making VERY good financial decisions. Figure out what those decisions are and cognitively recognize them. Then repeat those good decisions day in and day out.
It will be different for everyone. Some will realize: “Oh wow, I didn’t realize I was spending $150 a month on my morning Starbucks run.” That’s a spending habit that you need to recognize. I’m not saying that you can’t have your Starbucks every morning, I’m saying that you need to recognize what your morning Starbucks and every other financial decision you make is doing to your Net Worth. If Starbucks is causing you to overextend on your budget, but you really want to keep your expensive morning coffee in the mix, look at other areas in your spending that you can cut down on. You don’t have to live like a poor hermit and never go outside or spend money on anything that’s considered “not a necessity,” you just can’t spend money on non-necessity items all the time, in every category of your life.
I like to race and ride road bikes. That is an area in my life where, if I need something for my bike to allow me to continue enjoying my sport (within reason), I will buy it. For example, I don’t go and blow $3k on a set of beautiful carbon race wheels every year (or at all). But if my tires are looking thin, I have no problem dropping $100 on a set of new tires, because I need them to ride, race, and perform well in my sport. This is my “extravagant spending” category. But I do it occasionally, and I limit my extravagant spending to only that category. Because I do this, I have to make sacrifices in other areas of my life. I love to eat out. I like trying new food and new restaurants. But I don’t do it because I know that it would negatively affect my Net Worth significantly over time if I did that regularly at this stage in my life.
Obviously, your categories and dollar amounts are not static and will change over time as you grow your Net Worth and as a person in general. As I said, tracking your net worth is a strategy to make you consciously realize your financial habits so you can adjust them where needed.
One thing that is so important about this habit is that some people who try this will realize how incredibly bad they are with money. For some, it will be those who previously thought you were GREAT with money. Let me be the one to tell you, DO NOT get prideful and think “This is stupid,” and stop filling out the spreadsheet. I can say this because that was me when I first started this habit. I filled out my spreadsheet regularly and realized very quickly that I was not on a good financial track whatsoever. My spreadsheet would go down, shoot up, then crash again, then flat line for a while. It was bad. But instead of thinking “I’m too good for this” and quitting, I humbled myself and admitted that while I had previously thought I was “an Investor,” and was great with money, I was not.
This experience truly humbled me and inspired me to become a TRUE Investor, one that builds wealth consistently over time. So I began to read, seek out advice, research, and learn everything that I could. Slowly, my Net Worth graph began to increase more and more over time. Soon, my increases every two weeks started to look more and more exponential. I got myself on the right track. I became a true investor.
While I am far from the master investors like Warren Buffet, Mark Cuban, and Kevin O’Leary, I believe that if I stay the course, I will come closer and closer to the success of the great investors. Success at that level will allow one to help numbers of people you would have never thought possible. Using the incredible utility of money for good so effectively around the world that even remote villages in Africa will benefit from the wealth you have created. But that’s a story for a different day.
To your prosperity,
AJ
Excellent post! I totally agree and have thought about it too. Living below your means and investing long term is the path to wealth. If you do not have time to do your own market research, get an investor who understands this. Unfortunately this message drowns out in headlines instant of riches by being lucky. Too many people confuses leveraged trading with investing.
This ^ This ^ This ^ Every word of it. My life and finances only started to change when I began keeping track of every penny coming in and every penny going out. I use a free app called expense tracker - it works for me - but not everyone will want to share their email (they didn't ask for personal info when I first got it a year ago :-/ )
If you rely on 'what I think I spend' - you'll never save. For the first month when I started tracking my 'net worth' - I didn't change anything. The second month, I went back and started making changes. Also, keeping track makes me think twice about making a dumb ass purchase I know I'll regret.
Please keep posting stuff like this :-) I don't know if I call myself an investor - but I work for me, and don't let anyone else manage my money. Vanguard Index funds for the bulk - then some stocks and cryptos for a smaller percentage. What's your strategy /Mix?
Thank you for the positive words. I like to have many different avenues of investments, but not to the point where I'm not investing in what I DON'T know. My one rule for investing (as far as choosing investments) is "Invest ONLY in What You Know." If I don't understand it, I don't buy it. That said, I believe everyone should never put all their eggs in one basket. Everyone should have a 401k/IRA (I prefer Roth), parked Cash position, real estate, stocks/ETF's/Index Funds, etc. (In my opinion). If you don't have a decent understanding in at LEAST those things, learn them. That said, I contribute 5% of my income to my 401k, and I reserve about 15-20% of my cash for speculation (such as crypto, which has (so far) treated me well). The rest of my cash position is constantly "looking" for a lucrative investment. For example, I'm always looking for the next real estate deal I can do (you need cash for that) so I save a ton of money, and until I make that next real estate deal, I'm swing trading the stock market. It's all about finding/learning something that you come to KNOW, and always growing, even if it is slow at times.
That's awesome. #financialgoals for me - to have enough left over for real estate. I do Roth IRA, enough cash to live for about a year, handful of stocks and index funds. Totally agree about not investing in what you don't know. Smart advice ! I think you're positioned to be the Mr. Money Mustache or JL collins of Steemit . Will be following your blog closely! :-)
As a beginner to all this, this was actually quite informative. Thanks
Too much ambition to get rich aint good there are possibilities that money can also ruin life.
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