The 7 Aspects Of Money You Need To Master
You need to understand how money works before you can become rich
In its abstract form, money is one of the most incredible inventions mankind has ever dreamt up. It is a store of value (in a representative item such as a shell, a piece of gold, or a paper bank note) that creates a medium of exchange for trades. We have come a long way from trading shells, having building Wall Street companies, complex financial instruments and Billionaires, but a form of money has always been with us and the underlying concepts have stayed mostly the same.
There are 7 characteristics of money that all wealthy people understand (or if they don’t, then they have financial planners that do), and it is essential that anyone who deals with money needs to understand these concepts. They are not difficult, but anybody on a path to financial independence should make sure that they understand them so that they can use the concepts successfully in their everyday lives.
Debt
“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds and six, result misery” ― Charles Dickens
For many people debt is deadly. Borrowing money you don’t have comes at a cost (interest) and means that you will be paying more money back than you borrowed. If the interest charged on debt is high (the shorter term the debt, the higher the interest is) then this can quickly lead to debt building up into a snowball — hitting you hard once it’s grown out of control. Debt also slows people down when it comes to growing their wealth, as they are not starting at zero, rather, they are starting with a negative and so need to pay off the debt first before they can move on to growing their wealth.
However, there are different aspects of debt to be aware of, and not all debt is bad. Used wisely, borrowing money can create personal wealth in the long run, by giving you access to money that you don’t have. The perfect example is the mortgage. If you do not have $300,000 to buy a house, then taking out a mortgage suddenly allows you to get on the property ladder. If the mortgage rate is low (e.g. 1.5%) then you are getting access to cheap money, and hopefully the equity you build up in the house (or the income you make by renting it) will offset the 1.5% interest you paid in the long run.
If you have high-interest debts, consolidate them and pay them off fast. Long term, low-interest debts can be used to buy assets you couldn’t afford otherwise, but always with the goal that they will make you more money in the long run.
Savings and the power of compound interest
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”- Albert Einstein
Saving is the opposite of debt. If you spend less than you make, you end up with a surplus. This surplus then forms an emergency fund (money available immediately in an emergency, instead of having to borrow), and you can use it to start investing, as a down payment on a property, to start a business, or even on education.
Once you start to save money, then banks will pay you interest for that money. For example, if you have saved $10,000 and deposit it into a savings account offering 3% a year, then your $10k is making $300 a year. After 1 year you now have $10,300, and at the end of year 2, you will have made $309 in interest, as your original interest is compounding. This is the positive snowball effect, and if you would keep your initial deposit of $10,000 in the bank for 20 years at 3% interest, then it would become $18,061.11 just from compounding the interest.
However, nobody gets rich from saving money, unless they are earning a high income and spending little of it. However, the concept of spending less than you earn to create savings, and the power of compounding interest are essential concepts to understand on your personal finance journey.
Investing
Investing is the big brother of saving. While the risks tend to be higher, so do the returns. The most common form of investment is in stocks and shares, or index funds, where you make a profit either on the rising value of the stock, or from dividends paid to shareholders. However, there are many other ways to make money from investing, including;
- Property (rental)
- Bonds
- Peer-to-peer lending
- Land
- Investing (in cars, art, gold, fine wine, bitcoin, commodities etc.)
- Investing in new businesses (see 5. Ownership)
The downside to investing is that the value of what you invest may go up or down. For every person that made money in the stock market, there is another person who didn’t (for various reasons). Perhaps you went all in on Nokia shares back when the 3310 phone was all the range, or perhaps you invested in Wirecard or WeWork, or even Uber, which is yet to make any profit or returns for its investors.
To reduce the risk of investing, you need to diversify and think long term. Don’t put all of your eggs into one basket, instead, choose a mixture of investments that aren’t closely linked, so that over time, even if one investment fails, another succeeds. The easiest way to do this is to invest in an ETF or index, which tracks the most successful companies across time, saving you hours of research. And remember Warren Buffett’s wise advice, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
The final and most important investment is in your health. If 2020 has taught us anything, it’s that health is incredibly important and we need to take care of ourselves. A millionaire will give away everything to heal themselves, and all your wealth is worth nothing if it cannot buy you more time or good health. Health is not something that can be bought, but it is important to invest a little time every day into exercise and staying healthy.
The first 3 aspects of money are what most personal finance advice revolves around. They are the fundamentals of ‘getting your financials in order’, and are important to understand and apply. Through saving, investing, and using good debt carefully, you can live a comfortable and wealthy life. In fact, the above 3 concepts are how many people in the FIRE movement (Financial Independence, Retire Early) operate. The 3 concepts work well if you have a well-paying job and low cost of living. However, this is not how many millionaires and billionaires make their fortunes. There are 4 more advanced concepts that need to be understood to really become rich.
Specializing
“The weak compete. The strong dominate.” — Grant Cardone
Diversifying your investments is useful once you have accumulated a solid portfolio of investments, but to start with your focus should be on specializing and becoming an expert at one or two things. When Mark Cuban said, “Diversification is for idiots” he meant that by being knowledgeable about everything, you are a master of nothing. If you can become the best in your field, regardless of what you do, you will be able to command a higher salary and access more opportunities. You will be able to take larger bets because you know the risks involved and the potential outcomes.
Regardless of what you are doing, push to be better, and to know more. Apply this to everything that you do. If you are buying your first home, then do your research and find the absolute best deal. Become an expert at your job, so good that you have outgrown it and need to move on to something bigger and better. Become so knowledgeable that you can start your own company. Set large goals and keep pushing towards them — and don’t waste time on things that are not going to help you reach your goals. The payoff of excellence is not immediate, but across time, it will pay out exponentially.
Ownership
When you invest in a company, you buy a fraction of ownership, in the form of a share. However, that is very different from having significant equity in a business, or to actually call yourself an owner. Early investors have a significant share of the business, sit on the board so have voting rights, and can even decide how much money is given to shareholders. They are taking a risk by giving a company an investment, but in the long run, their investments can pay off exponentially.
Some good examples of this are Peter Thiel’s $500,000 investment in Facebook, which is now estimated to be worth more than $1 billion. Chris Sacca’s Lowercase Capital fund has been an early stage investor in technology companies like Twitter, Uber, Instagram, Twilio, Stripe, and Kickstarter, which over time made him a billionaire. Even if you don’t have half a million lying around, don’t despair — many of today’s companies started with a lot less. Nike was built with a few different $10,000 investments, John Paul Mitchell Systems started with $700, Dell was started with $100 from a family member, and Patagonia was built from a love of climbing, not from a cash injection.
But more than just owning part of a company, a lot of wealthy people own their own companies. Some are built from scratch, while others are bought or acquired. Owning a system, having other people working for you and making a small profit on every item that is sold is potentially more profitable in the long run than buying shares.
Opportunities through networking
“Effective networking isn’t a result of luck — it requires hard work and persistence”- Lewis Howes
There is a reason that people aspire to send their children to Harvard, Stanford, Yale etc. and spend thousands of dollars on schooling and preparing them to get there. It’s not just because they care about education, but rather they care about giving their children the opportunity to network. In a room where your peers are either smart or wealthy (or both), and the teachers are highly respected in their fields, this gives students a great advantage when they leave university. They already have a good network to lean on. Later when your friends want to start companies and need investors or business partners, you will be first in line.
The same concepts work when you are in a certain area. For example, tech entrepreneurs flocked to San Francisco back in the early 1990s, and today, most of them know each other through friends, events, or working together at some start-up. As the old saying goes, you are the average of your 5 friends, so if none of your friends are interested in business, entrepreneurship, or financial independence, then you will need to find other ways to open doors for yourself.
Luck & moon shots
“There are rules to luck, not everything is chance for the wise; luck can be helped by skill.” — Balthasar Gracian
The final aspect of money to consider is the element of luck. This kind of luck doesn’t refer to “the harder I work, the luckier I get” quote, rather it refers to the lottery of being born in the right place at the right time. Being born in a developed country, having access to a good education, and in a time where access to information is readily available online is good luck. Having an interest and deciding to study computer science 15 years ago is luck. Deciding to buy a house in London, New York or San Francisco 20 years ago is luck.
On the path to wealth, there is always an element of luck involved, as we cannot predict the future. However, there is an aspect of luck you can control, and these are called moon shots. You can’t win the lottery if you don’t buy a ticket. You can’t gain wealth in the stock market if you don’t own any stocks. You can’t command a high salary if you don’t have the skills that people want to pay for. Moon shots are shots in the dark, but with incredibly high returns if they happen to succeed. Increasingly, this is how the venture capital arena is operating, with VC funds investing in a range of high risk but high reward companies. Moon shots should be a small part of your portfolio and should have the potential to bring in life-changing returns.
Becoming financially independent and becoming rich are two different things, but regardless of what you are aiming for, understanding how money works, and how it can be used to create more money, is a solid starting point for generating personal wealth. Alongside wealth, you also need a dream and goals, as ultimately:
Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. — Ayn Rand
