Below I’ll outline a few ideas on how you can manage money to increase your earning-potential over the course of your entire life. The ideas are derived from compound interest.
The Principles Covered:
- Respect Money while staying indifferent to it
- Make lasting improvements to your flywheel
- Increase the speed of money
- Treat it has an infinite game
The first and most important thing is to be able to stay indifferent to money while respecting it. Money is a commodity that's used to transact with goods and services. That’s all it is. A common issue is to overcome the inherent emotional barriers to money. As Anton Kreil explained beautifully in this Youtube video
The brain does not register the visual stimuli as simple objects, but as soon as you see an object your brain will create a “mental movie” in free association. This applies to any object, and the stronger the emotions generated by the mental movie the greater the importance your brain puts on the object. With increased importance, the more you’ll think about it. You obviously think more about your children than a mosquito. This creates emotional barriers that make it difficult to assess risk objectively.
A while later, Anton Kreil summarized his teachings with:
“Ideal situation not having personal liabilities, assessing risk in terms of business. Trying to work towards business opportunities with a very limited downside, but a huge upside. And repeating it an infinite amount of times.”
His perspective is from trading, but how can we apply this in our personal lives. Finding things to invest in, where there’s a limited downside with almost infinite upside.
The key to finding these low-risk/high-reward opportunities is to focus on making lasting improvements to your flywheel.
Flywheel is a term coined by Jim Collins in the book “Good to Great” which explains the upward moving spiral caused by positive compounded growth. Your personal flywheel is the term I’ll use to describe your earning potential. Imagining that one 360 degree rotation of the flywheel gives you $10,000. When you’re first starting earning money, it might take you a whole year working 40 hours /week to earn $10,000.
By acquiring skills & experiences, you’ll make the flywheel spin faster. So you might make $10,000 in 8 months instead of 12.. The key here is lasting. Invest in things that will last to eternity. A new cryptocurrency might give a better return in the short-term, but since we’re trying to maximize the earning potential over the course of your entire life, it might be wiser to invest into the timeless (books, knowledge, experiences).
If you’re able to make daily incremental improvements to the speed of your flywheel, you’ll quickly create an exponential effect with your money. By the time you notice these long-term bets play out you’ll be so far ahead of everyone else, that they will never be able to catch up. People relying on ‘hard-work’ and putting in long-hours will not be able to compete, since they don’t respect the power of compound interest. If you structure your life correctly, the things you spend on have an infinite half-life, so you’ll gain advantage from it throughout your entire life. Which means that you can compete with 1000s of hours of work for a specific problem, while the other guy is relying on his 80 hours of hard work.
The best investment you can make is in yourself. As Eben Page says: Rich is a state of mind. There’s a big difference between money and wealth. Wealth comes from knowledge, systems, assets, understanding of how to create value for others. Money is just imaginary numbers that we try to pretend to have value.”
Invest into books, skill sets, experiences etc.
The third key to growing your wealth is to increase the velocity of your money, rather than the total amount. As this Y-combinator describes Google’s cash reserve:
Another famous billionaire as the same view, Dustin Moskovitz, the founder of Asana says this is one of his fundamental views on money:
“I never viewed money as being ‘my money’ I always saw it as ‘The money.’ It’s a resource. If it pools up around me then it needs to be flushed back out into the system.
Jeff Bezos, also follows the principle of increasing the velocity of money instead of saving it. If you look at Amazon, they have had virtually zero profit for the last 2 decades. Why? Everything has been re-invested. This is how they’ve been able to develop one-day shipping and the broadest selection of products available. What would happen if you were to do the same?
To re-invest every single penny you make might seem risky, but anyone who takes a college degree takes a bigger risk. Going $50-100k in debt to increase their future earning potential is far more risky than making these investments into yourself, since you’ll never go into debt.
But what should you invest in?
Your limbic brain might argue that a beer in a pub is a good investment because it improves your social circle. TV is also a fantastic investment in your health, since it will help you relax.
When considering these investments, rely on your prefrontal cortex which is able to consider the 2nd, 3rd and 4th order consequences from your investments. The first order consequence of the TV might arguably be positive, but the rest of them are negative (time wasting, opportunity cost of money spent, low quality input).
If you want to learn more on what to invest in, I’ve written an in-depth article on Compound Interest that should give you a lot of ideas on how to prioritize these decisions. But a few bullet points that should help you on your way:
- Outsource low-level tasks (cleaning, cooking, washing clothes)
- Evergreen Skills (coding, math, foreign language)
- Health (sleep, nutrition, gym)
- Increase Optionality
The principles discussed here is for people who want to maximize their earning potential at the expense of short-term stability. You will probably be without money a few times, if you were to re-invest your entire income. But with following this strategy you’ll have the opportunity to reach greatness. Saving all of your money in a 401k is stable in the short-term, but as Max Levichin (founder of 3 multi billion dollar companies) said in an interview “A lot of founders say they’re going to save up money before taking the leap and starting their own business. But if you get to $100,000 in savings, you’re too comfortable with life to ever take a risk, and that business will fail because of it.”
Lastly, I’d like to discuss the idea of “play the game for life”. The goal of an infinite game is to keep the game going. The majority set goals as “I want to make $1,000,000”, but what happens when you reach that goal? You’ll either increase the dollar amount right before you attain it to perhaps $2,000,000 or you will become depressed, realizing that you’re not really feeling any different (an oversimplification).
Viewing your money as a commodity that exists to increase the velocity of your personal flywheel gives you a system and a framework you can use for the rest of your life. This same system can be used by a multi-millionaire and by a high-school student making $10 /hour. Because once you start seeing yourself as an investor whose goal is to improve yourself, it will turn into an artform that will give you a lot more fun than just buying a new car.
So there’s my ideas when it comes to running your personal finances that optimizes for maximizing your long-term earning potential.
James Stuber’s Article - Run Your Personal Finances Like Amazon
Anton Kreil - Indifferent to Money
Jim Collins - Flywheel
Summarized into 1 sentence:
Money is a commodity used to make lasting improvements to the velocity of your flywheel to maximize your lifetime earning potential.