5 Lessons for Young Founders on Building Wealth

"A genius is the man who can do the average thing when everyone else around him is losing his mind." - Napoleon

This week I read The Psychology of Money, by author Morgan Housel.

Morgan is a pretty cool guy. He's a partner at the Collaborative Fund, a venture capital firm, and also a brilliant author.

In this book, he writes about how to better make sense of money.

Moral of the story: this book opened my mind to a different approach to money and happiness.

Nonetheless, here are 5 Lessons for young founders on building wealth, along with a few of my favorite quotes from the book.

My Key Takeaways

• Focus on increasing your savings, rather than chasing big returns.
• The hardest financial skill is to suppress your ego to below your income.
• The secret formula to investing is time.
• There is a huge difference between getting wealthy vs staying wealthy.
• You are not a spreadsheet. Be reasonable rather than rational.

Focus On Your Savings Rate

It is only natural for us to want assets with the best possible performance.

You can type in the word “Invest” on YouTube and be overwhelmed with thousands of hot tips and ideas.

The reality is that the secret to building wealth has less to do with returns and more to do with your savings rate.

If you’re in your early years, it would be wiser to focus on your savings rate and your own business, rather than seeking the next big return in the stock market.

Savings is the only variable that we have true control.

The standard way of thinking is:

“Savings = Income - Expenses.”

But the way Morgan puts it is:

“Savings = Income - Ego.”

You can't control the returns of the stock market, crypto, real estate, or necessarily the amount of money you're getting paid.

What you can control is the amount of each paycheck that goes towards savings, and the amount you need to live on.

With your ego in check and the ability to live below your means, there's a certain level of freedom gained.

So as cliché and simple as it sounds, the biggest takeaway is to save as much as you can.

When is "Enough" Enough?

As we progress in our lifetimes, it's only natural to forget what we've done and push towards the next goal.

This is a never-ending cycle of comparison that can eat away at us. It’s easy to get wrapped up in this, just scrolling through Social Media.

“It's dangerous to pursue growth for its own sake since there will never be a finish line.”

In the world of investing, you'd be hard-pressed to find someone more infamous than Bernie Madoff.

Madoff was found guilty of running a $64.8 billion Ponzi scheme (the largest in the world). When Madoff passed away at age 82, he was serving a 150-year sentence in federal prison.

The wild part of this story is that before this scheme he was a legitimate business person making between $25-$50 million a year.

Why would someone raking in $50 million a year feel the need to create a fraudulent investment scheme?

The simple answer is that "Madoff had no sense of enough". The never-ending cycle of wanting more is what drove him to risk it all.

"There is no reason to risk what you have and need, for what you don't have and don't need"

From personal experience, it's easy to fall into this self-comparison trap.

Job changes, vacations, new cars/homes; these positive and exciting events are the things we are most likely to see in our news feed.

The hardest financial skill is getting the goal post to stop moving.

"If expectations rise with results there is no logic in striving for more because you'll feel the same after you put in the extra effort."

After putting in that extra effort you may reach a step forward, but inevitably the goal post moves two steps ahead.

You'll begin to feel like you're behind, which will make you want to take greater and greater risks like Bernie Madoff.

The way the book explains it is to focus on things that can’t be replaced.

Things like your reputation, freedom, independence, family, and friends are invaluable. It’s not worth risking these things. The best shot at keeping them is to know when to stop taking risks that might harm you.

You have to know when "enough" is enough.

The Secret Formula to Investing is Time

When people talk investing or personal finance the word "compounding" seems to get thrown around quite a bit.

Compounding is basically what happens when you take a number and multiply it over and over again as opposed to increasing it by a fixed number.

If you look at investment greats like Warren Buffet, Morgan writes:

“None of the 2,000 books picking apart Buffet's success are titled "This guy has been investing consistently for three-quarters of a century"

A lot of the financial success we have seen from Warren buffet's amassed wealth of $100 billion is due to him starting in his early years as a young professional and continuing through to his geriatric years.

And you can attribute a lot of this success to compound growth.

People generally think linearly you can easily do 9+9+9+9+9, but not 9x9x9x9x9.

So here’s a visual way to look at linear growth vs compounding growth using pizza:

🍕 = a slice

Month 0 (when you start): 100 slices 🍕

Month 1: 100 + 10 = 110🍕

Month 2: 100 + 10 + 10 = 120🍕

Month 3: 100 + 10 + 10 + 10 = 130🍕

Month 4: 100 + 10 + 10 + 10 + 10 = 140🍕

Month 5: 100 + 10 + 10 + 10 + 10 + 10 = 150🍕

Total extra slices of pizza after 5 months: 50🍕

But that’s not actually how compounding works.

You don’t just get an additional 10% of your original 100 pizzas every month. Instead, you get an additional 10% of your total number of pizzas every month (rounded):

Month 0 (when you start): 100 slices 🍕

Month 1: 100 + (100 x 10%) = 110🍕

Month 2: 110 + (110 x 10%) = 121🍕

Month 3: 121 + (121 x 10%) = 133🍕

Month 4: 133 + (133 x 10%) = 146🍕

Month 5: 146 + (146 x 10%) = 161🍕

Total extra slices after 5 months: 61🍕

As you can expect, this comes into play if you begin to reinvest earnings on your investments.

So if the market were to increase over time, and you are invested, historically it’s been a fantastic way to build wealth.

“Investing should be about getting decent returns that you can stick with that can be repeated for the longest time.”

Better than just earning high returns in a short period.

Getting Wealthy Does Not Mean Staying Wealthy

The ability to get wealthy vs the ability to stay wealthy are two completely different skills.

You can graduate university with a 6 figure salary, but ultimately offset that income with high living expenses.

Over the long-term, being able to stay wealthy is far more important.

“We've seen throughout history many people could make vast amounts of wealth. Consequently, we've also seen many of those people lose vast amounts of wealth.”

The book illustrates three different points that someone like you and me can learn to appreciate:

• More than wanting big returns, I want to be financially unbreakable. Be able to stick around long enough for compounding.
• The most important part of any plan is to plan on the plan not going according to plan. Be okay with not knowing what's next. Have a margin of safety that accounts for the unknown inevitably happening. A future filled with unknowns is everyone's reality.
• Learn to have a "Barbelled personality". This means being optimistic about the future, but paranoid about what will keep you from getting there. It's common for humans to double down on one single idea, but being flexible is not mutually exclusive.

The ability to get wealthy requires risk-taking and being optimistic. But staying wealthy requires the opposite of taking risks.

Staying wealthy requires humility.

Being Reasonable

What matters most when it comes to managing your money is the ability to stick with a reasonable strategy over the long term.

This means avoiding extremes.

We can afford to not be a perfect investor, but we can't afford to be a bad one.

Understanding this at the onset of your career can be a huge advantage.

Building wealth is not black and white. There are situations in life that can be "technically true", but contextually nonsense.

Many of life's greatest financial decisions, like purchasing a home, taking out a mortgage, or having a child aren't made with a spreadsheet, they are made at the dinner table.

The social component of building wealth cannot be ignored.

“A rational investor makes decisions based on numeric facts. A reasonable investor makes them in a conference room surrounded by co-workers you want to think highly of you, with a spouse you don’t want to let down or judged against the silly but realistic competitors that are your brother-in-law, your neighbor, and your own personal doubts. Investing has a social component that’s often ignored when viewed through a strictly financial lens.“

A reasonable investment strategy relies on a high savings rate, patience, and optimism.

After all, it's your life, and your money.

I plan on reading this book once in a while to bring me back to reality. If you make the time to read this I believe you’ll find it enjoyable and inspirational.

Here’s a link to the book below.

The Psychology of Money: Timeless lessons on wealth, greed, and happiness

The Psychology of Money: Timeless lessons on wealth, greed, and happiness [Housel, Morgan] on Amazon.com. *FREE* shipping on qualifying offers. The Psychology of Money: Timeless lessons on wealth, greed, and happiness

www.amazon.com

This is not tax, investment, or legal advice. Please consult your a professional

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