Intro – Episode 2
Welcome to Part 2 of this intro series to Finance & Fury.
Today I wanted to start this episode off with getting you to imaging you’ve hit the lotto jackpot! Say for instance, you’ve got a guaranteed million dollars per annum in future income, perhaps it’s one of those “Get rich for life” programs where for every year of the rest of your life you’re guaranteed to get a million dollars.
So, what are you doing? Where are you? And how are you living your life?
This might be pretty hard to think about for some (or, actually pretty easy for others) and it just depends on much time you’ve actually spent thinking about it before. If you had unlimited financial resources how would you spend your time? and what would you do? and would all your problems be solved?
More importantly how much would you actually be spending?
If you were getting a million dollars a year, would you just spend that million dollars per year, or would you have a different expense requirement in mind to just do what you want to do?
And this is a two-sided problem to tackle with financial independence. First because it doesn’t really matter how much money you have, it more so matters how you much you need to have. And, what would you do with your independence? And how much would that cost?
So, as we went through at the end of the last episode, I think that financial independence is really reached once you have the ability to choose how you spend 100% of your time and maintain the life that you want to live in doing that.
The first focus is mainly on the finance though before defining what actually independence is. And that’s an issue to really tackle because if you are just aiming for that million-dollars-a-year of income, and it’s only going to cost you $80,000 then financial independence is almost something that may never be achieved – if you think it’s a million dollars a year.
To tackle this a little further, we’re focusing on a thing called ‘the economic problem’. It’s where we started and this is the definition of really what economics is as a class or theory is trying to achieve…and that it is how to best meet our unlimited wants with the finite or limited resources actually available.
So the more I thought about this the less it actually made sense because while the second part of this is really true; that we all have limited resources or we all have a finite amount that we can actually use to put towards financial independence, the first part of having unlimited wants is what gets in the way a lot of the time. Because it’s a really, really big hurdle. And, we’ve got really powerful imaginations so we can imagine how we would spend that million dollars pretty easily I believe, but trying to get there is quite a different story! Because, if you’re trying to achieve a million per year in passive income it’s going to pretty hard, and if that’s what you’re aiming for in independence it’s going to be pretty disheartening.
So, it’s that very thought that made me change my mind around financial independence as a target because, with a million dollars a year (which is really more money than what anyone could want to be able to provide most of their actual needs and independence goals) you’ll still probably not be meeting your unlimited wants because unlimited wants are, unlimited.
And it’s doesn’t meet the criteria of being independent because while you’re earning a million dollars a year, it depends on where it’s coming from…
Say you’re employed as CEO of some company, getting a million dollars a year, could you walk out the door at any minute and never return? And also, be able to survive financially and meet the same level of requirements that you were before. So, say you’re on a million dollars and you walk out the door, would you have enough to survive if that million dollars dried up? And if it’s the case that you can walk out the door and you’d still be fine then obviously you’re financially independent and you’re staying on working because it’s your choice.
But what happens when the cost of maintaining a lifestyle is greater than the income that you’d receive if you stopped working?
Then really even if you’re earning a million dollars meeting your unlimited wants definition, is it actually independence? and I don’t really think it is. Because you meet the criteria of being able to fill almost unlimited wants but you don’t have the independence side which is really what everyone is trying to achieve.
So, by this definition though would someone who lives in a forest and somehow manages to survive off no income being totally self-sustainable, would they be financially independent? Well yeah, if that’s what they want to do and that’s how they want to live their life. Then, as long as money isn’t a barrier (and they’re there out of choice) then that actually meets the definition of being financially independent.
So technically even if you earn income from being self-employed, while you have no boss in the classical sense, the people that you provide a good or service become your boss…and as the saying goes, the customers’ always right.
So even if you’re self-employed it’s a great place to be, but you might not be financially independent because if you walk out the door or just shut self-employment-shop, would an income still keep coming in?
It’s been proven that getting our unlimited wants doesn’t provide much in the way of happiness, and once you have enough to pay the bills chase away debt collectors it doesn’t provide much additional benefit for happiness or joy beyond that point. It comes back to what you want to do with the money that really does.
Money provides ability to have independence but creating a picture of what your independence looks like is a really, really good place to start. That should be almost the overriding goal for every single person who wants to reach financial independence because it needs to be pretty specific, measurable, relevant, timely and achievable, and with all goals (if you’re familiar) that’s the S.M.A.R.T acronym.
So ‘timely’ and ‘specific’ are really the first things we could focus on helping with financial independence because for us that’s fairly easy to help you work out. When do you want it by and how much do you need?
But working out how to create a template for people to remove all the other confusion and really help with the ‘measurable’ and ‘achievable’ and more importantly ‘relevant’ side – that’s what we have been trying to work out for the first few months of this series. And if not, at least it takes what it works to be achievable out in your head. And having a plan and aim can actually help you back track so as long as you know where you’re going to be, you can fill in the gaps and we can help with how is it achievable, and, how do you actually measure your progress.
So, let’s take the lotto winner as an example again of when you get a lot of money meeting all your goals for financial independence. A lot of winners do this in a spectacular fashion. Mostly, $450 million is the US lottery winnings on the news a lot of the time. If you get $450 million all of your problems are gone, you’ve got all the independence ever – but that’s a lot of responsibility in your hands in one day. And, unless you’ve got the habits formed around money and really fully prepared for receiving that level of responsibility, it can actually go pretty wrong without a plan. It’s actually almost impossible to prepare for – so last minute – to get such a large level of funds and to actually change your mindset and be ready to reach that financial independence.
Because again, we’ve all got unlimited wants, and unless they’re curbed prior to receiving that, it’s very hard to curb your unlimited wants once you get the ability to meet them. Think about people and their lives – how do they know that their friends are any more their friends and they like them more, or, people just are just becoming friends with them because they’ve got $450 million?
It reminded me of the scene in the movie “A Bronx Tale”, if anyone’s seen it probably know what I’m talking about, but it’s a great movie from the early 90’s I think – with Robert De Niro, about the Bronx, with immigrants and Italian mobsters and things, and there’s an Italian mobster called Sonny and he says one of the best things (that can actually relate to this) when he gives the quote and says, ‘Friendships that are bought with money mean nothing, you see how it is, I make a joke, everybody laughs. I’m funny, but not that funny.’ So, he knows exactly why everyone’s around him because he’s got the fear, the power, and the money in that position. But, if you’re not prepared for that how do you know that people who are around (and laughing at your jokes) are not there for the money?
That’s where a lot of the additional money comes with additional problems. Look at that college student in the US who not long ago won $450 million at the age of 20. A lot of people see that as a massive blessing but I think it’s more of a curse, because how can a 20-year-old be prepared for that level of responsibility?
And even for myself, if I had $450 million at 20, it would be very hard to trust yourself not to acquire those expensive tastes, and as we see with a lot of lotto winners, those expensive tastes are hard to maintain. After a certain while, unless the money’s actually put to good use (as it happens with anyone) if they’re given too much responsibility without actually working for it or having a plan in place. Even child actors where they get thrust into the spotlight with very little in the way of barriers, and no one to say ‘no’, that doesn’t lead to a very good outcome in the majority of cases. So, money and power really doesn’t give the ability to solve your problems unless you know what to do with it. As the saying goes, “mo’ money, mo’ problems”. It’s really true. Unless you have the idea of how to deal with your problems first. Because money will just introduce more problems unless you’re prepared for it – you’ll just likely spend it and end up back where you were.
So, let’s get back to the original point, what does independence look like for you and how much does it cost? Even once you know what you need, and what your finite resources are that you can actually work with how do you put it to use? And that’s where it can be quite hard to start because financial services can almost be like speaking another language the first time you try to learn it.
There’s lots of ratios – PE’s, EBITDAs, so those little acronyms and the terminology with finance is almost another language …and think about how much effort it would take you to learn a new language right now. Say you’re going on a vacation to Germany – just popping in for a week and then popping out – would you be bothered to learn the whole language? So, you might just learn a few sayings; hello, goodbye, where’s the toilet? But the level of effort it would really require to pick the language up fluently is not worth it for a week’s worth of travel. And that’s more or less what we do with finances every day where we’re just doing transactions – so it’s almost like popping in and out of a country. Not really speaking the language properly. But now imagine that you move there…and you’re going to be living there for the rest of your life so 50, 60, even 70 years. Would you learn the language?
You’d probably be more incentivised to pick it up and learn what’s going on so you can actually interact in society. So, just like language, you use money and you interact with finance on a daily basis so even if you’re not quite sure what you’re doing you’re still using it.
And, if you’re in Germany, and you don’t understand the language it’s pretty hard to get around day to day and avoid the pitfalls of society and life. Say that for instance there’s a nice German individual, and he’s waving you in, he’s very friendly, offering for you to come have a drink with him, sit down…he’s speaking German and you have no idea what he’s saying. But he seems warm and friendly.
Now imagine if you could understand what he’s saying and he said “oh, your drink is just poisoned and you’re going to wake up in my prison basement”.
The content of that speech is quite different to the message that you actually think is what’s going on. For instance, the frustration of not understanding what’s happening is really one of the key roots to why financial independence is so hard. Because you try to learn, it’s too frustrating, it’s too hard, so, hey you getting by fine why actually bother learning the language.
And seeing people struggle under this is really what made us want to do this because for us it’s quite infuriating. Because, in this analogy we speak German and we see these stories of either translators or people misinterpreting for others what they’re doing. Or, people just misinterpreting what’s happening and that’s how people are taken advantage of financially, where most of the time they don’t speak the language – but the other person knows it!
So, we get mad when we see this because a lot of people offer the world and its very, very, hard (unless you speak the language) to know what they’re saying is not actually 100% correct.
So, we want to help you stay out of the prison basement pretty much. And you need to be able to speak the language to understand if something good or bad is really going on. It all comes back to the translator or who you have to translate for you. Because you can translate for yourself or have someone to help translate. With the exposure to stories of bad translators when it comes to finance, there’s no ability to get any trust within the industry or know that what you hear as being accurate. You can’t really trust.
So, I now question every time I see someone doing sign language interpretations on TV – are they faking it or not? Like when Obama was giving the Nelson Mandela speech in South Africa, or recently with a few press conferences (in the US they were doing hurricane press conferences), the sign language [interpreters] for two of those were actually just up there faking it. They actually didn’t know what they were doing. But I had no idea. I was watching it and it looked legit. And it actually took someone who actually knew what sign language would look like to realise, “this guy’s just waving his hands”.
So that is actually a very applicable analogy where (if you understood sign language) you would understand that what that individual was doing was not actually sign language.
And it’s very hard to find a decent translator or actually pick it up on your own, so that’s what we wanted to do – to try to make it simple enough for you to translate on your own and actually only translate only what you need to know. Because again, with a language you can learn every single thing and become fluent, but there’s a massive diminishing marginal return after a certain point. Like, if you can get around in a country you know how to ask for things, you know directions, you know the basic conversation, that can be picked up relatively quickly within a year but it takes a lot longer to actually become fully fluent and we hope this podcast will help with that.
But finance is a little hard to translate without actually seeing the numbers and following a structure, to cover all the basics, to make sure you can build on the foundations, and get to exactly where you want to go.
That translation was obviously why we’ve broken down the independence problem, and that might be something we can actually focus on solving, but it doesn’t help without actually having a tangible framework or knowing what you’re doing is correct.
You can translate it but it’s very, very, hard so we wanted to keep breaking this down and uncover more and more and more of these problems so…we keep doing this in the next episode.
I hope you’ve enjoyed it and I’ll see you next time