Learning to Respect Money, After Taking a Punch to the Face

For the vast majority, money is never “enough” which means that you’ll adjust to the amount you have. Unless you become filthy rich (over $50M or so), there is always one more thing that someone has in front of you. The key to getting rich and avoiding the spending trip is to force yourself to “adjust”. So if you’re worth $1M or $20M, you want to avoid changing your lifestyle for around a year or two. At that point, your brain will be used to the new digits on the screen. 

Learn to Respect Money: The reason why people go broke? They become overconfident in their ability to earn. In fact we have a real time example of a project we have been working on for over 9 months. The result? Negative earnings. It was a disaster. Such a disaster that we’re going to take a couple weeks to think about where it went wrong. Originally, the expectation was for $500K or so in net profit, which resulted in a negative number… that is quite a different outcome! The plus minus sign wasn’t even correct. But. As they say… no risk, no reward.

Another good example is actually the investment banking industry, numbers are down and are even worse than our expectations based on current news flow. Sounds like it could be worse than -10% for most firms. This is an important figure as most bankers quite literally only save their bonuses. So for the past 5 years or so they got addicted to the increasing bonuses and living off the salaries. This will be a rude awakening in February-April and will be significantly worse if we see an economic downturn around 2021 (our original expectation that we’ll stick with for fun).

What do we mean by “Respect Money”? It means that if you earn a large amount of money (most likely a one time event such as a sale) you are not allowed to spend a penny of it for a year. Does this sound extreme? Yes. That’s how you get big results anyway. Your one time windfall is only allowed into real investments and cash. For now, things like crypto currencies would be out of the equation. You could toss it into crypto currencies only if you are already a multi-millionaire. Dropping a one time windfall of $250K into crypto with no other savings will likely cause panic selling in down days (like what we saw a few days ago). 

Businesses Have Shelf Lives: One of the main reasons we recommend copy writing sales and several other tangible transferable skills? They have longer duration. Even if you’re running an incredible diet pill campaign making hundreds of thousands, the chances are high that it’ll go to zero at some point. Owning your own product is always more sustainable and higher margin… but just like the products you were selling, your specific product can go out of style as well. 

A good example that sticks in our mind is fidget spinners. Man. So much money was made in a short period of time, yet it died rapidly as well. This is a good way to describe what we’re trying to convey. If you have a successful business running you simply do not know if it’s a fidget spinner fad or a sustainable product. 

Take another extreme. 

If you look at the taxi business, back 20 years ago you could have made good money with medallions. A yielding investment that was required to operate a taxi. Now? What a disaster that business is. No one takes taxis anymore, the medallion value is practically nothing and this was an area that was heavily regulated! You just never know. 

For fun another example we think about a lot is property taxes. If revenue needs to be raised, the easiest way to tax the rich is through large homes. This is a legitimate business risk to real estate if wealth disparity continues. Imagine the property taxes on a million dollar home jumping to $50,000-70,000 a year. Absolutely possible and would be unbelievably painful if you’re forced to sell assets in a “fire sale”.

Your Best Isn’t Always Enough:This is a heartbreaking reality for a lot of people. If you put your heart and soul into something, it doesn’t mean it’s going to work out. While we do think you’ll always live a good life (making 6 figures at minimum as most don’t work hard)… hard work and effort does not guarantee sales/success. You need some luck. 

In our opinion, it is actually better to *fail* first then succeed. Much worse to *succeed* first then fail. Why? The chances you put more capital up at risk in the second venture is much higher. Also. If you succeed instantly, it’s difficult to pinpoint “why” and you can quickly flame out as a one hit wonder as you didn’t develop any real positive habits.

If you fail a few times and then succeed, one of the major lessons you learn is that money invested is rarely a leading indicator of success.

The silver lining in all of these failed projects is that unlike other jobs where you’re simply doing a processing role of some sort, you likely learned a valuable lesson or skill. For example, if you try to scale up a business and end up losing money and are forced to exit parts of the market, you should have learned why. Similarly, if you sold too early and didn’t wait for the “knee in the curve” you learned another lesson related to sales multiples at certain stages of the product life-cycle.

The 50% Rule: This is a big one that we learned early (fortunately). Any time you have a one time event or any major sales month/year, you’re not allowed to touch 50% of the net profit. This means it is locked away for good into an investment (either s&p 500 or real estate in our case). This simple rule makes it impossible to start from ground zero ever again.

Assuming you netted $300-500K from a sale (a solid one time success for the vast majority). You have to take $150-250K and quite literally lock it up for good. There is just no way you’re going to find the “next best thing” right when you sell your first business. The chances are low and you’re emotionally high which creates a mental state of hubris. As you can imagine, making any decision in a state of hubris is probably not a good idea. The only exception (where you sell and reinvest everything) is in real estate when you do a like kind transaction to avoid paying capital gains tax. Generally, you’re selling to buy something nicer in a lower risk neighborhood (again that’s a general rule of thumb)

You will do something stupid: Instead of sitting on a high chair, it is best to admit that you’ll do something stupid when you’re officially “rich” in your own eyes (number different for everyone). We’ve seen it all. An expensive car, too much house, unrealistic watch purchases, drug, alcohol, escort benders… and more. While they sound “cool” when you write it out (the average man glorifies movies like “the hangover”), after 5-years you look back and realize it was a terrible decision. The next time you get a windfall, it’ll be a lot more subtle and you’ll probably buy something reasonable (reasonable new watch, upgraded car, basic/small vacation home that has low taxes… etc). We’ll admit that your stupid decision will definitely get a lot of interest from people at social events so that’s one benefit!

The second piece of good news related to your inevitable stupid decision is you won’t repeat the mistake. That’s critical. When you make a major F-up you can actually say you won’t do it again. In fact, that’s probably one of the common threads that separate smart people from regular people. If you touch the hot stove once and your hand is burned, you never do it again. Your average person needs to touch it “five times” to be sure that it is hot. This sets them back over and over again to the point of no recovery.

When Successful Never Burn Cash: Okay, this is practically impossible. That said, it’s a good high level goal to have. Once you’ve succeeded at something, be it a career in enterprise sales or as an engineer… it’s time to remain cash flow positive on a monthly basis. If you can avoid burning cash in perpetuity, by definition, you’ll become richer and never have money issues.

If you want to plan this out here are some good things to write down: 1) around mid 30s it is normal to have at least one notable injury – ski trip, weight lifting, tennis, golf… it doesn’t matter. You’ll likely have one significant set back; 2) assume someone you care about will need money. This could be your parents if you have a good relationship with them or someone else. If you have a soul there is at least one person you’ll help out. Similar to Felix Dennis, do not expect to see the money ever again; 3) assume a housing expense increase at age 30, 40 and perhaps one last move at 50. Why? Well you’ll get tired of the place you’re in. Everyone grows over time and living in a one bedroom place at age 40 is simply unlikely; 4) always have a “2% fund” this means that 2% of your annual net income will go to unforeseen costs. Could be as simple as a broken refrigerator to a car repair. They happen every year and 5) have a “3% gift fund”, no one enjoys hanging out with the cheap rich uncle. So make sure you have enough money to spend on special events such as birthdays and weddings. While 3% of annual income doesn’t sound like much if adds up quite fast as some years it’ll be as low as 1-2% and you’ll offset the years where it is closer to 5% (multiple weddings/birthdays hit at the same time) 

On the Topic of Money… After having a lot of ups and downs (good years and bad years), we’re going to highlight a lot of “coincidences” that we’ve seen. None of this is to be seen as fact. That said we’ve seen several clear trends so we’ll drop them in bullet format.

1) We’ve never seen someone fail for 5-years straight. Fail, meaning they are poorer after 5-years of effort and they did not increase their earnings by at least 50%. This assumes the person is relatively young and isn’t earning a huge amount of money. To put brackets around that, if you’re making $100,000 a year… With 5-years of real effort we’d put the chances of making less than $150,000 a year at less than 1%. Yes, we’re serious.

2) When you cross $200-250K in net income per year, the volatility kicks in. This is somewhere around $400K a year gross income depending on where you are (no we won’t split hairs on the exact math). There is something strange about this level and you end up either going down to $200K sometimes and other people inflect big and grow to $600K+ net income. It’s similar to the growth of bamboo. It takes about 5-years to really build anything and suddenly starts growing quickly. Also. It eventually matures and you have to move on to the next task.

3) When you’re about to cross a specific financial hurdle, maybe it’s $1 million exactly or $2 million… expect life to throw you a massive number of curve balls. This means you’re going to be close to your “exit number” and somehow you’ll be thrown a massive wrench right at the last second. This never ends. Right at the very end of the game, something always happens so you should be prepared for massive amounts of headaches right before crossing a specific net worth level. Not sure why this occurs but it happens every single time

4) Always sell a business/asset when you lose interest. While we’re certain you’ve already dealt with people “chattering” about the volatility at the company… It’s 100x worse if you’re actually disengaged. A rough quarter or two where employees worry about the business is not a big deal. When you’ve lost interest, you won’t be able to re-kindle the fire. So it is better to sell it.

5) Any time you feel like quitting, it’s time to triple down. This is also how life works. If you’re about to quit, you should actually work 3x harder to get over the hump. The only time you should actually quit is when you’re certain it’ll never go cash flow positive again (for some reason). On a similar note, if everything is going perfectly fine… Get ready for a wrench. Typically you can have 1-2 great years without any issues (smooth sailing). And. By year 3, we can all but guarantee something will happen.

6) If you have money in a checking account without a plan on how to use it, it’ll slowly “go away”. This is another theory we have on why people don’t get rich. If you don’t have any ideas on where to put your money, the cash piles up in a checking account and suddenly random costs show up! It’s almost like the money gods know when you’re cash flush and search for ways to drain your account. This means you should always know what you’re going to do with cash in your accounts. No exceptions.

7) Discount all of your revenue streams by 50%. This is a good metric to keep in mind since you never know when competition or structural changes to your industry will occur. If you have three streams of cash flow, generating say $100,000 a year each… assume that you’re really making $150,000 because we promise you that one of them will take a step down in a couple of years. It’s just mathematics.

8) Never sell for 2x sales or less. We’ve never seen it work! No doubt that it has worked for some people, but, if it’s actually successful selling for 2x is just not worth it. Even if the business slowly dies over the next several years, you’re going to make more money by riding it to zero from a cash flow perspective. And. This assumes you’re doing nothing to keep it afloat.

9) Don’t work with friends for money. This is yet another fact of life. Anyone who is around the same age as you will always think they are better than you. You could be making $1 million a year and crushing it in your industry. It doesn’t matter. Joe Blow, your friend from college making $80,000 a year thinks he deserves to make the same as you. No matter what.

10) Only invest in people who are “in it for the money”. If someone wants to work with you simply because they are passionate or interested in it… This won’t work. Always go with the greedy person. While this sounds dangerous as you’re working with someone solely looking to make money, you can write specific contracts to make sure incentives are aligned. It is possible that you’ll eventually split, but the chances are extremely high that you’ll make a lot of money in the process. And. Those contracts are going to be a life saver. So. Always work with people who want to make money. Period.

That is it for now. As a side note as we’re wrapping up our book that talks about spending, feel free to leave questions related to spending in the comments. We’ll tack on a Q&A section at the end for the good ones.