“Money is just a means. They will lead you to any goal, but they will not replace you at the helm,” said the American writer and philosopher Ayn Rand.
Only those who are ready to overcome the difficulties that arise along the way, step by step, achieve wealth. But in order to reach the heights of financial success, you need to be able to plan your own future and know a few simple rules.
See what happens to your money over three years if you invest it with a 5% return:
Investors are looking for ways to make money on compound interest, and mathematics helps them do this. And if a person is deeply in debt, then mathematics and compound interest are his curse. But the math is the same! It's just better to be on the right side.
The path to wealth is never straight; there will definitely be ups and downs. Success will depend on your ability to emotionally detach from your victories and failures and analyze them.
Bottom line: you need to understand the concept of compound interest and learn how to apply it in everyday life, and financial success will be closer.
So get a qualification in a field that you really enjoy. Do what you love, become an excellent professional in your field, and financial success will not keep you waiting.
You will reap the dividends of this approach not just for a few years - but indefinitely.
But the pursuit of money will only lead to failure.
This fact is easy to overlook: firstly, it is unpleasant to realize, and secondly, inflation is usually not very high and is easy to ignore.
Inflation stealthily destroys your capital - sometimes faster, sometimes slower. In any case, you lose a few percent per year. It's especially helpful to keep inflation in mind when it comes time to ask for a raise: if your income doesn't change, it actually gets smaller.
The greatest successes have been achieved by those people whom we can call second-level thinkers. Here is an example from the field of investment.
Achieving mediocre investment results is easy: just invest in a passive instrument, such as a traded index fund (ETF).
If the average return does not suit you, you need to move to the so-called second level - this concept was coined by the famous investor Howard Marks of Oaktree Capital Management, who specialized in “bad” debt securities of companies, and it applies to all professional investors about whom you could hear (Warren Buffett, Charlie Munger, Jeffrey Gundlach, etc.). So what is the second level of investing thinking?
Or:
It's possible that the company you're evaluating is quite good—it's just overvalued. And the second-level investor wins precisely because the first-level investor thinks so. The current market price of any security already reflects the views of those who do not rise above the first level. And if you buy shares based on the obvious reasons—“Apple is a great company, I like it, and I think others will like it”—you may be unpleasantly surprised because you ignore the fact that the attitudes of other investors are already included in share price.
Can you reach the second level? Unknown. Not everyone is destined to be a good investor. Try to be honest with yourself.
1/2000 Rule: If you make $1 an hour, you will earn $2,000 before taxes in a year. For example, with a profit of $10 per hour, your annual income will be approximately $20 thousand.
Rule 72: It shows how long it will take for your capital to double at a given growth rate. Divide 72 by the return on investment - this will be your result.
Let's say you invest capital with a return of 5%. Divide 72 by 5, we get 14.4 years - that's how long it will take to double your savings.
The rule showing how much income you need to have to buy a home: Its cost should not exceed your annual income by more than two and a half times. If you follow this rule, the next financial crisis will not leave you without pants.
It is worth keeping in mind that all these rules are only recommendations and guidelines that allow you to assess the speed of movement towards the goal.
Maybe there is something you also can't admit to yourself? Are you afraid of the unknown? Are you impatient and break your own promises? Have you gotten involved with people who are ruining their own lives? Do you promise yourself something and then don't deliver?
This means you need to know your weak points and situations that push you to do the wrong thing. By learning to be honest with yourself about your desires and strengths, you have a chance to move to the next level. The more realistic your plan, the more likely it is to be implemented.
What's the trick here?
You should not strive only for financial success. It's much better when it becomes a byproduct of achieving a goal that is more important to you.
And if you are plagued by periodic financial setbacks, it's time to look back and rethink your path. Remember that your ultimate success will depend on how quickly you learn to be honest with yourself and understand your strengths and weaknesses - this is when you begin to move in the right direction.
Only those who are ready to overcome the difficulties that arise along the way, step by step, achieve wealth. But in order to reach the heights of financial success, you need to be able to plan your own future and know a few simple rules.
1. Learn to understand math
The mathematical apparatus used in finance is quite limited: addition, subtraction and multiplication. It is also very important to understand how compound interest is calculated. Albert Einstein once said:See what happens to your money over three years if you invest it with a 5% return:
- after the first year: 1 x 1.05 = 1.05;
- after the second year: 1.05 x 1.05 = 1.1025;
- after the third year: 1.1025 x 1.05 = 1.1576.
Investors are looking for ways to make money on compound interest, and mathematics helps them do this. And if a person is deeply in debt, then mathematics and compound interest are his curse. But the math is the same! It's just better to be on the right side.
The path to wealth is never straight; there will definitely be ups and downs. Success will depend on your ability to emotionally detach from your victories and failures and analyze them.
Bottom line: you need to understand the concept of compound interest and learn how to apply it in everyday life, and financial success will be closer.
2. Don't chase money
Chasing money means dooming yourself to lose. If you choose a job based on the principle of “where the salary is higher,” do not expect success. The market situation is changing too quickly: previously, design engineers were held in high esteem, then lawyers, then programmers and application developers. We cannot judge tomorrow by what we see today.So get a qualification in a field that you really enjoy. Do what you love, become an excellent professional in your field, and financial success will not keep you waiting.
You will reap the dividends of this approach not just for a few years - but indefinitely.
But the pursuit of money will only lead to failure.
3. Beware the silent killer
If the price of all goods rises by a few percent a year, your annual income must rise by the same amount, otherwise you become poorer. This increase in price is called inflation.This fact is easy to overlook: firstly, it is unpleasant to realize, and secondly, inflation is usually not very high and is easy to ignore.
Inflation stealthily destroys your capital - sometimes faster, sometimes slower. In any case, you lose a few percent per year. It's especially helpful to keep inflation in mind when it comes time to ask for a raise: if your income doesn't change, it actually gets smaller.
4. Think a level deeper to achieve significant success.
Albert Einstein said:The greatest successes have been achieved by those people whom we can call second-level thinkers. Here is an example from the field of investment.
Achieving mediocre investment results is easy: just invest in a passive instrument, such as a traded index fund (ETF).
If the average return does not suit you, you need to move to the so-called second level - this concept was coined by the famous investor Howard Marks of Oaktree Capital Management, who specialized in “bad” debt securities of companies, and it applies to all professional investors about whom you could hear (Warren Buffett, Charlie Munger, Jeffrey Gundlach, etc.). So what is the second level of investing thinking?
- At the first level, we reason like this: “This is a good company, let's buy its shares.”
- At the second level, the logic is more complicated: “This is a good company, but everyone understands this, which means that in the future it will not be able to grow as much as before. This means that its shares are overvalued and need to be sold.”
Or:
- First level: “I believe that the profit of this company will fall, we are selling.”
- Second level: “I believe that the profit of this company will fall much less than most expect, which means that everyone will be pleasantly surprised and the shares will rise - we buy.”
It's possible that the company you're evaluating is quite good—it's just overvalued. And the second-level investor wins precisely because the first-level investor thinks so. The current market price of any security already reflects the views of those who do not rise above the first level. And if you buy shares based on the obvious reasons—“Apple is a great company, I like it, and I think others will like it”—you may be unpleasantly surprised because you ignore the fact that the attitudes of other investors are already included in share price.
Can you reach the second level? Unknown. Not everyone is destined to be a good investor. Try to be honest with yourself.
5. Calculate and plan
Reaching a new level is a race with yourself. In particular, it is important to understand how long it will take to achieve your goal. A few simple rules of thumb will help you with this:1/2000 Rule: If you make $1 an hour, you will earn $2,000 before taxes in a year. For example, with a profit of $10 per hour, your annual income will be approximately $20 thousand.
Rule 72: It shows how long it will take for your capital to double at a given growth rate. Divide 72 by the return on investment - this will be your result.
Let's say you invest capital with a return of 5%. Divide 72 by 5, we get 14.4 years - that's how long it will take to double your savings.
The rule showing how much income you need to have to buy a home: Its cost should not exceed your annual income by more than two and a half times. If you follow this rule, the next financial crisis will not leave you without pants.
It is worth keeping in mind that all these rules are only recommendations and guidelines that allow you to assess the speed of movement towards the goal.
6. Remember that self-deception interferes with success.
There is nothing worse for an investor than self-deception.Maybe there is something you also can't admit to yourself? Are you afraid of the unknown? Are you impatient and break your own promises? Have you gotten involved with people who are ruining their own lives? Do you promise yourself something and then don't deliver?
This means you need to know your weak points and situations that push you to do the wrong thing. By learning to be honest with yourself about your desires and strengths, you have a chance to move to the next level. The more realistic your plan, the more likely it is to be implemented.
What's the trick here?
You should not strive only for financial success. It's much better when it becomes a byproduct of achieving a goal that is more important to you.
And if you are plagued by periodic financial setbacks, it's time to look back and rethink your path. Remember that your ultimate success will depend on how quickly you learn to be honest with yourself and understand your strengths and weaknesses - this is when you begin to move in the right direction.
