The equations that matter when we manage money – for our personal lives or our organizations – are simple:
(1) Viability = Our Income – our Expenses/”Burn”
Implications:
(a) If we aren’t viable, we must get viable by reducing our burn.
(b) The closer our burn is to our income, the more attention we must pay to it. Micro-optimizations go a long way. The reverse is also true.
(2) Wealth = when viability is generated from our principal/investments.
This is the powerful thing about thing about being wealthy. If you have a low burn and have enough in savings/investments that covers your spending with a little to spare, you are wealthy. Any income from work or projects is upside that goes into making the principal bigger.
The flip side is also true. You could be earning in the highest tax bracket. However, if your burn isn’t paid for by the money from your principal, you aren’t wealthy.
Implications:
(a) The younger we are, the more it makes sense to invest aggressively. This means reinvesting our dividends and savings back into making our principal bigger for future years. The best analogy is climbing up a mountain. It is hard on the way up and correspondingly easy on the way down. There’s no middle ground.
(b) The second is that it helps to have a cushion for unforeseen circumstances when we’re attempting to build wealth. The size of this cushion is a personal preference and will depend on life circumstances – depending on kids, mortgage, etc. There are rules of thumb – e.g., 6 months in your early 20s, 12-18 months in your 30s – but your mileage may vary.
First, be viable. Then intentionally work towards getting financially wealthy.
Along the way, you’ll likely realize that financial wealth isn’t the only kind of wealth that matters. More on this soon.
