The critical element to building wealth is leverage.
But not the leverage you may be thinking about. Heavens no.
A lever “amplifies an input force to provide a greater output force.” (Thank you Wikipedia.) I can’t lift a piano for very long if I just squat down and give it the ol’ heave-ho, but if I lift it using a lever, I expend a lot less energy, and get the exact same output. The lever is a simple machine that makes your life easier.
In the traditional sense, leverage means that you’re borrowing money, investing that money, and earning a return on your investment greater than the cost of borrowing. That’s not at all how I operate, and you won’t hear another word about “other people’s money” for the rest of this course, unless I see an opportunity to mock it.
Most of you are familiar with Rule One of the YNAB Method: Give Every Dollar a Job. Some of those dollars go off and buy groceries, some feed your hobby of artistic blacksmithing, and some… some of those dollars are your levers.
When you invest, you’re leveraging your money. Your money basically goes out and does work for you. It’s beautiful. They’re the easiest employees to manage. They never talk back. They always stay on task. And they recruit other employees to keep doing the same thing. When you build wealth, you are leveraging your money. Period. There’s no other way around it.
The end goal is to have so many little dollars out there, recruiting other dollars, that you just sit around in your underwear watching your soaps. Or something else. But at least you have the option.😉
Wealth is a super-boring motivator.
I mean, snooze alert.
Normal Person: “Hey, what drives you? What gets you up in the morning?”
Boring Person: “Money.”
Normal Person: “I see…” [looks off and to the left, suddenly remembering something very important that must be taken care of this instant.]
I think I used to be motivated purely by money. I would plan, scheme, and project how I could retire before I turn 45. It was all about the nest egg.
That was all fine and good until my first child. The lesson was reinforced with the subsequent four children thereafter.
Wealth just doesn’t bring joy. Beyond the levels necessary to survive, and live comfortably (I recognize the wide definitional chasm that word introduces, but choose to pass…), wealth is not directly correlated to happiness. In fact, researchers at Princeton studied just that. While the “comfort level” was dependent on the survey respondent’s location, when it all shook out, it turns out that beyond about $75,000 we just don’t find much more happiness.
I don’t say this to drive you completely away from using raw wealth as your motivator–only to perhaps give you some food for thought.
What could your wealth do? That is an exciting question.
What could you DO with your wealth?
The obvious one is that you could retire. Make sure you define your retirement beyond a simple amount, or an age. You’ll want to retire with purpose, and that purpose will be realized because you’re independently wealthy.
Just this morning I was reading job applications for a Quality Assurance position on the YNAB Team. One of our standard interview questions is to ask, “What do you want to learn next? And what do you want to learn after that?”
Reading these job applications is quite time-consuming, because I’m constantly sent off on informational treasure-hunting tangents. “Wait, what is that they want to learn? I want to learn that!” This happens to me again, and again. We have aspiring woodworkers, linguists, mechanics, blacksmiths, gardeners, musicians… One of the reasons I invest for my future is so I can have more time to pursue my own educational endeavors. I find that motivating.
The same researchers at Princeton that settled on the $75,000 “happiness number”, recommended that we spend less on material items (which don’t increase our happiness), and more on experiences, which do. What experiences could you have, or share, with your wealth? I find that question motivating.