Making a Lot of Money Is Easy, Keeping Your Wealth Over Time Is the Real Challenge.
Developing your financial IQ, adopting minimalism, and living frugally are the keys.
While reading about personal finance, I came across two amazing statistics the other night. The first one said that 77% of people who inherit a large family fortune end up losing it all in just 3 years.
The second one said that 65% of all American professional athletes end up bankrupt 5 years after their retirement. We are talking about people who earn millions of dollars during their professional careers.
If I was surprised by these statistics, it was not because of the content, but rather because of the magnitude of the figures. Indeed, it has long been my understanding that only by learning to manage your money wisely can you preserve your wealth over time.
I just didn't think that the problem was this bad among people with so much money. Nevertheless, it proves once again that the most important thing in life is not to make a lot of money. Sure, it takes hard work, resilience, and patience. But once you've reached the top of the mountain once, you need to be able to be smart enough to stay on top.
And that's where the problems start for most people.
99% of people focus on only one of the two parameters of sustainable wealth
99% of people think that to get rich, they need to focus exclusively on making money over and over again. This is a good starting point, but by thinking this way, you are only focusing on one part of the equation.
That equation is wealth. Your wealth will evolve according to the money you generate, but mostly according to the money you spend:
Evolution of your wealth = Income - Expenses
Other parameters will come into play, but these are the two main ones. By increasing your income, you will necessarily get closer to your wealth. However, a majority of people continue to act with a poor mindset. This pushes them to keep spending more and more money:
Conversely, people with a wealthy mindset will keep their spending level more or less constant throughout their lives. This allows them to continue to grow richer over time.
Antoine Walker earned $108 million as an NBA player before filing for bankruptcy two years after retirement
Unfortunately, too few people make the effort to develop their money and financial IQ. Yet this is the key to lasting wealth. You may have made millions of dollars as an NBA player like Antoine Walker, former star of the Boston Celtics in the early 2000s, but you will end up broke because of poor financial decisions.
Antoine Walker earned $108 million in salary alone during his career. He retired in 2008. After generating that much money, you might think Antoine Walker would be enjoying a peaceful retirement. But no!
In May 2010, just two years after his retirement from the sport, Antoine Walker filed for bankruptcy protection in the Southern District of Florida due to debts he could not pay amounting to $12.7 million.
Antoine Walker's mistake is best illustrated in the preceding diagram. Throughout his career, as his income increased, he continually increased his expenses. Once he retired, he continued to spend in the same way even though his income was much lower.
Add to that an addiction to gambling that eventually took away his fortune.
Still living in the same house since 1958, Warren Buffett gives you the keys to lasting wealth
On the other hand, you have the example of Warren Buffett who at the age of 91 has just entered the club of personalities with a fortune exceeding 100 billion dollars. Yet the Oracle of Omaha continues to live in the same house he bought in Omaha, Nebraska in 1958 for $31,500. The valuation of this house is now close to $1 million, but considering his wealth, this is not extravagant.
This makes Warren Buffett say that this is the third-best investment he has ever made in his life.
This house is luxurious with 5,570 square feet, 5 bedrooms, and 2 bathrooms. Nevertheless, you would expect a more extravagant house for a man whose fortune exceeds $60 billion.
When asked why Warren Buffett has never moved since 1958, he says:
“I’m happy there. I’d move if I thought I’d be happier someplace else.”
— Warren Buffett
Warren Buffett never changed houses despite the exponential increase in his income, because it made him happy. His house was a good fit for him. So he had no reason to change it.
Warren Buffett’s philosophy of life is close to minimalism.
Adopting minimalism and living frugally are the keys to adding to developing your financial IQ
If you study the lives of ultra-rich people who remain ultra-rich over the long term, you will see that many adopt this philosophy. Just because you have billions of dollars doesn’t mean you have to increase your spending exponentially.
The biggest expenses of these ultra-rich people are investments aimed at making them even more money. So they focus on assets, leaving liabilities far behind.
I know that I will never become as rich as Warren Buffett.
That doesn’t prevent me from expecting to increase my wealth significantly for my life. To do so, I apply the same philosophy of frugality that aims to limit my expenses so that they remain as stable as possible over time.
I don’t need to buy a luxury car as soon as my income increases. Similarly, I don’t need to buy the latest iPhone that’s worth more than $1,500. I make sure that my needs remain the same. With this philosophy of life, I get a little richer every time my income increases.
The sooner you learn how to manage your expenses, the better it will be for you
Learning how to control your spending is the key if you hope one day to become rich, and above all, to remain so in the long term. You can learn to control your spending whether you are rich or poor. It’s even better to learn how to optimize your spending while you’re poor.
This good habit of managing your finances will stay with you. Each time you increase your income during your life, you will increase your wealth.
This philosophy is part of the 5 essential rules of money that make the difference between those who become rich and those who remain in poverty all their life:
Pay yourself first
Save to build up an emergency fund
Invest to beat the effects of inflation
Adopt minimalism and live frugally
Spend only money you own to avoid debt
What I have just told you about in this story corresponds to rule 4, which is to adopt minimalism to live a frugal life.
Some reading
The Four Levels To Achieve Self-Sovereignty With Bitcoin - Buying Bitcoin is just the first step in a long and wonderful journey.
6 Reasons Why the Success of Bitcoin Is Inevitable. No force on earth can stop an idea whose time has come.
Two Major Reasons Why Bitcoin Leaves No One Indifferent - You should definitely form your own opinion so you don't miss out on this incredible revolution.
Wanting To Explain to a Baby Boomer What Bitcoin Is? Use This Simple 3-Step Explanation. There’s nothing better than relying on things they’ve already mastered.
We Are Year 13 After Bitcoin Network Came Into Existence. Nothing Will Ever Be the Same Again. Happy Proof of Keys Day!