To fulfill our financial ambitions to earn and save enough money to live a good life throughout our entire lives, or until we are about 90 years old, which really requires us to produce incomes between $400k and $4m, we need to know our financial objectives and the “truths” about the situations in which we find ourselves working to fulfill them.
Although answering the question of how much is enough produces incalculable gains, it is challenging. Gaining the capacity to answer it requires ambition, maturity, seriousness and dignity. It requires study and thought. It requires psychological strength to confront a number of disturbing truths about reality, which alter how people need to think about themselves, money and the marketplace.
The fundamental human and financial mechanisms at work on us and in our environment, which lead us to answer the question successfully or not, operate the same way for everyone. People, money, the marketplace, compound interest, the time/value of money, inflation, the stock market and financial doctrine work the same for everyone.
The marketplace, compound interest, the time/value of money and inflation are “real”, which means they have “real properties” for affecting our concerns, situations and capacities to think and act effectively to fulfill our ambitions for living a good life.
Truths about The Marketplace
The most important operation of the marketplace for answering the question, How much annual income and Capital-at-Work is enough to live a good life now and in the future? is the "pricing" of goods and services all of us need to take care of our concerns.
It means that prices are completely unaffected by our personal situations. Prices do not change whether we are suffering and about to die or so rich we could afford to pay more. This may not be “fair” but it is the truth.
Contrary to common advice given by many financial advisors and money managers, the cost of living does not drop by 30% when we retire. It stays exactly the same in the sense that the marketplace operates the exact same way regardless of our age. Our concerns do change as we get older, but not quickly. That is, the day after we retire, our concerns do not cost less.
Only when people learn and accept truths about reality can they make an assessment of how much money they need to live a good life.
Truths about Compound Interest
Compound interest means that the interest or fee paid on borrowed money becomes principal that then earns interest in the future, which means the interest earns interest. This accelerates the growth of the principal significantly over time.
Before people understand the meaning of “compound interest”, they often confuse it with “simple interest”, which is the simple percentage calculation.
Ambitious businesspeople need to be clear about the difference between the two in order to succeed producing enough money to live a good life.
Truths about the Time/Value of Money
Compound interest produces the time/value of money. The time/value of money is a description of the effects of compound interest over time, which can be enormous when a person invests wisely, early and consistently.
Ambitious businesspeople can exploit the opportunity of compounding interest only if they save and invest early and regularly to allow time for their investments to increase their value over time.
Truths about Inflation
When inflation is managed effectively by the federal government so that the economy expands and remains healthy, it tends to average about 3% a year. This drops the purchasing power of money by 25% every 10 years ($100 = $75) and 50% every 24 years ($100 = $50).
This means that to be effective any calculation about the “future value” of money we will use to buy products and services in our old age must include a calculation that reduces its purchasing power by 3% each year. This is compound interest in reverse. The calculation is very simple when a person knows how to operate the relevant 5 buttons on a financial calculator, which takes about 30 minutes to learn and practice.
The sooner ambitious businesspeople learn about reality and act coherently with it, the more likely they are to fulfill their lifestyle, financial and business ambitions.
The opposite is also brutally true. The longer they wait to accumulate "strategic knowledge", power, annual income, savings and investments, the more difficult it becomes to fulfill personal ambitions. At a certain moment it becomes impossible.
*This is an excerpt from a larger paper written by Toby Hecht available in our online offer, The Aji Space. To experience the "strategic knowledge" offered in The Aji Space, enroll in a free two-week trial.
Toby Hecht has taught thousands of ambitious businesspeople to earn a living and compete for annual incomes, capital-at-work for retirement, and enterprise values for their businesses in the top 1% of the marketplace.