The 3 Muscle Groups Of Wealth Building
April 18, 2019 FIRE By Mr. Bo Dangles
Welcome to the Gym of Wealth! I’m your trainer, Mr. Bo Dangles. It’s time to get to work.
It’s my job to give you the tools you need to build a nice, strong bank account that will give you all the confidence of a rhino, attract the envy and admiration of your peers, and give you the power and freedom to spend your days as you want.
Everyone who goes to a real gym has their own reason for being there, but those reasons always boil down to one of three categories:
They want to look better
They want to feel better
They want to do more
I know moms who exercise because want to be able to carry their kids around without feeling winded. They want to do more. I went to school with a bunch of frat guys who wanted to make their tee shirts look even tighter. They want to look better.
I know a bunch of 20- and 30-somethings who are addicted to the neurochemicals, stress reduction, and better sleep that comes from exercise. They want to feel better.
Strangely enough, everyone who strives to accumulate wealth has their specific reason, but those reasons fall into the same few categories!
If you want to build an emergency fund, layers upon layers of insurance, and to sleep better knowing that your family will be provided for even if something happens to you, you want to feel better.
If you want to be able to flaunt some cash, a shiny new car, or a gold-plated toilet, you want to look better. If you want the freedom to choose how you spend your days, welcome to FIRE, and you want to do more.
Regardless of your “Why”, cement it in your brain and use that as the primary motivator to fuel your money workouts. Luckily, you don’t have to choose one of those things while leaving the others behind — strengthening your wealth muscles allow you to feel better, look better, and do more!
It’s EVERYTHING DAY in the Gym of Wealth and we’re hitting all three major muscle groups!
Upper Body – Earning
Core – Investing
Lower Body – Saving
When you work on your Upper Body, you’re working on increasing your EARNINGS.
Upper Body is sexy. Everyone likes to show it off. But if you only focus on Upper Body, you’ll be unbalanced. You’ll end up being shaped like a light bulb, which is definitely unsexy. Same with your finances.
Most of America focuses on building their Earning muscles, because it’s all they know. You want more money? Make more money! That’s how they think.
That includes everyone from the impoverished (who actually would see the most benefit by strengthening these muscles) to the C-level employees who bring in hundreds of thousands of dollars a year.
They all pick one of the “Why’s” above — Look Better, Feel Better, or Do More — and they immediately think that the only way to get to that Why is to earn more money.
The problem is that if all you do is work your Earning muscles and never exercise the other muscle groups, you’ll never become wealthy. Never.
The guy who earns $200,000 a year and spends $200,000 a year is just as wealthy as the guy who earns and spends $40,000 a year. They’re both broke!
The upside to building Earning muscles is that there’s unlimited potential.
Saving and Investing both have limits. You can live off-grid, farm your own food, and dodge taxes, but the lowest you can go is zero expenses. You can’t save any harder than that. Investing becomes riskier as you chase investments with more lucrative expected returns, so there’s a limit there too.
But Income doesn’t have those problems! You can always make more money.
You strengthen your upper body “Earning” muscles by making more money, of course! There are a billion ways to earn more money, and your 9-5 is only one way to do it.
Create something. Learn a new trade that can be practiced on the weekends for additional cash. Provide more value to the world than you’re current providing and your earnings will eventually increase.
Your Core muscles are your INVESTMENTS.
This muscle group is extremely important, yet overlooked by most people. You can either workout your core in a ridiculous, flashy way that will wind up hurting you; or you can do it in the boring but effective way.
Your core is comprised of all of the tiny muscles surrounding and supporting your spine. DO NOT MESS AROUND HERE!
Most people tend to focus on other areas. Investing is a scary thing to those who don’t know what they’re doing, so people prefer not to deal with it. They either don’t invest at all, or they follow the advice of their friends and/or financial adviser.
There are three ways to hurt yourself with investments.
1. The Hands Off Mistake
There’s a way to be hands off that works (*cough* index funds! *cough*), and there are plenty of ways that don’t work.
One bad way to do it it to get a financial adviser and let that person do whatever they want with your money. You need to pay attention to what they’re doing, or you may end up lining the adviser’s pockets instead of your own. Learn the investments that are being made and watch out for people who may not be acting in your best interest.
Don’t expect money if you don’t respect money.
Money needs nurturing! You can’t just drop your money off at the daycare and come back for it 30-years later. It’s growth will be stunted.
If you’ve done a little bit of research into personal finance, you know that fees are EXTREMELY damaging in the long run.
Someone who invests $500 every month for 45 years at a 7% return rate will end up with $1,800,000.
Someone who invests $500 every month for 45 years at a 7% return rate with a 1% fee will end up with $1,300,000.
A half million of difference! Pay attention to fees, expense ratios, and any other sneaky way that people may be skimming money off the top of your stack. It makes a world of difference.
2. The TOO Hands On Mistake
“Set it and almost forget it” is the motto you want to use when you’re playing this game. Just make sure that wherever you “set it” is not in the hands of someone else, like in the last example.
A sure-fire way to kill your wealth is by poking it and moving it around too much. Just put it in one place and leave it alone!
There are studies that have shown that active traders almost always under-perform those who just stick their money in an index fund and never touch it. AND, they also show that the more a person trades, the worse they do!
The smartest people in the world don’t know if the stock market will go up or down. The smartest supercomputers don’t know either! You can’t study a strategy for an hour and expect to outsmart those who have spent their entire lives trying (and failing) to figure out a magic formula.
Here are the reasons that active trading results in wasted money:
You don’t know when it’s time to buy. Everyone wants to buy when the market is at the bottom! But you don’t know where the bottom is.
You don’t know when it’s time to sell. Similarly, everyone wants to sell at the top, but they don’t know where the top is either.
Trading incurs taxes. When you sell something for more than you bought it for, you have to pay capital gains on that growth. This eats away at the profit.
Trading usually incurs fees. Buying and selling of investments sometimes costs a little bit — or a lot– of money. This also eats away at potential profit.
You might get lucky and manage to avoid one of these pitfalls, but the others will get you. I almost bought a bitcoin at $10,000. I was entertaining the idea of dumping my car fund into a whole coin. If I had pulled the trigger, I would’ve doubled my money in two weeks. Or I would’ve LOST half my money if I sold after two months…
3. The Speculation Mistake
See the last paragraph. Bitcoin. Need I say more?
When you are making a guess about what the market will do, you’re speculating. It doesn’t matter how well-informed you think that guess is. Buying something because it’s going up for a moment, or selling because it’s falling is a bad way to play the game.
Again, you might get lucky once or twice, but I hope you don’t…
When I was in the UK for a Study Abroad, I got to try my first slot machine in Scotland. It was a quarter machine (or whatever the Scottish equivalent of a quarter is) and I burned through £5, without winning anything at all. Twenty losses in a row. I felt so lucky!
I walked away from the machine feeling like it was a complete waste of money, and I’ll never do it again. If I had even a little tiny win, I would’ve been hooked.
So I hope you never get lucky with speculation. In the long-run, you’ll lose.
Those are the ways in which you can damage your core muscles! Don’t mess around when you’re dealing with something so important, stick to the boring but efficient method of index fund investing. That will provide the best results.
You strengthen your core investing muscles by researching. Studying. You need to learn how an investment works. Learn the risks associated with that vehicle, and most importantly of all, find out how the investment provides value.
Owning a rental property is a good investment because people want a place to live. Bitcoin is a bad investment because it doesn’t help anyone in any way.
Your Lower Body muscles are all about SAVING.
They say “defense wins games”, well, “saving creates wealth”. It’s as simple as that. You can make all the money in the world, and be the best or luckiest investor in the world, but if you’re spending everything that comes in, you’ll never be wealthy.
Just as you can recognize a serious bodybuilder by the musculature of their legs, you can recognize a wealthy person by how frugal they are.
Cutting costs allows for flexibility. You’ll have the fortitude to take life’s punches and to entirely dodge others. It makes you agile and adaptable. Don’t skip leg day!
If you’re able to save 50% of your income and you get laid off because the economy is crumbling, you’ll be able to survive for twice as long as your unemployed ex-coworkers who were used to blowing every dime. So strengthen these muscles now, or it’s going to hurt when life throws you a curveball.
Saving is extremely powerful for those who are trying to retire. You can cut costs now and immediately keep more of your money, which can then be invested. But also, once that cost has been permanently cut, you no longer need a nest egg large enough to pay for that thing every month.
For example, if you get rid of your Crossfit membership, you’ll save $150/mo. That’s $1800 per year that can be invested. Then when you retire, your investments won’t need to kick out money to pay for that expense. If you’re planning to use the 4% rule, you’ll be able to have a nest egg that is $45,000 smaller than you would have needed if you kept the membership. These things add up!
You can become wealthier by strengthening any of these muscle groups — Earning, Investing, or Saving. There are benefits to all three and you need to determine which one to focus on for your situation.
If you’ve already cut costs down to a bare-minimum-but-still-happy level, and you’ve already decided that a Total Stock Market Index Fund will be your go-to, then the only thing left to focus on is boosting your earnings. This is my exact situation.
But you have to be real with yourself! Honestly, I could save harder. I could sell my house and rent a room in someone else’s house for $500/mo, but I won’t because saving an additional $750/mo isn’t worth that much of a lifestyle change for me. I enjoy my house.
It would also be a whole lot more enjoyable for me to find ways to Earn an additional $750/mo instead of Saving that much to live in a dump.
In fact, I can tell you exactly how I’d do it. I’d rent out one of my spare bedrooms for $500/mo and then donate plasma to another $250/mo. Easy. I won’t do it, because I’m lazy and enjoy my privacy but that’s how I would do it, if I did. ?
I’ve read about these three categories of wealth building described in other ways. The Three Levers of Wealth Building, and other metaphors like that. But I prefer the metaphor of muscle groups because I really feel like these three skills need to be exercised. It takes practice to be good at them.
You can’t just snap your fingers and move from earning $50,000 a year to earning $100,000 a year. It takes time and discipline to increase your earnings, just like building muscle takes time and discipline.
Work hard. Exercise those wealth building muscles. Keep dangling the carrot.
-Mr. Bo Dangles
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