Hi friends!
Welcome to the 9th issue of my newsletter.
The new year is settling in, and I am sure quite a few of you have made many resolutions. Let me take a wild guess and say that at least some of you have made resolutions around money.
Yes, that’s right. This fortnight we are talking about money. I am going to share some basic principles I learnt and which are working for me.
The standard disclaimer applies: Don’t take this as professional financial advice. This is just general advice on how to think about money and manage it. This is going to be a mix of philosophy and practical advice.
Know anyone for whom this advice would be helpful? Why don’t you share this article?
Photo by Jason Leung on Unsplash
Before I begin, let me say this. I am not an expert in money. This led me to save a lot of money and avoided a lot of misery. How?
Because I know that I don’t know much about money, I was willing to listen to the right people and follow their advice. I started learning more about money and why we mismanage it. I will share my learnings on money and how we can do better with it.
Being financially literate is good, but making good financial decisions is quite hard. More so, if you are early employees at a startup. Time is never on our side with relentless execution and pressure. What worked really well for me - getting a qualified financial advisor to help manage the money. (Of course, this advice does not apply if you are already working in a fintech sector and extremely aware of how money works.) It is important to identify our circle of competence really well. If money management is not our competence, it is best to leave it to the experts.
Now let’s begin the discussion on money and see what is the right way to think and manage it. Let’s have the mandatory money meme of Tom Cruise to get started.
First let us understand money as a philosophy or an idea.
Why does money exist? If you don’t know this then you can’t respect it. And if you can’t respect it and understand it, then you’ll be destined to let it control your emotions. Earlier there was the barter system. People exchanged goods with equivalent perceived value. But there are two problems with barter system:
Indivisibility - Say a cobbler and baker want to exchange their goods? The value of 1 loaf of bread is fixed at half a shoe. How will the exchange happen?
Mismatch of wants - The cobbler wants to have a loaf of bread, but the baker does not want shoes he wants a shirt instead? Now what happens?
Money as a medium of exchange was invented to overcome these issues. There are deeper questions like how money circulation is controlled, who fixes the value etc. Here is an excellent thread written by Paras Chopra on how money works. It is a really long thread, but an excellent read, where we understand in detail how money works.
I discovered interstitial reading recently and the first cluster I read were two books - The Psychology of Money by Morgan Housel and Let’s Talk Money by Monika Halan. I wanted to understand more about money. The first book is more universal in approach and talks about the psychology of money in general while the second book is more practical and gives practical money management advice in the Indian context.
The first book is a must read for all, while the second book is more tailored to the Indian audience. I would advice the international readers to pick a 2nd book which is tailored to the country’s investment climate and get practical knowledge on how to handle money. I will discuss the main principles from the first book since they are evergreen and universal in nature.
Money compounds and we get rich ‘slowly’ and not quickly. We don’t understand the principle of compounding properly. To give an example, 99.9% of Warren Buffet’s wealth accumulated after his 50th birthday. If he had retired at 60, his wealth would have been $11.9 million instead of $84.5 billion he currently has. Let me share a Twitter thread by Sahil Bloom that explains the principles of compounding.
We can’t control the money we make but we can definitely control the amount of money we save. We need to change our mindset slightly. Instead of saving after spending, we must aim to spend after saving. Keep a standing instruction on the account to immediately invest a particular day of the month. Only spend what is remaining after investment.
The longer we wait, the better the odds for success. Diversify the bets. The best investors all had losses but their gains outperformed the losses. Over 20 years, the odds of making a positive return on investment is 100%. All we need is the patience to wait for 20 years.
Be pessimistic for the short term, and optimistic in the long term. When we invest, we must be optimistic, and when we save we must be pessimistic. Save in financial instruments we understand.
Staying wealthy is more difficult than making wealth. Being frugal and not getting greedy is extremely important. The true wealth is what we don’t see - the cars we didn’t buy and the costly watches we didn’t wear represents our wealth.
The most important takeaway - Nothing is as good or as bad as it seems. Whether the markets are super-bullish or there is a deep recession, the situation will not stay the same. Prosperity and recession are cyclical occurrences.
If we follow these principles and manage our money with this framework in mind, we are less likely to lose money in the long run.
I have come across an excellent google doc - 10 things you should know about money. Read it to understand the concept of money better. The key takeaway for me is that we need to build assets and shun liabilities as much as possible.
At the end of the day, we need to audit our savings and expenditure and ensure that we are not going overboard. Personal Tip: I maintain 3 accounts - 1 account for salary, 1 account for investments and the remaining account for expenditure. The expenditure account contains limited money which I keep replenishing. That way I keep an eye on expenditure without keeping daily audits. (A tip I discovered in Monika Halan’s book.)
Well this is a newsletter for early employees, so this discussion is incomplete if I don’t talk about an important wealth component - Employee Stock Options (ESOPs). Lots of startups fail, so we must consider that this portion of the wealth not an active part of our portfolio. We might not get any money from this. Let’s understand and demystify this wealth instrument with this video.
If by any chance our startup gets acquired or we go to IPO, then we have a windfall. Otherwise, well we haven’t considered it as part of our portfolio so we have nothing to lose.
So these are some tips and ways to think about money. Hope you discovered something new or rediscovered something you already knew. :)
Happy savings.
Finds of the Fortnight
It has been a decent fortnight—lots of great advice floating around in the Twitter-sphere. I have been reading some really great tweets. I don’t know for what reason - whether it is because of the new year’s advent - I have been reading lots of great advice. Some of it, I am repackaging and using at as a Personal OS - ideas and beliefs that I keep as my guiding light. The best advice I read so far (in the fortnight) was Julian Shapiro about the lies we are generally told.
I believe in good thinking frameworks. If a framework makes us aware of our biases, then we make conscious efforts to avoid them. I have been reading about mental tools to use and I found this tweet that summarizes the best mental models of successful people well.
A small caveat: What works for others may not work well for us. We must make attempts to discover a mental architecture that would work for us.
I always felt that there is not much advice for early employees in startups. It is a chaotic maze which overwhelms us. I found this great advice, originally given for early product managers, but I feel it extends to all fields. Read and internalize this advice and start your professional journey on the right foot.
Finally, I want to share a thread that strengthened the idea that I always had - a diverse portfolio of income. While this is a breakdown of a YouTuber’s earnings, I feel there are lessons for us too. We must try to develop skills and diversify our income sources and reduce risk. The worst outcome - nothing happens and the upside is enormous.
A Story that Seized me
Harry Houdini used to invite the strongest man in the audience on stage. Then he’d ask the man to punch him in the stomach as hard as he could.
Houdini told crowds he could withstand any man’s punch with barely a flinch. The stunt matched what people loved about his famous escapes: the idea that his body could conquer physics.
After a show in 1926, Houdini invited a group of students backstage to meet him. One, Gordon Whitehead, walked up and started punching Houdini in the stomach without warning.
Whitehead didn’t mean any harm. He thought he was performing the same trick he saw Houdini pull off on stage.
But Houdini wasn’t prepared. He wasn’t steadying his stance and holding his breath like he normally would before the trick. Whitehead caught him off guard. Houdini waved him off, clearly in pain.
The next day Houdini woke up doubled over in pain. His appendix was ruptured, almost certainly from Whitehead’s punches.
And then Harry Houdini died.
The riskiest stuff is always what we don’t see coming. The intensity of Whitehead’s punches was relatively low compared to others who punched Houdini. A less intense crisis that springs a surprise on us is more dangerous than a disaster we can see coming.
And so what can we do? Develop a mental resilience with a stoic attitude. Always remember that nothing is as good or as bad as it seems.
Hope you liked this issue. Any thoughts, comments or suggestions? Any suggestions on how to think about money better and manage it well? Feel free to reply on email or reach out to me on Twitter. If you think someone else will be benefited, feel free to forward the email.