Money Making Secrets
Over the years, the frequency in which I've seen investors delude themselves is astonishing. Sometimes, they delude themselves into thinking that their financial situation isn't as bad as it really is. Other times, they delude themselves into thinking they can ignore their retirement and spend today's cash, then make up for it later - they rarely do.
When it comes to managing an investment portfolio, one of the most common delusions I see is when an individual investor passionately argues that a stock is "undervalued" at 100x earnings (learn how to calculate price-to-earnings) or that the reason they are losing money is because of the "crooks" on Wall Street.
The 4 Keys to Making Money
There were four keys we used during those early days that aided us in our quest to make money. If you take the time to remember each one, I believe you'll have a much better prospect of achieving your financial goals than you would by going it alone. These keys are:
Revenue Minus Cost = Profit
Never forget that making money consists of one simple formula: Revenue (sales or gross pay) minus cost (expenses) = profit. To make more money, you must either increase your revenue, decrease your expenses, or both. There is no other way. It really is that simple. How you do that involves tradeoffs in terms of time, relationships, and quality of living. Some people try to make money by going to law school and earning a higher salary, even though it means years of study and lots of debt. Others try to make money by starting a successful business.
Focus Obsessively on Controlling Your Risk
You should never be willing to take on wipe-out risk just for the chance of making money. Don't start speculating with options in the hopes of striking it rich. Don't recklessly borrow money in an attempt to leverage yourself to the hilt and have one big score. Never rely on a single household income to pay all of your bills (I much prefer the Berkshire Hathaway model).
Treat Your Money Like an Employee
Think of each dollar as a potential employee that could earn more dollars for you if protected them and put to work. At some point, your dollars (workers) would be earning enough for you to live off the passive income.
Making Money Is Impossible If You Delude Yourself
In a 1982 speech to the British Parliament during an international visit, then-President Ronald Reagan said, "If history teaches anything, it teaches self-delusion in the face of unpleasant facts is folly." While Reagan was discussing political science, the same is true in economics. The first step to making progress is to confront reality, face it boldly, and recognize the situation in which you find yourself. Only then can you develop a plan to improve your life. It may not be pleasant, but it is necessary.
In short, making money and building wealth is easy if you stay the course, keep costs low, and put your cash to work in good investments for long periods of time. Compounding will do all of the heavy lifting. An 18-year-old saving $500 per month throughout his or her career would retire at 65 with nearly $2,000,000 in wealth at a 7% rate of return. Add another decade and the fortune grows to nearly $4,000,000. Increase the return to 10% and the portfolio swells to $13,665,700. This is the nature of money and making money.