The path to financial security

Let’s be clear: getting rich from being poor is a mission most of us will fail. This is true for the majority of history in most continents.

However, the path from poverty to financial security(or financial freedom if you prefer) is in fact clearly defined at strategic level. This is the topic of this post. The conclusions are based on my study on history and economics. I won’t dig deep into why they are true. Interested readers are encouraged to read the following books for the source of supporting data.

• Capital in the 21st century
• The Deficit Myth

How to become financially healthy from poverty

Financial security means owning a stable stream of income that consistently exceeds desired consumption by a comfortable margin. A subtle but important detail is that both income and consumption are denominated in US dollars. Let’s breakdown the income:

Total Income = Labor income + Capital income

Labor income is usually wages or salaries. Capital income consists of rent, dividends, asset appreciation, etc.

Both labor income and capital income will naturally grow exponentially. But without superior skill, which we should assume capital income grows way faster than labor income. This is because the real growth of labor income comes from national output growth. Without big technology breakthroughs, in all developed countries, this number is expected to be less than 2% in the following decades.

Through human civilization, real capital return has been a stable 4–5%. This is because population growth tends to track capital accumulation, such that capital is always a scarce production resource compared to labor in the market. Thus capital maintains very strong bargain power.

Therefore it’s clear that the path to wealth is paved with capital accumulation. This is the core idea of the bestseller Rich Dad Poor Dad.

How to accumulate capital

Poor people by definition don’t own much capital. How can they accumulate significant capital in their lifetimes? Sadly, through the whole agrarian society, the only practical way is marriage. This is also a popular approach today. Fortunately, it’s not the case anymore.

After WWII, a class of super managers rose. While being working class, executives and senior managers from large corporations managed to enjoy a compatible level of income as capitalists. Therefore, super managers manage to accumulate capital from strong income. This is unprecedented in capitalism history, but I expect these opportunities will continue to exist in the future.

While it’s impossible to formulate a template about how to become one such super earners, there are some guidelines to follow.

1. The work’s output can’t be objectively quantified.
2. The work’s output can be subjectively quantified with ease.
3. Leverage an industry with hyper growth.

Executive job in the IT industry is one such example. The output of top leadership is measured by the company’s input or revenue growth, usually the quarterly financial statements. They are easily quantified by clearly defined numbers. Those evaluations are highly subjective because the company’s performance in the short term(1–5 years) is largely determined by external factors like macroeconomics and monetary/fiscal policy. Last but not least, the IT industry’s growth is a very fat multiplier. Even many low rank troopers in Internet companies earn higher income than senior leaders from other industries.

One without wealth should strive to find a job meeting all three criteria.

What capital is worth owning

With a job described above, one could accumulate a significant amount of wealth, usually less than 10 years. The next vital question is how to invest the wealth. This question needs many long posts to discuss so I will simply list my conclusions without reasoning. The main purpose of all my study about history and economics is to answer this very question.

• More than 95% of wealth should be in the form of business equity
• The investment need to be evaluated for infinite horizon
• Only sell when the business is proven a failure or you need to liquid
• Avoid investing in properties
• Avoid investing in debt and gold
• Escape holding cash like plague, especially if you still have a stable labor income

Like I said, each of the above guidance deserves multiple posts to explain and reason with. In the future, I will cover them in depth. I apologize if they seem radical, counter-intuitive or nonsense.

The wrong ways to become rich

I will list common wrong ways to pursue financial security.

Working harder. Like being disciplined is necessary for a satisfying life, working hard is a valuable trait. But by itself, it won’t take you very far if the job doesn’t meet at least two of the above criteria. So please stop accepting the illusion that your struggle is because of your not working hard enough. Especially if you are already working your ass off like in those in 996 working scheme. Stop as soon as possible to salvage your health and relationship, then start in any position you can grow sustainably in a booming industry. I know people start by selling drinks outside of Yahoo and end up VP in another top Internet company. Try to copy this route.

Having multiple jobs. This is another very common mistake. I see many folks plateaued at a low level in a promising industry. Frustrated, they began dispersing their efforts in part time jobs. This is the best way to cripple your long term labor income. The reasoning is very straightforward:

Labor Income = Hours * HourlySalary

You can’t scale much by increasing hours for obvious reasons. Your hourly salary will often decrease in a part time job. Or the part time job is very hard to grow.

The correct strategy is to radically focus on increasing your income per hour! It is hard, but it’s the only practical way if you ever want to get anywhere, it’s the only strong move you can make in a difficult position. Most people plateau at a low rank because they lack a key ability: to discover personal flaws and progressively fix them. They fail to realize one can’t break the ceiling by being a better self. They have to be a new version of themselves. It took self-revolution to break the rank!

Ignoring capital management, saving on cash. Many people have the mindset that any asset price will either repeat its history or the price will rise and drop periodically. So if the price has been spiking for a while, expect it to crash. Such is possible to be correct when economies work in gold standard.

Sadly, it’s not true if we look at the scale of 100 years. In that time span, gold(or equivalent) standard always dies, some dominant fiat currency is always invented by the rising power, the currency will then be devalued and distinct following the debt pressure and fall of the power. In our age, the devaluation and possibly distinction of US dollars will dominate our financial life. The direct result is that cash will be a loser even in a relatively short period, like 5 years. I hope to explain what’s money and their archetypal evolution of each fiat currency in later posts.

Summary

To summarize, the path to financial security is clearly defined. I think most people can’t achieve it due to distractions and lack of guidance/education.

The myth of financial freedom

Lastly, the idea of financial freedom if interpreted as living as a rentier by asset income is toxic for the majority. With a big fortune, it’s still a miserable life where one can’t find a meaningful job so wonderful that she wants to do it for free. Notice that, willing to do it for free with and without established wealth is very different. The latter is a much higher bar which I believe is not practical for the most of us.

Many people I know have no financial incentive to work, but continue doing so because they like what they are doing and the job is an important purpose of their lives. They tend to be top performers and most respected at work. We should be one of them!