A Few Simple Math Rules That Determine Your Wealth
- Discover how using mathematical, provable concepts guarantees a secure financial future.
- Learn the 2 key wealth-building insights I used to retire at age 35.
- How following these simple math rules can lead to becoming a millionaire.
I'm a junkie for anything claiming to divulge the secrets of how the rich got that way.
After all, I coach business owners and investors on how to build wealth, so any recipe for the “secret sauce” is tasty fodder for my furtive mind.
Recently, I ran across an admittedly unscientific study of the Forbes 400 called “A Recipe For Riches” providing some interesting perspectives on how the rich got that way.
The article opens with the question, “Are billionaires born or made?” and then searches for common attributes among the Forbes 400 in an effort to discover the secrets of self-made wealth.
What are their conclusions?
Surprisingly, most of the article isn't very useful. Actually, it was a disappointment.
By the way, that's the way most of this stuff works out: I sort through mountains of junk to find an occasional diamond-in-the-rough to share with you.
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For example, the Forbes article points out how a high percentage of the leaders in the technology industry dropped out of college. Well, duhh!
Technology was growing at the speed of light when these guys were in college, and their aptitude for all that newfangled techie stuff, combined with the irrelevancy of traditional education to that business model, made for a completely unique and unrepeatable situation.
Only a fool would conclude it's a good idea to drop out of college because Bill Gates, Steve Jobs, Michael Dell, and Larry Ellison did the same. It was an unrepeatable, one-time event we missed. It was only valid for a few special people.
Similarly, the article points out a statistically significant number of the Forbes 400 were born in the fall. Well, so what? There's not much use in that fact, either. I'm somewhat committed to my birth date at this point in life.
What I care about is stuff that can help my readers (you) and coaching clients make changes in their lives that support building wealth. That was why I got excited by the lead piece in the article.
It’s an idea you can apply to your own life that I have also found true with my successful financial coaching clients.
Forbes noticed that a significant percentage of self-made wealth went to people whose parents had a high aptitude for math. They concluded “the ability to crunch numbers is crucial to becoming a billionaire, and mathematical prowess is hereditary.”
Hmmm, their conclusion sounds a little too hyperbole for my tastes. Let me tone it down a little and repackage it into something you can use…
I have long stated that building wealth is just simple math. In other words, I agree with Forbes that developing some comfort with numbers and basic math is important if your goal is financial security.
In fact, I credit my financial success to a few simple mathematical insights I had back in college that I applied in a practical way.
Let me explain them here so you can do the same…
Math Insights To Build Wealth
The first insight involved how money compounds. Once you know the math behind how wealth compounds and grows, you’ll notice two absolutely certain, mathematically provable conclusions:
- Time is more valuable than money: If you want to be wealthy, the single easiest way to achieve the goal is to start early. I began my financial freedom plan with my first paycheck out of college, and I continued until I reached my goal at age 35. It was simple math. If you’re starting later in life, it doesn't change anything because the message is identical – start now because sooner is better than later.
- An essential key to growing your wealth is to never incur a large loss. Again, it’s just simple math: arithmetic growth in losses requires geometrically increasing gains to get back to even. For example, a 10% loss requires an 11.1% gain to get back to even; a 50% loss requires a 100% gain to get back to even; a 90% loss requires a 900% gain to get back to even. The equation is asymptotic. If all those fancy math words elude you, then Warren Buffett's words of wisdom should clarify: “The first rule of investing is don't lose money; the second rule is don't forget Rule No. 1.” This isn't just a clever saying, it’s mathematical fact based on how money grows.
In other words, this first insight about the mathematics of growing wealth implies two very actionable rules for managing your financial life:
- The earlier you start building wealth, the easier it is to reach the goal because time is more important than money.
- The more skilled you are at risk management, the more financially successful you’ll be. How much you lose when you’re wrong is more important than how much you gain when you’re right.
These are both clear cut, actionable rules to live by if your goal is financial freedom, and they’re both mathematically provable.
In other words, Forbes was right: math matters to financial success.
Notice that none of the math is intimidating. It’s simple, intuitive, common sense application of numbers.
You math phobics out there have no excuses. Anybody can understand and apply this stuff – even the mathematically challenged.
Money and Happiness
The second insight I had during college was mathematical in nature, but common sense in practicality. It relates to happiness and money.
What I realized is my happiness had little to do with how much money I made. Some of my happiest days were when I was poorest because I was learning, growing, being creative, and had great friends.
I watched my friends graduate into high-paying jobs and spend all their earnings on lifestyle. Their financial situation didn't improve over other friends who remained in college and were having more fun.
I put these observations into practice by not making the same mistake.
I maintained my college lifestyle after graduating even though I was growing my income. I banked my ever-increasing savings rate to my investment portfolio.
It was basic math – more income minus the same low expense rate equals increased savings.
These two principles – limiting lifestyle to less than income to free up savings for investments, and the mathematics of how those investments compound and grow – were the root cause of my retiring early and wealthy at the ripe, old age of 35.
They’re both mathematically based, and they’re both simple to understand. Anyone can do it.
I point this out because I’ve found an intuitive level of math competency to be a common denominator among financially successful people – just like the Forbes 400.
Let me be clear – we’re not talking about advanced math here. Instead, we’re talking about the common sense application of what basic, provable math principles tell us.
For example, I know prosperity consciousness followers preach the idea of buying new clothes and a fancy car so that you feel successful (fake it 'till you make it), but the math tells you it’s nonsense.
Doing the math provides a scientific check to keep you from being deluded by all the rubbish ideas out there.
Nobody ever spent their way to prosperity (maybe the U.S. Government should listen?). The truth is, savings results from the gap between lifestyle and income, and savings is what feeds investments.
Investments grow based on strict mathematical rules. Again, these aren’t my opinions – this is just the way the math works. It’s inviolable truth.
It's not complicated either – simple addition and subtraction is sufficient.
Anyone reading this blog has the skills. You just have to intuitively grasp the simple math and apply the principle it implies to your daily life.
How To Convert Math Rules Into Daily Life Practice
The math implies the rule, and the rule implies a daily life practice. If you can connect the two, then you can build wealth.
The math isn’t all that important because it just implies the rule: the daily life practice of living that rule is what will determine your success. That’s the key point.
Anyway, I could go on and on about math rules, but you get the basic idea. It’s an important concept with far reaching implications.
There’s no question the Forbes 400 required a few more math rules than discussed here to reach billionaire status, but I guarantee the principles are identical.
It’s about having a basic aptitude for seeing the math behind business so that your plans are grounded in science rather than floating in speculation.
When your plans to build wealth are based on scientific, mathematically provable concepts, your success becomes a probability instead of a possibility. Building wealth becomes a question of “when” – not “if.”
That was how I approached the wealth building process and it worked for me.
It's also what I teach my financial coaching clients and students in this wealth planning course, and it works for them.
It's fun to see that studying the common factors behind Forbes 400 success leads to a similar conclusion.
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Thanks for the write up, I got curious about the article based on a quote on a Dave Ramsey seminar and landed here. Thanks for your breakdown! Keep it up. -Elias
@Elias – Thanks for stopping by and sharing your thoughts.