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by • February 7, 2015 • Career Entrepreneurship, Lifestyle, WealthComments (4)163

Wealth narratives

The typical wealth narrative is accumulation-decumulation, which means you work to build up a pile of savings and then, once the pile is big enough, stop working it and start slowly spending it (e.g. 3-5% per year).

The previous generation achieved this as a career man, whereas now we jump between a number of companies. Paul Graham has even said that the startup journey is just a compressed version of this narrative (possibly with several restarts). The tactics have been updated, but the broad goal is the same: retirement.

The bootstrapping community switches the wealth narrative from accumulation into income streams. To collect a salary of 60k from your savings, you would need 1.2m in the bank (assuming 5% interest and no draw-down on the principal). Or alternately, you could set up an small business which generates 5k per month in profits.

There are risks in both cases, so you still need to diversify (multiple investment categories, multiple income streams). But it does seem true that building an income stream will tend to require far fewer years than accumulating a huge pile of cash.

Despite various problems with the book, Ferris’ 4 Hour Work Week brought the wealth narrative of lifestyle design to the mainstream. He asks why we don’t just start doing what we’re dreaming, instead of postponing it until a future when our age may not allow us?

The compromises may be less optimal from a career perspective, but you could also argue that pleasure today is worth considerably more than pleasure at 65. So if you want to surf and sail every morning, you’ve probably got some options between remote working, entrepreneurship, and extended sabbaticals that would get you to the beachfront.

In the amusingly titled How to Get Rich (highly recommended), deceased hedonist Felix Dennis says that the only real different between being super-rich and upper-middle-class is that the super rich never have to be at a certain place at a certain time. In other words, you control your ‘where’ and ‘when’.

In a twist of irony, the moderately rich tend to be even more constrained by time and place than the poor. The golden handcuffs keep their hold for as long as you care about gold. Taleb (and various others) point out that to remain free, you must avoid becoming not just a servant, but also a master.

While do still need an income stream (the hobo lifestyle seems to have lost its romantic allure), controlling your time and place seems like a good goal for most of us. Still, the opportunity cost of giving up certain jobs can seem awful high. The question to remember (which I believe came from Godin), is: “What is this salary costing me?” It’s possible that you’re trying to get rich by giving up the main thing being rich actually gets you.

Mark Cuban recommends a very different approach, which is to clear your high-interest debts and then sit on all your cash. Don’t invest it, don’t try to beat inflation, don’t put it in the stock market, and certainly don’t put it in anything longer-term than that. Just sit on the cash.

The logic here is that even wealthy people can have a difficult time pulling together a pile of cash overnight, so if you’re able to, you’re uniquely able to swoop down on the best deals the world has to offer. With a pile of cash at your disposal, you aren’t looking to get 10%, but rather to wait until you can get 10x. We’ll call this approach keeping an opportunistic surplus. The Tropical MBA guys discussed this in more depth on a recent podcast.

One other small twist, which can apply to all the above, is that some people seem to be waiting for the perfect opportunity (the big idea, the foolproof investment, the perfect job), whereas others are constantly scanning for small, achievable goals and using them as stepping stones when and if they become available.

Choosing which wealth narrative to believe in is an interesting question, since it forces you to think about what makes a good life, which is a question we typically postpone via busyness. As Ferriss pointed out, everyone thinks they want to spend their life sitting on a beach with a Mai Tai, but if you actually try it, you’ll be bored out of your mind by day 10. The stuff we think we want while we’re working ends up being quite different to what we actually want when we control our own life. Anyway, I’m sure there are other wealth narratives I’ve missed — I’d be keen to hear if you’ve seen any others that resonated.

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4 Responses to Wealth narratives

  1. Marius says:

    I certainly like the approach of having multiple small-business income streams. But due to the required simplicity (so you can handle multiple businesses as a single founder), it also seems kind of boring.

    To me the most important thing is to spend my life on interesting and challenging work.

  2. campbell says:

    I’m not sure why, but this may be my favourite post of yours. I know all these themes but had never considered them separate “beliefs”.

    The reason I’m in startupland comes from taking a step back and being thoughtful about what I wanted (financial independence and building something from nothing) and I what I didn’t (working for someone else, predictable career path). But there is a lot of nuance here.

    Thanks for clarifying.

  3. Good post.

    A couple nuances:

    The 4 Hour Work week was about doing 40 hours of work in 4 hours. It wasn’t actually about working 4 hours. Most people take the 10x gain and still work 40 hours.

    You mentioned Nassim Taleb earlier in the post but don’t mention him in the Mark Cuban section. That’s called Black Swan Hunting or the barbell distribution. Keep money in cash or cash-like equivalents and invest time and money in things that may be +1000x. Also called optionality.

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