We get a lot of questions about how to make a comeback if they’re age XX or if they should quit their jobs today. Unfortunately, they never address the core issue of *risk*. Risk is all about foregone opportunities. If the foregone opportunity was nothing to begin with, it’s time to jump ship. If your foregone opportunity is a million dollars, it’s time to review the risk profile.
Life Risk – Unacceptable
The first type of risk is the most important: risk of losing your entire life. We’re not talking about getting hit by a car or a bus which could happen as a freak event. We’re talking about making decisions that practically guarantee you’re going to be stuck relying on other people (borderline welfare). Or worse, making other people reliant (unable to support a family).
The Dead-End: If you’re making $60K a year in salary (total compensation), you’re solidly in dead-end risk territory. You have to get out. It doesn’t matter if you’re worried about paying the bills. Your unemployment checks would practically offset your cost of living anyway.
You’re not allowed to have any fun if the current future says “dead-end”. This means no partying at the club. No drinking with friends after work and absolutely no right to live alone. You’re in hell and the only way out is to switch into a career (at minimum) or start scaling a business *starting yesterday*
In general, most individuals are risk averse, constantly worried about being able to find the next position. It doesn’t add up. If you’re making $5K a month (pre-tax!), there is just no wiggle room for error anymore, your entire life is at risk.
“Most people die at 25 and aren’t buried until they’re 75” – Benjamin Franklin
Shackles: This is also known as “painting yourself into a corner”. We talk a lot about uncomfortable topics such as family members holding you down and this is no different. People shouldn’t be having families if they can’t afford them. This is just another anchor in life that can cause a material amount of stress over the next several years. No different than getting legally married followed by a divorce (1/2 of your income for life is certainly a shackle)
A similar less emotional example is debt load. Levering up a balance sheet (your net worth) is a dangerous activity. If total debt payments are not covered by investment income the downside is far too large. This is a severely conservative approach since you don’t want to make a life changing mistake into the red. Total recurring income “passive income” needs to be higher than the total debt payments.
“There are two ways to conquer and enslave a country. One is by the sword the other is by debt.” – John Adams
Paying the Life Toll: While we focus on efficiency, there is no way to avoid paying the toll. The Toll is 3-5 years of working 60-80 hours per week. That is not a typo. Everyone in their 20s must pay this toll if they want to become financially successful and the longer they wait the more it becomes a real life risk.
Why is it a life risk? Well, there is an interest rate on that 60-80 hour a week payment owed to the Money Gods. The longer someone waits the more hours they must pay back. If someone pays the life toll of 60-80 hours per week for 3 years in the age range of 20-22, that toll now becomes 5 years if someone starts at age 30. It continues to increase until the toll is paid.
“Quality is never an accident. It is always the result of intelligent effort.” – John Ruskin
Summary of Life Risks: Under no circumstances do you take a life risk. What does this mean?
Dead-End Issues:
– If you’re working a salary (job) then you’re going to work 40 hours per week after work AND you are going to attempt to work while at your job to generate money from a side business. There is *no excuse* here and no exceptions. If an incorrect career choice was made then you’re 100% forced to start a business while simultaneously transitioning your skills toward a career (a dual process)
– If you’re older then your choice is limited to just one: start a business with recurring revenue. There is no other choice. There is no lower risk choice because the price was never paid and going down the wrong path means you’re running back to the starting line to take it into a different direction! It is the only way to reverse the course.
Shackles:
– This is boiled down to emotional control. Ask if the decision makes financial sense and if it doesn’t then there is no reason to do it. We don’t care if everyone else is doing it (buying a home, signing governmental marriage contracts). That’s not a valid reason because the vast majority of people never become financially independent in the first place. Make no mistake, your life is a business until you’re financially independent.
Paying the Toll:
– Well if you’re doing the first two, killing all dead-end items and avoiding catastrophic financial mistakes you’re not going to have very much free time. Why? You’re extremely busy paying the toll. Your life consists of eating, drinking, working out and sleeping. Can’t go broke if all your time is spent producing something to make you more money.
Opportunity Risk – Acceptable
Everyone is different. We’ve found that somewhere around a million dollars in liquid net worth makes you value your time significantly more. If you’re part of the growing online frugality group it’s less and if you’re in the group that realizes life without work is boring… it’s much higher than a million bucks (yes we’re in group 2!).
Loss of One Time Investments: If you’re making money with a business outside of a steady paycheck, we can practically guarantee money will be lost at some point. Either due to traffic that isn’t converting, a product that is mis-priced or both. The key is to make sure you’re making the right risk to reward decisions. Was the opportunity cost superior? If not it was still the right decision even if money was lost.
As an example, if you have located a specific niche for a diet related product that could generate $100K in income per year… It is absolutely worth the $50K start up cost. If the idea would require an unchanging website (not a content website like a blog) then your upside is already 100% in year one ($50K in to get $100K back). More importantly, if the product and targeted ad campaign works out, this is going to be forever. You’re going to clean up by making $100K per year for an initial $50K outlay. Overall, all you need is a 3-5% success rate (probably less) for you to go ahead and invest the $50K today.
The key is this: will the upfront costs lead to long-term revenue generation versus straight time for money exchanges (hourly income). If so it is worth the risk.
Losing Your Best Years: This was partially covered in the greatest book ever written “How to Get Rich” by Felix Dennis. Eventually you’ll reach a point where making additional money is eating up too much of your time. When you’re 20 there is no reason to do anything besides make money (assuming you want to be successful) so grinding away for 80 hours a week makes a lot of sense. When you start creeping up in age to 30, 35, 40 and beyond… it becomes significantly less clear if the effort is worth it.
We only get one shot at life (for now!) so we should live appropriately. If you’re never touching the principal (cost of living income) then it may not make sense to continue putting in those long hours. Don’t get us wrong. The game never really ends. If your personality type allowed you to crank out 80 hours per week in your 20s, you’re not going to sit around the house watching sports all day. Chasing an extra line of income when you could be traveling the world and avoiding regret is significantly more valuable.
Declining Income Risks: There are several industries with material declining income profiles. Look no further than our post on the future of Wall Street where we predict declines in Equities related positions. The interesting point here is the value in a declining business. This is no different than buying a company in a dying industry. There is still a ton of value in riding the declines to zero!
Specifically, if you find an opportunity to invest money into a declining business, it may be worth it. The trick is making sure that the business will generate enough cash flow to offset the inevitable declines. Calculate all of the future income and see if you can net a material positive return. It sounds risky at first glance… But… No one wants to deal with a declining business which creates an opportunity for a major bargain.
Summary of Acceptable Risks: We’ve lost tons of money in the past off of ideas that never worked. We don’t think this will be any different for other people going down the exact same route. You’ll lose money (you’ll get it back), You’ll value your time more and of course, you’ll find ways to bargain hunt for terribly run businesses that no one wants to deal with. Importantly, these *acceptable* risks should never create a life risk. You’re not going to throw down money in excess of your cost of living income into any venture since it’ll break the bank if mis-execution occurs.
What isn’t a Risk?
We’ve heard of several that don’t make any logical sense. Risk has nothing to do with feelings and is 100% related to an impact to your standard of living. If it does not impact your standard of living it’s not a risk.
Fear of Social Loss: This blog is a good example. We receive comments that state they are not willing to participate in our Facebook Q&A (March 16, 8PM EST) since they don’t want to “like the page”. All of these people will fail (so yes feel free to like the page to improve your chances of succeeding!). There is no doubt in our mind that they will fail because following a blog is not going to impact your future at all (it is not a risk). In addition, we’ve got enough traffic here that it’s becoming normal to visit the page.
Secondly, we learned that many people spend 1-2 hours per day on Facebook! Think about that. They don’t have any money but are willing to spend more time on Facebook to improve their “social status ranking”. If impressing peers is the strategy to get rich, we have several luxury handbags and cars to sell them into slavery.
Serviceable Debt: This is also not a risk. If you’re taking income in the form of dividends to offset the payments of a mortgage, it is not a risk at all. Debt for home equity is typically not enough to be considered a risk unless you’re relying on active income to make the payments. This means mortgages (for our smart readers) will not be considered a risk. Inflation will cause the asset to appreciate over the long-term making the minimal amount of debt a lever for you over the long-term.
Getting Laid Off: This also isn’t a real risk. If you’ve built skills that are transferable a layoff (which occurs to practically everyone at least once) is not a risk. Transferable skills allow you to find work elsewhere and *ideally* allows you to have more free time (temporary) to work on your business venture. Saying that working on a side business will hurt work performance leading to a layoff… well… it doesn’t matter. If you’re committed the results will absolutely come through over time.
Concluding Remarks
Under no circumstances do you ever take a life risk. Ever. By avoiding *life risks* you can sleep soundly knowing that you’ll eventually get there (financially independent). Once you’ve reached that saturation point it’s time to move toward multiple acceptable risks.
In terms of incorrect choices, we’ve found that the most common one is avoiding the toll. Paying the toll is equivalent to saving up for a plane ticket across the country. If you save up early (20s) you get to board the plane. If someone avoids paying the toll until they are older, they are now physically biking across the country. Sure, it is possible to hit the ball out of the park your first attempt at a later age, however, the biking example vs. boarding a flight is a representation of how painful it will be (mentally and physically).
