There are rules for making money, losing money, holding on to money, and growing money. There are principles for practicing medicine or law and a framework of rules for success, the same applies to finance. There are strategies for winning at sports or in business and there are also ways to win at money.
Here are a set of definitive principles governing the behavior of money.
1. Money is neutral
Money is neither good nor bad, its user is what determines its value. Money just makes a person more of what they already are, greedy people become more greedy and generous people become more generous. The love of money can lead to greed but money itself has no emotions.
2. If you hate money you will stay broke
You will never have money if you think it’s bad or evil and hate it. People that think money is bad will immediately spend it as they will have the subconscious desire to get rid of what they think is bad. The love of money can lead to immoral behavior to get it but the hatred of money leads to wastefulness to get rid of it.
3. Wealth is created through compounding
The magic of becoming rich lies in the ability to compound growth in business or on capital. Things can grow exponentially when you compound returns on top of returns. This goes for investments or business growth. A 10% return on $100,000 is $10,000 but a 10% return on the new total amount of $110,000 is $11,000. This is money making money as the compounding is on the new total. Business sales and profits can grow the same way as a growth rate is compounded on the new business size.
4. Money flows to those that know how to manage it
Money flows from those who don’t know how to manage it to those who do. Money flows from those who waste it to those who know how to grow it. Money flows from consumers to creators of value with products, services, and businesses. If you want to have money create things people will want to give you money for. Invest in businesses that grow. Buy assets that cash flow and go up in value not depreciating consumer goods.
“The whole world is simply nothing more than a flow chart for capital.” – Paul Tudor Jones
5. Entries and Exits
Money is made on the entry when you buy an asset at a great value based on its intrinsic value like a stock or real estate, you will almost always be able to sell it higher. However for speculative trades and flipping properties the money is only made at the exit when you find someone to buy it for a higher price and you can take your profits while they are still there. Timing is importance for making money. You must be right in price and in the time frame.
6. Controlling Yourself
Most of personal finance is not about math it’s about self-control. Investing can also be about controlling your fear and greed to make the right decisions. If you can’t control your own actions you will never be able to control your money.
7. Risk/Reward Ratio
The key to making money and building wealth is to always measure the possible risk and the potential reward in every financial decision you make. You want all your financial risks to be worth the reward. Limit the downside and optimize the upside in your financial life.
8. Spend money on value
Spend money on only the things that are worth it and have the most value for you. Optimize your personal finances for value not frugality or being cheap. You can’t buy everything you want but you can buy the things that give you the best quality of life improvements. Spend your money wisely, don’t waste it. Focus on value.
9. Acquire cash flow not payments
If you use debt then use it for cash flowing assets not consumer goods. Create or buy cash flowing assets that pay you instead of acquiring things with payments. Anything that pays you is a long-term asset, anything you pay a payment on is a short-term liability. Focus on assets.
10. Wealth Mindset
Building wealth starts with the belief that it’s possible for you. Becoming rich also requires working hard and working smart to build a business or investment portfolio but that’s only possible with the right wealth psychology. The right mindset doesn’t guarantee wealth but the wrong mindset almost always causes failure to achieve it.
11. Follow the Money
When you are curious about why something is happening in business, entertainment, politics, religion, charities, or sports, always follow the money. Things are created and pushed for the goal of money in almost every situation you see. You can learn a lot from tracking the money back through the system from the end product.
12. Model Financial Success
If you want to be financially successful find someone who has accomplished the goals you seek and study them in detail. Look at both what they do and what they say. Find the principles of their financial success and create your own systematic process to achieve your own goals.
13. Design your own process for wealth building
Create your own wealth building strategy that fits your own time frame, risk tolerance, monetary goals, beliefs, and personality. You must find what process works best for you to achieve your goals.
14. Your friends and family can affect you finances
Who you hang around with can have a huge impact on your personal finances as you can pick up their belief systems. It’s important to make friends that match your own mindset and have similar goals. It’s also crucial to read books and learn how others think about finances outside your own family. Expand your circle with like-minded people and expand your mind with books by people you want to be like.
15. You are your most important investment
Invest money in yourself. Your education, mental health, happiness, and physical health are your most important assets. Learning, growing, exercising, healthy eating, and your daily habits are where you should invest time and money for greater success in life overall. A healthy lifestyle is cheaper in the long-term than an unhealthy lifestyle.
“You have only one mind and one body for the rest of your life,” Buffett says. “If you aren’t taking care of them when you’re young, it’s like leaving that car out in hailstorms and letting rust eat away at it.” – Warren Buffett
“The most important investment you can make is in yourself.” – Warren Buffett
16. The power of leverage
Wealth is created through leverage. Financial leverage comes from the loans of other people’s money. Investing leverage comes from margin and option contracts. Housing leverage comes from mortgages. Business leverage comes from controlling assets and having employees. Leverage increases returns on your original capital exponentially. Leverage is one of the biggest secrets of money that few know or understand.
17. Business Partnerships
Almost all great businesses were built through a partnership of at least two people at the top. It generally takes two people to found and build a business. Even Steve Jobs teamed up with Steve Wozniak to build Apple at the beginning and Warren Buffett had Charlie Munger to help him scale Berkshire-Hathaway. Business partnerships help both sides exponentially benefit from each other’s strengths and overcome their own weaknesses.
18. The Get Rich Quick Fallacy
The fastest way to lose all your money and end up broke is to try to get rich quick with risky gambles. Greed leads people to lose money in the attempt to make the most they can in the shortest period of time. Money doesn’t work that way and there is no such thing as easy money, much less fast and easy big money. Even if people do get lucky enough to make a lot of money they don’t know how to manage it and just spend it all quickly as the majority of lottery winners find out as they end up broke. Only the people that build their wealth correctly end up keeping their wealth over the long-term.
19. Risk Management
Once you have money and assets your focus must be on keeping what you have. The first goal may be to get rich but the second goal must be to stay rich. It is crucial to manage your financial risk at all times. Always maintain adequate insurance on all of your assets. Never take risks so big that if they don’t work out they can ruin you financially. Never bet the farm for the chance to win a few more chickens.
20. Perseverance until the financial goal is reached
Most people don’t fail on their path to building wealth, the truth is most just give up and quit early. The best way to win the money game is simply to not quit. Setbacks should slow you down not make you give up. All financial success stories about people who won the money game have one thing in common, they never gave up on their financial goals.