Why giving leads to getting

Many years ago I heard a quote from the late great Jim Rohn who said that if you help enough people solve their money problems, then all yours would disappear. At first I thought it was motivational bunk.

But while reading the terrific book Homo Deus by Harari recently I came across something called The Ultimatum Game. It is a famous experiment in behavioural economics which disproves the theory that we are all rational beings when it comes to money and economics.

In this experiment, usually conducted with two people, one of the them is given $100, which they must decide to divide between themselves and the other participant in any way they want. The person may keep everything, split the money, give most away, or keep more for themselves. The other player can do one of two things: accept the suggested division, or reject it outright. If they reject the division, nobody gets anything.

Classical economic theory would suggest that people are rational calculating machines. They assume that most people will keep $99 and give the other person $1. And that, the person would accept the offer of $1 because it is still better than getting nothing. They claim that a rational person would always accept a free dollar. Except that we don’t – and it isn’t irrational.

For the record most people split it 50/50. Some 40/60 or 30/70.

People may think that we reject tiny offers because it is ‘unfair’, they look like ‘suckers’, but it has more to do with the fact that our social structures just don’t operate that way. We humans work on a warm social logic. We know that sometimes we have more and sometimes we have less. We split the labour amongst our tribe and try to collaborate so we all have more through trade and trust. Once we do this the laws of reciprocity set in. We know we are all in it together, and we benefit more through sharing, than we do through gauging. We know this intuitively through thousands of years of evolution. Greedy people and pure suckers, well, their DNA never made it through the many famines.

A practice what I preach. Come join me in Melbourne June 20th, for a Free night where I share ideas I’ve learned in my career, from my new book, The Lessons School Forgot. Drinks on me, and I’ll answering any questions you have about your future.

It’ll be a great night. Hope to see you there.

Stay rad, Steve. 

 

We’re all trapped – The dark side of the APPOCALYPSE

Today Apple started it’s WWDC17 with a parody of what our modern world might be like if the app store went down. They called it the APPOCALYPSE – It’s worth watching if you haven’t seen it yet. It had a lot of detractors, many for good reason. I’m not even sure if Apple are laughing at us, or haven’t realised the gravity of their proposition? But I think most people missed the dark side of our reality.

We are living deep inside a technology trap. 

In 1978 technology historian James Bourke explained this vital concept with this video. For much of the industrial age we’ve all been living in a world we know little about. We’re all eking out a living via micro specialised gigs which have little to do with sustaining life. If the lights went out, few of us would be able to survive very long on our own. Once the stores are empty, where would we get our food, water, medicine, heating, cooling and other essentials from? Even if we had the skills of a renaissance person, there wouldn’t be enough time to gather the resources needed for mere survival.

But today, we are much deeper in the hole than that. We could, as a pre internet society probably muster up enough people with enough physical skills and knowledge to rebuild a bootstrapped society. But today, much of our critical infrastructure is buried deep inside a technological grid few people understand, and no one understands entirely. We are trapped. In the pre-internet based technology trap, the system wasn’t singular, the traps were at least geographically isolated. Today, they are all inextricably linked.

The most warped thing about this, is that it resides in the hands of a few private global internet giants. Their primary interest is to serve their shareholders, not society or end users. Users being the operative word here, we rely on them like a dealer, we show up for our digital high, just to be able to function on any given day. I’m not sure if calling us users is by design or coincidence, but I’m sure they’ve got the gear and we’ve got little choice but to take it.

This is another reminder that we need greater distribution of wealth and critical digital infrastructure. But the truth is we can’t control this. There is little we can do about it the foibles of the system. But what we can do is invest in ourselves so that we de-risk our own economic future. We can acquire the skills and resources of self reliance. Now more than ever, we can spread our personal financial risk beyond the hands of a single financial overlord – otherwise known as a boss.

If you’re interested in making yourself future proof, come join me in Melbourne on June 20th and get your mind around ‘The Lessons School Forgot’

I’ll be doing a talk on how to hack your way to a radical future, and answer all the questions you might have about finding a path to independence. It’s going to be a great night.

Click here to reserve your Free seat. 

See you then, Steve. 

It's getting much quicker to fly across the globe, here's why.

Boeing 707 - Qantas

Over the years flying overseas on a ‘public jet’ has become seriously more comfortable. Sitting back watching a movie, having something to eat and drink in air conditioned comfort ain’t that bad, despite  the ill founded whinging. Yet, the time it takes to fly across the nation or globe hasn’t improved much in 50 years – or has it?

Yes, it still takes around 8 hours to fly London to New York, but it is less than 10% of the price it was in 1965. That means we only have to work 10% of the hours we did 50 years ago to afford the ticket. Time and money are inextricably linked. So on this measure it is 90% quicker to get there.

Something we should think about with what we sell isn’t just the time it takes to do something, but the time it takes to acquire the ability to do it.

There are many ways to measure money, but the the best measure I know of is time. It’s the only asset we can never get more of.

You should totally read my book – The Great Fragmentation.

The Financial Wealth Ratio

old money mansion

When it comes to money there is a simple ratio which tells us the real story of how wealthy we are. Here it is:

Financial Wealth = Passive Income / Earned Income.

We should be aiming for a number which is greater than 1: The reason this is such an important formula is that it takes into account the most important and scare resource – time. While it includes money, it goes beyond it. It infers that earning money from control and ownership of assets is far superior to earning money through labour – regardless of how big the earned portion of our income may be. Passive income does not require our time to be earned.

So what things are included in Passive Income? They include but are not limited to Shares (Dividends), Property (Rents), Licensing Rights (Royalties)… the assets we’ve acquired or built which put money into our pockets. What it is not, is the net value of those assets, just what they generate in real returns – actual cashflow.  Much like a salary is a ‘real’ return on our labour.  And while trading large capital assets may generate actual cash returns, that return is singular and only available at the point of transaction. Unless we happen to be in the business of trading assets, it doesn’t provide a true month to month reflection on our cash position. Passive income is about earnings and probability of those earnings to be maintained over time.

Why Passive is more important than Earned: Speaking of probability, another reason passive income is so vital is that it has a high probability of increasing. Rents and corporate earnings in most developed economies increase at around 10% per annum. Wages on the other hand increase annually at less than 3% per annum. Passive income also removes the power of others. When we earn wages, we are at the whim of the work environment, the company, our boss, the economy, technological upheaval, and all other manner of things which make having a job inferior. Earned income is riskier than than passive income because it generally is not something we control. Sure we can influence it by becoming more skilled and valuable to the marketplace, but we can never have total decision authority like we can with allocating our money to a portfolio. Word of warning – passive income, doesn’t mean it shouldn’t be actively managed, or that we don’t need to earn money to acquire it – it takes effort, but builds independence. In other words a passive attitude doesn’t build passive income, quite the opposite.

As mentioned in an earlier post about building financial wealth passive income is the money we earn when we are not in the room. This is actually more important than total income is. Firstly, passive income usually grows over time. Rents go up, anyone who has rented a house knows this pattern. In good companies earnings increase over time. Secondly, passive income is important, because it should be regarded as bonus money. We can manage to live on the earned portion of our income. We know this is true because most people start with zero passive income – unless you’re a trust fund baby. The passive portion becomes it’s own eco system of building more of itself – think compound interest. More on this later.

A story about the Stars: Not those in the sky, but rock stars, sport stars and movie stars. There is no shortage of stories about these people going broke. Bankrupt after earning zillions of dollars. In fact this statistics is very telling: By the time they are retired for 2 years, 78% of NFL players are bankrupt or under severe financial stress. This documentary – ESPN 30 for 30 Broke is worth watching on the topic. How is this even possible? The reason rock stars and sports stars go broke is because they have a poor ratio. Pure and simple. They earn big, have bad spending habits and don’t create a good financial wealth ratio while they have the chance. It should be easier for them than anyone, and most don’t take their opportunity. They don’t de-risk their future.

A story about the Rich: Look at any rich (financially rich) people you know, famous, or even that local business person you admire and you’ll see a good ratio. They own properties, have equity stakes in successful businesses and make the majority of their money from the passive side, not the earned. Even most employees who get rich – think CEO’s – become so from share options more than they do from pure wages. The pattern is clear.

How to hack your ratio: The trick is to move money from the earned income denominator to the passive income nominator. Until at some point there is more passive than earned income resulting in a ratio of 1 or greater. So long as we keep our spending in check, once we earn more money passively than actively, work becomes a choice for both type and frequency. Another hack for building this equation in your favour is ensuring your earned income and passive income are in the same realm or industry. This usually gives you an advantage in your passive income building as your skill base moves you up the learning curve of both sides of the wealth equation. This strategy often results in bigger returns both earned and passive as they interact interdependently. Stick what you know, and leverage knowledge advantage to beat the averages.

Know your ratio: We should know your position, your ratio. You should have a plan to increase the passive portion. The problem is that most people go through life aiming to increase the earned portion more than they do the passive portion. This ends up as a micro version of the rock star problem. The life style spending increases with the income. Knowing your ratio allows you to aim and game the system. To set targets for increasing the passive side. If your ratio is 5% this year, then aim to acquire investments to make it 10% next year.

Other advantages with the Wealth Equation: In most economies the taxation system gives large advantages to passive income. Often dividends are fully franked (the tax is already paid for you). You can offset your earned income with the expenses associated with generating your passive income. You don’t have to pay tax as you earn this money (PAYE), and can earn interest on the returns before it gets taxed. As well as many other structural benefits, such as paying lower corporate tax rates (30% company vs 45% top rate for a mere human) via holding the passive income assets in a private company.

How to build Passive Income: Save at least 10% of what you earn and invest it. The two simplest places to invest would be residential property and index shares. Invest the return on investment from the passive income into more passive income generating assets – never spend any of it. If we can manage to do this, then as soon as our ratio is 1. Work becomes a choice not a necessity.

To do: Add improve your wealth ratio to your goals list for 2015.

New book – The Great Fragmentation – out now!

How to build financial wealth in 1 sentence.

cityhead

The way in which all financial wealth is built, time immemorial is this:

Find a way to make money when you are not in the room.

This formula has never actually changed. All the traditional investments fit this definition. Property, Rents, Dividends, Interest, Equity and even creating a startup which becomes bigger than us. Essentially, we need to invent more than 24 hours in a day through the labour of others. We need revenue which is controlled rather than earned. We can build it, or buy it, either way can work. Some ways are faster than others. But if you want to generate money, then you need to bethink this maxim. It tells all about the financial future.

New book – The Great Fragmentation – out now!

The average success story

While success is in the eye of the beholder, I heard an interesting fact recently about intelligence and financial independence.  And that fact was that the vast majority of financially independent people have average or below average intelligence. We are talking here about raw intellectual capability. This would seem counter intuitive to everything we are taught to believe in school, the corporate world and life. That we have to be ‘smart’ to accumulate financial advantage. Turns out the opposite is true and social researchers put it down to one simple thing:

“People of average intelligence are not overly impressed with how clever they are.”

Sounds like a silly thing to say, but it gives average people like you and me a big advantage. It means that we know we have to work hard, and maybe even a bit harder. And it also means that we don’t think we know everything already and so we have on open mind to learn new things and methods.

Turns out that some of the key factors in the success equation are about being average.