Most wealthy people receive their income in spurts (read our last message at https://garyascott.com/makingwealth/ if you missed this point).
We have recently seen this process regularly during the internet craze. Executives left proven fields to begin bold new startups. Futures were unknown. Remuneration was more stock options than cash. These risk takers worked hard, often sixty hours a week, survived on low pay and hit the big leagues when their firms went public.
Sounds great? Most investors dream of making a big hit. Beware! My experience suggests that sudden financial success creates disaster as often as not.
Invertors all too often make one of two mistakes. The first mistake is to believe this is the only time there will be such an influx of cash. This tightens a person, so they can’t enjoy spending. They become afraid. Life becomes filled with paranoia. Unhappiness sets in. If money doesn’t make life better, what’s the use?
The other mistake is to think that these large chunks of cash will come easily again and again without working. This thinking creates unrealistic lifestyles and work ethics that lead to disaster. I first observed this ironic fact while living in England. A happy, financially responsible middle class family won millions in the lottery. Just a few short years after reaping this spurt of cash through supposed good luck, the husband and wife were bankrupt, divorced and no longer speaking to their kids.
I have seen example after example, of people, who received a sudden chunk of income made very unhappy by this large inflow of wealth. This is why the riskiest time for a small business is not when it starts, but when it begins to really take off. The proud owner with his new found wealth, buys new cars, hires new staff, moves into a bigger home, spends more, works less, and creates overhead and debt. If there is a single reversal, they are wiped out.
How much is a big hit anyway? One measure is a ten times increase in wealth. This normally is enough to make a significant difference in a person’s life. For someone with a thousand dollars in the bank, $10,000 seems like a lot. The extra money can make a difference. For someone who already has a million dollars, another million doesn’t make such a significant shift. Ten million does.
The reason spurts create problems is because they disrupt our discipline. Money is discipline and our financial affairs have some form of economic routine, either self imposed or not.
We have a set of mental standards that thinks , I can afford this, but can’t have that, etc. Spurts of wealth demolish these standards. Suddenly we can have many things we previously could not. We become, once again, kids in the proverbial candy shop.
Yet much of the Western world spends their lives trying to become and stay independently rich. If succeeding in this process can ruin happiness, what can we do?
First realize that independent, permanent never-ending, fearless wealth is a process, (not a state) of a continual series of reasonable risks, mistakes, refinements, lessons and actions that culminate in getting it right. When success arrives there is a huge income (or capital) spurt.
Understand that this is not the only time you can make a huge wad of cash.
Impose discipline. Here is a simple formula if you cannot create your own.
The formula begins by immediately spending ten percent of the new money on your dreams. Buy, the Porsche. Take the world cruise. Build the new eight bedroom house. Do whatever you want that does not cost more than ten percent.
Second, give ten percent to a worthy charity. Take a little time, find a need in this world you feel really should be filled and truly give the ten percent away. Third invest the remaining eighty percent very conservatively. Use the PIEC system (see our Inspired Investing Course linked from https://garyascott.com/eclub/). Hire a good, conservative investment manager such as Nigel Stephens Counsel (this is the firm I use – for more details send your address to email@example.com as they are about to open a website).
Remember you make money. Money does not make you.
Finally be grateful every day, not for the lump of cash, but for all the important things in life such as the ideas recently sent to me in the message below.
Good global investing!