The Algebra of Wealth by Scott Galloway

Wealth = Focus + (Time x Stoicism x Diversification)

Wealth

Scott Galloway defines wealth as having enough passive income to exceed your burn rate.

While passive income is anything but, it generally refers to income you do not need to trade your time directly for (for example, think of buying stocks with dividends, owning an apartment building and getting rent from tenants, etc.).

Your burn rate is the amount of money you need every month to live the life you want. Your burn rate can be minimal (i.e., what you need for basic necessities), or it can be large (what people might call FAT FIRE).

Stating the obvious: there are two ways for your passive income to exceed your burn rate, if you know your burn rate or you have passive income (or both):

1. Increase your passive income so it exceeds your / desired burn rate
2. Decrease your burn rate so it is lower than your passive income

A combination of the two is also possible.

Focus

The truth is that most of us aren't born into wealth. And we're not going to all start a unicorn business and become super rich. This means for many of us, we will have to work our way up the corporate ladder.

Focus, to Scott, means focusing in on key skills that will make you valuable to an organisation. This could be selling. This could be executing strategy. This could be developing incredible programs.

Your beginning years is likely going to be focused on experimenting with different things until you identify the skill that will make you valuable to an organisation (i.e., make you money). Scott has an interesting take on work and mind you, this is what worked for him. Work ridiculously hard in your early years (20s and 30s). You aren't going to know more than other people in your organisation in your 20s, but the one advantage you do have is you can put in way more hours because you have fewer commitments, you have the time and energy to do so, and well, you can outwork others. It's by working hard in his early years that Scott was able to be wealthy in his later years.

Time

Wealth takes time. Unfortunately for you (and me), there aren't any get rich quick schemes. But wealthy people think about time differently:

• They get into the habit of saving money because they recognize it is a muscle to be developed
• They save early to allow for compounding (there's an example of two people - one who invests money from 25 - 35 and stops investing, and another who invests from 35 - 65. Guess who has more money at retirement?)

Another thing to think about: early in your career focus on saving. Why? Because you have few savings to worry about investing. If you earn 10% on $10,000, that's $1,000. If you normally eat twice a week and only eat out once a week ($20 a week), that's $1,000 you have saved. In other words, your savings compared to your investment can be a lot greater.

Later in your career though, focus on investing your money. On a $100,000 portfolio, earning 10% gives you $10,000. Later on in your career, you may have more commitments: mortgage, kids, family to take care of, car payments so saving money is both more challenging (not impossible) and less effective than being a better investor.

Stoicism

How in the world does stoicism play a role in wealth? It's about spending less than you earn. It's about not hopping on the hedonic treadmill and letting your spending increase as your income increases. If you get an annual bonus, don't splurge on the coolest tech or latest handbag, save and invest it instead.

Scott makes an important point: there is a careful balance between short-term spending and your future self. The less you spend now, the more for your future self.

Diversification

I have read dozens of personal finance books and Scott's book is no different: don't invest in individual stocks. Invest in index funds as they historically, over the long term, have provided 7 - 8% returns. Plus, they have less fees than mutual funds, which means you get the 7-8% historical returns.

If you need money in the short term, put the money in a high-interest savings account or bonds.

What about for very risky (I might even argue its gambling at that point) plays? Cryptocurrency? Individual stocks you hear about from a coworker? NFTs? I love what Scott suggests: have a small amount of 'play' money, something that won't kill you, but is still enough to let you have some fun. Set expectations you might not make money, in fact, set expectations you might lose all of the $1k. Then, use the $1k to invest in individual stocks.

There's a few benefits for this: you aren't betting all of your money on something risky (and that you could potentially lose) and you will learn a lot about investing in the individual stock (or crypto). Use play money because why would you want your first investment to be something you don't know anything about?