Personal Finance

The King of Personal Finance, Robert Kiyosaki, has a rather flexible view of personal finance. “You don't need to have a high income to become rich. the key to building wealth lies in two things: Building a portfolio of passive income-generating assets and minimizing debts.”, he says.

Managing personal finance is more of a behavioral aspect, rather than knowledge. It depends mostly on intuition which continues to be accurate with experience. a person’s relationship with money should not be of insecurity and childish stupidity. Doing well with money doesn’t determine how smart you are, it rather depends a lot on how you behave once you have money. Financial disasters happen to those geniuses who lose control of their emotions while handling money. A normal human being with zero financial education can be rich with a handful of behavioral skills. Many times, financial outcomes are driven by luck, which is independent of intelligence and effort.

Compounding is the biggest factor in personal finance. But, being patient is the key. Wealth is bound to compound sometimes. Small changes compound to huge changes. $81.5B of Warren Buffet’s $84.5B net worth came after his 65th birthday. $84.2B of Buffet’s worth was after he was aged 50 years. If something compounds – if a little growth serves as the fuel for future growth – a small starting base can lead to results so extraordinary that they seem to defy logic.

Good investing is not necessarily about making good decisions. It is about consistently not screwing up. It doesn’t matter how good a person is at getting wealthy, what matters is how good a person is at staying wealthy. Monetary success in a single word is “survival”. Getting money and keeping money are two different skills. Getting money requires taking risks, being optimistic, and putting oneself out there. Keeping money requires humility, and fear of losing money. It requires frugality and acceptance of luck.

Micheal Moritz, the billionaire head of Sequoia Capital mentions longevity as the main reason for its success. He was afraid to go out of business. Survival again becomes very important. The ability to stick around for a long time, without wiping out or being forced to give up is what makes the biggest difference. Two reasons why the survival mentality is to go with money is:

·??????? Few gains are worth wiping yourself out over, such is their greatness.

·??????? Factor of compounding.

A plan is useful if it can survive reality. Room for error or margin of error is an underrated force in finance. It raises the odds of success at a given level of risk by increasing your chances of survival. The higher the margin of safety, the smaller the edge for a favorable outcome. People can be wrong half the time and still make a fortune. No matter how much wrong you do and fail, you can do one right thing out of a hundred wrongs and still make a fortune like Disney did with Snow White and the Seven Dwarfs.

An investing genius is someone who can do the average thing when all those around him are going crazy. Controlling your time is the highest dividend that money pays. Money’s greatest intrinsic value is that it gives you control over time. Being free implies that you can do anything, anytime, and anywhere. Money helps a lot to do that.

The only factor you can control generates one of the only things that matters: PEOPLE. Those who save. Those who don’t think they can save. Those who don’t think that they should save.

Building wealth has little to do with your income/investment returns and lots to do with your savings rate. Personal savings and frugality, conservation, and efficiency are the parts of the money equation that are more in your control and have a hundred percent chance of being as effective in the future as they are today. Wealth is not built by more money or big investment schemes. Those things surely help, but their own frugality and efficiency are what build wealth. Wealth can be built without a high income, but not without a high savings rate.

The value of wealth is relative to what we require. Learning to be happy with less money creates a gap between what you have and what you want. Similar to the gap you get from growing your paycheck, but easier and more in your control. A high savings rate means having lower expenses than you otherwise could, and lower expenses, mean your savings go farther than they would if you spent more. Past a certain level of income, what you need just sits below your ego. People’s ability to save is more in their control than they might think. Money relies more on psychology than finance. There is no need for a specific reason to save.

History is the study of change. Ironically used as a map of the future. Things that have never happened before happen all the time. Investors study history to predict the future. History is not a map of the future, but experiencing specific events does not necessarily qualify you to know what will happen next. The correct lesson to learn from unexpected events is that the world is surprising. We shouldn’t use past surprises as a guide to future boundaries. We should use past experiences as an admission that we have no idea what might happen next. History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes relevant to today’s world.

People tend to forget to plan for the future, as they are mostly focused on the present and past. But every person should create a financial plan for the future, be it a teenager or a working adult. Long-term planning is harder than it seems because people’s goals and desires change over time. Long-term financial planning is essential. There are two things to keep in mind when making long-term decisions:

·??????? To avoid extreme ends of financial planning. Compounding works best when it is given a few planned decades to grow.

·??????? To come to accept the reality of changing our minds. There is no use crying over spilled milk. Past financial decisions cannot be refunded.

Everything has a price, but not all prices appear on labels. Every job looks easy when you’re the one doing it because the challenges faced by someone in the arena are often invisible to those in the crowd. It is often hard to even recognize the severity of problems. Things are harder in practice, rather than in theory. The irony here is that by trying to avoid paying the price, investors end up paying double.

People should be aware of taking financial cues from people who are playing a different game than you are. Investors often innocently do the same thing as other investors do, rather than trying to find out in which industry or service are those the investors investing. When investors have different goals and time horizons, they do it in every asset or price that looks ridiculous to one person. But they can make sense to another because the factors these investors pay attention to are different. The iron rule here of Finance is that money changes return to the greatest extent it can. The profits will always be chased.

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