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Atomic Habits

What’s In It For Me?

Millions of people set goals for themselves at the new year, typically involving changing a bad habit or acquiring a good habit, but when a year has come and gone, most of those goals have not been accomplished.  In Atomic Habits, James Clear argues that instead of focusing on goals, focus on systems.  Bad habits repeat themselves not because you don’t want to change but because you have the wrong system for change.  Drawing on ideas from biology, psychology, and neuroscience, Clear shares a guide that anyone can implement to make good habits inevitable and bad habits impossible.

The Big Idea

“You do not rise to the level of your goals.  You fall to the level of your systems.”  Atomic Habits

From social media to pop culture, our society focuses on accomplishments and results.  What we don’t see, however, is the behind the scenes framework that led to those results.  James Clear is one of the world’s leading experts on habit formation and the core theme throughout the book is the idea that focusing on getting just 1% better every day is the key to long-term success.  In fact, this concept inspired the title for the book, with the idea that atoms are extremely small, but together as part of a larger system, are powerful.  Habits are the compound interest of self-improvement.  If you have the habit of going to the gym 5 days a week, you may not notice much of a difference in your body for the first few months.  But keep that habit up over the course of several years, and the commitment will surely pay off.  This idea can apply to all areas of life, where your outcomes are a lagging measure of your habits.  The author argues that although having grit and discipline can be important, what successful people have is really just a better system for building good habits.  As a simple example, you may think someone who doesn’t each junk food has a lot of self control, but in reality they have the same amount of self control as everybody else, they just changed their environment by not keeping any junk food in the house.

Key Concept #1

Focus on Habits Not Goals

It is easy to overestimate the importance of one defining moment and underestimate the value of making small improvements on a daily basis. Similar to how money multiples through compound interest, the effects of your habits multiply as you repeat them.  Unfortunately, small daily improvements often go unnoticed and it is only after looking back over many years that the value of good habits and the cost of bad ones becomes strikingly apparent.  This is why focusing on the process (i.e. habits) and not the goal is important.  Clear gives several examples of why focusing on goals is a problem:

#1 Winners and losers have the same goals

Every NFL team has the same goal of winning the super bowl, so presumably it wasn’t the goal that causes the New England Patriots to be so dominate.  It is only through the implementation of a system of continuous small improvements that achieved the outcome.

#2 Achieving a goal is only a momentary change

Imagine you are not much of a runner, but a friend dares you to sign up for a half marathon.  You agree to the challenge, and over the next few months start running 3-4 days a week.  The hard work pays off, and you successfully complete the half marathon, but quickly fall back into your sedentary lifestyle.  Achieving a goal only changes your life for a moment, but focusing on the system (i.e. running 3-4 days a week) creates the long-term results.

#3 Goals restrict your happiness

When you set a goal, you automatically assume that once you accomplish your goal, you will be happy.  The issue with this approach is you are constantly delaying happiness until the next accomplishment, so when will you ever be truly happy?  Additionally, goals create an all or nothing mentality where either you accomplish your goal and are successful or you don’t and you fail.  It is nonsensical to restrict your satisfaction to one scenario when there are often so many paths to success, as it is often unlikely that your path through life will match the exact journey you had in mind when you set out.

#4 Goals are at odds with long-term progress

The purpose of setting goals is to accomplish them or “win”, while the purpose of building systems (i.e. habits) is to continue playing the game.  “Ultimately, it is your commitment to the process that will determine your progress.” Atomic Habits p. 27

Now that the case has been made for focusing on habits, it is important to understand there are both outcome-based habits and identity-based habits.  The difference between the two can best be illustrated by a simple example.  Imagine two people resisting a cigarette.  When offered a smoke, the first person responds, “No thanks.  I’m trying to quit.”  The second person declines by saying, “No thanks, I’m not a smoker.”  The differences in responses may seem subtle, but the second person is far more likely to succeed long term in not smoking again because their statement signals a shift in identity.  Smoking was part of their former life, not their current one.

Many people don’t even consider identity change when they set goals.  Instead, they just determine the actions they should take to achieve those goals without considering the beliefs that drive their actions.

Key Concept #2

The Four Laws of Behavior Change

The process of building a habit can be divided into four steps, which in the book are referred to as the Four Laws of Behavior Change: cue, craving, response, and reward.  This four step pattern is the framework of every habit.

  • Cue: The cue triggers your brain to initiate a behavior.  We spend most of out time learning cues that predict secondary rewards like money and fame, praise and approval, power and status, etc.

 

  • Craving: Cravings are the second step, and they are the motivational force behind every habit.  What you crave is not the habit itself but the change in state it delivers (i.e. you are not motivated by brushing your teeth, but by the feeling of a clean mouth).

 

  • Response: The third step is response, which is the actual habit you perform, and can take the form of a thought or an action.  Your response depends both on the amount of effort you are willing to expend and your ability (i.e. if you want to dunk a basketball but can’t touch the rim, you’re out of luck).  Lastly, the response delivers a reward, which is the end goal of every habit.

 

  • Reward: Rewards not only satisfy your craving to eat or gain status or win approval, but your sensory nervous system is continually monitoring which actions satisfy your desires and deliver pleasure. Together, these four steps form a neurological feedback loop that ultimately allows you to create automatic habits.

The fours steps above can be transformed into a practical framework that can be used to design good habits and eliminate bad ones.  Each step can be thought of as a lever that influences human behavior, so that when the levers are in the right position, creating good habits is effortless.  Below are the Four Laws of Behavior Change to create both a good habit and break a bad habit:

How to Create a Good Habit:

  • Make it obvious (cue)
  • Make it attractive (craving)
  • Make it easy (response)
  • Make it satisfying (reward)

How to Break a Bad Habit:

  • Make it invisible (inversion of cue)
  • Make it unattractive (inversion of craving)
  • Make it difficult (inversion of response)
  • Make it unsatisfying (inversion of reward)

If you have ever wondered why you don’t lose weight, stop smoking, or start that side business, the answers to those questions can be found somewhere in the Four Laws of Behavior Change.

Key Concept #3

Make it Obvious, Make it Attractive

“Many people think they lack motivation when what they really lack is clarity.” Atomic Habits p. 71

In order to build a new habit, it is imperative you make it obvious and attractive.  James Clear offers great advice on how to accomplish this.

Research studies have confirmed that to build a new habit, implementation intentions are key.  An implementation intention is a plan you make beforehand about when and where to act.  For instance, if you are having a hard time working out, you might commit to a class at a specific time and set out your workout clothes next to your bed so when you get up each morning it is an obvious cue and requires less self discipline.  Some people wait for motivation, but with an implementation intention, you don’t have to wait to feel inspired because when the moment of action occurs, there is no decision to be made, just follow your predetermined plan.  The easiest way to apply this strategy to your habits is to fill in the sentence below:

I will [BEHAVIOR] at [TIME] in [LOCATION]

When it comes to building new habits, you can use the connectedness of behavior to your advantage by identifying a current habit you already do each day and then add your new behavior right after.  This concept is referred to as habit stacking.  Rather than pairing your new habit with a particular time and location, you pair it with a current habit.  An example could be after you make your cup of coffee each morning, you will meditate for 10 minutes.  The secret to creating a successful habit stack is selecting the right cue to kick things off.

The author suggests that motivation is overrated, and a better approach is to focus on creating an environment that is conducive to the new habit you want to form.  A simple example of this is if you have the goal of not eating any junk food, instead of trying to force yourself to resist the temptation, simply don’t keep any junk food in the house.  One of the ways I used this in my life is I had the goal of wanting to practice guitar more frequently, so instead of keeping the guitar in the closet of my bedroom, I moved it to the corner of my living room where I see it more frequently.  We also mentally assign our habits to the locations in which they occur.  Since practicing guitar requires mental energy and focus, keeping it in a bedroom is not ideal since that room is associated with sleeping and relaxation.  Even thought it seems trivial, small changes in context of environment can lead to big changes in behavior over time.

As mentioned previously, the second law of behavior change is to make it attractive.  It may sound obvious, but you are more likely to find a behavior attractive if you get to do one of your favorite things at the same time.  Perhaps you like watching trashy reality tv shows.  Don’t give this up if you enjoy it, but only let yourself watch these shows if you are working out on the treadmill or bike at the same time.  The hope with this approach is eventually you will look forward to exercising because you get to watch reality tv.  The author refers to this technique as temptation bundling.

Habits are a dopamine-driven feedback loop because when dopamine rises, so does our motivation to act.  Psychology has proven that it is the anticipation of a reward, not the fulfillment of it, that gets us to take action.  The greater the anticipation, the greater the dopamine spike.

The final point James Clear makes on how to make a habit attractive is to realize that the culture we live in determines which behaviors are attractive.  Human beings have a desire to fit in and belong, so we tend to adopt habits that are praised and approved by our culture.  One of the most effective things you can do to build better habits is to join a culture where (1) your desired behavior is the normal behavior (2) you already have something in common with the group.

Key Concept #4

Make it Easy, Make it Satisfying

One of the most common questions people ask is “How long does it take to form a new habit?”  James Clear argues that what people should really be asking is how many repetitions are required to make a habit automatic.  After all, your current habits have been internalized over the course of hundreds or even thousands of repetitions, so new habits require the same level of frequency.  To build a habit you need to practice it, and the most effective way to make practice happen is to adhere to the 3rd Law of Behavior Change, which is make it easy.

Human behavior follows the Law of Least Effort, as humans will naturally gravitate towards the option that requires the least amount of work.  Therefore, it is important to create an environment where doing the right thing is as easy as possible, and for habits you want to reduce, increase the friction to make those habits more difficult.  For example, it could be something as simple moving your phone into a different room when you are working so that you are not tempted to constantly check it.  For personal finance, have money automatically deducted from your paycheck and invested in a retirement account.  This takes zero discipline and over time you will be amazed at the power of compound interest, particularly if you automatically increase your contribution percentage after each raise.

It is important not to have an all or nothing mentality when it comes to forming new habits.  The idea is to make your habits as easy as possible to start.  If your goal is to read more, it could be something as simple as read only one page before bed each night.  The point is to master the habit of showing up.  Instead of trying to create a perfect habit from the start, do the easy thing on a more consistent basis.

We all want better lives for our future selves, but when the moment of decision arrives, instant gratification usually wins.  As a general rule, James Clear suggests that the more immediate pleasure you get from an action, the more strongly you should question whether it aligns with your long-term goals.  The challenge is the human brain is wired to spend all day chasing quick hits of satisfaction.  However, you can turn instant gratification to your advantage by using reinforcement.  As an example, going to the gym a few times is not going to make you any noticeably fitter or stronger.  It’s only months or even years down the road when you begin to see the benefits, so in the beginning you need a reason to stay on track.  It is important that the reward is not conflicting with your long term visions.  For instance, don’t eat a bowl of ice cream because you worked out; instead, reward yourself by going to get a massage.  The good news is incentives can start a habit, but identity sustains a habit, so over time you will not need to reward yourself because the new habit will be part of your normal routine and you will have already seen the benefits of this new habit.

Key Concept #5

Play The Right Game

“Our genes do not eliminate the need for hard work.  They clarify it.  They tell us what to work hard on.  Once we realize our strengths, we know where to spend our time and energy.” Atomic Habits p.226

Learning to play a game where the odds are in your favor is critical for both motivation and feeling successful.  Pick the right habit and progress is easy, pick the wrong habit and life is a struggle.  So how do you pick the right habit?  In most cases, trial and error is the most common approach.  Unfortunately, life is short, as you don’t have time to try every career, date every person, or learn to play every musical instrument.  In the beginning of a new activity, there should be a period of exploration.  After this period of exploration, shift your focus to the best solution you have found, but keep experimenting occasionally.  If you are at the beginning of your career, you have more time, so it makes sense to explore because once you find the right thing, you still have a good amount of time to exploit it.  Below are a series of questions you can ask yourself to narrow in on the habits and areas that will be most satisfying to you:

What feels like fun to me, but work to others?  Whether you are made for a task is not whether you love it, but if you can handle the pain of the task easier than most people.  The work that hurst you less than it hurts others is the work you were made to do.

What makes me lose track of time?  Flow is the blend of happiness and peak performance.  It is being “in the zone.”

Where do I get greater returns than the average person?  We are all continually comparing ourselves to those around us, so a behavior is more likely to be satisfying when the comparison is in our favor.

 What comes naturally to me?  Ignore what society has told you, and what others expect of you.  Look inside yourself and think about what feels natural to you.

Apply It

*Try implementing the habit stacking formula by first writing down a list of all your daily habits you do without fail.  Think of a new habit you would like to form, and then try completing it after one of your existing daily habits, using it as a cue to get started.

*Instead of trying to wait for the right moment to start a new habit, realize that you can start small.  If you want to get in shape, start by going to gym just for 15 minutes a few times a week.  Once you realize that showing up is half the battle, your motivation will increase and you can gradually build from there.

*Regardless of where you are in life or what you want your future life to look like, remember that the key to getting results that last is to never stop making improvements.  The next time you are lacking motivation, think about the quote below from Atomic Habits:

“It’s remarkable what you can build if you just don’t stop.  It’s remarkable the business you can build if you don’t stop working.  It’s remarkable the body you can build if you don’t stop training.  It’s remarkable the knowledge you can build if you don’t stop learning.  It’s remarkable the fortune you can build if you don’t stop saving.  It’s remarkable the friendships you can build if you don’t stop caring.  Small habits don’t add up.  They compound.”  Atomic Habits p. 253

 

 

 

 

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Money Master The Game

What’s In It For Me?

Do feel overwhelmed or intimidated when it comes to personal finances and investing?  Achieving financial freedom isn’t complicated, but unfortunately the financial services industry’s marketing strategy is to make people think the exact opposite.  In Money Master the Game Tony Robbins interviews 50 of the world’s most talented investors and financial minds.  This book will help you take advantage of opportunities you would have potentially missed and prevent you from making the same costly mistakes that millions make every day.

The Big Idea

The book offers 7 steps to financial freedom, which at a high level can be summarized as:

Section 1: Understanding the power of compound interest is critical and can serve as motivation to save and invest as early and often as possible.

Section 2: The majority of the personal finance industry is out to make money off of you.  Although a 1% fee you pay to a financial advisor may seem small, it is killing your portfolio value over time, taking years off your planned retirement date.  Equally as bad are the high fees in mutual funds or 401k plans that eat into your account value. Stick with low cost index funds and you will not be disappointed over the long run.

Section 3: Many people have no idea how much money they will need to achieve financial security.

Section 4: Asset allocation (i.e. how your portfolio is allocated among various asset classes) is the most important decision impacting the performance of your portfolio over the long run.

Section 5: Develop a lifetime income plan to avoid ever running out of money.

Section 6:  Tony interviews billionaire investors and shares how they invest.

Section 7: Learn how to enjoy your money by spending on experiences and giving to those in need.

Key Concept #1

Fees are the Ultimate Enemy To Investing

The mutual fund/ETF industry is one of the few industries where the more you pay, quite often the worse performance you achieve.  Always look to use low cost index funds as the building blocks for your portfolio.

In addition to mutual funds/ETFs, 401(k) plans can be another source of excessive fees to watch out for.  According to the Government Accountability Office, the average plan administrator charges between 1.3% and 1.5% annually.  If you work for a larger company, you likely have lower plan administrator fees, but smaller companies sometimes struggle to get the economies of scale to lower fees in their 401(k) plans.

Another reason to avoid actively managed mutual funds is they typicality maintain a cash position to manage liquidity.  According to one study, the average cost of cash drag on large cap mutual funds over a 10 year horizon was 0.83% per year.  This may not be a direct fee, but it certainly cuts into performance.  Additionally, actively managed mutual funds incur transaction costs typically much higher than passive mutual funds/ETFs.  A 2006 study by business school professors concluded transaction costs for US actively managed mutual funds averaged 1.44% per year.

Key Concept #2

Don’t Time The Market

“We tend to put money into the market and take it out at exactly the wrong time.” Burton Malkiel, Money Master The Game p.349

Emotions are the enemy of investors, and trying to time the market typically always ends in a costly mistake.  Even the best investors in the world cannot consistently time the markets.  Therefore, the best strategy is to diversify your investing across time by dollar-cost averaging.  If you are automatically enrolled in a 401(k) plan, you are already doing this since a percentage of your paycheck is invested every two weeks (or whatever frequency you receive paychecks).  If you do not have access to a 401(k), consider automatically depositing money into your brokerage account each month.

The first 10 years of the 2000s is a prime example of the benefits of dollar cost averaging.  One dollar invested in the S&P 500 Index on December 31, 1999 was worth 90 cents by the end of 2009, which is why this is commonly referred to as the lost decade of investing.  However, if you had spread out your investments through dollar-cost averaging during the same time period, you would have made money.

American economist Burton Malkiel explained in a Wall Street Journal article on the merits of buy and hold investing that if you had invested in a basket of index funds, including US stocks, foreign stocks, and emerging market stocks, bonds, and real estate, between the beginning of 2000 and the end of 2009, you would have earned a 6.7% annual return.  Not only is this an example of why buy and hold investing works, but why having diversification in your portfolio is essential.

Another proven technique to increase returns and take the emotion out of investing is to regularly rebalance your portfolio.  Although it is debatable about how often you should rebalance, the consensus from the book seems to be once a year is sufficient, especially if your investments are subject to taxes.

Key Concept #3

Risk Parity

Throughout the book, Tony interviews many of the brightest minds in investing.  Within the section on asset allocation, Tony’s interview with hedge fund legend Ray Dalio provides unique insight on an asset allocation known as risk parity.  Most investors think that if they divide a portfolio between stocks and bonds (i.e. 60% stocks, 40% bonds), then they are diversified.  Ray Dalio makes the point that to achieve diversification, one must diversify risks, not asset classes.  His rationale is the risk, or volatility, of a 60/40 portfolio is almost 100% being driven by the stock allocation since stocks are much more volatile (i.e. riskier) than bonds.  To build a truly risk balanced asset allocation, Ray recommends the following:

30% stocks

40% long term US Treasurys

15% intermediate term US Treasurys

7.5% gold

7.5% commodities

The above allocation may seem unorthodox, but keep in mind the goal is to balance risk.  Since stocks are volatile, they need to be offset with a heavy allocation to bonds.  Ray points out that there are only 4 aspects that move asset prices:

  1. Inflation
  2. Deflation
  3. Rising economic growth
  4. Declining economic growth

Since it is impossible to predict which regime will come next, the risk parity allocation is prepared for any of the four regimes.  In a rising growth, falling inflation environment, stocks will perform well.  In a rising inflation, rising growth environment, commodities will perform well.  When growth is falling or there is a deflationary environment, bonds perform well.  The point is the portfolio is designed to be risk balanced, while a traditional 60/40 portfolio is only positioned for a rising growth, falling inflation environment since the majority of the risk is in the stock allocation.  2008 was an excellent case study, with the 60/40 portfolio down approximately -15% and the risk parity portfolio down -3.9%.  In fact, when the above asset allocation was back tested over the past 30 years, -3.9% was the worst returning year.  The annualized return was 9.7% and you would have lost money in only 3 years out of 30.

The risk parity approach may not be for everyone, particularly young investors looking to maximize their account balance over a long time period, but for risk averse investors or those near retirement, it could be an asset allocation worth serious consideration.  For more detail on this, check out my blog post on Risk Parity For Late Cycle Investing.

Key Concept #4

Financial Independence

Part of the reason why many people do not save enough for retirement is because it is an abstract concept, making it hard to find the motivation to save.  How do you know how much to save and if your nest egg will last your entire lifetime?   The first step toward tackling this problem is to brainstorm what your ideal lifestyle would look life, and to start, you need to evaluate where you currently are.  Tony lays out the five components, or dreams, to financial independence:

Dream #1: Financial Security

Imagine if you had all your basic living needs covered for the rest of your life, which would include housing, food, and transportation.  The book gives a hypothetical example of someone who needs $34,000 a year to cover her living expenses of housing, food, transportation, and basic healthcare.  The book recommends that approximately $640,000 should cover these basic needs. Although this is a large number, and she would still have to continue working to cover other expenses, it is the first step on the journey towards financial independence and brings piece of mind knowing that the she has enough money to cover the main cost of living components.

Dream #2: Financial Vitality

This goal is mile marker on the path to financial independence and is intended to give you some extra money for clothing and entertainment expenses.  To calculate financial vitality, take half of your monthly expenses for clothing, dining/entertainment, and other small indulgences and add those figures together.

Dream #3: Financial Independence

Financial independence is achieved when you no longer have to work to have the same lifestyle you have today because the annual interest you earn from investments will cover your expenses.  Money is now working for you, and you are no longer working for money.

Dream #4: Financial Freedom

Financial Freedom goes a step beyond financial independence because it represents having enough to cover two or three significant luxuries that you want in the future.  It answers the question, “What annual income would I need to have the lifestyle I want and deserve?”

Dream #5: Absolute Financial Freedom

This is the last level of financial freedom and represents having enough to do anything you want, anytime you want.  For many this may be out of reach, but the author makes the point that often times your wildest dreams may not cost as much as you think.  For instance, let’s say you want to own a plane.  Instead of owning a plane, you could rent one and get a lot of the same satisfaction for significantly lower cost.

The point of going through the above 5 steps is to remember that you are the creator of your life, and sometimes it easy to forget just how much you have already created.  Think back to what once seemed impossible in your life, such as getting a dream job or living somewhere you always wanted to live.  It may be easy to take these things for granted now, but if you appreciate what you have and get back in the mindset of what allowed you to accomplish these things in the first place, it can propel you forward.  Tony gives a three step process to incorporate things that seem impossible into your life:

Step 1: Unleash your hunger and desire, and awaken laser-like focus

Wherever focus goes, energy flows.  When you become inspired by something that excites you so much you can focus with laser-like intensity, and then step 2 happens:

Step 2: Take massive and effective action

If your desire is truly unleashed, you will do whatever it takes to make your dream a reality.  In addition to taking massive action, you need effective execution.  For example, you could put all your effort into saving for the future, but if you invest in active mutual funds with high fees, you may be getting no where.

Step 3: Grace

Some may call it luck, coincidence, fate, or God’s hand.  If you look back on situations in your life, there are probably a few serendipitous moments that you are very thankful for.  When you take care of the first two steps, you put yourself in a position to get lucky.

Money Master The Game p.227-228   

Key Concept #5

Living a Balanced Life and Giving Back

“I’ve always taught that success without fulfillment is the ultimate failure.”Money Master The Game p. 575

Although the majority of the book discusses strategies to create and sustain wealth, the final section puts everything in perspective by discussing other types of wealth.  After all, there are many types of wealth, including emotional wealth, relationship wealth, intellectual wealth, physical wealth (in the form of energy, strength and vitality), and spiritual wealth.  Unfortunately one of the biggest mistakes people make is mastering one form of wealth at the expense of all the rest.  It is impossible to live an extraordinary life if you don’t master the game of relationships, the game of fulfillment, and the game of health.

Our decisions control the quality of our lives.  Tony Robbins has found that there are three key decisions that we make every moment of our lives.  If we make these decisions unconsciously, we end up with lives like the majority of people who end up emotionally exhausted, out of shape physically, financially stressed, and often too bored or too comfortable with their intimate relationships. However, if you make these three decisions consciously, you can literally change your life.  Below is a brief summary of the three decisions:

Decision #1: What are you going to focus on?

What you focus on, and your pattern of focus, shape your whole life.  What do you tend to focus more on, what you have or what’s missing from your life?  It is important to spend time each day practicing gratitude by thinking or even writing down what you are grateful for.  The second pattern of focus is asking yourself if you tend to focus more what you can control or what you can’t control.  If you focus more on what you can’t control, there is no doubt you will live a more stressful life.

Decision #2: What does this mean?

Ultimately, how we feel about our lives has little to nothing to do with the events in our lives, our financial condition, or what has or has not happened to us.  The quality of our lives is determined by the meaning we attach to these things, but most of the time we are unaware of the impact of these quick meaning decisions that are made in our unconscious mind.  Victor Frankl is a prime example of someone who found meaning even in the extreme suffering of Auschwitz, not only in the deep desire to survive, but to save the lives of so many others in the future by saying, “This will never happen again.”

Decision #3: What am I going to do?

Once we create a meaning in our minds, in creates an emotion which leads to action.  If you want to shape your actions, the fastest way is to change what you focus on and change the meanings to something more empowering.  It is useful to become aware of what your patterns are when you are frustrated, angry, sad, or lonely because you cannot change your pattern if you are not aware of it.

We have all been taught that money cannot buy happiness, but research shows it in fact can, depending what you spend it on.  Below are some ways money has been shown to buy happiness:

Investing in experiences: such as travel, learning a new skill, or taking courses

Buying time for yourself: outsource your most dreaded tasks, such as house cleaning, to free up time to pursue your passions.

Investing in others:  this is perhaps the greatest thing you can do with your money that will bring increased happiness.  Giving your money away has been scientifically proven to make you happier. As Tony Robbins mentioned in the book, “the secret to living is giving.” (P.603)

“Live life fully while you’re here.  Experience everything.  Take care of yourself and your friends.  Have fun, be crazy, be weird.  Go out and screw up!  You’re going to anyway, so you might as well enjoy the process.  Take the opportunity to learn from your mistakes: find the cause of your problem and eliminate it.  Don’t try to be perfect; just be an excellent example of being human. “ Tony Robbins, Money Master The Game p. 607

Apply It

*Look at the investment options in your 401(k) plan and make sure you are investing in low cost index funds.

*If you use a financial adviser that charges a fee based on your percentage of assets invested, consider switching to an adviser that charges a fixed fee per hour of advice, or better yet, manager your own money.  Even a 1% management fee can dramatically decrease the size of your investment portfolio over time.

*The quality of your decisions control the quality of your life.  Write down things in your life that you spend time focusing on that are out of your control.  Replace these items with things you can control.  Consider writing down three things you are grateful for each day, which trains the mind to focus on what you have instead of what is missing from your life.

 

 

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The Telomere Effet

What’s In It For Me?

Have you ever wondered why some 60 year-olds look like and feel like they are in their 40’s, while some 40 year old looks look at feel like they are in their 60’s?  Although many factors contribute to illness and aging, research shows that the length and health of one’s telomeres are a biological underpinning of the long hypothesized mind/body connection.  Dr. Blackburn and Dr. Epel’s research, along with other scientists, shows that changes we make to our daily habits can protect our telomeres and increase our health spans (the number of years we remain healthy, active, and disease-free).  If nothing else, the research provided in this book should provide that extra motivation you may need to make changes to improve your health.

The Big Idea

With research collected from scientists around the world, The Telomere Effect shows that sleep quality, exercise, diet, and even certain chemicals profoundly impact our telomeres.  On the contrary, chronic stress, strained relationships, and negative thoughts can eat away at them.  Drawing on a scientific body of knowledge, the authors share lists of foods and suggest types of exercise that are supportive of telomere health, and share stress reduction tips.

 

Key Concept #1

A Pathway to Living Longer

What are telomeres and why do they matter?  The DNA of every chromosome has some end regions consisting of DNA strands coated by a dedicated protective sheath of proteins.  This end region of the chromosome is the telomere and they are a small but vitally important component of the chromosome.  Telomeres shorten and lengthen with each cell division and help determine how fast your cells age, depending on how quickly they wear down.  Scientific research has confirmed that telomeres can actually lengthen, and as a result aging can be slowed down.  We all eventually get older, but how we age is very much dependent on our cellular health.

When you think about trying to live in a healthier way, you may groan about all the things you ought to be doing.  However, when you think about how your actions can directly impact your telomeres, it can provide motivation to make lasting changes.

The shorter your telomeres, the higher your risk of dying from cancer, cardiovascular disease, and at dying at a younger age more generally.

Key Concept #2

Your Cells Are Listening To Your Thoughts

By the turn of the millennium, scientists had become accustomed to thinking about telomeres and the enzymes associated with it (telomerase) as the foundations for cell renewal.  Further research has shown that life experiences, and the way we respond to those events, can change the lengths of our telomeres.  In other words, it is possible to change the way we age at the cellular level.

How you experience stress matters.  It is not always possible to change your automatic response to stress, but it is possible to learn to change your response to your responses, which is what stress resilience is all about.  To be clear, not all stress is bad.  Short-term manageable stressors can be good for you because they build up your coping muscles.  The ups and downs of daily life will not wear on your telomeres, but a high dose of chronic stress that wears on for years will take its toll.  Burnout from job stress and long-term caregiving for a family member are examples shown to potentially decrease telomere length.  It is important to keep in mind it is not the situations themselves that damage telomeres, but the stress responses people feel when they are in that situation.  Therefore, studies have shown that being under chronic stress does not inevitably lead to telomere damage.  For example, some people have a challenge response to stress where they feel excited and energized, with a “bring it on” mentality.  A predominate challenge response to stress may help shield your telomeres from some of the worst effects of chronic stress.

Even if you do not naturally have a challenge response to stress, it is possible to learn to develop one.  A prominent sports psychologist who worked with an Olympic sprinter struggling with a racing pulse and anxiety right before a sprint told the athlete that trying to think about getting the heart rate down was not the right approach.  Instead, he told the athlete to think of the stress as helping her get ready to perform.  Believe it or not, this simple change in thinking made all the difference.  We cannot get rid of our stress, but approaching stress with challenge mentality can help promote protective stress resilience in the body and mind.

We are largely unaware of the mental chatter in our minds and how it impacts us.  However, it is important to recognize some of the negative thought patterns we can fall into below:

Pessimism: The brain is constantly scanning the environment and comparing it to past experience, looking for upcoming threats to your safety.  However, too much pessimism is not good and pessimists tend to feel more threatened by stressful situations.

Mind Wandering:  We spend roughly half the day thinking about something other than what we’re doing.  When you are thinking negative thoughts about the past, you are more likely to be unhappy.

Unitasking:  Try to focus on only the task at hand.  The concept of multitasking is a misnomer and adds stress with decreased results.

Rumination:  Rumination is the act of rehashing your problems over and over.  It can be easy to get caught in a spiral of negative thoughts when you are constantly thinking about what is wrong.

Thought Suppression:  Thought suppression is an attempt to push away unwanted thoughts or feelings.  When we push away our bad feelings, they inevitably roar back, and then we feel bad, and then we feel bad about feeling bad.

Key Concept #3

Help Your Body Protect Its Cells

We all know exercise is important, but how much is sufficient and what should we be doing?  In the research on telomere health, two kinds of exercise stood out.  Moderate aerobic endurance exercise performed three times a week for 45 minutes, and high intensity interval training (HIIT).  HIIT involves short bursts of activity followed by brief periods of rest.

However, too much exercise, such as training by ultramarathon runners, can actually damage cellular health because the body is not getting sufficient recovery periods.

The important thing to remember is exercise helps out the cell clean-up crew, so cells have less junk buildup and more efficient mitochondria, along with fewer free radicals.  Regardless of whether you have a high stress life or not, exercise is essential to maintaining good cellular health.

Sleep is another extremely important component to overall health.  Not surprisingly, those that sleep at least 7 hours a night have longer telomeres than people who get less sleep.  However, it is not just hours that matter, but overall sleep quality.  Be consistent in the times you go to bed and wake up each day, and try to get into the habit of doing something calming before bed, such as reading a book or meditating.  If you are having trouble sleeping, don’t obsess over it.  Remind yourself that you can function regardless of how much sleep you get, and by having this approach you will actually be more likely to fall asleep.

Diet is the last essential component to good cellular health, and it comes as no surprise that eating plenty of fresh fruits and vegetables is the main recommendation from the book.  Inflammation, insulin resistance, and oxidative stress are your enemies, so to fight them follow a prudent pattern of eating: fruit, vegetables, whole grains, beans, legumes, nuts, seeds, and low-fat high-quality protein sources.  This is essentially known as the Mediterranean diet.  It may be worth considering taking Omega 3 supplements given this essential fatty acid is low in many people’s diet, but obviously consult with a physician.  It is recommended to minimize red meat (especially processed meat), and it may be worth going vegetarian for a few meals each week.  Most importantly, avoid sugary foods and drinks, and processed foods.

Key Concept #4

The Social World Shapes Your Telomeres

The environment you live in has been shown to impact your telomeres.  In particular, chemicals such as carbon monoxide, pesticides, and cigarette smoke all have negative impacts on your cellular health. In addition, many of the chemicals found in regular household cleaning products and cosmetics have the potential to cause damage, although further research is needed.  The authors recommend trying to use natural products whenever possible.

 

Arsenic is found naturally in many wells and groundwater, so it is recommended you either have your water tested or use a filter.  If you have a habit of eating microwave meals, it is recommend to try to not microwave plastics, as the chemicals from the plastic may get into your food.

Marriages come in all flavors, and not surprisingly, the better the quality of the marriage, the better the health benefits.  Happily married people have a lower risk of early mortality, and people in happy marriages show more resilience during stressful situations.

On the other hand, couples in unhappy marriages suffer from a high level of permeability, essentially picking up on each other’s stress and negative moods.  If one spouse wakes up in the morning with a big stress response, the other is more likely to as well.

Key Concept #5

Childhood Matters For Life

Childhood exposure to stress, poor nutrition, and violence affects telomeres.  When telomeres were measured in healthy adults who experienced adverse childhood events, a dose-response relationship is often seen, meaning that the more traumatic the event the person experienced in childhood, the shorter their telomeres as adults.

However, moderate adversity in childhood can be a good thing.  Adults who reported having a few adverse experiences in their childhood have healthy cardiovascular responses to stress.  They felt invigorated during stress, perhaps because their early experiences gave them confidence to overcome obstacles.  Teaching children how to cope with stress and a young age can be a valuable life skill.  The key is the stress has to happen in a moderate amount and be manageable.

Pregnant women hear the advice all the time, “now you’re eating for two.”  This is true, and research shows that what a pregnant woman eats can also impact the baby’s telomeres.  The authors recommend avoiding a low protein diet, and getting a sufficient amount of folate, which is a B vitamin.  However, moderation is the key to success, as getting too much exposure to vitamins can be detrimental.

In addition to diet, a mother’s psychological stress may also impact her developing baby’s telomere length.  Mothers with the highest number of stressful life events had babies with telomeres that were shorter by 1,760 base pair at birth (p.289).  The good news is mild to moderate stress, which is experienced by everyone, is not impactful to telomere health of babies.

Apply It

*Lifestyle, mental health, and environment all contribute significantly to overall health, which is obviously not new information.  However, the book shows that telomeres are impacted by these factors, so use this information as motivation to make a change to a component of your health.

*Evaluate sources of persistent, intense stress.  What can you change?  If it is not something that is easy to change, can you change your perspective on this stress from a threat to a challenge, or opportunity to grow.

*Help maintain your telomeres by developing a sleep ritual for restorative sleep, such as disconnecting from screens/electronic devices an hour before bed and meditating.

 

 

 

 

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The Obstacle Is The Way

What’s In It For Me?

Do you feel stuck in life or frustrated because something is holding you back?  Based on timeless philosophical principles from Roman emperor Marcus Aurelius and other historical examples, The Obstacle Is The Way describes how our biggest setbacks in life can pave the path for our greatest triumphs.

The Big Idea

“The impediment to action advances action.  What stands in the way becomes the way.” Marcus Aurelius, The Obstacle Is The Way p. Xiv

 Overcoming obstacles consists of three critical steps:  It begins with 1) how we look at specific problems (i.e. our attitude or approach); 2) the energy or creativity that we use to break down our problems and turn them into opportunities; 3) the cultivation of an inner will that allows us to handle defeat and setbacks.

Throughout human history, adversity and struggle have been a constant challenge every human being has had to face.  Contrary to how we may feel at the time, obstacles should be embraced because they are actually opportunities to test ourselves, try new things, and ultimately triumph and grow. The world is constantly testing us, asking questions such as: Are you worthy? Can you get past the things that fall in your way?  Will you stand up and show the world what you are made of? This book will show you how to thrive and rally at these challenges.

Key Concept #1

Perception

“You will come across obstacles in life—fair and unfair.  And you will discover, time and again, that what matters most is not what these obstacles are but how we see them, how we react to them, and whether we keep our composure.”  The Obstacle Is The Way p. 16

Human brains have evolved from an environment very different than the one we are currently living in.  As a result, we carry biological baggage that can get in the way, such as the fight or flight responses that kicks in when you are public speaking.  Fortunately we have a choice on how we respond to any situation. We can be blindly led by primal feelings or we can understand them and learn to filter them.  Discipline in perception lets you clearly see the advantage and the proper course of action in every situation.  The book offers some guidance on what to focus on when faced with a seemingly insurmountable obstacle:

Be Objective

Control emotions and keep an even keel

Choose to see the good in every situation

Steady your nerves

Ignore what disturbs or limits others

Place things in perspective

Revert to the present moment

Focus on what can be controlled

(The Obstacle Is The Way p. 18)

The book describes the famous story of Rubin “Hurricane” Carter, a top boxer of the 1960s who was wrongly accused of a triple homicide.  Instead of breaking down, as most anyone would in that situation, Carter recognized the power he still had and declined to surrender the freedoms that were innately his: his attitude, his beliefs, his choices. Even though his physical freedom had been taken from him, Carter maintained that he still had choices, choices that could not be taken from him.  Of course he was still furious about what had happened to him, but he understand that anger was not productive.  It took 19 years and two trials to overturn the verdict, but when Carter walked out of prison a free man he simply resumed to normal life.  Carter did not even request an apology from the court because to him, that would imply they had taken something from him.

Key Concept #2

Live In The Present and Take Action

Half of the companies in the Fortune 500 were started during a bear market or recession.  The author uses this fact to make a point that most people or businesses start with a disadvantage, often not realizing they are doing so.  Those that survive have the mentality of taking things day by day.

The implications of an obstacle are theoretical; they exist in the past and the future.  We can live in the moment, and the more we embrace that, the easier the obstacle will be to move.  In fact, you can use the trouble you are dealing with as a reminder to focus on the present moment.  If you don’t make any predictions about the future, you won’t waste time worrying if the future will conform to your predictions.  Living in the present is easier said then done, but the author gives some tips to help keep your mind in the present moment: strenuous exercise, a walk in the park, meditation, and unplugging from your technology.  Focus on what is in front of you right now.

Anyone can take action, but taking the right action, directed action, is what is necessary to overcome obstacles.  Deliberation, boldness, and persistence are the attributes that define effective action.

Amelia Earhart wanted to be a great aviator, but in the 1920s, it was against societal norms for women to be pilots.  Instead, she took a job as a social worker.  Then one day the phone rang, and the man on the line had a arguably offensive proposition for Amelia: Someone was willing to fund the first female transatlantic flight, their first choice had backed out, and they needed a women to be in the plane, although two men would actually be flying it.  Amelia Earhart agreed.  The point is that even though the conditions were not perfect, people who accomplish great things are willing to start anywhere, as long as it gets them moving in the right direction.  Less than five years later, Earhart became the first woman to fly solo non-stop across the Atlantic.

Key Concept #3

Change Your Relationship With Failure

Failure is the preceding feature of nearly all success.  In Silicon Valley, start-ups don’t launch with a polished finished product.  Instead, they release their minimum viable product (MVP), which is the most basic version of their idea.  The idea is to initially see how customers respond, and if it is not well, then to fail cheaply and quickly.

Contrary to what our initial instincts may tell us, failure really can be an asset if we are trying to learn, improve, or do something new.  Problems become opportunities.  In the MVP model, products get stronger by failure because they drop features that don’t work or customers don’t find appealing.  In life, it can be helpful to view yourself like a start-up, and that means changing your relationship with failure.  On the path to successful action, failure is likely to occur many times.  It is important to keep in mind that failure and action are two sides of the same coin. When failure occurs, ask yourself what went wrong and what could be improved? Great entrepreneurs are:

*never wedded to a position

*never afraid to lose a little of their investment

*never bitter or embarrassed

*never out of the game for long

The author is not claiming that failure shouldn’t hurt.  Of course it does, but it is important to acknowledge that temporary failure certainly hurts less than catastrophic, permanent failure.  It is important to understand that the world is telling you something with each and every failure and action.  Listen to the feedback that its giving you.

Key Concept #4

Follow The Process

“Replace fear with the process. Depend on it.  Lean on it.  Trust in it.” The Obstacle Is The Way p. 92

One of the most successful college football coaches of all time is the University of Alabama coach Nick Saban.  Coach Saban preaches “The Process”, which simply means instead of focusing on the big goal (i.e. win the national championship), break it down into small pieces and focus on the task at hand (i.e. this current practice drill).  By simply focusing on what you need to do right now, and by doing it well, and then moving on to the next thing, it will eventually put you in position to accomplish your goal.  Even seemingly mammoth tasks become just a series of component parts when you follow the process.

Remember the first time you saw a complicated algebraic equation in school?  It was a mess of symbols and unknowns.  But if you isolated the variables and solved for them, the answer was staring you in the face.  This same concept can be applied to obstacles in life.  Our human nature tends to panic and think the problem cannot be solved, but if you break it down into small pieces and follow a process, suddenly an unsolvable problem has a solution.  People often put their life goals on hold because they seem too big.  If your goal is to write a book, the tasks seems so insurmountable that few even start.  But if instead you made it a goal of writing at least 500 words a day, over time you would be well on your way to writing that book.  Humans tend to be A-to-Z thinkers, focusing on A and worrying about Z, but forgetting B through Y.

It is helpful to have goals because goals help put the obstacles into perspective.  When you know what you are setting out to do, the obstacles that arise seem smaller and more manageable.

Key Concept #5

Will

What is will?  Will is your internal power, which can never be impacted by the outside world.  Will power can be cultivated by turning a seemingly negative situation into a positive one.  Many people think that will is how bad we want something.  The author argues that will has more to do with surrender than with strength.  True will is “quiet humility, resilience, and flexibility; the other kind of will is weakness disguised by bluster and ambition.” The Obstacle Is The Way p. 125

Because of this mythical legend, most people are unaware that Abraham Lincoln battled crippling depression his entire life.  Known as melancholy at the time, his often debilitating depression drove him to suicide on two separate occasion.  Lincoln’s life was defined by enduring difficulty.  He grew up in rural poverty, lost his mother while he was still a child, and lost the woman he loved as a young man.  And he had to deal with the bouts of depression, which at the time were not understood by the medical community.  Lincoln’s personal challenges were so great that he believed they were destined for him in some way, that they were a unique experience that prepared him for greater things.  For most of Lincoln’s political career, slavery was a dark cloud that engulfed the entire nation, but it came to be that every quality produced by Lincoln’s personal journey was exactly what was required to lead the nation through its own journey and trial.  “Lincoln’s words went to the people’s hearts because they came from his, because he had access to a part of the human experience that many had walled themselves off from.  His personal pain was an advantage.” The Obstacle Is The Way p. 130

It is inevitable that certain things in life will cut you open like a knife.  Having a strong will is a critical discipline because it allows you to think, act and adjust to a world that is unpredictable.  In every situation we can:

Always prepare ourselves for more difficult times

Always accept what we’re unable to change

Always manage our expectations

Always persevere

Always learn to love our fate and what happens to us

Always protect our inner self, retreat into ourselves

Always submit to a greater, larger cause

Always remind ourselves of our own mortality

The Obstacle Is The Way p. 133

Apply It

*Do you have a large goal you have always put off from trying to achieve because it seems too big?  Try applying “the process” that Coach Nick Saban has preached for years.  Break your goal down into small pieces that you can focus on every day.

*The next time something bad happens to you, as yourself the question, “what if this was a gift?”  By reframing a negative experience, you will soon realize that there is a positive that can be found in any seemingly negative situation.

*When you find yourself in a difficult situation, try to focus on the present.  It can be a waste of mental energy to replay the past numerous times in your head or worry about the future.

 

 

 

 

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Financial Freedom

 

What’s In It for Me?

In 2010, 24-year-old Grant Sabatier was living with his parents and had $2.26 in his bank account.  Fast forward five years later, and Grant had a net worth of over $1.25 million.  By the age of 30 he had reached financial independence.  In Financial Freedom, Grant shares all his knowledge about how he achieved financial independence, and in the process uncovers why the accepted wisdom about money, work, and retirement is either incorrect or obsolete.  If you want a step-by-step process to make more money in less time and not be forced to work until age 65 or beyond, this book is for you.

The Big Idea

While much of the advice in the financial independence community is centered on minimizing expenses, Financial Freedom highlights the importance of trying to improve your earnings potential, whether it be in the form of knowing how to ask for a raise or pursing various side hustle projects.  The benefit of having multiple semi-passive income streams, whether it be rental income from real estate or an online business, is that you can ideally cover your living expenses and thus delay withdrawing from your retirement accounts which will benefit from years of compounding.  Borrowing from the concepts in Your Money or Your Life, Grant challenges readers to think about how much their time is worth as a motivation tool to reconsider unnecessary purchases and increase savings rates to speed up the path to financial independence.  There are no short-cuts to financial freedom, but Grant lays out the blueprint to realistically achieve this goal far before the traditional retirement age.

Key Concept #1

Time Is More Valuable Than Money

“..I didn’t want to spend the best years of my life working in a poorly lit cubicle at a stressful job I didn’t particularly enjoy.” Financial Freedom p.35

If you had the option to trade places with a 90 year old with $50 million, would you do it?  Of course not!  Clearly time is more valuable than money.  The average person has approximately 25,000 days to live in their adult life.  Most people on the planet need to trade their time in order to live a safe, happy, and healthy life.  No one cares about your time as much as you do, so Financial Freedom is designed to help you make the most of your time, and use money as your tool to help you buy time.  Even if you love your job now, that could change in the future, and the reality is the vast majority or people would prefer to spend their most active healthy days of their lives living life on their own terms.  The book offers advice on how you can retire as early as possible, not so that you will never work again, but so that you will have enough money so that you will never have to work again.

Traditional retirement advance has three major problems:

  1. It doesn’t work for most people
  2. You end up spending the most valuable years of your life working for money
  3. It’s not designed to help you retire as quickly as possible

The key to fast-tracking your financial freedom is making and investing as much money as early and often as you can to benefit from compound interest.  This illustrates the important concept that the relationship between time and money is not strictly linear (i.e. if you want to make more money, you don’t necessarily need to sacrifice more time to do so.)

Before we dive in to the strategies to accomplish financial freedom, it’s helpful to first know what goal you are working towards.  The book has an entire chapter called “what is your number?” That helps address this important question.  At a high level, the most direct answer is simply to figure out what your annual expenses are (or what they will be for your desired lifestyle) and multiple that number by 25.  This general guideline is based off of research around the 4% rule, which states that most people can safely withdraw 4% of their portfolio each year, adjusted for inflation, and have enough money to last the rest of their life.  The author argues this rule is actually conservative for people who retire early because they have a longer time horizon to continue to have their investments reap the benefits of compound interest.

Key Concept #2

How to Build Wealth Quickly

While there are many ways to build wealth, they all rely on three basic levers:

  1. Income: How much money you are making
  2. Savings: How much money you are saving/investing
  3. Expenses: How much money you are spending

Financial Freedom (p.93)

This is clearly not rocket science, as the more you increase savings and reduce expenses, the sooner you will reach financial freedom.  In order to build wealth quickly, you need to focus on all three levers.  When Grant did the math for his own situation, he determined that if he saved 50% of an annual salary of $50,000 and compounded it at 7 percent per year, it would take him at least 25 years to save $1.25m, and even then that would likely not be enough given the impacts of inflation.  The point is unless you are making a very high salary, it will be difficult to reach financial freedom through saving alone.

Therefore, it is imperative to focus on earning more money.  The book suggests adopting the “enterprise mindset” to help accomplish this.  There are four general ways to make more money:

  1. Full-time employment: working for someone else
  2. Side hustling: making money on the side
  3. Entrepreneurship: scaling your side hustle and making it your full-time job
  4. Investing: growing your money in the market

Financial Freedom (p.104)

Even if you like your full-time job, the biggest disadvantage is your time is not your own, and the higher your salary gets, the more your employer expects from you to justify that salary. However, continuing to work your full time job on your path to financial freedom is often essential since it provides security and benefits not possible to get through side hustling or entrepreneurship.  The author suggests “hacking” your full-time job by taking advantage of the opportunity to learn new skills you may be able to use in a side hustle or taking advantage of networking opportunities.  But perhaps the biggest advantage of working a full-time job is the potential to work remotely.  The book describes the story of a full-time network administrator making $100k per year and working remotely.  Since the job only takes him 20 hours a week to complete, he spend the rest of his time on his side hustle consulting company, making an additional $150k per year.  While this might be an extreme example, it illustrates how valuable it can be to work remotely.

Key Concept #3

Side Hustle

Grant credits a key component of going from essentially broke to financial freedom in 5 years was his ability to earn income outside of his day job (i.e. side hustle).  If you want to make a lot of money quickly, you need to diversify your income streams through side hustling.  To be clear, this is not easy money.  In fact, in addition to having a full time job, Grant spent about 40 additional hours a week working on his side hustles, which included:

*Building website for law firms

*Flipping domain names

*Running digital marketing campaigns for law firms and real estate agents

*Doing search engine optimization projects

*Flipping vintage mopeds and VW campers

The above list may seem a bit random, but Grant leveraged the skills he developed at his W-2 job at a digital marketing agency to focus on side hustle ventures.  If you want to make money side hustling, you need to evaluate how much time you are realistically willing to commit to it, because that determines the types of side hustles you can launch.  If you are thinking you don’t have time to start a side hustle, first ask yourself how much time you are spending watching TV per week.

Another benefit of side hustling is you can deduct many of the expenses from your taxes.  As your side hustle grows, there are many benefits to creating an LLC.  The most lucrative side hustles are ones that generate passive income.  Passive income disrupts the notion that you need to trade your time for money.

The book offers a side hustle evaluation framework to help you choose your next side hustle:

  • Analyze your passions and skills

Think about what you enjoy doing and look at your skills.  Can you get paid for any of them?  Also think about what new skills you would like to learn, as there is nothing like a paying client to motivate you to learn how to do something.

  • Evaluate the money making potential

Once you have a list of potential side hustle ideas, you have to narrow it down to the ones that can make you the most money.  This starts with looking at market demand and competition.

  • Figure out what to charge, get your first sale, and get paid as much as possible

The more in demand your skill set, the more you can charge for your service.  How much you charge also depends on what your competition is charging, so do some research.

To get your first sale, it is important that customers connect with your story.  For your company website, the About page is the most important page because we are all human, and selling any product or service is all about connecting with people.

  • Know when to scale

You should consider scaling your side hustle if you have been able to consistently sell your service or product and have been making a profit for the past six months.

Key Concept #4

Stock Market & Real Estate Investing

Up until this point, you have learned several concepts including understanding that working is trading your valuable time for money, how to maximize your income, and minimize expense.  The final element to putting you on your path to financial independence is understanding investing.

Unfortunately the financial services industry makes it seem like investing is very complicated, but they are really just excellent marketers, as the truth is anyone can learn to manage their own money through a little self-education.  If you do need to hire a financial advisor, make sure you go with one who charges on an hourly or project basis, not someone what charges on a percentage of assets.

For stock market investing, the book makes the strong case for using low cost index funds, as all the academic research indicates this approach is superior to trying to pick stocks or find the next hot mutual fund.  Specifically, Grant is an advocate of the Vanguard Total Stock Market Index (VTSAX) since it gives low cost broad exposure to the US stock market, including some exposure to mid cap and small cap stocks.

To reach financial freedom, taking advantage of the various retirement savings accounts is critical.  In addition, having a strategy to minimize taxes goes a long way.  Grant recommends investors should always try to max out tax-advantaged accounts first (such as 401ks, 457(b), 403(b)) If you happen to be one of the lucky employees that has access to a 457(b), this is the account you should max out first since you are allowed to withdraw the money penalty free before age 59.5.  Next, consider maxing out your health savings account (HSA).  Your HSA is just like another retirement account, and you can deduct your contributions from your taxable income and use the money you contribute (and investment gains) tax-free anytime for medical expenses.  Next, consider maxing out your IRA.   Finally, if you still have money to invest after you’ve maxed out your tax advantaged accounts, you should open up a taxable account (i.e. brokerage account).

Real estate investing is the other area Grant recommends investors focus on if they want to speed up their path to financial freedom.  Because of the use of leverage and certain tax advantages, in many ways real estate can be a superior strategy to building wealth than investing in the stock market.  Grant is an advocate for putting down 5% instead of the standard 20% on a home because he believes the opportunity cost of waiting to save enough to come up with the 20% just isn’t worth it.  For example, if you have a mortgage rate that is below 5%, chances are you are better off using the additional cash to invest in the stock market than having it tied up in home equity.

There are two primary strategies for real estate investing: flipping properties, or buy and hold for the long-term.  When it comes to hitting your FI number as soon as possible, cash flow is more important than appreciation, so focusing on the buy and hold strategy is likely the best option.  The book provides an example of how over a ten year period, buying just 5 rental properties could have the potential to generate over $6,000 per month in rental income.  Real estate investing is scalable, so you can build your portfolio depending on how much money you have to invest and time you are willing to commit.  The book offers 9 tips to help you find an amazing investment property:

1). Develop real estate investing criteria to follow

2). Set a budget and get preapproved for a mortgage or loan

3). Look for properties that generate immediate positive cash flow and have appreciation potential

4). Find a realtor who does the hard work for you

5). Hunt when everyone else isn’t (such as in the winter months)

6). Look for foreclosures or short sales

7). Test-drive the neighborhood (try staying in an Airbnb nearby)

8). Find an experienced home inspector

9). Be prepared to walk away from the deal

(Financial Freedom p. 280-285).

Key Concept #5

Budgets Are Overrated / How To Live Off Your Investments

While budgets work for some people, the reality is you will not save the most money by cutting back on small expenses.  Instead, you save the most money by controlling your biggest expenses, which are typically housing, food, and transportation.  The author argues that just be optimizing these three expenses, you can realistically increase your savings rate by 25%.

The cost of housing accounts for approximately 33% of the average American’s budget.  Although it may not work for everyone’s situation, the concept of “house hacking” is introduced as a way to significantly reduce the housing expense or perhaps even live for free.  This involves purchasing a property and renting out the spare bedroom(s) to help cover the mortgage.

Transportation accounts for 19% of the average budget.  The easiest way to save on transportation costs if you have to buy a car is to buy the cheapest used car you can and not take out an auto loan.  Even then, a car still costs on average about $8,500 per year if you drive 15,000 (this includes insurance, gas, maintenance, etc).  Factoring this in, the best way to save on transportation is to not own a car at all, which can be easier said than done depending on where you live.

Fast forward 10 years, and imagine you have hit your financial independence number.  The book offers some advice on how to live off of your investments for the rest of your life.  If possible, it is best to try to use money you make from real estate rental income, side hustle income, or other sources of passive income to cover your monthly expenses before touching your brokerage or retirement accounts.  This approach can have an extremely big impact on your chances of never running out of money.  For example, if you make an extra $2,500 a month off rental income and need $5,000 a month to cover your living expenses, the amount you need to withdraw from your investment portfolio is reduced by 50%, leaving an additional $30,000 a year in your investment accounts to continue to grow.

The safe withdrawal percentage, which is the amount you can withdrawal from your portfolio each year without risking running out of money, is a highly debated, but the book recommends 3%-4%, with annual adjustments for inflation.  It goes without saying that you should plan to take out as little money as possible to keep as much of your money invested and compounding.  Due to sequence-of-returns risk, your investment performance of the first five to ten years of retirement can have a dramatic impact on how long your money could potentially last.  For instance, if right before you retire you have a portfolio with 100% in stocks and the market drops 30%, you a starting retirement with 30% less money and likely less than your target retirement number.  You can also reduce the sequence-of-returns risk by moving some of your investments into fixed income that you can live off of during your first five to ten years of retirement, which guarantees income that is not impacted by the performance of the stock market.

While it can vary depending on your personal financial situation, Grant recommends that if you need to live off of your investment gains before age 59.5, it is better to withdraw from your accounts in the following order:

  1. Traditional 401(k) or 403(b)
  2. Traditional IRA
  3. HAS
  4. 457(b)
  5. Roth IRA
  6. Roth 401(k)

The reason you should take withdrawals from your Roth accounts last is because the investment gains are growing tax-free. If you need the money before age 59.5, the nice aspect of the Roth IRA is that you can withdraw your contributions anytime without penalty.  If you invested in a Roth 401(k), then you should convert your Roth 401(k) to a Roth IRA before taking any withdrawals because with a Roth 401(k) you have to withdraw a percentage of your contributions and gains, so you are taxed if you take early withdrawals and are thus subject to an 10% early withdrawal penalty.

The book mentions the concept of the “Roth IRA Conversion Latter”, which is a way to avoid the 10% early withdrawal penalty on your tax-advantaged accounts.  Here’s how it works:

  1. First convert the money in your 401(k) or 403(b) into a traditional IRA
  2. Next convert your Traditional IRA into a Roth IRA. You’ll need to pay taxes here, so convert only as much as you will need.  Once your get closer to retirement, it should be easier to determine how much you might need to withdraw to cover your living expenses.
  3. In five years you can withdraw the money you converted from your Roth IRA penalty-free.

The reason it is called a latter is because every year you will want to convert another portion of your Traditional IRA to a Roth IRA so that you are building a ladder.  At each step you have to wait five years after conversion to withdraw the money tax-free.

Apply It

*Calculate the percentage of your income that you save and invest (i.e. your savings rate) and strive to increase it by 1% every 30 days.  The higher your savings rate, the faster you will achieve financial independence.

*Try to hack your full-time job by learning as many skills as possible that you could potentially apply as a freelancer.  Ask your boss to work from home at least one day a week to gain more flexibility in your schedule and ultimately give yourself opportunities to work on your side hustle projects.

*Try using a website such as www.personalcapital.com to track your investments across your various accounts.  Analyze how much you are paying in fees and switch to low cost index funds if you have any high fee active mutual funds or ETFs.

*Consider renting out a spare bedroom on Airbnb or a similar site to reduce your housing expense, which is by far the largest expense in most people’s budget.

 

 

 

 

 

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Buy It, Rent It, Profit!

What’s In It For Me?

Real estate investing can be an effective way to grow your wealth and can be particularly valuable if you are interested in pursuing financial independence.  The potential for returns are higher in real estate investing compared to investing the stock market because of the use of leverage (or borrowed funds) that you use to buy real estate.  Additionally, real estate receives favorable tax advantages and the income the properties generate can be used to help fund an early retirement.  Real estate investing can be a great “side hustle” since it can be a nice supplement to a full time job and is not incredibly time consuming.  Buy it, Rent it, Profit! Was written by an experienced real estate investor and helps provide a solid foundation of knowledge for those looking to get into real estate investing.

The Big Idea

One of the key mantras from the book is “buildings don’t pay rent, people do!”  Therefore, it is imperative to understand what the demographics and psychographics show the renters in your target area want, and then find a building that fits their needs.  Unlike other real estate books that preach “fix and flip” or get rich quick schemes, the author firmly believes in a buy and hold approach to reduce risk and slowly build wealth over time.  The author also preaches the importance of using systems to achieve success in real estate investing, whether it is a move-in checklist or a process for evaluating a potential investment.

Key Concept #1

How to Be a Successful Landlord

Get educated

The more knowledgeable you become about real estate investing, the greater the chances you will succeed.  Continue to read and educate yourself because all the wisdom you need already exists, you just need to expose yourself to it.

Always be professional

Real estate is a team sport because you are interacting with lenders, tenants, contractors, and real estate agents.  Being professional will improve your ability to lease units and access deals.

Develop effective systems

Systems allow things to be done consistently, correctly, and in less time, increasing profitability and decreasing the likelihood of mistakes.

Build a team

You will need experts in various fields to help you invest and manage profitably.  A team that works together wins together.

Manage your time

Organize your time by prioritizing, with cash flow activities coming first and actions to minimize expenses coming a close second.

Maximize income, minimize expenses

This mantra is the key to success.  Learning how to set proper rental rates, reduce turnover, and implement preventive maintenance to avoid repairs is critical.

Set goals and achieve them

In property management, goals can provide benchmarks for achievement, such as 97% occupancy or 90 percent on time rent collection.  Goals should be specific and measurable.

In addition to following the steps above to be a successful landlord, the book offers some advice on how to get a good deal.  It is important to understand the net operating income (NOI) of the property, which is the amount of revenue it will generate.  Knowing what the present NOI is, what you can do to increase it, and projecting what that number will begin the future is essential to being a successful landlord.

Targeting added-value properties is a proven method to getting a good deal.  Added-value properties are those in which value can be increased through renovations.  Sometimes it could be as simple as new paint and carpet, or it may be adding an additional bedroom or bathroom.

Those new to real estate may think it is less risky to own one or two units.  However, nothing could be further from the truth, as a portfolio of only a few units puts you at a high risk of vacancy should one of your tenants leave.  Building economies of scale is the key to being successful in real estate.  Not only will owning more units reduce your vacancy risk, but it will minimize expenses as well.  To thoughtfully build economies of scale, consider targeting duplexes or multi-unit properties that will be easier to manage.

Key Concept #2

The SEOTA Method of Evaluating Properties

“Doing your research on an area before you start looking at specific properties serves as protection against getting sidetracked into looking at every “great deal” someone wants to pitch you.” Buy it, Rent it, Profit! P. 50

SEOTA stands for the Strategic Evaluation of a Target Area, which is a step-by step process for evaluating a property and determining if it’s a good investment for you.

The first goal of the SEOTA process is to identify areas that are good rental markets to invest in.  The book offers eight key indicators to analyze a target area, and evaluating them will identify the areas with the strongest rental markets:

  • Building permits

Looking at building permits helps track growth.

  • Employment

Strong employment increases demand for housing, which can positively impact your occupancy rates and ability to increase rent over time.

  • Average household size

This is important to determine the proper unit mix.  If you learn the average household size is 3.8 persons per household, then pursing a mix of studio or one bedroom apartments won’t work.

  • Demographics

Gives you the age, gender, and income level to help determine who your prospective tenant will be.

  • Psychographics

Determines why someone will rent from you, or why they will not.  While demographics tells you who they are, psychographics tells you what they want.

  • Mortgage interest rates

These help determine market cycles.  If rates are at all-time lows, more people will be qualifying for mortgages and are therefore less likely to be in the rental market.  However, if rates are low and lending standards are tight for the middle to moderate income demographic, this demographic will likely be forced to rent.

  • Rental market rates

Looking at the rental rate history in an area helps in determining where rents are currently and where they will be in the future.

  • Occupancy rates

This is the percentage of currently rented units and helps you forecast how many vacant units to average in your numbers so your financial calculations are based on accurate vacancy estimates.

If a property passes your initial SEOTA check, the next thing to look for is if the property generates cash flow (i.e. does it produce enough income to cover expenses).  Key Concept #3 will go into some more detail on key metrics to use when evaluating a potential property.

Key Concept #3

Understand Real Estate Metrics

There are some basic metrics that are important to understand as a real estate investor, and fortunately the math is very straightforward.  Below are some of the key terms and formulas you should use to help evaluate your real estate investment:

Gross Potential Income (GPI): Your main source of income is the rents you take in.  The GPI is the maximum possible rental income you can collect if all the units are being rented and is calculated on an annual basis.  For example, if you have a duplex with each side renting for $1,000 per month, your gross potential income would be $24,000 per year ($2,000 x 12 months).

Vacancy Loss (VAC):  In a perfect situation, all your units would be rented 100% of the time, but that is rarely the case, so it is important to allow for some vacancies when putting together a financial forecast for the property, which is known as vacancy loss.  The average vacancy rate used by most investors is 5 percent, but it is more advisable to use the average vacancy rate in your area.  Another term to understand is collection loss, which is the fact that not everyone will pay all the rent all the time.

VAC = GPI X estimated vacancy rate

If we continue with the duplex example and assume a 5 percent vacancy rate, the VAC would be $1,200 ($24,000 GPI x 5% vacancy).

Effective Gross Income (EGI): Effective gross income is defined as your total income from possible rents minus VAC and collection loss.

EGI = GPI – VAC

Capitalization Rate (Cap Rate):  Cap rates are primarily used to help estimate the value of income properties and is a measure of the absolute return on dollars invested.  For example, if a property has an NOI of $50,000 and the price of the property is $500,000, then the cap rate is 10 percent.  When you think about cap rates, keep in mind that NOI is verifiable, but value is debatable, since everyone can have an opinion on the value of a property, ranging from the bank to the seller, to the appraiser, and finally to you as an investor.

Cap Rate = NOI/Value

Cash-on-Cash Return: The cash-on-cash return is the ratio of annual before-tax cash flow divided by the total amount of cash invested, expressed as a percentage.  Unlike the cap rate, which does not factor in leverage (i.e. financing), the cash-on-cash return factors in the use of leverage.  The cash-on-cash return highlights why real estate investing can be so powerful: because it allows the investor to increase returns through using leverage (other people’s money).

Key Concept #4

How Do I Pay For It?

Financing can make or break the profitability of a deal.  Before selecting your financing, however, it is important to understand your exit strategy.  Investors planning to purchase below-value properties, rehab it, and then quickly place the property back on the market will typically want to use a variable rate mortgage.  A short-term investor may find variable rate mortgages are more attractive as the interest rates on these loans are often initially lower and the investor plans to sell the property before the loan resets to higher payments.

A long term buy and hold investor may want to look at a fixed rate mortgage or an ARM (adjustable rate mortgage) for the first five years to help maximize cash flow.  If you anticipate interest rate increases, having the piece of mind of a fixed rate mortgage can be invaluable.

The author gives several keys to securing financing in a difficult lending environment :

1). Pick wise investments: Use the SEOTA method mentioned earlier to help find the right property. The property should have positive cash flow.

2). Have a resume: In cautious financial times, credibility can help you get a loan.  The more you do to assure lenders you are educated, trained, and prepared to manage rental property, the more you are reducing your risk.

3). Be prepared to put more money down.  If lending is tight, this will help reduce risk and increase your chances of getting the loan approved.

4). Safeguard your credit: Take steps to improve your credit score and keep it in good standing.

5). Develop professional relationships: Work with mortgage brokers who understand investment property.

When the real estate market crashed in 2008, a lot of people were over-leveraged on their properties and they couldn’t refinance.  Real estate courses preaching “zero money down” left a lot of people on the hook for their investments.  Had investors put 30 percent or some other amount down, their mortgage would have been a little lower.  The author is not making the case that leverage is always wrong, but knowing when to use leverage and how much to use is critical.  The type of rental property and well as its demographics can play a major role in the ability for a real estate investor to survive a crisis and stabilize a property.

Key Concept #5

Legal Protection

Every real estate investor should have a working knowledge of the different types of legal entities out there.  There book suggests real estate investors should consider either a corporation or a limited liability corporation (LLC).

A corporation is popular type of legal entity due to its flexibility.  It provides the ability to protect your personal assets from claims against the business, and you can elect two different tax structures for the business: subchapter S or C corp.

A LLC is probably the most popular legal entity to do business because it offers maximum creditor protection and maximum tax flexibility.  The LLC provides protection from claims of creditors of the business, and also has some additional protections that when used effectively can make it preferable over a regular corporation.  If there are investors other than you in the LLC, most state laws provide that they are protected from any claims related to the LLC.  Investors know that the only risk they will have is the actual capital they invested.  Additionally, the LLC provides that if a creditor tries to take ownership of an LLC, that creditor cannot seize the ownership.  This protection makes the LLC preferable to a regular corporation in any situation where there is more than one owner.

If you have a single owner LLC or single owner corporation, the protection is approximately the same.  However, an LLC is generally more flexible from a tax perspective because you have four ways to tax it as opposed to two ways to tax a regular corporation.  Below are the four ways:

As a sub-S you elect to treat your business as a small business under the tax code. All profits and losses are directly passed through to the owner.

As a C corporation your business will be taxed twice: once on the income it earns, then again when the business makes distributions to its owners. This is referred to as “double taxation.”  A C Corporation has the ability to accumulate capital inside of it (called retained earnings) and is capital that the business may use for acquisitions or investments.  Additionally, the C Corporation has the ability to take a greater tax deduction.

As a partnership tax status you are taxed on a “pass through” basis as well. Companies taxed as partnerships have quite a few flexible tax benefits in the right situation.

A disregarded entity is ignored for tax purposes. If the owners tell the IRS to ignore the business and just tax the owners as if the business was not there, it’s “disregarded.”

If the above is confusing, just remember a corporation can be taxed either as a sub-S or a C corp.  The LLC may be taxes as a sub-S, C corp, partnership, or disregarded entity.  The protection benefits and greater tax flexibility make the LLC the entity of choice for most investors, but it is worth consulting with an attorney for your individual situation.

The book recommends that investors create a brand name around a management LLC, which is an LLC taxed as a sub-S corporation.  This will not be an entity you own property in, but it’s a “storefront” you do business through.  One of the biggest mistakes investors make is pile all of the real estate assets they own into one corporate basket.  If there is one lawsuit against that corporation, all of their investment assets are impacted or at risk.  The recommendation would be to have one brand name under a corporation entity, but own separate properties under separate corporation entities.  This limits the liability of each property but allows you one “brand” to operate under.

Apply It

Preform a SEOTA analysis on a property. Even if you do not have the funds currently to be making any offers, analyzing properties in your target area will make you more prepared for when you are ready to make an offer.

Many amateur landlords own one or two properties, typically prior properties they lived in. While there is nothing wrong with this approach, the book makes a strong case for why scaling is important in real estate.  Consider looking at duplexes or triplexes as a way to gradually build your real estate business since it will be more effective to manage and decrease the vacancy risk.

Analyze a prospective investment property by making assumptions and calculating some of the important metrics such as cash-on-cash return, GPI and cap rate.

 

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Set For Life

What’s In It For Me?

Are you tired of the workweek grind?  Do you work hard making someone else rich, but are not sure how to improve your financial position?  In Set For Life, author Scott Trench reveals the blueprint for becoming financially independent within ten years, allowing you to live the best years of your life on your own terms.  This is not a get rich quick scheme, but rather unorthodox yet simple advice that has the potential to put you on the path towards financial freedom and living the life of your dreams, all while you are still young.  This book is written for the middle class millennial, but anyone looking to improve their finances will walk away with useful knowledge.  Keep in mind that even if you love your job today, that might not always be the case in the future, so why not give your future self the flexibility to live life on your own terms?

The Big Idea

“The financially free design their day based on what they want to do, not what they have to do.” Set For Life p. 219

The book provides an actionable 3-step guide that takes you from zero to financial independence by slowly building out a financial runway.  Part I starts with saving your first $25,000 and setting this aside in cash.  In conjunction with significantly reducing your major expenses of housing, transportation, and food, you will set yourself up to then have more options, knowing you have a cash cushion, to not invest capital, but to take advantage of potentially better career opportunities.  Part II focuses on going from $25,000 to $100,000 through optimizing your housing and income generation.  The importance of trying to “house hack” is not to be understated in the path towards early financial freedom.  Additionally, one has to be in a career the offers scalable income opportunity, ideally directly correlated by the amount of effort an employee puts forth.  Sadly, most corporate jobs come with meager wage increases, unfair politics, and a slow rise up the corporate ladder.  Meanwhile, the most active, healthy years of your life have slowly dwindled away.  Finally, part III focuses on moving from $100,000 to financial freedom, with the goal of acquiring enough income producing assets (mainly real estate rental properties and stock index funds) to eventually produce enough cash flow from rent and dividends to finance your lifestyle in perpetuity.  If your are pursuing financial freedom simply to sit on a beach all day and drink Coronas, that’s fine, but unlikely to lead to happiness.  Instead, the author argues financial freedom is a noble pursuit because one has the ability to control how their direct their day, and take advantage of the best years of their life by spending it with loved ones or pursing interests that may not otherwise be possible without the support of financial independence.

Key Concept #1

Track Spending and Live An Efficient Lifestyle

“Design your life so it’s impossible to spend more than a few thousand per month—when you save 50 percent or more of your income each month, you begin making real progress towards financial freedom.”  Set For Life p. 37

The wealth building process really begins with a close examination of one’s expenses.  The book cautions readers to not fall victim to the marketing messages that “you deserve the best.”  Remember, frugality will be worth it because it will buy you freedom.

The average American spends 33% of their income on housing, 17% on transportation, and 13% on food.  Unlike other personal finance books that discuss cutting out lattes, the author astutely recognizes that to really move the needle on reducing spending, the three aforementioned categories need to be optimized.  To reduce the housing expense, the author introduces the term “house hack”, which is buying a property with the intention to rent out a spare bedrooms to help cover the mortgage.  In some cases, living for free is possible if you find the right house hack.

A long commute not only hurts your physical and emotional health, but negatively impacts your wallet as well.  According to statistics from the book, the average cost of car ownership comes to approximately $9,000 per year when factoring in depreciation, insurance, gas, and repairs.  Instead of buying a new car, try a used Corolla or  Civic.  Better yet, live close enough to work that you can bike or walk.  On the rare occasion you need the extra seating or 4-wheel drive, rent that type of car for a day or two, as you will still come out way ahead financially that owning a more expensive SUV or truck that gets poor gas mileage.

Food makes up the final of the Big 3 spending items.  The good news is much of the spending is from eating out at restaurants, so this is a habit that can be fixed.  Instead of going out to eat several times a week, why not make it once a month?  You will be healthier and wealthier, plus going out to eat will actually feel like a special treat instead of a standard weekly habit.

Try to cut back on any form of spending that does not bring you happiness.  Saving your first $25,000 and keeping that in cash as a reserve is the first step to building out your financial runway.  The book makes the argument that a single person who is able to optimize housing, transportation, and food expenses, as described above, should be able to live on approximately $25,000 per year.  Therefore, a person with one year of financial runway will now have more optionality in life, such as being able to put a down payment on a home or pursue a career or business opportunity without fear of running out of cash.  A frugal lifestyle enables faster accumulation of assets and reduces the amount of wealth needed to develop a financial runway.

Key Concept #2

Financial Impact of Housing Decisions

A key premise in the book is turning housing into an income generating opportunity.  The house hack is the most advantageous way to buy a home for those interested in pursuing early financial freedom.  It involves purchasing a property as an investment that would make immediate sense as a rental, but living in one of the units or bedrooms.  It allows the owner to live for free or very low costs while the other tenants cover the mortgage payment.

There are four questions an investor should consider before buying their first house-hack:

  • Is the property affordable with conventional financing?

Although a 20% down payment is the standard, if you have a good job and credit you may be able to put down as little as 3.5% using an FHA loan.  However, keep in mind you will always want to have additional reserves for repairs and other home-related expenses.

  • Are you willing to live in the property?

It may sound obvious, but make sure you buy in a location that you would be happy living in.  Buy in a location that is acceptable to you given the other things going on in your life.

  • Will the property cash flow?

Perform two cash flow analysis of the property, both with you as an occupant and you not as an occupant.  A true house hack should still produce cash flow if you moved out and made the property a 100% rental managed with a property manager.

  • Is there a reasonable chance at appreciation?

Try to pick a property where there is opportunity to add some value, such as an extra bedroom or bathroom, to give yourself some upside appreciation potential.  Additionally, try to focus on a market with strong potential for job growth or other positive metrics that will make market appreciation more likely.

If the idea of having roommates in your 30s doesn’t appeal to you, the other option that can also accelerate your journey to financial freedom is the live-in flip strategy.  This involves buying a property with a lot of value-add opportunities.  The buyer can rehab the property while they are living in it, and then they have the option to sell, rent for a profit, or continue living in a much nicer home for a cheaper price.  A tax benefit also occurs with this strategy, as live-in flippers can often exclude capital gains tax when they go to sell the property, a loophole as part of the Taxpayer Relief Act of 1997.

Many people think buying a home limits their flexibility and fear that if they do know how long they will be living in an area or if they will move on to another job, renting is the only option.  However, if you approach the housing decision like an investor and think about the optionality you have to rent out your property when you move out, it can help ease some of that fear, and set you up on the path to financial independence by creating a cash flowing asset.

Key Concept #3

Earn More

“The traditional corporate ladder is unacceptably slow for those looking to achieve early financial freedom and must be discarded.” Set For Life p. 117

If you are already a fairly frugal person, you will likely have come to the realization that there is only so much spending you can cut out of your life.  Income, on the other hand, does not have a limit.  The advice given in this section is for someone who would not show up to work if money were no longer a concern.  Even if you enjoy your job, chances are you would agree with the preceding statement.  As it pertains to financial independence, the sole point of earning more money is to use that money to acquire more income producing assets.

A wage earning employee trades their time for money, so it is through more efficient and productive use of time that an employee will be able to earn more and escape the rat race of the corporate world.   Therefore, it is important to track how your spend your time to ensure you are using it as efficiently as possible.  Work related activities, including commuting time, and sleep will make up the largest percentages of most people’s day.  The author points out that the problem with books that recommend side hustles as options to increase income is most employees have very little free time left to pursue side hustle opportunities.  Therefore, they have to rely on their day jobs to scale income.

Unfortunately, in the corporate world, it takes years or even decades to climb the corporate ladder.  The recommendation given is to consider pursuing career opportunities that are scalable.  The changes necessary to increase one’s income are:

  • Develop highly sought-after skills

There are a large number of jobs that can take you from earning $50k per year to over $100k per year without incurring the costs of a four year degree (contractor work, software developer, real estate agent/broker)

  • Take control of your future

The problem with most salaried employees in the corporate world is they cannot take control of their income since there is a limit to their potential and someone else is subjectively making a judgement about their performance.  If you want to have a shot at early financial freedom, you will likely have to give up a regular salary in a traditional career to attain it.  Unless you are making $150k+ a year, switching to a career that allows for performance based pay may be necessary to scale your income.

  • Find synergies between your work and lifestyle and investments.

Try to take skills from your day job and think about how you can apply them in freelance setting.  The worst thing you can do is try to have two totally separate jobs at the same time.

The main message from this section is you have to put yourself in a position financially where you are not afraid to pursue an opportunity.  You are more likely to realize satisfaction with your workday by taking control of your income in the form of performance based pay or scalable income opportunities.  The cost of pursuing a new opportunity is often a reduction in base pay, but over the long-run the increased income potential will likely be worth it.

If you are in a career you enjoy with opportunity for significant income, focus on the five tactics below to help you earn more:

  • Put yourself in a high achieving environment
  • Read and self-educate forever
  • Focus on continual improvement
  • Instantly make trivial decisions
  • Put yourself in a position to get lucky

Key Concept #4

Components of the Financial Independence Equation

Simply put, financial freedom is attainted when one no longer needs to work for money and is satisfied by the equation: Assets x Return > Lifestyle

Below we can briefly break down the components of the equation:

Assets

An asset is something that produces income or appreciates in value.  Somewhat counterintuitively, the author argues that retirement accounts are considered “false assets” for the purposes of pursing early financial independence because they cannot be readily accessed until the traditional retirement age.  Therefore, one should focus on investing in rental properties, stocks, or other income generating businesses/opportunities.

Returns

Investment returns are critical to wealth generation, but only for those who have significant assets with which to invest.  The next section will cover investment strategies, but the author makes it clear that there is not a get rich quick scheme or hot stock tips that will allow someone to earn superior returns.  The safe withdrawal rate, which is the percentage of your portfolio you can use to cover living expenses each year, can be used to help determine how large of an investment portfolio you will need to achieve early financial independence.  For instance, if you and your family require $80,000 in annual living expenses, you may need a portfolio of $2 million to ensure you do not run out of money, assuming a 4% withdrawal rate.

Lifestyle

Your spending is likely to be the single biggest barrier between achieving early financial freedom because the higher your spending, the greater the portfolio needed to support your lifestyle.  Using the 4% rule from above, you can simply multiply your spending needs by 25 to come up with the size of portfolio you would need to potentially last throughout your lifetime.

Key Concept #5

Invest Aggressively

The goal of investing, at least of the purposes of early financial freedom, is to continually build real assets with return sufficient to sustain an early financial freedom lifestyle.  The author introduces the seven tenants of investing:

  • Never spend the principle

In order to build sustainable wealth, you need to think of the principle of each investment you make as gone forever, and only spend the cash flow component.  For instance, if you buy an index fund, you should be using the dividends to help finance your lifestyle, but not selling the principle.

  • Reinvest most investment returns

Similar to #1 above, you cannot spend all your income from investments.  If you have a rental property, use a portion of the monthly cash flow to save up for the next rental investment or stock index fund investment.

  • To invest, one must have capital

To take advantage of opportunities, you must have capital to invest.

  • Effort correlates with return only if you are in control of the investment

The prime example to explain this tenant is to think of someone who constantly checks the price of a stock investment they own.  This is a complete waste of time, as they obviously have no control over the future stock price.  On the other hand, a real estate investor does have some control over his or her investment, as they can manage expenses, make improvements, etc.

  • Investment returns are impacted by knowledge

Knowledge helps decrease the risk of an investment for which the investor has some control, and failing to accumulate knowledge can reduce returns.  For example, all the research points to the conclusion that investors are better served by buying an index fund, yet many investors still try to by individual stocks, often to their detriment.

  • Do not confuse volatility with risk

Many investors think that stocks are too risky.  However, if they took the long-term view, they would realize that it is actually significantly more risky to own a portfolio of Treasury bonds because your total wealth would be substantially lower in a 100% bond portfolio compared to 100% stock index funds.

  • The best investments are specific to the investors personal situation

The greatest investments are often in things that reduce your monthly personal expenses.

The book gives a brief overview of investing in the stock market and real estate market.  The conclusion for the stock market section is investors are likely much better served by investing in a low cost index fund instead of trying to pick the next great stock.

The argument for why real estate is an excellent investment for early financial freedom is explained:

  • Rental properties build wealth in multiple ways

Rental properties help investors build wealth through income, appreciation, and loan amortization.  Assuming the investor does his homework and buys correctly, a rental property should produce income in excess of the mortgage and expenses.

  • Rental properties allow the investor control

Real estate investors have much more control compared to investors in the stock market.  Value can be increased through rehabs, or expenses can be controlled through more efficient management systems.  Additionally, since there are many amateur landlords, those who take building a real estate investing business seriously have the opportunity to differentiate themselves.

  • Rental properties allow the investor to benefit from leverage

By only putting 20% down on a property, and investor can free up more capital to pursue other investment opportunities.  Since leverage magnifies returns, there is the potential for higher returns in leveraged real estate compared to traditional stock index fund investing.  Every year as the loan is paid down, your return on equity will gradually decrease, but your cash flow will increase, which is an important component for financial freedom.

  • Real estate investors can trade up

Successful real estate investors can sell-off deleveraging properties and use the capital to buy more scalable properties, such as duplexes or triplexes.  This strategy reduces the management time needed to tend to a portfolio of properties and reduces tenant turnover risk that is more likely in a single family home investment.

  • Real estate is manageable while working a full time job

Many investors are able to invest in real estate on the side, which allows them to greatly accelerate their path to financial freedom.  One transaction per year can produce life changing results in 10 years.

The author does caution that real estate investing has bankrupted many people, so he offers a few basic principles to increase the probability of success:

*Keep plenty of cash on hand to handle maintenance and repairs

*Buy properties that will cash flow after financing and operational expenses

*Buy properties in locations that are desirable or have great potential to become desirable

*Treat tenants and those you do business with honestly

*Act consistently, with a long-term outlook

The author points out that due to leverage, it is not a stretch to achieve a 25% compound return for the first several years on your real estate investment.  Compounding your wealth at this rate can have a dramatic impact on your portfolio over the long-run.

Apply It

*Use a tool such as Mint or Personal Capital to begin tracking your spending.  Analyze the data and see what areas you can cut back on, particularly needless subscriptions or spending that does not align with your values.

*If your mortgage is making up a significant portion of our overall spending, consider renting out a bedroom on Airbnb’s or better yet, consider renting out your guest bedroom to a tenant.  If your current living situation is not conducive to this, consider looking for a duplex as an opportunity to give yourself privacy, while also benefiting from the advantages of a house hack.

*If you are in a career with little scalable income opportunity, consider retooling and learning a new skill or move on to a company that may have lower base pay, but offer equity ownership or incentive compensation.

 

 

 

 

 

 

 

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The One Thing

 

What’s In It For Me?

Do you feel like you are very busy, but not getting much accomplished in both your professional or personal life?  Author Gary Keller, cofounder of Keller Williams Realty, Inc provides insight on how we can improve productivity without feeling overwhelmed by cutting out distraction and focusing on our ONE Thing.  The never-ending flood of emails, work meetings, and obligations outside of work can leave us feeling stressed out like we are on a hamster wheel.  However, the book suggests there is a better approach to getting things accomplished that will help create a purposeful life.  This will make it bit more sense if you read on.

The Big Idea

At the heart of The One Thing is the idea of essentialism, which can be applied to deliver extraordinary results in every area of your life, including work, personal, family, and spiritual.  The author challenges readers to ask the question “What’s the one thing I could do such that by doing it everything will become easier or unnecessary.”  This question can be asked in any aspect of your life (i.e. job, relationships, etc).  The point of the question is to bring clarity on what really matters, and then work backwards to set up the small steps necessary to achieve your ONE Thing.  Because extraordinary success is sequential, not simultaneous, you can apply the “domino effect” to your life where when you do the right thing and the next right thing, over time it adds up and the geometric potential of success is unleashed.

Key Concept #1

The Lies That Mislead or Derail Us

Before having a discussion on how the ONE Thing works, it is important to address the myths and misinformation that keeps us from accepting it.  Below are the six lies between you and success:

Everything matters equally

The book concludes that instead of creating to-do lists, people should follow Pareto’s Principle, also known as the 80/20 principle, which states that 80% of the rewards/positive outcomes are created by just 20% of the effort.   Keller challenges readers to go even farther by instead just identifying the imperative ONE Thing that will have the biggest impact, and this should go at the top of your success list. Although it can be easier said than done, make sure you say “no” to any other obligations until your most important work is done.  Do not get caught up in the game of checking things off your to-do list, since everything on the list does not matter equally.

 

Multitasking

Multitasking is a misnomer.  Why would you ever tolerate multitasking when doing your most important work?  In the age of smart phones, distraction is natural, so don’t feel bad if you get distracted, but recognize it and try to focus only on one thing at a time.  Multitasking at work or at home take a toll, leading to poor choices, painful mistakes, and unnecessary stress.  When you try to do too much at once, you end up doing nothing successful at all.  Try to figure out what matters most in the moment and give it your undivided attention.

A Disciplined Life

Instead of trying to be a disciplined person, focus on building habits.  Build powerful habits and use selective discipline to develop them.  Acquire one new successful habit at a time.  Habits on average take 66 days to form, so once you have formed a new habit, it doesn’t require as much discipline to continue doing it.  After all, discipline is a limited resource, but habits become routine.

Willpower is always on will-call

Do what matters most each day first when your willpower is the strongest.  Willpower is a limited resource so decide what matters most and reserve your willpower for it.  Your brain makes up 1/50th of your body mass but consumes 1/5 of the calories you burn for energy, so make sure you eat right.

A balanced life

It is not possible to live a truly balanced life, because when you act on your top propriety, you will automatically go out of balance.  The challenge becomes how long you stay on your top priority. Separate your work life and personal life into two distinct buckets with each having its own counterbalancing goals and approaches.

Big is bad

Think big by setting a goal so far above what you want that you’ll be building a plan that practically guarantees your original goal.  Study people who have already achieved what you want.  Don’t fear failure and adopt a growth mindset (i.e you must believe that all things in life are skills that can be developed, as opposed to fixed traits).

Key Concept #2

The Focusing Question

“Anyone who dreams of an uncommon life eventually discovers there is no choice but to seek an uncommon approach to living it.”  The One Thing p. 105

The book discusses the concept of the focusing question, which is both a big-picture map and small-focus compass.  By asking yourself, “what’s the one thing I can do such that by doing it everything else will be easier or unnecessary” it can lead you to exceptional answers that create extraordinary results.  It will help you find the first domino you can knock over for your job or personal life.

Use your answer to “what’s my one thing” to develop a vision for your life and direction for your career.  It also works when considering what you want to master, what you want to give to others and your community, and how you want to be remembered.

Use your answer to “what’s my one thing right now” as a small focus question to think about what you need to focus on a daily basis.

Gary Keller uses the focusing question as the foundational habit to achieve extraordinary results and lead to a big life.  He applies it to his spiritual life, physical health, personal life, key relationships, job, business, and financial life.  The focusing question can direct you to your one thing in the different areas of your life.

Research shows that those around you can influence you tremendously.  Try starting a success support group with friends or work colleagues.  By sharing your ONE Thing with others, it will help hold you accountable and you will be more likely to accomplish your goal.

Key Concept #3

Live With Purpose and Priority

When you have a definite purpose for your life, it provides the straightest path to power and the ultimate source of personal strength, which is strength of conviction and strength to persevere. Purpose helps when things don’t go your way in life.  Knowing why you are doing something helps provide that extra motivation to preserve when the going gets tough.  When you ask yourself, “What the ONE Thing I can do in my life that would mean the most to me and my world, such that by doing it everything else would become easier or unnecessary?” You are using the power of the ONE Thing to bring purpose to your life.

Purpose may sound heavy, but it doesn’t have to be.  Discover your purpose by asking yourself what drives you.  What’s the thing that gets you up in the morning and keeps you going when you are worn down?  Thinks of purpose as simply the ONE Thing that you want your life to be about more than any other.  As an example, the author’s purpose is to help people live their greatest life possible through teaching, coaching, and writing.

Purpose without priority is useless.  This is where goal setting comes in.  Keller offers a non-traditional approach to goal setting by conducting an exercise called goal setting to the now, which is setting a future goal and then methodically drilling down to what you should be doing right now.  Start with your someday goal, then work backwards to your 5 year goal, one year goal, monthly goal, weekly goal, daily goal, and what you should be doing right now.  Write down your goals and share them with others, as your probability for success dramatically increase compared to having ambiguous goals in your head.

Key Concept #4

Productivity

When it comes to improving productivity, one of the key tips the book offers is the concept of time blocking.  Specifically, the author mentions that to devote maximum time to your top priority, you need to protect it by blocking time on your calendar everyday to devote to it.  It is essentially a way of making sure that what has to be done gets done.  Time block these three things on your calendar:

  1. Time block your time off (i.e. vacations)
  2. Time block your ONE Thing
  3. Time block your planning time

Resting is as important as working, because after a vacation you will come back more relaxed, focused, and productive.  Next, time block your ONE Thing.  The most productive people work on “event time,” meaning they don’t quit when its 5 o’clock, but work until their ONE Thing is done.  The book recommendation for time blocking your ONE Thing is a four hour time block.  That may seem like a lot, but to really productive, you cannot have constant interruptions or switching back and forth between different tasks.  A suggestion is to divide your time into two buckets: maker (do or create) and manager (oversee or direct).  “Maker” time requires large time blocks to write code, develop ideas, or execute projects/plans, while “manager” time can be divided into individual hours for meetings or conference calls.  To experience extraordinary results, try to be a maker in the morning and manager in the afternoon.  Finally, it is important to block an hour each week to review your monthly and annual goals.  Ask yourself what must happen that month to be on track with your annual goals, then ask yourself what must happen that week to be on track with your monthly goals.

Believe it or not, comedian Jerry Seinfeld is a prime example of someone who has excelled because of time blocking.  When Seinfeld shared his secret on how to become a better comedian, it was pretty simple: write jokes everyday.    This sounds simple enough, but Seinfeld actually had a large calendar on his wall that had an “X” through every day that he wrote a joke.  The goal was to never break the chain of X’s.

No doubt, there are plenty of ways for your time blocks to be sabotaged.  Here are four ways to protect them:

  1. Find somewhere to work that takes you out of the path of interruptions. It could be a separate conference room in your office.
  2. Have snacks and drinks on hand. A trip to the coffee machine or kitchen could distract you with conversations.
  3. Turn your phone off, shut down your internet browser, and exit e-mail. These will all distract you.
  4. Tell those people most likely to seek you out what you are doing and when you will be available. They will eventually get used to your new work approach, and your boss will begin to notice the improved productivity.

Key Concept #5

Live With No Regrets

“Only those who will risk going too far can possibly find out how far one can go.” T.S. Elliot

An elder Cherokee Indian told his grandson about a battle that goes on inside of all people.  He said, “My son, the battle is between two wolves inside us.  One is Fear.  It carries anxiety, concern, uncertainty, hesitancy, indecision and inaction.  The other is Faith.  It brings calm, conviction, confidence, enthusiasm, decisiveness, excitement and action.”  The grandson thought about this for a moment and then asked his grandfather: “Which wolf wins?” The Cherokee replied, “The one you feed.”

It is only when you have faith in your purpose and priorities that you will seek out your ONE Thing.  This will give you the power to push through adversity.  Faith leads to action, and when we take action we avoid the single thing that could undermine everything we have worked for–regret.

As satisfying as succeeding is, there is an even better reason to get up everyday and take action on your ONE Thing.  Doing your best to succeed at what matters most to you helps you live with no regrets.  Imagine going forward in time and getting advice from the 80-year old version of you.  What would that advice be?  The book offers a few ideas: “Go live your life.  Live it fully, without fear.  Live it with purpose, give it your all, and never give up.  Effort is important, for without it you will never succeed at your highest level.  Achievement is important, for without it you will never experience your true potential.  Pursuing purpose is important, for unless you do, you may never find lasting happiness.  Step out on faith that these things are true.  Go live a life worth living where, in the end, you’ll be able to say “I’m glad I did” not “I wish I had.”  The One Thing p. 212

A life worth living could be measured in many ways, but the one that stands above all others is living a life with no regrets.  Who might be the people with the greatest clarity on life?  Keller believes it is those people nearing the end of their life who can provide the most valuable clues on how we should approach our life today.  Author Bonnie Ware’s 2012 book The Top Five Regrets of the Dying provides valuable lessons that are worth seriously pondering, as she spent years caring for patients near the end of their lives, and discovered many of them had the common regrets, which are worth reflecting on below:

  1. I wish that I’d let myself be happier—too late they realized that happiness is a choice.
  2. I wish I’d stayed in touch with my friends—too often they failed to give them the time and effort they deserved.
  3. I wish I had the courage to express my feelings—too frequently shut mouths and shuttered feelings weighted too heavy to handle.
  4. I wish I hadn’t worked so hard—too much time making a living instead of living life caused remorse.
  5. I wish I’d had the courage to live a life true to myself, not the life others expected of me.

#5 from the list above was actually the number-one regret expressed by the dying.  Ware discovered through her work that most people had not even honored half of their dreams and had to die knowing that it was due to choices they had made, or not made.

If you think this is just anecdotal advice, think again.  Other research studies have concluded that when people look back on their lives, it is the things they have not done that generate the greatest regret.

So, how do you live a life with no regrets?  Live your live with purpose, priority, and productivity, and with your ONE Thing at the top of your scheduling, knowing that regret can be avoided.  Ultimately, success is an inside job, meaning that if you put yourself together by knowing your purpose and priorities, your world falls into place.  All success in life starts with you. 

Apply It

*Let the ONE Thing bring clarity to key areas of your life.  Think about the ONE Thing you can do in each area of your personal life, work life, and family life that can have the greatest impacts on each area. Below are a few examples:

What’s the ONE Thing I can do in 90 days to get in the physical shape I want…?

What’s the ONE Thing we can do every week to spend more quality family time together…?

What’s the ONE Thing I can do before my review at work to get the raise I want…?

*Write down the top 5 regrets of the dying on a notecard and place it somewhere discreetly that you will look at everyday.  The reality is we are all mortals, so why not take invaluable advice given to you by elders and use it now while you still have time.

*Use your e-mail calendar at work or at home to time block your day.  Focus on your most important tasks first such as writing or creating a project, and spend the afternoons for manager related tasks like meetings and conference calls.

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Smarter Faster Better

What’s In It For Me?

Drawing on the latest findings in neuroscience, psychology, and behavioral economics, Smarter Faster Better explains that the most productive people, companies, and organizations don’t merely act differently.  Instead, they view the world, and their choices, in profoundly different ways.  Author Charles Duhigg explains how we can get better at the things we do by exploring the science of productivity.  Since we are all running short on time these days, the extensive research provided through thoughtful examples and stories in the book can be useful to anyone looking to more effectively use their time and accomplish more in life.

The Big Idea

At the core of Smarter Faster Better are eight key concepts-from goal setting to motivation-that explain why some people and companies get so much done.

To generate motivation: Make choices that put you in control and figure out how the task is connected to something you care about.

Goal setting: Choose a stretch goal that reflects your biggest aspiration and then break that into subgoals and develop SMART objectives.

Focus: To stay focused, envision what will happen and what the potential obstacles are, and how you will avoid them.  By telling yourself a story about what you expect to occur, you make it easier to determine where your focus should go when you encounter problems.

Decision Making: Push yourself to imagine various possibilities/multiple futures.  Assign a probability to each future by seeking out different experiences and perspectives.

Effective Teams:  Encourage everyone in the group to speak in roughly equal measure and be sensitive to how people feel.

Manage Others Productively: Lean management techniques tell us employees work smarter and better when they believe they have more decision making authority and when they believe their colleagues are committed to their success. By pushing decision making to whoever is closest to a problem, managers can take advantage of everyone’s input.

Encourage Innovation: Creativity often emerges by combining old ideas in new ways.  It is important to remember that the stress that emerges amid the creative process is not a sign everything is falling apart.

Absorb Better Data:   When encountered with new information, force yourself to do something with it.  Write a note explaining what you just learned, or force yourself to explain the idea to a friend.

Key Concept #1

Motivation

“Motivation becomes easier when we transform a chore into a choice.  Doing so gives us a sense of control.” Smarter Faster Better p. 270

We all have our days where we feel less motivated than others, but have you ever wondered if there are techniques you can use to consistently create motivation?  Charles Duhigg, who at the time of writing this book was also a reporter at The New York Times, a father and a husband, would struggle with motivation after a long day at work.  He would have to start typing up notes for a chapter, help put the kids to bed, or clean up the dishes.  Then there is the never-ending flood of emails that seem impossible to keep up with.  As Duhigg struggled to find the drive to reply to the emails, he began thinking of the research he encountered on motivation and a key insight from his chapter on ideas that General Charles Krulak used to redesign Marine Corps boot camp by strengthening recruits’ internal locus of control:

General Krulak noted that most Marine Corps recruits don’t know how to force themselves to start something hard.  By training the recruits to take the first step by doing something that makes them feel in charge, it’s easier to keep moving.  Duhigg applied this approach to help clear-out his inbox.  He sat at his laptop and hit the reply button, creating a series of responses.  As fast as he could, he typed a sentence, any sentence, within each email to get going.  For instance, a co-worker sent a email asking him to attend a meeting.  Knowing that the meeting would be long and boring, Duhigg typed a reply stating he could attend, but would have to leave after 20 minutes.  This process made it much easier to reply to an email once at least one sentence was on the screen, and it was easier to get motivated when the first sentence was something that made him feel in control.  Essentially, he used the short sentences to amplify his internal locus of control.

But what about other types of procrastination, especially when you’re confronting a bigger, more involved task, such as having a hard conversation with a colleague or writing a long memo?

The other key lesson from the motivation chapter was:

“Self-motivation becomes easier when we see our choices as affirmations of our deeper values and goals.” Smarter Faster Better p. 272

The Marine Corps recruits ask each other “why” when working on a task.  Why are you doing push-ups, cleaning a mess hall, or running onto a battlefield when there are safer, easier ways to live life?  Forcing ourselves to explain why we are doing something helps us remember that the task is a step along a longer path and that by choosing to complete the task we are getting closer to more meaningful objectives.

When Duhigg was writing the book, he would begin writing at the top of each manuscript why it was important for him to get that task done.  This process made it easier to focus on why he was choosing to read a specific research paper, instead of bouncing between different studies and feeling like he was not accomplishing anything.

In summary, to generate motivation, make a choice that puts you in control.  If you are replying to emails, write an initial sentence that expresses an opinion or decision.  If you need to have a hard conversation, decide where it will occur ahead of time.  The specific choice itself matters less in sparking motivation than the assertion of control.  Figure out how a task is connected to something you care about and explain to yourself why this choice will help you get closer to a meaningful goal.

Key Concept #2

Goal Setting

Figuring out how to get motivated isn’t always enough.  Writing a book, for example, is a very big goal.  The big takeaway on the goal setting chapter from the book was:

  • You need to have a stretch goal, which helps spark big ambitions.
  • You need to have a SMART goal to help form a concrete plan.

One of the most effective ways to formulate both objectives is through a specific kind of to-do list.  It is important to write out your goals, but in a way that forces you to identify your stretch objectives and SMART aims.  It’s probably first helpful to define the acronym SMART, which stand for goals that are:

Specific

Measurable

Achievable

Realistic

Timeline (i.e. based on a timeline)

The SMART mindset spread throughout the culture at GE.  There were SMART charts to help mid level managers describe monthly goals and worksheets to turn personal objectives into action plans.  GE’s belief that SMART goals would work was rooted in science.  In the 1970s psychologists helped develop the SMART criteria through experiments scrutinizing the best way to set goals.

When the author wrote his to-do list, he would write on the top of each one his overarching ambition that he was working toward in the long-term.  This helped avoid the need for cognitive closure that can force us to become obsessed with short-term, easy to achieve goals.

One of Duhigg’s stretch goals related to completing the book was to find an aviation story that illustrated how mental models worked.  Below the stretch goal, he wrote SMART goals related to that big ambition:

Specific: Locate an aviation expert by researching academic papers.

Measurable: Call four experts each morning until the right person is found.

Achievable: Clear the morning schedule to focus on the task and turn off email from 9am-11am

Realistic: On Monday, spend an hour researching aviation experts and creating a call list rank those experts and by 10:15, begin four calls for the day.

Timeline: If four calls are done a day, then 16 calls should be completed by Thursday.

By creating a to-do list for every big task, you will know exactly what to do.  Instead of having to make decisions and running the risk of distraction, you will know how to proceed. The additional benefit is you are always reminded of your stretch goal, and you will not get easily sidetracked of captured by the need to simply check things off your list.

In summary, to set goals, choose a stretch goal (an ambition that reflects your biggest aspirations) and then break that into subgoals and develop SMART objectives.

Key Concept #3

Focus

You can have the motivation and goal setting in place, but distractions always come into play.  Finding focus is imperative.

“We aid our focus by building mental models-telling ourselves stories-about what we expect to see.” Smarter Faster Better p. 278

For the author to stay focused on his stretch and SMART goals, he had to envision what he expected to happen when he sat down at his desk each morning.  Every Sunday night, he got into the habit of taking a few moments with a pen and paper to imagine what the next day and week ought to look like.  He usually chose three or four things that he wanted to make sure would happen, and made himself answer a series of questions:

What will happen first?

What distractions are likely to occur?

How will you handle that distraction?

How will you know you have succeeded?

What is necessary for success?

What will you do next?

Although it takes a few minutes to envision what you hope will occur, by the end of the exercise you should have a story/mental model of how your morning should proceed.  As a result, when distractions inevitably arise, it will be easier to decide in the moment whether they deserve focus or can be ignored.  For instance, if you email inbox has 40 messages, you know you can ignore them until 10:30am because that is what the mental model you developed (i.e. the story inside your head) tells you to do.  On the other hand, if the phone rings from an important person you have been trying to contact, you will take the call because the interruption has a place in your mental model.

To help stay focused, envision what will happen.  What will occur first, and what are the potential obstacles?  How will you prevent them?  Telling yourself a story about what you expect to occur makes it easier to decide where your focus should go when your plan encounters a set-back, which is bound to happen in real life.

Key Concept #4

Decision Making

Human beings are faced with countless decisions on a daily basis, ranging from trivial decisions to important ones.  How should you make a decision when confronted with the unexpected?  Then book describes the importance of probabilistic thinking, which entails envisioning multiple futures and then forcing yourself to figure out which ones are most likely, and why.  For instance, for a simple decision like whether to meet your wife for lunch, the calculus is easy:  In one potential future, you take an hour for lunch and come back happy and relaxed.  In another, lunch goes long and you spend most of the time discussing family issues, so that when you get back to your desk you are fried and behind schedule.  By thinking through potential futures, you will be better prepared to influence which of those futures would actually occur.  When choosing a restaurant to meet your wife, for example, you could suggest one close to your office so it is easy to get back to work quickly.  If the topic of family issues comes up at lunch, you could suggest to wait to talk about that until later in the evening.  Anticipating the future allows us to be better prepared to make wiser decisions.

For bigger decisions, like deciding to take a new job, it may require a bit more analysis.  Do your research, talk to others in the industry, and assign each scenario a rough probability.  By writing this analysis down, you can feel better that you will have made the best decision you could given the information available.

In the late 1990s, a professor of cognitive science at MIT named Joshua Tenenbaum began a large scale experiment of the casual ways that people make everyday predictions.  For instance, when we estimate how long a meeting will last or envision two driving routes and guess at which one will have less traffic.  How do our brains make those decisions?  It turns out our brains are able to determine that different kinds of predictions require different kinds of reasoning.  Researchers call the ability to intuit patterns “Bayesian cognition” because for a computer to make predictions, it must use a variation of Baye’s rule, which is a mathematical formula that generally requires running thousands of models simultaneously and comparing millions of results.  At the core of Bayes rules is the principle that even if we have very little data, we can still forecast the future by making assumptions and then skewing them based on what we observe about the world.  Humans are surprisingly good Bayesian predictors, even if we’re unaware of it.

In summary, to make better decisions, envision multiple futures.  By pushing yourself to imagine various possibles, you will be better equipped to make wise choices.  You can hone your Bayesian instincts by seeking out different experiences, perspectives, and other people’s ideas.  By finding information and letting yourself sit with it for a day or two, options become clearer.

Key Concept #5

Make Teams More Effective

“The researchers eventually concluded that the good teams had succeeded not because of innate qualities of team members, but because of how they treated one another.” Smarter Faster Better p. 60

Regardless of where you work, chances are you have to deal with a team.  Even a solo freelancer likely relies on other people for a segment of their work.

The book mentions that Google’s Human Resources department has a specific group called People Analytics that is designed to help examine if employees were satisfied with their bosses and coworkers, whether they felt overworked, intellectually challenged, and a whole host of other variables.  The goal of People Analytics was to make life at Google a little bit better and a lot more productive.  People Analytics latest undertaking had been to help determine why some teams were more effective than others.  The conclusion from the study was that “psychological safety” was a key ingredient to good teams.  Psychological safety is a shared belief held by team members that the group is a safe place for taking risks and that team members will not embarrass, reject, or punish someone for speaking up.  Essentially, it describes a team environment that is characterized by interpersonal trust and mutual respect in which people are comfortable being themselves.

Additional research supported Google’s conclusion.  Simply combining the 10 smartest people together and forming a team does not lead to outperformance.  Nor does having a team that has a decisive leader.  The single most important factor in team effectiveness is how members of the team treat each other.  Everyone on the team should feel like they have an equal opportunity to speak and their opinions are respected.

To make teams more effective, the book offers several key concepts.  First, manage the how, not the who of teams.  Psychological safety emerges when everyone feels like they can speak in roughly equal measure and when team members show they are sensitive to how each other feel.  Secondly, if you are leading a team, think about the message your choices are sending.  Are you encouraging equality in speaking, or rewarding the most vocal person?  Make sure you show you are listening by repeating what people say and replying to questions and thoughts.  When someone is upset of flustered, show sensitivity and encourage others to follow your lead.

Apply It

*The next time you are feeling a lack of motivation, just get started with a simple task that allows you to feel like you have some sense of control.  Remind yourself that completing the task is important to a bigger goal that aligns with your values.

*Instead of coming up with a list of 5 items for a New Year’s resolution, simply write down one stretch goal and the supporting SMART goals to accomplish this.  Breaking your goal into subgoals that follow the SMART objectives will not only help keep you motivated, but will lead to a higher likelihood of accomplishing your goals.

*The next time you are faced with a difficult decision, write down 3-4 scenarios and assign a probability to each outcome.  This will help you better think through your decision and lead to better decision making.

 

 

 

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So Good They Can’t Ignore You

What’s in it for me?

Do you have the feeling like you might have missed your true calling in your career? Or maybe you fantasize about your “dream job.”  When it comes to career advice, common wisdom you have probably heard at commencement speeches or from mentors is to “follow your passion.”  Fortunately, you can breathe a sigh of relief if you think you have missed out your fantasy career.  Georgetown University Professor Cal Newport logically explains in So Good They Can’t Ignore You why following your passion is misguided career advice, often leading to heartbreak and frustration.  The book explains a better way to approach your career and ultimately find a job you love.  The conclusions drawn in the book can be helpful regardless of where you are in your career.  This is the book you wish you would have read back in high school or college so you could have focused energy away from worrying about matching a pre-existing passion with a career, and instead spent your time understanding how enjoyable careers are developed.

The Big Idea

The central idea of the book is the conventional career advice that one should follow their passion is simply bad advice.  Instead, Cal Newport argues that to construct work you love, you must first build career capital by mastering rare and valuable skills, and then cash in this capital for the types of traits that define compelling careers.  Newport draws on extensive research and real-life examples of why this a superior approach to career development and had a much higher likelihood of leaving you with a career you truly enjoy.  Unfortunately there are no short-cuts, as deliberate practice is definitely required to get you to a point where you acquire enough career capital to have valuable skills.  However, research shows that as you begin to acquire skills, your enjoyment will begin to increase.  Think back to the first time you may have tried learning a new instrument, hobby, or even riding a bike.  It probably wasn’t very fun in the beginning, but if you stuck with it and practiced, over time it became enjoyable.  Once you have acquired sufficient career capital, the book argues that cashing it in for more control/autonomy typically leads to a more enjoyable career.  Additionally, connecting your career to a greater mission, which can be tricky, is also proven to enhance your job satisfaction.

Key Concept #1

Don’t Follow Your Passion

In 2005, Steve Jobs delivered one of the most famous commencement speeches of all time.  In the press release following the event, Stanford’s news service reported Jobs “urged graduates to pursue their dreams.”  When you dig a little deeper, however, you will realize this is advice Jobs did not follow himself.  If you had met Steve Jobs in the years leading up to Apple, you would not have labeled him as someone who was passionate about starting a technology company.  Jobs dropped out of Reed College after his first year and moved back in with his parents in California.  He took a night shift job at Atari and frequently commuted to a country commune north of San Francisco.  Jobs left his job at Atari for several months to take a spiritual trip through India, and upon returning home he began training at a Zen center.  Jobs long-time friend Steve Wozniak, an electronics wiz, approached him to help out on the business operations of a computer time-sharing company.  All was going well until the fall of 1975, when Jobs left the company to spend time at the commune, failing to tell anyone he was leaving.  When jobs returned, he was replaced.  The details of of this story may sound trivial, but this was less than a year before Jobs started Apple Computer, and they hardly paint the picture of someone who was passionate about technology or entrepreneurship.  The truth is Steve Jobs was a conflicted young man, seeking spiritual enlightenment and only dabbling in electronics when it gave him the chance to earn quick cash.  To say that Steve Jobs was passionate about technology and destined to become a business icon from his early days would simply be inaccurate.

In conducting extensive research from many different career professionals, Newport concluded that compelling careers often have complex origins that reject the simple idea that all you have to do is follow your passion.  Why do some people enjoy their work while so many other people do not?  There are three conclusions the author draws:

 

Career Passions Are Rare:   A study of over 500 Canadians university students identified their top five passions as: dance, hockey, skiing, reading, and swimming.  Not surprisingly, these passions don’t exactly translate into careers.  How can we follow our passions if we don’t have any relevant passions to follow?

 

Passion Takes Time:  The strongest predictor of an employee viewing their work as a calling, instead of just a job, was the number of years spent on the job.  In other words, the happiest employees were the ones who had been on the job long enough to become good at what they do.

Passion Is a Side Effect of Mastery:  Science has developed a 40 year old theoretical framework known as Self Determination Theory (SDT), which helps explain why some pursuits get us excited and others leave us with no motivation.  SDT tells us that motivation in the workplace is driven from three requirements:

  • Autonomy: the feeling you have control over your day, and that your actions are important.
  • Competence: the feeling you are good at what you do.
  • Relatedness: the feeling of connection to other people.

Key Concept #2

Be So Good They Can’t Ignore You

The author argues that instead of following your passion, you need to develop rare and valuable skills.  There are two distinct approaches to thinking about your work.  The craftsman mindset focuses on what value you can produce in your job, while the passion mindset focuses on what value your job offers you.  Most people adopt the passion mindset, but the craftsman mindset is really the foundation for creating work you love.

Before we jump in to the craftsman mindset, it is helpful to understand why the passion mindset is problematic.  First, when you focus only on what your work offers you, it makes you aware of what you don’t like about it, leading to chronic unhappiness.  This is especially true for entry-level positions, which are unlikely to be filled with autonomy or exciting projects.  Second, the deep questions driving the passion mindset, such as “what do I truly love” lead you to be perpetually unhappy and confused, as rarely is there a clear answer to this question.  Adopting the craftsman mindset first will then typically lead to a job you are passionate about.  Once you have acquired the valuable skills, you are more likely to be in a career that offers compelling traits of great work, such as creativity, impact, and control.

Although adopting the craftsman mindset works in most job situations, it is important to distinguish a few situations where it may not be as successful:

  1. The job presents few opportunities to distinguish yourself by developing skills that are rare and valuable.
  2. The job focuses on something you think is useless or perhaps even bad for the world.
  3. The job forces you to work with people you really dislike.

If your job has any of the above combination of traits, it can prevent any attempt to build and invest career capital.

The craftsman mindset is more than just showing up and working hard.  To successfully adopt the craftsman mindset requires deliberate practice, a form of practice that involves stretching yourself outside your comfort zone and then receiving ruthless feedback on your performance.  It is important to have clear goals for yourself and to always be pushing for more.  Deliberate practice is often the opposite of enjoyable.  The good news is, outside of professional athletes and musicians, very few knowledge workers employee deliberate practice in an office setting, creating an opportunity for you to really set yourself apart.

As an example, the typical office worker likely checks email constantly throughout the day, since it is an easy distraction from the task at hand.  A worker employing deliberate practice would have their calendar scheduled with blocks of time to work on specific projects, scheduling the most difficult tasks to be completed during the time when they know they will be at their best to push themselves.

Key Concept #3

The Power of Control

“Giving people more control over what they do and how they do it increases their happiness, engagement, and sense fo fulfillment.” So Good They Can’t Ignore You p. 113

Once you have enough career capital acquired, cashing that in for more control is a proven way to increase career happiness.  In Dan Pink’s 2009 bestselling book Drive, Pink concluded that more control leads to better grades, better sports performance, improved productivity, and more happiness.  As a real life example, companies such as Best Buy that have implemented a Results-Only Work Environment (ROWE) saw that the rate that people left the corporate headquarters plummet by 90 percent.  In a ROWE company, all that matters is results.  When you show up to work and when you leave, take vacations, or even check e-mail are all irrelevant.  It is up to the employee to decide the optimal structure that works best for them.  Gap’s corporate headquarters also implemented ROWE, and a manager concluded that he had never seen his employees happier.

However, the Newport warns that there are two control traps employees should be aware of:

  1. Control that’s acquired without career capital is not sustainable. In other words, you cannot expect to have success asking your boss to only come into the office 3 days a week if you are not already making exceptionally valuable contributions to the organization.  Similarly, quitting your job as a finance professional to start a yoga studio is unlikely to be successful unless you have significant experience with yoga.
  2. Once you have enough career capital to acquire more control in your working life, you have become valuable to your employer and they will fight your efforts to gain more autonomy. The book describes the story of an employee who turns down a promotion to work as a freelance contractor for her employer, creating more control and ultimately the chance to work with outside clients to increase income potential.

It is important that you only pursue a bid for more control if you have evidence that it is something people are willing to pay for.  The author refers to this concept as the law of financial viability.  Money, in many respects, is a neutral indicator of value because by aiming to make money, you are aiming to be valuable.  This obviously does not apply to hobbies, but when it comes to decisions affecting your core career, money remains an effective judge of value.  Therefore, to help navigate the two control traps above, ask yourself if your next move is something people are willing to pay for.  This applies whether you are pondering an entrepreneurial venture or a new job within an established company.

Key Concept #4

The Importance of Mission

“People who feel like their careers truly matter are more satisfied with their working lives, and they’re also more resistant to the strain of hard work.” So Good They Can’t Ignore You p. 152

In researching people who love what they do for work, Newport concluded having a mission was a key component.  To have a mission is to have a unifying focus for your career.  Missions are powerful because they your energy towards a useful goal that in turn maximizes your impact on your world.

How do you make incorporating a mission a reality in your working life?  Any desirable trait in a career, such as having a mission, requires that you first build career capital.  However, career capital alone is not enough to make a mission a reality.  The book gives the example of a woman that dropped out of college to start a non-profit, but quickly ran into a harsh financial reality when she failed to raise enough money to support the organization.  Just because you organize your work around a mission does not mean you can easily make it happen.  The author suggests that you should make little bets to allow you to tentatively explore the specific avenues surrounding general mission, looking for those with the highest likelihood of leading to outstanding results.  This systematic exploration can help you uncover an exceptional way forward that you might not have otherwise noticed.

In addition to making little bets, it also helps to adopt the mindset of a marketer.  For a project to transform a mission into a success, it should be remarkable in two ways.  First, it must compel people to remark about it, and second, it must be launched in a venue conducive to such remarking.

Key Concept #5

Working Right Trumps Finding the Right Work

The beginning of the book starts with a story of Thomas, a young banking employee that decided to follow his passion for Zen practice by moving to a remote monastery in the Catskills mountains.  He immersed himself in the study of Zen and meditation, pondering endless Dharma lectures.  Unfortunately, he did not find the happiness and contentment he was expecting, as he realized that although his surroundings had changed, he was still the exact same person as before he arrived at the monastery.

Fast forward ten years, and the author interviewed Thomas again, who was at a dramatically different place in his life.  After leaving the monastery, Thomas returned to the banking job he had left two years earlier. This time, however, he approached his working life with a new awareness and focus, freed from the fantasy jobs that had once dominated his mind.  He was able to focus on the tasks given to him and accomplished them extremely well, no longer having the burden of thinking about some magical future occupation waiting to be discovered.  The new focus was appreciated by management, as Thomas was promoted multiple times within a few years and suddenly found himself managing the computer systems for the bank that processed over $6 billion of investment assets.  The work was challenging, but it provided him with a sense of respect, impact, and autonomy-exactly the kind of traits needed to create work you love.

Thomas realized that working right trumps finding the right work, which fittingly sums up the core message of So Good They Can’t Ignore You.  He didn’t have to have the perfect job to find occupational happiness.

Apply It

*Instead of obsessing over “finding your true calling”, focus your energy at your current job at acquiring rare and valuable skills.  Ask to be assigned to a niche project at work and focus on giving that your best effort.

*If you feel like you are at a point where you have acquired enough career capital, try incorporating more control into your working life.  Start by asking to work from home one day a week, or ask for a more flexible work schedule.  Reference the ROWE companies that have implemented this with success.

*Focus on adopting the craftsman mindset at work.  Deliberate practice (i.e. stretching yourself beyond your comfort zone and getting feedback for improvement) is well known among musicians and professional athletes for creating exceptional results, but few people apply it in the office world.  This leaves an incredible opportunity for you to “be so good they can’t ignore you.”