A new, unique take on FIRE
About the series…
When most people talk about money management, they discuss
tactics. Occasionally, you’ll encounter someone who elevates the
discussion to strategy, rather than simply scattershot tactics.
But what’s missing from both conversations — both tactics and
strategy — is a wider-lens look at how to become a better thinker; how
to become a crisp, clear decision-maker.
How to think from first principles. How to better your brain. How to cultivate the wisdom to know the next move.
This series is an attempt to bring first principles thinking into the conversation around money. Welcome to the inaugural post.
Rethinking the FIRE Construct
I’ve been thinking about FIRE in new terms:
Financial psychology
Investing
Real estate
Entrepreneurship
Together, these four concepts encompass everything we need for
mastery over our financial life. And the letters are ordered perfectly:
start with mindset and master the basics, then shift focus to “the IRE
of FIRE” — high-growth activities such as making investments, buying
real estate, and starting a side hustle or business.
So I’m trying something new.
With every post in this First Principles series, I’ll share insights into these four domains, with the goal being to fill each post with original and unusual insights.
My commitment to you is to write a series with nuance. Too much
personal finance content lives in an echo chamber, rehashing the same
tired lines and prescriptive, one-size-fits-all advice. You won’t find
that here. This series is built to make you smarter. Together, we’ll
uncover mental models, examine frameworks, rethink perspectives, peer at
our cognitive biases and emotional triggers, and engage in the deep
work of thinking about how to think.
This is a series about how to think from first principles, how to be a
better, smarter, wiser decision-maker, told through the lens of money.
Let’s begin — and in today’s introductory post, we’ll kickoff with a deeper look at each of these four concepts.
Financial Psychology
If you say “personal finance 101,” most people immediately think of
tactics: building automations, setting up cash reserves, hiding money
from yourself. They think of bulk cooking, buying used cars, and the
low-hanging-fruit of frugality.
Those tactics are great. But starting there is a mistake.
Bigger, more sustained improvements come from understanding why we
spend, why we behave irrationally with money, why there’s a behavior gap
between what we pledge and what we do.
The key to finding your financial footing is understanding the psychology of money.
Want to stop spending so much on the weekends? Start by understanding the impulse behind the purchase. We don’t buy items, we buy feelings. Figure
out what feelings you’re trying to purchase — and the triggers and root
causes behind that — and your spending will adjust naturally.
Want to get (and stay) out of consumer debt? Start with the
psychology of debt — both the factors that led you into debt, and the
mindset that the debt burden creates.
Most of us know what to do (spend less than you earn, invest
the difference), but translating awareness into action is tough.
Tactics are necessary, but not sufficient.
Understanding the psychology of money is at the core of mastering our
financial mental game. And until we master the mindset, then we’ll
never follow through with the tactics.
Investing
Most discussion around investments fall into two categories:
1: The fundamentals. These are the articles that
teach basics around how the system works: “the 401k, 403b, and IRA are
examples of retirement accounts,” or “stocks and bonds are examples of
assets.”
2: The horserace. These are the articles that track what the market is doing today, or this week — market moves, winners and losers.
You can either read evergreen articles on long-term investing, or you
can track today’s stock performance; there’s not much information
outside of those two domains.
But there are three important elements missing from this conversation:
1: The strategy. Investing decisions need to be made
in the context of your life (or as my buddy Joe says on the podcast,
“start with the end in mind.”) These strategic discussions around
“what’s the end goal?” and “how do I reverse engineer?” often get
overlooked, which is why so many investors experience FOMO, the fear of
missing out. If there’s no clarity of purpose, then the only goal is
“more.” And when the only goal is “more,” then the Next Hot Stock Tip
seems too tempting to pass up.
2: The psychology. The greatest investors are the
ones who have a strong awareness of investor psychology: fear and greed,
FOMO, loss aversion, recall bias, the availability heuristic, our
tendency to overvalue what we already own, and other cognitive biases.
3: The new frontier. Cryptocurrencies for
conservative, thoughtful, diversified investors. We live in a world with
SPACs and NFTs, acronyms that the average investor didn’t know a few
years ago. And at the moment, millions of people are learning about
these next-frontier innovations primarily from Twitter and TikTok.
I’ll be writing about investments with a focus on these three elements.
SPOTLIGHT ON…
One of the most fascinating trends of today is the decoupling of skills from diplomas.
The established order used to demand that we dig ourselves into debt
for a formal education in order to be considered skilled, useful job
candidates. The advent of specific skills-based online learning has
transformed this, making it possible to land a six-figure career with
only a few months of training.
For a deeper discussion around this decoupling — and how it affects anyone who wants a higher-paying job — watch this video conversation that I had with Jonathan Mendonsa, co-host of the Choose FI podcast.
Real Estate
Real estate is one of the few asset classes that’s a hybrid between
an investment and an entrepreneurial venture, so it’s perfect that the
“R” in “FIRE” fits in-between the “I” of investing and the “E” of
entrepreneurship.
Housing prices have soared in 2021, and the psychological response
has been fascinating. When macro events happen, our brains grasp for an
explanation.
Many people have reflexively reached for the simplistic, reductive
explanation that home prices are high because buyers are irrationally
exuberant, and that what goes up must come down. Many people have a fear
of heights: the soaring new highs of the market must *necessarily* mean
that there will come a crash … right?
After all, that’s what happened in 2008 … so isn’t this history repeating itself?
Yet it takes more than new highs to cause a crash. And there are
major differences between the market peaks of 2021 and the peaks of
2006-07.
In 2006-07, we faced a housing surplus. Builders were
over-developing, speculating that demand would be able to keep up with
the huge spike in supply.
In 2021, we face a housing shortage. New construction permits and
renovation permits are low. Lumber prices are high. Labor is scarce. New
household formation is high. The supply can’t keep pace with demand.
To be clear, this isn’t a prediction of the future. I’m opposed to making predictions (though I’m an advocate of probabilistic thinking).
It’s simply an observation that the factors influencing each run-up
are different — so it’s unwise to assume we know what the future holds.
Entrepreneurship
The word “entrepreneurship” is overused, so let’s pause to look at
the different concepts and styles of work that fall under this umbrella
category.
First, there’s *gig economy* work, like driving for DoorDash or Uber
Eats. It’ll get cash in your pocket immediately, but because there are
low barriers to entry and few ways to distinguish yourself, the upside
is limited.
Next, there are *scalable* side hustles, like building an online
business of your own: freelancing, consulting, producing a product or
service that carries your own branding. This allows you to distinguish
yourself and offers the benefit of a limited startup cost, but it could
take months before it turns profitable.
Once you convert side hustles into full-time work, there are two iterations.
There’s self-employment, in which you’re a solo service provider (potentially with a few 1099 contractors).
And then there’s full-blown entrepreneurship, in which you’re running
a company with W2 employees, health benefits, vacation policies and a
401k plan.
The confusing thing about the catch-all term “entrepreneurship” is
that people online use this to apply to all four of the above-listed
situations, and as a result, most information that you’ll find about
this topic is muddled.
In this First Principles series, I’ll be clear about which
of these four situations I’m referencing, as I write about how to think
and act like a successful entrepreneur.
Hope you enjoyed AND learned from this inaugural post in the First Principles series.
Click here if you want future posts like this straight to your inbox with more thoughts, ideas and insights on a new take on FIRE.
See you soon!
Hey there! FYI, this post is part of our