I just read a book titled: The Algebra of Wealth, A Simple Formula for Financial Security,by Scott Galloway. Mr. Galloway is a professor of marketing at NYU Stern School of Business and a serial entrepreneur. In this article I am summarizing the main points expressed in this book.
How do we get economic security? The answer is slowly. Wealth is a means to an end: economic security. Put another way, wealth is the absence of economic anxiety. The first lesson of the book: economic security isn’t a function of what you earn but what you keep and knowing how much is enough for you. Economic security is acquiring sufficient assets, not income, but assets such that the passive income they generate exceeds the level of spending you choose for yourself, your burn rate. Passive income is money your money makes: interest you make on your saving accounts, dividend paid by stocks you hold, rent paid by your tenet (after expenses) if you own real estate.
1- Economic Security = Passive Income > Burn rate.
2- Happiness Research – If money is the goal, you will never have enough. Research into happiness ((at least as of 2023) shows that higher incomes are associated with greater happiness, but happiness increases lag income increases, and for some people, there is no correlation at higher income. It means lot more money does not make you lot happier. Research suggests that genetics predetermine as much as 50% of our happiness level. But 50% genetic predisposition leaves 50% under your control.
One of the most important advices I can offer has no direct correlation with finance: get plenty of exercise. It might be the single most effective thing you can do for across the-board improvement in your quality of life, short and long term.
4- The Importance of Relationship
The most important economic decision you’ll make in your life is not what you major in, where you work, what stock you buy, or where you live. It is who you partner with. Your relationship with your spouse is the most critical relationship in your life; it will have a huge impact on your economic trajectory. Married individuals (in USA) are 77% wealthier than single people. Lack of money is one of the greatest, if not the greatest strains on relationship.
5 – Hard Work
Go to a city, go to the office and find a mentor. Be around people. Expand your network. Talent and desire, matched to the right career, are a good start. What turns these into economic security is years of hard work. There is no secret, no shortcut; it takes hard work to achieve it.
6 – Know When to Quit
Don’t quit because it is hard, it’s supposed to be hard. Quit because the data, or a member you trust, or multiple external signs, indicate your time would be better invested elsewhere. There is no shame in this.
Successful, wealth-generating employment careers (as opposed to entrepreneurship) typically include strategic job changes that produce jump in responsibilities and compensation.
Be on LinkedIn, maintain your profile, and talk to your friends, former classmates, and colleagues about their jobs. In USA, job switchers increased their compensation by 7.7% compared to their previous jobs.
7 – The Power of Time: Compounding
Albert Einstein supposedly remarked that compound interest is the eighth wonder of the world. It is that, but it’s also simple math.
Future Value = Present V (1+ Interest rate) Number of periods
Example: If you invest $12,000 per year at 8% rate of return for ten years, and then stop and watch your returns compound. If you invest this way from age 25 to 35, then you will have $2.5 million when you turn 65, whereas if you start 45, you’ll have only $500,000 by 65.
Investment is like planting oak trees. The best time to start is ten years ago. The second best time is right now.
8 – Budget Your Head Above Water
When you are not making much money, budgeting is about being careful-spending with intention and feeling the weight. Your budget must include a line item for “savings”. You should allocate your income into three buckets: 1- Day to day spending, 2- Intermediate spending, and 3-Long-term investment.
Build an emergency fund. Keep the money in an interest earning saving account with your broker or bank.
9- Take the Match
The highest priority for you is to match your employer’s retirement plans like: 401(K), Regular IRA, and Roth IRA. You will never get a better investment than an immediate, tax-deferred 100% return. Fund this up to the maximum matching contribution level under almost any circumstance.
10- Debt
Long-term debt used to finance long-term assets like buying a home is sensible. Debt can give you leverage, but can be dangerous. Avoid high- interest credit card debt by all means.
11- Investing
- Do not trust your emotion
- Don’t day trade
Invest your personal and retirement savings in low-cost stock index fund like S&P 500 index fund or Exchange Traded Fund (ETF) (For Indian readers, it will be Nifty 50 ). Numerous companies offer these funds. Choose a fund with the lowest expense ratio. This ratio should be less than 0.5%. Unless you are close to retirement age, invest 100 % of your saving in stock index fund or ETF. Avoid fixed deposits or bond funds as they don’t keep up with inflation.
Source
Scott Galloway. The Algebra of Wealth. A Simple Formula for Financial Security. Portfolio/Penguin, New York: 2024
