Pay Yourself First
- Tom discovered that the “Pay Yourself First” philosophy advocated that you should set aside 10% of your income each month before spending it on anything else.
- He recognized that this was something that his supervisor at General Motors was not doing, and that was preventing him from becoming financially independent.
- Tom learned that investing in the stock market can help you to make a decent amount of money into a massive amount if done properly.
- He learned that it is important to invest real money, rather than just theorizing about it with a stock market simulator.
- Tom started off by investing in speculative tips from Reddit which lead to high initial returns, but he experienced a rapid decline in capital due to his approach. generationally expensive”, and he was certainly scared of that.
The Intelligent Investor’s Road to $1,000,000 – Stage 2
Tom managed to go from $0 – $20,000 in almost exactly two years by saving $1,000 from his paycheck each month, and making mistakes investing in unprofitable-nano-biotech-companies, as well as losing $1,000 in brokerage commissions trading a lot in the beginning
- Tom’s father offered to chip in an additional $10,000 if Tom wanted to purchase his own place, but Robert Kiyosaki’s advice of acquiring assets meant Tom politely declined
- What characterises the second stage is that a good chunk of the $100,000 must originate from stock market returns
- Tom followed Warren Buffett’s mantra of only investing in what he understood and doing back-of-the-envelope DCF analysis. He refrained from “brilliant or advanced investments,” as he looked for “1-foot bars [he] could step over”
- Tom was then presented with an “amazing investment opportunity” that proved to be too much for him, so he ended up only investing 500$. He aimed to not make “generationally expensive” mistakes by picking up stocks form companies like Google and Microsoft with low P/Es compared to their peers
How Tom Increased his Savings while Working
- Tom worked at General Motors and managed to increase his savings from $1,000 to $1,500 per month.
- Tom moved in with his girlfriend, Sarah, which helped him increase his savings rate significantly, as they split the rent on a home together.
- At the same time, his responsibilities at work increased, giving him higher salary with which to save.
Lessons on Wealth and Frugality
- Remember Charlie Munger’s advice that the “first $100,000 is a bitch”.
- Being orderly with one’s expenses is important in increasing savings rate.
- Take advantage of cost efficient living options, such as sharing rent or household duties.
- Understand the opportunity cost of your decisions, such as when it comes to materialistic things.
- Beware of the power of habits; once you open the gate of your stock market account and let a chunk of money out of it, it may be difficult to close it again.
The Importance of Patience
- Tom had mentally prepared for the S&P 500 stock market crash that happened right before he turned 31
- The crash resulted in Tom being back at stage 2, with wealth below $100,000
- Tom was advised to keep swimming and stick to his process even when returns weren’t very good and investments felt discouraging
- Tom refused to splurge in the stock market, picking up exceptional companies in bargain prices
- Tom made 30% and 45% returns on the stock market in the following two years
- Tom was rewarded with returns that beat the market by an average of 8% per year
- Patience was essential in this period as it took time for additional deposits to have an impact on the portfolio value
Earning Financial Independence
- Tom’s boss wasn’t happy when he wanted to return, but eventually let him back in.
- Despite this, his retirement was still nowhere in sight.
- The point of Tom’s story is to demonstrate that anyone can earn more than him with enough effort and intention.
Warren Buffett: Making $1 Million by Age 31
- The story of Warren Buffett is extraordinary compared to that of the “normal guy”, Tom.
- Buffett made his first $1,000,000 by the age of 31.
- It can be learned from Buffett’s success that, with enough hard work and focus, anyone can achieve financial independence in record time.
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