Ep. 4 - Freedom

I touched on Freedom and Sovereignty a little in my last post. Freedom (& I don’t mean the ‘f*ck masks, give me my guns' type freedom) is something I think about a lot. It is why I show up everyday. It is why I fight the Resistance. And ultimately, it is why I started my own firm.

Freedom begins with health, moves to relationships, and ends with wealth. I personally don’t think you can have true freedom without all three. Although I am passionate about fitness and developing deep relationships, it is not my area of expertise. So I'll focus on wealth.

Wealthy. Rich. Money. These usually have negative connotations. People don’t like talking about money. It can be uncomfortable. But, I think we've convinced ourselves that it's not important. We hear things like ‘find your passion and you won’t work a day in your life.’ This is bullshit. This happens for very few people. I know professional athletes that don’t like their job. Because guess what, showing up to the rink or the field everyday becomes a job very quickly. For 99% of people money is VERY important. And, the more you have, the more freedom you have.

Being tied to a job until your 65, even if you don’t mind it, is not freedom. In this article I want to reiterate over and over again that making money is a good thing, not a bad thing. Never be ashamed of it. Don’t feel guilty for wanting more, either.

BUT, things are changing rapidly around the world. You used to be able to earn low-to-mid six-figures and sail off into the sunset. You could buy the house you wanted, the car, the vacations, and even a cabin if you like. You could continue working because you want to, not because you have to. This is no longer the case. The baby-boomer lifestyle is over.

In this article I will discuss three key areas impacting the future of personal finance. I will share where I think it’s heading, and how I am setting myself up for success.

• Inflation - We are potentially living through the beginning of one of the largest inflationary periods of our generation. How can you protect yourself? Where should you be putting your money?
• Income - “The three most harmful addictions are heroin, carbohydrates, and a monthly salary” - Nassim Taleb. Your monthly expenses creep up with your monthly salary. Lifestyle creep is very real. How do we avoid this? How can we create distance?
• Big wins, small losses - You need skin in the game. You need to have a risk tolerance. You need to expose yourself to major returns with limited downside. How do we achieve this? Is it only achieved through luck?

Let's get into it.

Inflation

This is a tough one. Inflation can occur silently, especially when the Government maintains the narrative that ‘we are not in an inflationary period’. But, is that true? The narrative being pushed right now is that rising costs are the result of supply chain issues, combined with consolidation of capital, and cheap money. Let me explain.

There is no doubt that COVID caused an absolute mess with global supply chains. I won’t argue that, and I don’t think I need to go into the weeds with that one. However, the second consideration is the consolidation of capital. What does this mean? Well, less money being spent on restaurants, commuting, and vacations has led to people spending more on specific items like home renovations (i.e., cost of lumber skyrocketing), outdoor activities (good luck trying to buy a bike), and personal development (online courses are booming). Then there is the cheap money. The ‘Fed’ and the Government of Canada have been pumping money into the economy at a ridiculous rate. Look at this graph below.

This is an unprecedented amount of money being injected into the economy. This has forced interest rates to historic lows, which has also fueled spending. This is why your parents basic split-level home is now worth $2m. It has created a perfect fly-wheel. Fed lowers interest rates to spur economic activity, consumers purchase more and take on debt, prices increases, the Fed lowers interest rates again, people take on more debt because of the rising costs fueled by increased consumer spending, and so it goes. Then, we eventually find ourselves at a junction point where a slight increase in rates would bankrupt the country (and a lot of consumers).

So, how do we protect ourselves?

Don't hold cash. I repeat - don't hold cash. As of writing this, I currently hold about ~5% cash. The rest is invested in a host of items; equities, cryptocurrency, private placements, etc. Holding the dollar right now will literally eat away at your purchasing power. (In the last section, I discuss what I hold and how I invest.)

The other way to outpace inflation is to supercharge your income or slash your expenses. Basically create distance, and pile into investments. This is where we'll go next.

Income

“The three most harmful addictions are heroin, carbohydrates, and a monthly salary” - Nassim Taleb.

I love this quote from Nassim Taleb. Nothing is more true. This story plays out year after year. For example, you have a nice paying job at $100k/annually. Over the course of ten years you receive appropriate raises as you climb the corporate ladder and you're now making $220k/annually. Not bad for ten years. However, during this time you have; moved out of your one-bedroom apartment into a three bedroom townhome, financed a $40,000 SUV, went to Hawaii every year, bought a second vehicle because it's 'easier', and then bought an overpriced home for $2m because that's 'just what you do'. And, by year ten, you're bringing home $12k per month (after tax) and seeing $8k of it vanish immediately and then the other $4k disappears on ad-hoc expenses. Herein lies the addiction. You cannot leave your job because your lifestyle is dependent on it. You cannot lose your job. Or, you can, but then you're really f*cked. It gives you no freedom. You are officially trapped.

So what do we do?

You have to create distance. Increase the topline and significantly decrease the bottom-line. Or at the very least, you keep the bottom-line the same for years. My partner and I have seen combined incomes increase nearly 400% over the last three years. We have worked hard to get there. However, we're still in our one bedroom apartment. We still cook almost all our meals. We don't do fancy things. I'm also lucky because she is about 10x cheaper than me - so this easy. This is how you create distance.

Also, I'm sorry to burst anyone's bubble, but the personal finance books that say save 10% of your income are wrong. Frankly, it is not enough. 50% should be the goal. I understand this is a luxury, but there are ways to achieve it.

Why?

Why am I so passionate about this? I think it's because so much has changed from when I was growing up and learning about personal finance. I used to think six-figures was the holy grail. But I am very, very wrong. Take a look at this graph:

So do you make $895k? If so, congratulations! This is extremely eye-opening. Wages have largely stagnated, especially over the last decade, leading to even more purchasing power erosion. This is why I am so bullish on self-employment. Carve your own path, command your own income, and don't fall victim to being priced out of your own country.

Big Wins, Small Losses

What do people like more than making money? Not losing it. How can you set yourself up for those 10x gains, while simultaneously hedging your down-side risk? This, again, is where I defer to Nassim Taleb. Taleb built his wealth off the 'Black Swan' strategy (the book is a must read --> Black Swan). It is defined as "an event, positive or negative, that is deemed improbable yet causes massive consequences." Now, you want to be on the right side of those massive consequences.

So what do I do? I use the 80/20 rule. 80% of my money is diverted either back into my business (best return I can get) or invested into solid, dividend paying stocks (Microsoft, Apple, TD, RBC, Fortis). Then 10% is invested into higher growth, but still fairly solid, revenue producing companies (Tesla, Stone Co). The remaining 10% is held for deals. Private Placements or IPOs. The reason I only divert 10% into these is for the following reason. Let's say I invest in four different deals ($50k each, to keep it simple). Now, two do horrible and go to zero (I lose $100k). But, one does okay with a 10% gain, and the other has a 10x return. My total net gain is $355k. Big win, even though I had two major losses.

I made it sound easy. And it's definitely not. However, gaining exposure to pre-IPO deals, even if it is a small sum money is a fantastic way to supercharge returns.

These returns can also be obtained on the open market. Do your due diligence. Ask the right people the right questions and make the bet.

The Best Investment

As I eluded to above, the best return I see is reinvestment into myself, or my company. When I hired the first person at Elevate Financial I was nervous. It felt like it was money leaving my pocket. But, I was very wrong. Since bringing them on we have doubled our client portfolio, and it created more capacity for me to work ON the business, not IN the business.

The best bet you can make is on yourself.

Conclusion

The theme of this article is ownership over one's life. Put in the work and the time now, so you're not left on the sidelines a decade from now. Prepare, make logical bets, and enjoy the process ✌