When you are tackling a challenge like getting to financial independence, there are lots of choices to be made along the way.
To make good choices, we need an operating system that allows us to get stuff done more effectively.
Once you have your operating system up and running, life and the journey to financial independence become much easier. The Principles of Lifehacking provide the basis of that system. So here’s a quick overview:
Principle 1 : Experiment
We have to experiment because we can’t know what is going to work until we’ve tried it. We should start by taking some baby steps, even when success is not guaranteed…actually, especially when success is not guaranteeed.
We should experiment the right way – where failure is survivable and where success is potentially great. For example, I don’t recommend experimenting with Russian roulette. The upside is limited and the downside is catastrophic.
I look for real life experiments where the payoffs are asymmetric in my favour. For example, this blog is an experiment. Before I started, I had no idea whether it would “work” or not. I could see that the downside was limited and that other blogs had created fun & new opportunities for their authors. So this looked like a perfect experiment – low downside if it didn’t work, high upside if it did.
If you are struggling to visualise this, here’s what a low-risk experiment with an asymmetric payoff skewed to the upside looks like:
Principle 2: Optimise speed of response
There are two speeds at which I make decisions: fast and slow. The trick is knowing which bucket to put each individual decision into.
Things that can hurt you if ignored – even for a short time – go into Bucket 1. Don’t be an ostrich – don’t ignore the warning signs and shaft your future self.
Decisions that have long lasting consequences (on the upside and the downside) but can wait, go into the second bucket. These buckets map to Kahneman’s 2 systems of decision making (see Thinking Fast and Slow).
Bucket 1 examples
- Arterial wound spurting blood – apply tourniquet / call 999 / go to hospital NOW
- Credit card debt – pay off asap
- Paying % fees on pension to IFA / active funds – move portfolio asap
- Surplus cash being eaten away by tax and inflation – put to work quickly
If something is a bucket 1 decision, do not delay, do not pass GO, do not collect £200….do not do anything until you have sorted this shit out. Taking action may require you to overcome your freeze response. Get help if you are stuck.
The second bucket requires taking our time, using our unique human capacity for rational analysis to over-ride our emotional kneejerk reactions. We evolved this way of thinking more recently and it takes more conscious effort to use. But the greater the consequences and the more interactions with other parts of our life, the more time we should spend on the decision.
Bucket 2 examples
- Decide whether to buy double glazing – take 2+ weeks
- Decide whether to buy house – take 3+ months
- Decide whether to marry current partner – take 1+ year
- Decide whether to have (another) child – take 2+ years
The world is full of pressures to make decisions quickly. If it is a Bucket 2 decision, resist this pressure. Don’t be bullied, stand your ground, take your time.
Principle 3 : Don’t worry about failure
People worry too much about failure. But there is no failure, there is only learning and growing.
We learn from our mistakes. Mistakes feel bad but often prove to be a blessing in disguise. This is called post-traumatic growth by psychologists. I am not making this shit up, its an actual thing. The Obstacle is the Way and what doesn’t kill you makes you stronger.
One of my defining moments on the road to FI was a career crisis that I had about 12 years ago. I took a new job because it looked prestigious on paper. But I hated every moment of it. I felt trapped because my wife was pregnant with our second child, we had only one income and still had a mortgage back then.
But that screw-up provided me with great motivation. I slashed my spending, found a new job which I threw myself into and pushed on hard towards financial independence.
Principle 4 : Think 80:20
Another application of the 80:20 principle is that you don’t need to capture 100% of the benefits from any action. You just need to ensure you capture the low hanging fruit which provide 80% of the value. You should never let the search for perfection become an excuse for inaction. Good enough is good enough.
I don’t wait until for 100% perfection before publishing a blog post; I publish when I think it’s good enough. If I later spot a typo or some woolly language, no problem, I will just correct that after its “out there”.
The same applies to getting started with investing. If you wait until you fully understand investing, then you will never start. If you never start investing, you will never understand it fully because experience is part of the learning process.
The whole concept of a safe withdrawal rate is an 80% solution (actually more like a 99% solution). If you demand 100% certainty, that’s your choice…but then you will never retire until you drop dead.
Principle 5: Be resourceful
The greatest value is always derived from using any resource as efficiently as possible.
One of the biggest earning drugs ever was Pfizer’s Viagra. The little blue pill earned billions of dollars and did more for the over 60’s than free bus passes ever did. Yet the irony is that Viagra was an accident. The drug was being trialled for use as a treatment for hypertension. The trial participants reported the side effect that it induced erections. A lesser company would have canned it. But, to their credit, Pfizer recognised a hidden gold mine when they saw one and re-purposed the drug.
This is how I define resourcefulness – its about making the best of what you have available to you. This is also the essence of frugality. Frugality does not work just because it is morally superior. Frugality works because you are using scarce resources more efficiently. But frugality on its own is not enough. Resourcefulness is frugality paired with creativity.
Principle 6: Keep it simple
When I used to watch Formula 1 racing I was struck by how often the cars broke down. The cars are hugely powerful and optimised for performance but the complexity of the engineering makes them fragile and so many (most?) most cars didn’t last the race distance.
Things that are complex are fragile in ways that are often hidden. Simplicity is always more robust. It is less likely to go wrong and its easier to fix if it does. Consultants love complexity in organisations. They know that when it breaks, the client will not be able to fix their own problems.
Time and headspace are scarce resources. So focus on simple solutions that are robust and capable of rapid implementation. Anyone who has seen the fucked up dynamics of decision making by committee will recognise the hugely under-rated value of simplicity.
As I’ve said before, the essence of simplicity in investing is to buy and hold Vanguard equity index funds.
Principle 7: Use crowd sourcing…and copy what works
Have you ever watched Who Wants to Be A Millionaire? If you have 3 lifelines left and its a really tricky question then Ask The Audience is always your best chance. I never saw an episode where The Audience got the answer wrong.
This illustrates the wisdom of crowds. The individuals in the audience are not geniuses, but the Ask The Audience aggregates their knowledge and delivers the right answer.
The free market economy works via the same principle. Prices embody the knowledge of the crowd. So supply and demand get balanced as if by an invisible hand. No one is in charge of the food supply for London nor setting food prices. Yet everyone gets fed.
The failures of the Soviet economy should have discredited central planning for ever. We should be sceptical (not cynical) of hierarchical central authorities including: Governments, Large Companies, Quangos, Universities etc.
Wisdom and knowledge often reside in non-obvious places. The beauty of the internet is that it allows us to access the wisdom of crowds and the best knowledge from around the world, like in these books. When I find such a source, I do not ignore them. I bow the fuck down, listen carefully to what they say and then shamelessly imitate them.
Principle 8: Look for alignment of interests
Find experts you can trust and learn from. Just be careful which experts you listen to. Many experts are incompetent or have no edge. Others use their knowledge to screw you.
Wealth managers and financial advisers have an incentive to make things complicated so they keep the power and you don’t learn. They put their interests before yours – this is not even a criticism, its just recognising reality.
Follow the money. If you don’t know exactly how much (as a number of £s / $s / €s) you are paying, you’re probably being screwed.
You can’t figure everything out for yourself quickly enough. So get help from people with good ethics and no conflict of interests with you.
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