Maybe you also think of your finances from time to time? Would it make sense to have more reserves and financial freedom? Maybe you dream big? It is easy to get caught up in every day life and forget to stake out the path to the future.
Since as long as I remember I have had the goal to build substantial wealth. When asked as a young kid what I would like to be when I grow up I used to say “A millionaire”. Soon I learned this was not a socially acceptable answer (in Sweden at the time) and modified my script. However, I was not discouraged and kept my dream alive. I still pursue new levels of financial freedom to ascertain I can have the independence I want.
Early on my dream was tied to consumption, especially sports cars. As a kid I had an obsession with cars and surely the nirvana of life was to have many of them. Preferably Italian or English. As my thinking matured so did my views of wealth. I now realize it was my drive from freedom and independence that nurtured such ambitions. Whilst freedom and independence are still pillars of my life and I would argue pillars in any formidable life - I now highly value working with something I love and contributing to a better world. Master coach Tony Robbins says research shows money alone does not cut it as a motivator and the same goes for me.
Over the years the hard work has paid of and I am building myself financially reaching higher levels of freedom and independence. All is relative and especially financial freedom is a highly personal setting depending on your habits of life and ambitions. Financial freedom does not have to be something remote or a permanent state. You can enjoy the fruits of your status throughout your life.
At certain times my family or I have used parts of our capital to get freedom from work or independence. At one point I did not work for a salary for quite some time to pursue a new project. When one of the kids was in intensive care and fought for his life we had the luxury of letting most things go for the duration of that period. I once left an unhealthy relationship and had to produce a lot of cash to leave. There are times I have used the freedom capital brings to help friends and family by extending long terms loans or financial guarantees enabling them to invest, follow a dream or simply survive. It just feels great to help out for the joy of helping.
What about you? Can you relate to these ambitions? What would you do if you could take a year or two off from work? How would you like to be able to cater for your family in need and ignoring the mechanics of bills for a while? I am sure you can find ample of examples in your life where you could use such a break too.
That is why we are introducing an amazing stock option program for our employees at Lytics. We want the very best life for our employees and kindly ask them and new recruits to accept a lower salary to be richly rewarded (both spiritually and financially) as future equity owners of Lytics. As a partner of Lytics it makes me very happy to think we are all in this together and will share our successes and sorrows. Likely it will benefit our customers and stakeholders too. There are few things as powerful as a community coming together around a cause and we can expect outstanding results. From time to time I spend time in Green Bay, Wisconsin and hold the concept of community ownership of the Green Bay Packers in very high regard. It is simply amazing to pull off what they do in little Green Bay!
How have you managed to reach some of the goals you set up, people ask me. Well, I think for many of you what I have to say are mere basics, but nevertheless am I happy to share my thoughts. Here are 9 laws I abide on my journey towards financial freedom and independence. How about if they can help you too?
1st law – Look at the net effect
Mattias, you cannot look at earnings alone, always think of the net effect.
This was one of the wisdoms my mom passed onto me. She did not so much live by her words, but they sure helped me get to where I am.
Living in Sweden means all your income is subject to a fairly high taxation of a progressive kind. To earn more than 37,900 SEK per month is punished with a 52-57% tax rate. Also, one needs to consider the pay roll tax levied on top of the income. Capital gains tax on the other hand plateaus at 30%. Many countries have similar systems.
Knowing this makes you search for solutions outside the box and disregard the status folly of a high salary. Be aware of the salary costs for your employer as this really is bargaining power.
In Sweden there are plenty of tax friendly buckets of investment – you just need to explore them. Also, you can stack them on top of each other and scale them to a certain point. To not do it makes very little sense. I am all for paying taxes, but not more than is required by tax law.
2nd law – trade salary for equity or stock options
Any attempt to exchange the high end of your income for stock option or equity is a very smart idea. You can often get a better negotiation, at least in the start up community, if you trade a lower salary for stock options. Why? Because a pesky feature of start-ups is the burn rate of the company. Recapitalizing a company means dilution for the owners. Thus, excellent opportunity to join the ranks of business owners through options and or equity and make it work.
For as long as I have been an owner and entrepreneur I have, only with a few exceptions, had an income marginally higher than the state tax bracket. To me it is only horrible cash management and financial misconduct to take out a higher income. If you are employed it may make sense to maximize your income. Much of status in society is tied to your salary and if you can get some more money out of your job – why not? You have worked hard for it.
As counterintuitive as it seems people like me consequently decline pay rises and take a stake in what we work with. I know my net return will be much higher if accept options or equity and it gives me more influence at work. I pool this risk with other less risky investments and use my corporate structure to invest and further pool risk.
So what is at stake when taking a pay cut? You will be surprised at the petty difference. At one time, some years ago, one of my best friends had a salary of 65 kSEK per month whilst I took out a salary of 34 kSEK per month. He had another folly, a company car, and while he netted 33 kSEK I was not far behind with 27 kSEK. The numbers are easy to understand - to live with the social status of earning 34 kSEK per month I have learned is so hard for many people. Without equity or stock options it is a no brainer, but depending on the program it is usually a very sound financial idea to let go of the fancy salary.
A colleague from the med tech industry always resisted a pay rise and traded it for stock options. Over time he generated a healthy amount of stock options, left the company and sold the stock options to fund some real estate assets. These assets still provides him with a passive income enough to cover his living expenses and he is free as a bird to work with whatever he wants.
3rd law - invest early in what you understand.
A number of months out of the year I make more from my investments than my day job. Maybe it is easier as I take out a low salary...
Often I go in early and catch the lion part of the rise of the stock price. It is not easy. It seems I always sell too early. For example a couple of weeks ago I invested in Riot Blockchain. I went in at 7,50 and decided to exit at 11,80 three days later. This was clearly too early as it reached close to 24 two days later. Such investments are unicorns and notoriously difficult to time perfectly. Unsurprisingly it fell again and I made money on the rebound. I have made most of my profits in the market on rebounds.
To invest early is the core of my strategy to build myself financially. I study some companies and industries and learn what I need to know; typically market drivers and risk factors. Then I go in with a significant amount of money. In my salad days one such significant investment could be 500 or 1,000 USD but over time as my portfolio has increased so has the stake I put in one particular stock. I have been fortunate to beat index most of the years and sometimes with factor two and on a few occasions with three. If I foresee a bull market and do not have time to do the research I put my investments in index funds.
4th law - invest all you can
You should take this recommendation lightly. It is not for everyone. It is an outstanding recipe for worrying your partner so use this tool with caution. I have a steady cash flow from several revenue streams and some evergreen businesses. Thus I can invest all I have at certain times and literally go down in financial limbo. There have been times when my beloved wife opens our bank accounts and see we have less than 50 cents in cash and the credit utilized to the maximum. Sometimes I have also used some of the credit card very expensive credit. Sometimes you need fly close to the sun to make it.
At any time I can raise decent amounts through credit should I need to. So the exposure looks worse than it is. But the principle is important to me. One dollar today will be five in a couple of year’s time.
I invest all I can when I find something that is obviously priced too low or when I need to follow up an earlier investment at an attractive rate. There needs to be plenty margins of safety in the price of the asset you acquire and you need to do your homework. Sometimes it pans out, like with Riot Blockchain as I mentioned before. Sometimes the reward is miniscule and you have exposed yourself for peanuts. This summer I bought a caravan I figured was on sale way too cheap. Dealers asked for 199 kSEK for the same model and I got it for 125 kSEK from a couple that needed a quick sale. I estimated I would get around 145-155 kSEK. We used it for vacation but only came out on top with a marginal profit. Still, we had a really nice caravan for free for the entire summer.
5th law – life is a marathon not a sprint
The lion part of the profits I make I reinvest. So should you. It may not be sexy and it can truly wear you down to work hard and not reap the rewards. You will feel poor and like everything is expensive as you spend less than your peers. If you are serious about building yourself financially there is no option. So invest, reinvest and then reinvest again is the modus operandi. Over time, as your portfolio grows so does the returns and you are one step closer to your goal and can loosen the leash on your wallet an inch or two.
One true story that circulated Wall Street some years ago about me took place a couple of years after I left university. In my job I met with the CEO of a publicly traded company (NASDAQ) and he gave my colleagues and me the dog and pony show about the company. Everything was in accordance with Sarbanes-Oxley so everything was above board. After our meeting I went home to do my homework. I realized the book value of the company was five times the market cap and quickly called my bank to take out a personal loan. The same day I invested about 6 kUSD and sold the shares three months later for close to 25 kUSD and used the profit as a down payment for my first house. The house I subsequently sold with a nice profit and forwarded the compounded profit into new investments. You need to exercise the capital. If you win 7-8 times out of 10 you will compound your capital and just repeat the process over and over again.
6th law – invest when others do not and vice versa
You will run into few laws that govern your mission of building yourself financially. There are cycles of economics you need to factor in. Sometimes capital is plenty and then there are not many interesting investment opportunities around. The available capital in the world increases all the time. This results in lower p/e levels and less attractive or riskier investments. Surplus capital simply means no bargains, as all want a decent return on their assets. If you have read Alice Schroeder’s excellent biography of Warren Buffett “Snowball” you are well aware of this. These are signs of warning. One day there is a stock crash and 30-50% of your assets are gone. These cycles repeat themselves.
You are always looking to buy at a good price. Sometimes this is difficult to asses and very time consuming. You cannot trust the analysts either. I remember buying Ericsson at the very peak based on the only premise the analysts recommended it. Then they plummeted and my investment was basically gone. Luckily I invested at rock bottom and cut my losses on the rebound and eventually turned it into a decent deal.
At the point of surplus capital in the market the very last thing you should do is to invest. For the last 18 months I have been sitting on my money not finding anything worth investing. Then I had some time and found some opportunities and have exercised my capital to the full extent. In a matter of months I have made up for the loss during the passive period.
In its most basic way you can earn money by sourcing at cheap prices. This weekend I got about ten packets of a drink discounted with 20%. The dollar saving is ridiculously low but it took me very little time as I was already in the aisle. As long as it is something you would consume anyway you can rarely get the same risk free profit. Also, considering the time it takes to make purchases I regularly by two pieces of most things. If you have the working capital it makes sense to save time. You can always use some opportunity shopping to stretch your capital.
7th law - margins beat revenue every day
When people think of a business they typically think of an “all in” in scenario where you invest a lot of money and spend all your working time building your company. While this is often the case it is a limiting factor to assume it needs to be.
It is easy to get stuck in this thinking, because it is challenging to make money with a modest investment. If you can front 1-2 MUSD there are many investment opportunities around. If you have 30 kUSD and want to build a business things are more challenging. To start a business it really needs to be worth the effort and be able to fully support you, many believe. Naturally it always needs to be worth the effort, however the way you go about your business is more relevant than if it is a full time venture.
Over the years I have run a couple of businesses many would spit on. They do not generate any massive amounts of capital and you will struggle to live off them. They are local and will never make me financially independent. By themselves that is. They operate on super low costs, will never go belly up and provide a flow of revenues I can reinvest.
Again, it all comes down to perspective and for people too rooted in their beliefs it is easy to miss the opportunities. One such business of mine I invested time and about 10 kUSD upfront, which in terms of business cannot be described as anything but chicken feed. The very same business has returned the investment annually with a marginal work effort. When I worked with pet care products at Mars any time our bird feed product, Trill, came up people would chuckle a bit. No one cared for this product, as the volumes were small and the turnover petty. When we looked at the profit margin of the product the chuckles stopped. It was in fact one of the most profitable products of the Mars conglomerate.
So, if you operate a side business with surgical precision and keep the costs down it can turn into a cash cow for your investments.
8th law – get an LLC/AB
If you have any respectable side business get an LLC. It is a fantastic tool for investing that lets you only pay company tax and then invest with much better terms for risk pooling. One of the very best things I did was get my LLC. It is the piggy bank of piggy banks.
9th law – regularly lavish yourself with spectacular rewards
Some people live like thrifty monks all their lives. Ingvar Kamprad, founder of IKEA, famously detests if you throw away a paper clip and rumor has it he buys the cake from yesterday for birthday celebrations. Old habits die hard I guess, but what is the purpose of amassing great wealth only to spoil your kids. A lot of thought has gone into this and the take away message is: do not – you ruin them!
So while putting money on pile has the purpose to provide financial freedom there is no intrinsic value in thriftiness. I think it comes downs to values and habits. To some extent I can relate. I think no matter how much money I have would I fly first class or drink super premium champagne. Also, I think I am happiest in jeans and plain t-shirt no matter the size of my bank account.
What I have learned through decades of reinvesting is to spoil yourself and your family with extraordinary and spectacular experiences or goods where it matters. Bringing my big family to Asia for several weeks of vacation in a holiday home hits reinvesting but is a crucial part in order to maintain long-term discipline. It makes it easier to ask family members to stay thrifty and sacrifice what our peers view as bare necessities. So sometimes you can find this thrifty guy from Småland staying at luxury hotels, driving a sports car or simply eating a can of pea soup for dinner.