Money is like water

Welcome to the letter this week.

To me, money and fitness are alike in a major way: you can find a challenge in each that goes deeper than the surface. On the surface, fitness makes you healthy and good looking; money makes you rich.

A layer down, there is more. There is a deeper level of pursuit in these arenas that allows you to grow as a person by facing insufficiencies in your own character. To be successful in either, you must deal with your weaknesses head on.

I have more to contribute on finances because it has been a path of growth for me. It has allowed me to recognize my shortcomings not only in my own finances, but it my attitude, beliefs and behavior. The path to improve financially has pushed me further into personal growth than I could have imagined. So, my aim each week is to contribute to others in a way this journey has contributed to me.

Money is like water 

Money is like water - it’s always moving.

It takes a reintroduction to money to grasp this. When you grow up, you are taught to save money. It’s a good principle. You put money in the piggy bank as a kid and are praised for it. Untouched, it will sit for years (unless you are young Tyler, spending it on football cards).

It feels like this money is secure in the piggy bank. You are learning a good habit as a child, but there is more to the story. In reality, that money isn’t doing its job. Money’s job is to grow. In the piggy bank, its stagnant and even shrinking each day due to inflation.  

If you were to zoom out from the piggy bank and look at the movement of money across the globe, you would see a different picture. Here’s where it starts: money is printed by the government. That money doesn’t stay stagnant. It immediately goes to the Federal Reserve and then is distributed into circulation through banks.

Now, many people picture bank accounts like money sitting in a piggy bank. If you deposit, $1,000 in the bank, you are under the impression it sits in that account. But that’s incorrect. When you look at your bank account, you see a number on a screen. However, as soon as you deposit the $1,000, it leaves. The number on the screen remains the same, but the bank puts this money to work. It lends your money to borrowers through loans. Your money isn’t sitting in the bank. That’s why you hear of old-time ‘runs on the bank’. Your money is never all there.

This is because banks know that real value isn’t in cash itself, but in cash flow. Based on your $1,000 deposit, the bank lends it out and earns cash flow through interest on that money. All the while, your $1,000 sits and devalues due to inflation. The bank may even be bold enough to offer you .25% interest on that savings account while they earn 4-8% in interest on it.

Staying zoomed out on the world, you would see money flowing like this by the minute. Individuals, corporations, and the government are constantly buying and selling stocks, loans, bonds and more. You would see the value of money isn’t in its existence, but in its movement.

When you understand this, you can start to make change in your own life. You can position yourself to where money flows to you. It just takes a little knowledge and decision making.

The power for the individual in the US financial system is in taking ownership of your situation. The requires you to learn the basics of cash flow and position yourself differently, which is entirely possible in a few simple steps.

The banks understand these rules and they win within the game, year in and year out. The good news is: thanks to the US financial system, the game is open to new players. And the rules to the game are different than you think. Once you learn the rules, you can start winning too.

Money flows up 

Money is like water, but not like a river. It’s more like a backwards river – it flows up. The US economy is built to facilitate commerce through corporations, so money doesn’t just move around, it flows up. It goes to the business owners.

This is why the US is the world’s leading economy. We have an unprecedented financial system that rewards business owners for creating businesses that provide valuable goods and services. This is why we are the richest nation in the world and have the best standard of living – money flows to those that create value over time. So, businesses that create value for their customers are rewarded in cash flow.

Here's a recent example of how money flows up to business owners: during COVID, the government made cash payments to the public. This looked like genuine support to people during the government-mandated shutdowns. But, the government and big businesses knew what it really meant. Unless that money got stuck under a mattress, it went back into their system and flowed upwards.

The money was direct deposited into bank accounts (we know what happens there) and then it got spent. Yes, people made legitimate purchases with this money. But, every dollar spent flows upstream. It went to businesses and subsequently, to business owners.

If you went out to eat, business owners made money. If you put it in the bank, it was loaned out and the business owner made money.

Even if you bought stock, that business owner benefitted. No matter where the money went, the business owner benefitted.

The government and big businesses knew exactly what was going on with the COVID bailout money. It was making its way right back to both of them – to business owners through purchases and to the government in taxes. This was another iteration of the same game.

Again, money flows up. Even if they redistributed all wealth evenly across the country today, the business owners would be the wealthy ones again within five years.

Hopefully, the picture is getting clearer. It becomes obvious that the only way to take ownership of your finances is by getting in the game yourself.

We get in the game by becoming owners.

The beauty of the US public stock market is that business ownership is not limited to the founder of a business.

Each and every American can become a part owner of the best and largest businesses in the US. This is how you get in the game.

You can position yourself upstream for the first time. This is how things change.

Imagine this: you are a part-owner in every one of the companies on the Fortune 500 list. When someone spends a dollar at Walmart, Chipotle, Home Depot, Apple or the hundreds of other businesses you own, you benefit. The money you invested in those businesses no longer sits, like in a piggy bank. It goes to work for you. While you are working, eating or sleeping, your money is now making more money. This is an asset. An asset is anything that makes you money without you having to work for it.

You might have gathered that I just described an index fund. This is a primary example of an asset that you will likely own on this journey. I will write more on specific assets in the future. The mechanics of owning assets like this are quite simple. The struggle many have is that they don’t understand building assets is the path to build financial independence.

Each dollar you invest in owning assets builds your position upstream, to where the money is flowing.

The system either works for you or against you. There is no middle ground. And nobody is coming to rescue you. The banks will continue making their interest. Businesses will continue to profit. The government will continue to take their taxes. All the while, you will work for a salary, pay taxes, pay interest and contribute to other businesses. The story ends there until you adopt the mindset of becoming an owner of assets yourself.

Getting in the game 

This is where the practical steps come in. Getting into the game as an owner takes some foundational steps and knowledge to begin. 

I have listed here some of the principles that have benefitted me financially and can serve as a foundation for you to move forward from. 

In the near future, I’ll be publishing a free downloadable guide that will deep dive on each principle so you know how to execute on them. For now, I hope these principles provide you some benefit and encouragement. 

Be willing to own your situation

When my wife and I got married, I had no financial knowledge, and I was $20K+ in debt. Lucky her. But, I was willing to learn and change. If you aren’t where you should be today, that’s ok. Just be willing to take one step. That’s how it was for me. It was a step-by-step journey, but now we enjoy working together in our finances. And I found out I love it.

This first step requires you to take inventory of where you are currently. Does your inner voice say you should be making better financial decisions? If so, do you want to take ownership of your situation, take the necessary steps, and find the peace of mind that comes from being on the path to financial independence?

Know how much money you make and spend

You have to spend less than you make. It seems obvious, but this is why 61% of Americans are in credit card debt. You have to control which way the current goes.

*Practical step: Export your bank and credit card statements to excel, then add it up. This will tell you where you are today.

Avoid high-interest debt

My wife and I made an agreement from the start that we will never allow ourselves to leave a credit card unpaid. We do not allow ourselves to overspend on a credit card. We have kept this 100% of the time since the start.

If money is flowing upstream, you are dumping it in that river by the bucket if you are in credit card debt, because you are paying interest at 20%+. No matter your financial goal, this is a no-go.

Know your financial independence number

This was covered in last week’s letter. You need a target, otherwise you can’t make decisions today.

Get your liabilities under control

Liabilities are all the things that cost money, rather than make money. You need this ratio correct within your finances.

For example: aim to spend less than 25% of your monthly pay on your mortgage. Yes, you mortgage is a liability. More specifics to come in the free guide to come.

Start identifying assets

When you manage your spending on liabilities, it allows you to shift more into assets. Again, liabilities are things that cost you money. Assets make you money.

This may be the simplest to execute on, as the first steps here for most are $401k, IRA, and low-cost index funds. More on this in the free guide in the coming weeks.

Take advantage of the automated investing plans provided to you

Investing is assets is power. Automating your investments into assets is a superpower. Payroll deductions going directly to your $401k are a perfect example of how automation works for you. Once you set it up, the decision is made for you and it requires no maintenance.

Stay encouraged

It takes time and diligence to achieve financial independence. When you get into the game, you will see that it takes time for the market to start working for you. But in time, it will. All you can do is prioritize and execute on each next step in front of you.