In Episode 7, we’ll talk about the importance of luck in relation to FIRE. Luck is incredibly important for breaking into “the top 1%.” How important is it for FIRE?
What you’ll learn in this episode:
- Why luck is hugely important in life to get to the very top
- How, even though you can’t control luck, the factors you CAN control can get you to FIRE if you plan thoughtfully and work hard
- Plus, the simple strategy and mindset you need to do this
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Links mentioned in this episode:
- My Top 5 Free Tools For Building Wealth And Minimizing Taxes
- HYW episode 2: My 4×4 FIRE framework for creating and protecting wealth
- Mobility Report Cards: The Role of Colleges in Intergenerational Mobility
- NYT: Extensive Data Shows Punishing Reach of Racism for Black Boys
- NYT: Income Mobility Charts for Girls, Asian-Americans and Other Groups. Or Make Your Own.
- NYT: What College Admissions Offices Really Want
- NYT: Getting Into Harvard Is Hard. Here Are 4 Ways Applicants Get an Edge.
- Robert Kiyosaki: Rich Dad, Poor Dad
- HYW private Facebook community
Read this episode as a post:
Okay, thanks for tuning into the hack your wealth podcast again.
Today I want to talk about luck and the role that luck plays when it comes to financial independence and how you can still be relatively unlucky or non lucky and still achieve financial independence.
So I want to talk about how luck is hugely important in life to get you to the very tippy top, but you can’t control luck.
You have to work hard because your own actions are the thing that you can control.
And that can still get you far, like to the top 5-10% of life, even if you aren’t particularly lucky.
And to achieve financial independence, you don’t strictly need to be in the top 1% or 0.1%.
The top 5-10% is well beyond what you need to get to FI and most people do it with less than that.
So even if you don’t break into the ranks of say, the super rich, you can still become wealthy enough to achieve FIRE, financial independence, retire early.
And we’ll talk about the simple strategy and framework you need that actually is in your control to do that.
So I’m really excited by today’s episode because I think it can often be easy to look at people who you know, retired at 30 or became really wealthy because of some windfall in their life and say all well, it’s just all luck or it’s predominantly luck.
So what are the things that I can do that are within my control, even if I’m not lucky and still achieve financial independence. It is possible, even if you’re not particularly lucky.
So I hope that this episode helps motivate and inspire you to understand that much of your financial independence is actually within your control.
Okay, so related to this I also wanted to mention that you can grab the freebie for this episode, which is the top five free tools that I use and recommend, all the tools are free, to build wealth in my own personal journey.
And you can get this generally, you know, on the hack your wealth website, but I think it’s particularly relevant to today’s episode, which is why I wanted to link it as today’s freebie so you can get that at hackyourwealth.com/7 which is the link to the the show notes for today’s episode.
Also, before we dive in, I wanted to, as always invite you to join the hack your wealth private Facebook group.
It is a forum where we can connect and have a two way dialogue.
I am in there every single day and I try to respond to every question and every comment.
And it’s a just a good group of people, a growing community of people, who are in there to ask and learn about financial independence and early retirement, tax strategies, real estate investing side business income, online income, career questions, and just asking generally for advice about personal finance issues that they’re thinking about and learning about.
Okay, now for today’s subscriber review.
Today’s review comes from happy smiles, who writes great podcast love the practical and actionable tips on all things financial independence, especially the focus on frameworks and advanced strategies.
The tax efficiency strategies are great because that’s is what you have most control over as an investor.
Well, thank you so much for the kind words happy smiles.
So glad to hear you are getting value from the podcast.
And to other listeners out there, if you are enjoying the podcast and learning a lot, please consider writing review for us for the podcast on iTunes or Spotify.
It does help us get visibility there and helps other people who are looking for this type of content, find our podcast, so definitely appreciate it if you could take a minute to help us do that.
And thank you so much in advance for it.
All right, let’s move on with the show.
Okay, so I want to start the topic today by sharing the story of how I met my wife.
I met my wife on an online dating website called OK Cupid and prior to meeting her I hadn’t really done online dating before.
My wife was actually the first person that I met in person from a dating website.
And then she’s the person who I ended up marrying.
So basically one and done, and shut down my account.
I could not have planned that out.
That was just pure luck and timing right place right time.
And I could have just as easily missed her if I was a little bit earlier or a little bit later or just using a different website or whatever it is.
Now, certainly, I think I had things to offer like I feel like I was a catch to some level.
I’m well educated, I have a good job.
I like to think that I’m a good person interesting to hang out with, reasonably funny, passable looks, don’t look like quasimodo, and I spent a good amount of time writing my profile, making sure my photos were good, my profile was well written, and all that hard work all the way back from my upbringing and school throughout my career.
Finally, spending the time to write a good detailed profile.
All of that was necessary.
But luck plays a huge role too, because there are lots of people who do all the same things, but they don’t get as lucky and they still end up on bad dates or in relationships that don’t work out or just takes a long time to find a suitable companion.
And I think those who are unlucky, may have difficulty finding a companion at all, but the merely non lucky may just take longer to find that person or recognizing that they have found the one may not be immediately clear and may only become apparent after you know a long period of time.
Whereas someone who is lucky may find that person quickly.
Or if it takes time to find that person, they may at least realize it quickly that they have found the one.
So either way I think clarity, in a way, equates to luck here in in terms of dating.
Now, I’m sure every one of us has a story about a relationship that didn’t work out.
It’s luck that creates the conditions where you find “the one” as the very first person you meet on an online dating website.
That is unusual.
And so I think the lesson here is that you shouldn’t discount the importance of luck. It is very important. It can be very important in setting the trajectory of things.
But at the same time, you still have to work hard because you can’t count on luck. By definition, it’s luck.
So you still have to work hard on the things that you can control to better your situation.
And that will help prepare you to catch luck when it comes.
I was very lucky that I happened to stumble across my wife’s profile very early on, and she was the first person I ever met from an online dating website.
But it like there is still connection and chemistry and compatibility that’s involved.
And that had something to do with all the hard work that I had put in from my schooling days through my career through even just you know, investing in time and effort to write a really thoughtful profile.
And then also, just personality things where there was just a click, but what my whatever my wife saw me.
Some part of that was also due to my hard work throughout my life.
It wasn’t all just because of luck that we ended up together, stay together, got married, built a family.
And so this is actually really relevant to the message of today’s episode because just as in matters of love, where hard work alone may only take you so far.
And you need some luck in matters of finance and financial independence.
Hard work alone also tends to only take you so far luck plays a really really important role.
But there is one important difference: and that is that someone looking for a companion who works hard, may still never find that person or may feel they have to settle if they are unlucky or non lucky.
But someone who works hard when it comes to their finances will achieve financial independence.
I don’t care what your income level is. If you work hard, are very disciplined, you follow the framework I teach on hack your wealth, you will achieve FI. 100%. No exceptions.
Where luck comes into play is the DEGREE of financial independence.
And let me explain what I mean by that.
There are levels of financial independence.
Level One is the basic level where your investments or your passive income, cover your basic living expenses, no luxuries, just what you need to survive.
So no vacations, no discretionary indulgences.
And if you’re in the top 30% of people, you can achieve this level of FI.
Level two, second level, is where your investments passive income cover your basic expenses, plus any expenses you normally have, such that you feel no change in lifestyle whatsoever, before versus after quitting your job.
So this would include things like being able to still take vacations, buy little discretionary luxuries.
For obvious reasons, this level is much harder to attain than the first level because here you’re probably now in the top 5-10% if you truly have to sacrifice nothing after quitting your job.
Then there’s level three, third level, that’s financial freedom, not just financial independence, its financial freedom, where you have total freedom to do anything, go anywhere, buy anything, and this is like, top 1% even top 0.1% territory.
In personal finance, hard work can definitely get you to level one.
If you work very hard and diligently, don’t make too many mistakes, hard work can also get you to level two, it may take you a little longer, but it’s achievable.
But to get to level three, you need more than hard work, you need a good dose of luck.
And I think one of the myths that people hold is that hard work alone can take you to the top with no limits.
But to actually get to level three, the top 1% or top 0.1%, the reality is that hard work is not enough. Luck is incredibly important.
And that starts with the family circumstances that you’re born into.
A couple of years ago, some faculty economists at Stanford, Brown, the University of California, Berkeleym published a study called: mobility report cards, the role of colleges and intergenerational mobility.
I’ll link to it in the show notes so you can check it out later if you’re interested.
And it was about the role of luck versus merit and upward economic mobility in America.
And they basically graded universities on how well they facilitated economic mobility and they wrote up these mobility report cards for each institution of higher learning in the United States and to infer mobility, they matched up the data from the US Department of Education with 30 million tax returns from the IRS.
And they constructed a data set that showed income distributions of graduates of different colleges, ranging from elite Ivy League schools to more mediocre universities, and how incomes after graduation actually correlate to how rich the graduates PARENTS were.
How rich their parents were.
And unsurprisingly, the data showed that going to an elite university will definitely give you a big leg up in terms of achieving an upper middle class life.
So, for example, Ivy League graduates and graduates from similar caliber universities basically had the same chance of getting to the top 20% of the income curve, regardless of their parents or family backgrounds.
So they they get to that level at similar rates.
Call that somewhere between the level one versus level two financial independence that I just mentioned earlier. Somewhere between level one and level two.
The pathway to the upper middle class is also doable for graduates of lesser known universities.
So not the Ivy Leagues or similar caliber universities, who studied practical, generally technical majors.
Because you know, as you might guess, your earnings are influenced by what you study, not just where you’re going to college.
So on average graduates of engineering schools like Kettering, or the Stevens Institute of Technology, did similarly well as your average Ivy League graduate.
But keep in mind that’s comparing across ALL Ivy League majors, not just technical or engineering majors.
And it’s also not comparing the variance, the range.
It’s comparing all the average Ivy League grads together.
So what this suggests is that basically hard work can get you pretty far, can get you to the top 20%.
But what about breaking into that third level, level three, the top 1% or 0.1%.
And here it turns out hard work and good education alone is not typically enough.
It’s not generally enough to lift someone who is merely upper middle class to someone who is truly financially rich.
Not many engineers and pharmacists can break into the top 1%.
The top 1% is dominated super heavily by Wall Street bankers, financiers, lawyers and the like.
And in the financial industry and in these professions, recruiters place a super high premium on pedigree.
And the Ivy Leagues play a very outsized role here.
Elite graduates from Harvard and Yale are much more likely to end up on Wall Street.
And the data clearly shows that getting into these universities is MUCH easier if your family is already rich in the first place.
The studies showed that at Ivy plus colleges, so Ivy League universities plus Stanford, MIT, Duke, University of Chicago, these schools, more than two thirds of undergraduates came from families in the top income quintile.
And fewer than 4% grew up in the bottom quintile.
So more than two thirds came from the top 20% of society.
Fewer than 4% came from the bottom 20% of society.
And at the very most selective colleges, low income students are even rarer.
So at Yale, for instance, the study found that just 2.1% of the student body came from the bottom fifth of the income distribution from society.
And between 1999 and 2004 just 2% of Princeton students came from the bottom quintile, whereas more than 3% came from the top 0.1% in terms of income distribution.
In other words, the most selective colleges in America are also the least socioeconomically diverse.
And to make matters worse, admission to elite colleges is further skewed by preference that’s given to legacies, which are alumni families, families where there were prior alumni or generations of alumni that attended.
In Harvard’s most recently admitted class, 27%, more than a QUARTER of undergrads had a relative who also went there.
And in fact, data was revealed in the recent lawsuit against Harvard affirmative action, showing that if you’re a recruited athlete, or legacy, or a rich donor, your odds of admission are 45%.
That’s 10 times the average admission rate at Harvard.
If you’re the kid of a rich donor, AND also a legacy, forget it.
The odds of admission reach like 70 plus percent, 70 plus percent!
There are state universities who don’t have admission rates that high.
All this suggests that really the simplest way to become extremely rich, and then subsequently to ride the conveyor belt into working in finance on Wall Street, is heavily driven by going to the right university, which in turn is heavily influenced by simply being born rich, being born to the right family – and better yet born to rich parents who also graduated from that Ivy League school.
That’s why with good education and hard work, there is a real path to the upper middle class, maybe even the top 5-10% if you work VERY hard.
But to crack the top 1% is a lot harder, like insanely harder, because there are all these structural networks and biases that create a ceiling for anyone who didn’t already come from a family in that elite circle.
Not saying it’s impossible.
You can always find examples of rags to riches success stories, even ones that got into the top 0.1%.
And those often gets celebrated in media news stories.
But what I am saying is that the probabilities, the odds, are SO skewed against you, so not in your favor if you come from an average family, even if you work hard and have merit, that it’s functionally impossible.
And that is where pure luck of being born in the right circumstances to the right family, the right legacy, whatever, gives you a big boost.
So given this, what can you do?
If you already come from a rich family, good on you, you got lucky, god bless you.
But if you don’t come from a rich family and the odds are against you for breaking into level three, that top 1% or top 0.1%, what can you do?
Well, you should take comfort knowing that, first, with sufficient hard work, it is still possible to break into the top 5-10% in a more realistic way.
You have to work very hard, but it is doable.
And that level, that top 5-10% level is more than you need to achieve FI, to achieve rock solid financial security at an early age and live a life of relative freedom.
Freedom to pursue the things you want to pursue, freedom to spend your time the way you want to spend it.
The best and most efficient way to do that is to be really efficient at implementing the framework that I teach here on hack your wealth: earn, save, invest, protect.
The four by four FIRE framework. Check out Episode Two for a refresher on that, where I laid out the framework and gory detail.
And not just implement the four by four framework, but in particular really emphasize the earn, save, and invest parts of the framework for accumulating and multiplying your wealth.
So, if you have ever read, for example, Robert Kiyosaki’s book, Rich Dad, Poor Dad, it’s one of the classic personal finance books out there, you know, his philosophy of pay yourself first.
When you get your paycheck before you spend it on anything, pay yourself first.
Set money aside into your retirement and investment accounts.
You spend what you have leftover. You don’t save what you have leftover.
And you should absolutely do that. And if that’s not your mindset, you need to shift that mindset quickly.
Because here’s the thing, the way you get to FI quickly is to make your assets work for you by earning enough money for you that you can replace your salary income without taking a hit in lifestyle.
Early in life, your job is going to be your primary source of income, because you have no assets, but you have your labor, you have a strong work ethic.
And so you use that to make money.
But you have a pay yourself first mindset and discipline to squirrel away as much of your earnings as possible, and turn them into assets, into little soldiers that can go out into the world, make you more money, bring back more dollars, more soldiers, and rinse and repeat.
As you get older, those proportions eventually invert.
And eventually your assets, whether they are dividend stocks or real estate, online business or whatever, are actually bringing in the majority of your income. Not your job.
And clearly, I think we would all say that, at that point, you for sure have FI, because you’re earning more money outside your job than inside your job.
And so that should be a clear indicator that you can you can leave your job.
And the more disciplined you are about this, the more you know you’re paying yourself first, investing wisely, letting compounding work its magic, then the faster you will reach that crossover point.
But honestly, you don’t even need to reach that crossover point to achieve financial independence.
That first level, that first threshold of financial independence, occurs when your assets are generating enough income to cover your expenses.
And that’s most likely going to be a lower number than the crossover point where your assets generate enough returns to exceed even your job income.
So you can think about these things in terms of those tiers. And that is really the message that I want to leave with you.
You cannot easily control the luck that lands your way, the circumstances you were born in, how rich your parents were, whether they were legacy alumni of Ivy League colleges.
And for that matter, you can’t control the lucky accident of landing on your future spouse’s online dating profile and that person being the first person you ever meet in person from the dating app, and then being one and done with it.
Both those situations are lucky accidents that you don’t control.
But you can control your actions, your hard work, your discipline and following the wealth building framework that we teach on hack your wealth.
And even if you only work very hard on doing the things that ARE within your control, that will take you far.
So takeaways from this, again, are, there are these three levels of financial independence.
And hard work alone can get you to the first level for sure. The second level, if you work very hard, that is possible, doable, and doesn’t really depend on luck either. And that can get you firmly into the upper middle class.
But to break into that third level, the top 1%, 0.1%, hard work alone is typically not going to be enough.
It’s not impossible. It’s just extraordinarily difficult.
And luck plays a huge role.
Sometimes it’s the kind of luck where you just happen to strike gold.
Like if you started a company and the product just took off. You just nailed it.
But more often is the kind of luck where you were just born into the right circumstances, you were born wealthy into a family with privilege and connections.
And that, in turn, propels you into the top echelon, too.
But even if you don’t have these advantages, we also talked about how hard work, even if you’re not particularly lucky, really is enough to get you into the top 5-10%.
And you do that by diligently following the earn, save, invest, protect framework. The four by four FIRE framework.
You always pay yourself first, invest that money into return generating assets, like stocks in real estate, and you do that over and over and over again, month after month, year after year.
You let compounding do its magic until your assets start gaining traction generating income that rivals your day job and eventually overtakes it.
Then you’re financially independent, you’re financially free, at some level, at that point, and depending on how much you earn, how much you save, how consistent you are with, it may take you 10 years, 20 years, even 30 years
It probably shouldn’t take you longer than 30 years to reach that level two, or in between level one and two status.
Or else something is something probably went awry during the years.
But whatever the timeline of your circumstances, whether you’re on the faster end or on the slower end, if you follow this simple framework, you will achieve FI. 100%. It is as simple as that.
So, hopefully that gives you some useful perspective, some inspiration and motivation, that the keys to FI really are within your control.
It is your actions, your habits, your behaviors, day after day, month after month, year after year, that shape your outcome and your financial future.
Okay, again, please be sure to grab the freebie for this episode, which is the top five free tools that I personally use and recommend.
To build wealth, I use these all myself. They’re all free.
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All right, thanks for tuning in. Next week I’m going to be talking about estate planning. This is a very big topic, very important.
It is part of the protect part of the four by four framework earn, save, invest, protect.
We’re going to be covering over wide range of topics related to estate planning, why it’s important, what the goals are, who it’s for, what you should be doing at different phases of your life regarding estate planning, and I’m also going to be walking through a very comprehensive checklist framework that can act as a guide for you when you start creating your own comprehensive estate plan.
So it’s going to be action packed, be sure to check out that episode, I probably will actually break it into two episodes. It’s that important.
And it’ll be really informative when it comes to your own efforts to build an estate plan so you definitely don’t want to miss that.
Okay, see you next time.