Money Rules aren't enough - 7 pillars of money mindset

You can follow all the "right" and safe money rules and still feel like you're never getting ahead. You can save all your life, or invest since your first paycheck, and work really hard, but never get anywhere. Yet some people go from rags to riches, building top companies on their own. And what i learned is that money does follow some rules, but mostly it follows a mindset. So here are the 7 pillars of the money mindset you need to understand to become a money magnet.

Watch this on Youtube or listen on Spotify Podcast

So, here's a system to make more money. They are: foundation, movement, and alignment. So, what does it mean? The job of alignment is to make sure you use the upside, and protect the downside. The job of the foundation is figuring out what actions drive the money, from who and what it takes to get a good outcome. The job of movement is doing actions that compound you money. 

Starting with pillar number one: act fast, compound slow. This is clearest when you look at trading vs investing. Trading means that you can make small amounts on the movement of stock or index price, while investing means that you buy and hold the stock, usually combined with paid dividends that are reinvested. In theory, you can have a lot of small actions with trading that will give you profit even if the price just chops, without a clear up or down movement. However, in 90% of the cases if you simply buy the stock, and reinvest its dividends into more of that stock, you will beat any trading results you could have with a similar budget. The market trend is usually mentioned at 12-15%, so it only takes one good investment to have that result. While with trading, by definition, it’s a lot of transactions, and if you take a loss on one, you lower your end result significantly, as you need to retake previous steps. If you simply invest, the net worth will be most likely several times bigger, as you can have more structured and deliberate actions.

So if you need to act fast and compound slow, what is speed and what is time? Speed is noticing an opportunity, interpreting it as such, and acting on it. So it’s a timeline between the seeing and acting upon that. The shorter the timeline, the better the money result usually is. So what does slow compounding mean? IT simply means that once you decide on something, you hold onto it for a long time. First, there might be no movement at all, or maybe even some regret, if you have some other opportunities that would need this cash elsewhere. But if you only made a good call on something, just hold onto it until it proves or disproves itself. So not back out of something simply because there’s seemingly no movement. Some people often expect immediate results, in today’s world. But you actually need to act fast, while the results might take time. 

Warren Buffet and Charlie Munger were masters of this idea. They were holding onto some stock forever. And their company, Berkshire Hathaway compounded at almost 20% annually. They beat the normal stock index by almost double, while their total return over 60 years hit 5 MILLION percent. So remember, compounding wealth takes time, but you need to act fast, when you see a good opportunity. When it comes to money, it’s best to have time on your side. 

Once you understand the impact of time and speed, the next question is, how can you actually benefit from that time? You need to know, the person who inputs the money controls the outcome. And that is pillar number two. The person who inputs the money, has the power. 

Let’s analyze the top of the most rich people in the world list. You can get rich from a salary, a stable income. This is the most obvious way. The second way of earning money is to sell a business. And third, is to continuously grow and build companies and opportunities. Technically there is another group of wealth that is inherited, old family money, but here we’re only dealing with self-made wealth. 

So how many do you think people in the list of richest in the world, are from the salary income? Well, zero. At least not on the salary alone. And what about people who sold their businesses? There might actually be a few. But the people who create and continuously build their businesses are the vast majority of the wealthiest people in the world list. 

Because if you actually input the money, you have all the power. And even companies use money to buy out and grow other businesses. Google bought Youtube, Facebook bought Instagram, Elon Musk bought Twitter/X. And all those buy-outs outgrew the previous ownership. It’s all about building the businesses up using owned wealth resources. 

Even if you look at something small-scale, like a real estate market in any given city. If there are no buyers, there is no market. It’s because it is the buyers that unlock the value of things. And however you look at it, it’s the buyers that have all the power, as they give the money and they control the terms. 

Pillar number three. Leverage. Let me give you some examples of great use of leverage in our lives. If you buy a house for cash, and you pay one million dollars, and after 3 years, it goes up 10% to 1.1 million, you just got the 100000 dollars profit on that. But if instead of using cash, you will get a loan, for 800 000 for example, and you put 20% down, 200 000, after those 3 years, you get 50% more than your original investment. That is how leverage works. It multiplies everything. 

Leverage even creates a whole industry on its own. Private equity is where people can invest in companies and unlock their value for them. It works exactly the same as in the house example, just getting a commercial loan for the business, instead of a mortgage. They buy a company with a loan, grow it and tweak it and make it better, using their money. This whole trillion dollar industry would not exist if it was not for the leverage. 

Let’s also talk about how the richest save money on taxes by using the right leverage. For example, Elon Musk. When he bought Twitter, instead of selling all his equity holding in Tesla, and buying Twitter using that, he actually borrowed against his Tesla stock. And when you borrow against your Tesla stock, the stock itself becomes the collateral. So basically, if he would default on Twitter, the bank would just take the Tesla stock from him. That is how he was able to take those 44 billion dollars of a loan against Tesla stock and go and buy Twitter. He was leveraging his position in Tesla without it becoming taxable, and then used that to buy an asset that became significantly bigger over time. This is exactly how leverage multiplies everything. 

Many people think that leverage is simply debt, and that all debt is bad. The truth is there is a wrong way to do it and a right way to do it. The right way to do it is to first and foremost educate yourself on the risks involved here. Also, you need to choose the best collateral. For example, when you get a mortgage, your house is the collateral. When you’re buying a building, it’s the building that is the collateral. If you borrow against the stock of some company, the stock is the collateral. That all makes it doable. However, the most important thing about leverage and good debt is that it’s not taxable, as it’s not an income. So you basically get a lot of money with zero tax. There is interest however, so one of the risks you need to take care of is obviously making sure the investment has positive cashflow, to take care of the interest rate for you. And this is the main limitation of leverage. In itself, it doesn’t provide the cashflow. You need to take care of that separately. Leverage is just a multiplicator of the impact you can make. 

And that’s how we get to pillar number four. Cash flow keeps you alive, while equity makes you stable. Cash flow is what you need to fund your life with your current lifestyle. It pays the bills, the mortgage, the loans, the car payments, the trips, restaurants and vacation. Cashflow gives you the money you need today. Equity is the wealth that you create for the future. 

So what is the best way to own equity? Well, the best way is to own your own business. But that may not work for each and every one of us. 

The second best way is to own a piece of someone else’s business. What does it actually mean? There are a lot of companies that are publicly traded and you can buy their stock. Like Amazon, Tesla, Google, just to name the few. But there are thousands of them to choose from. They are all companies you can buy shares of. The only thing you need to do is determine how you can use your cash flow to buy a part of someone else’s business. As at the end of the day, you either have your own business, and the equity in your company, or you have a piece of someone else’s company. Both ways, you need the equity to make you stable, and free in life. 

Do you know the McDonald’s story? There’s a great “The Founder” that tells the whole story. In short, McDonald’s business is not about selling burgers. Burgers are the business of a single McDonald’s restaurant. However, the company as the franchise is in the business of royalties and owning land. They actually buy real estate that they lend you for money to build a restaurant on. That is their main part of business. 

And here’s the tricky part that gets so many people to get stuck on. High earners chase stability and safety, but real wealth happens when you understand how risk and reward ratios work. 

Pillar number five is that risk and reward are not linear. Let’s say you have an investment company that backs startups. Most startups don’t actually make it. So let’s say you make five investments of $20,000 dollars each. So the maximum amount of money you can lose is $100,000 dollars. And imagine the first investment goes to zero. Same for the second one. The third one barely breaks even. The fourth investment goes 10x, and the fifth one goes 100x. Just with these two last investments, your company recaptures all the losses and makes a huge 100x profit. So you invest $100,000 dollars, and make a 100x more that amount. 

The risk and reward are non symmetrical and non linear. You don’t want to be in a game where $100 possibly gets you another 100$. You want to be in a game where $100 gives you $10,000 worth of return. Your job is to maximize the upside, the reward, and limit the risk, the downside. That’s exactly how venture capital companies work. You need to diversify and spread your investment between potential winners. As the easiest way to lose money on leverage is to go all in on just one thing. The goal with using the leverage is to just keep playing, not betting it all at once. 

And this brings us to pillar number six. Don’t bet everything you have for a potential win. Some people take huge, couple hundred thousands loan for one deal that seems too good to be true. And then it usually is. Some people lose within a couple months the savings they accumulated for 15 years or maybe even a lifetime. 

There’s a lesson here to be learned. It’s about sizing the bet. For example, in trading, there’s a rule that you don’t bet more than just a couple of percent of your portfolio amount on one thing. Some say it should be 1%, some say it can be 5%. But nobody is saying 20%. So you don’t risk 20 years of saving on one investment, especially if it’s brought to you by some friend or a family member, who may not even be well-educated in investing. 

The best way to approach sizing the investment is to look at risk and return. Let’s imagine the risk has an index. For example an investment with a risk of 200 can give you a 10% return. Can you reduce the risk to 140 and still get the 10% return? Or maybe you can get it to 75 risk, while the return reduces only a tiny amount to 9%? This would be the best investment. 

So it’s your job to reduce the risk while keeping the return exactly the same. Usually the biggest mistake is when people do the opposite - they try to increase the return without paying attention to the risk. That’s not how the richest people do it. 

And there are two lessons here. One, protect the golden duck that gives you golden eggs. Protect the machine producing investment opportunities. And two, cap the downside, and then reach for the upside. And once you size your bets to keep playing the game, and to stay alive, the next protection layer is very simple. You diversify only where there’s an unknown. 

Pillar number seven. Diversification is a hedge against ignorance. Financial advisors tell you to spread your money across everything. But all the rich people I know do the opposite. There is even an anecdote about Warren Buffet and Bill Gates. Bill Gates had a lot of Microsoft stock, and Buffed advised him to diversify the portfolio. He listened to the advice in 2000, and his diversified portfolio is now worth around 100 billion dollars. Had he not listened, it would be worth 1.4 trillion dollars. Over 10x more. Was is a good decision?

When you don’t understand something or you don’t control something, you’re just hoping that it works out. The formula for investing companies has two parts. One is the risk, and the second is control. When you understand the risk and you have control, it tells you whether you can concentrate or diversify. When you have control and understand the risk and have means of mitigating it, you can put all eggs in one basket, as you know everything about the business, which is your business. What if you understand the risk but you don’t have control? It’s ok, but you can diversify it a little bit, you can buy both Apple and Google stock equally. You can still invest as you understand the risks. And if it’s the opposite, you have control, but you don’t understand the risks? Well, it can happen within your own company - you just need to hire or partner up with someone who knows what they are doing as the CEO or other C-level in the area where such expertise matters the most. And when you neither understand the risk nor have any control - that’s where you actually spread the best out. This is full diversification mode. 

That is why most entrepreneurs have their entire investment in their own businesses. For example, Elon Musk or Jeff Bezos or Mark Zuckerberg. They all understand the risk so deeply that they don’t need to diversify from it. They own all their stock and all their equity because they have the insider information, they know the plan, and control and influence over the risks to build and grow their business accordingly. 

So why did Bill Gates sell Microsoft stock? He did it when he left the CEO chair, putting Steve Ballmer in charge. So while in hindsight, it seems like a bad move, potentially losing a 10x profit. However, since he was no longer influencing the company nor having a direct control over it, it was actually a good investment move at the time. 

So there you have it. 7 Pillars of the wealth money mindset. You have to know to use them all as a system to make you money.

Here are some questions you need to ask before investing in anything. 

One, can this compound? Meaning, is this a good long-term investment?

Two, who has control? You or someone else?

Three, what happens if it goes down to zero? Do you get some or all of your money back?

Four, what is the risk to reward ratio?

And Five, do you understand the risks? Meaning, can you clearly explain how the business works and what could go wrong? 

When you have all the answers, you can then decide whether to invest or move on.

Now that you have all those pillars of money mindset, the next step is knowing how to apply them in actual life decisions. We’ll talk about that in the near future.