Three Ways To Ruin Your Financial Life

One of the most powerful ways to think that I picked up from Charlie Munger was this: reverse engineer everything. There are generally two ways to do this: first, you determine the outcome you want, and then you break down the steps in reverse order that would be necessary to get you there—and voila!—you suddenly have a blueprint to fulfill a particular dream.

The other approach involves finding happiness by avoiding misery. This means that you identify the life outcomes that you want to avoid, and then you draw up a path that would lead to those undesirable outcomes, so that you can catch yourself if you find yourself drifting in that direction.

For instance, the three leading causes of bankruptcy are:

(1)   Divorce.

(2)   Job loss.

(3)   Health problems.

If you want to be financially miserable, those are three great ways to get you there.

The defeatist personality would think something like this—I can’t control what kind of spouse my significant other becomes, my employer could fire me at any moment, and I could wake up with cancer tomorrow. Each of those statements are true, but they ignore an important part of the thought process—every decision that we make puts us on a path with a certain series of probabilistic outcomes, and it is our job to act in a way that tilts those probabilities into a direction that we find favorable.

If I find myself falling for a girl that spends her days browsing Pinterest for $200 Ugg boots and $5,000 wedding dresses, well, I might want to back off before things get serious so I don’t become one of those yuppie snobs that live are living paycheck to paycheck. Yeah, I can’t control what an employer does, but if I become damn good at mastering the law, there will likely be a place in any economy for the services I can provide. Yeah, I can’t control what my future health situation will look like, but I can make a deliberate effort to avoid the one vice that seems to destroy many otherwise promising young men: alcohol. That’s the kind of stuff I can control. When you look at your own life, you can probably make a good list of what it would take to put you on a path towards divorce, job loss, and health problems, and once you identify that path, you have a whole lot of power that can reduce the probabilities of you experiencing any of those three things.

What Charlie Munger taught me is that a lot of people tend to give up once they realize that they cannot control something fully, because it requires some kind of third-party cooperation or the necessity of good fortune. But what Munger points out is that we are a variable in the equation. We can make individual decisions that either increase or decrease the probabilities of realizing an outcome that we desire. I’m really thankful that Mr. Munger taught me that it is dumb to give up on the things we cannot fully control, because we can almost surely influence them more than we might initially think. And if we reverse engineer the process, we can make distinctly concrete steps that can get us to where we want to go.

Originally posted 2013-09-08 00:31:09.

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