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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9 thoughts on “Three Ways To Ruin Your Financial Life

  1. sameer syed says:

    Tim, this is a great post full of wisdom! I wish I realized this much earlier than I did; life would just be fantastic! Wish the best to you, thanks

  2. says:

    I enjoy your articles, Tim. I think one thing all of your followers share in common is an appreciation of the grass roots value of delayed gratification. This simple value is at the heart of not only investing discipline but also flows over into one's marriage and career. I think our country is currently drifting away from this core value and into one of immediate gratification. In fact, I would go so far as to say that the drift toward immediate gratification is the root cause of the poor savings rate, lack of college savings, high divorce rate, and lack of graduates from the most challenging fields.

    As spot on as your articles tend to be, I fear that those who need to read them the most will never read them.

    1. Tim McAleenan says:

      Very good point, FalconCowboy. I think that "delayed gratification" is probably the most important principle that ties everything together because it's the only way you can ever build something good–or more precisely, the list of spontaneous "good things" is much, much shorter than the good things that were the result of deliberate effort and preparation.

  3. Old Partridge says:

    Charlie Munger began his career as a lawyer, but was able to move on to become an even more successful investor. For me this is the most important take away from a study of his stellar career.

    A Supreme Court Justice once stated: "The law is a jealous mistress and requires a long and constant courtship. It is not to be won by trifling favors, but by lavish homage." This is so true as I learned to my chagrin after I spent way too much time practicing law while struggling to learn the art of investing.

    Wikipedia describes Munger as "a generalist for whom investment is only one of a broad range of interests." Even though his name is currently associated with a prominent Los Angeles law firm, I am pretty sure Munger's fortune and fame resulted from his other activities. Being a generalist while practicing law is pretty hard to do.

    I suffered each of the setbacks you mentioned in this article and I overcame them. I would add bankruptcy to the list :-). I am finding that my focus on investing is leading to greater independence and happiness compared to my colleagues who only practice law.

    I had it right as a young lawyer 35 years ago when I pondered what to do with my excess income and decided on investing. But I lacked good information about how to do it. The internet has changed that for me and I am very grateful.

    My sincerest thanks for your contributions!!!

    1. Tim McAleenan says:

      Old Patridge! Thanks for your comments. And that is a good point about Munger–he would set aside an hour every morning for himself to develop his interests and, say, study business or philosophy before he began his legal work. I suspect that kind of deliberation is necessary to juggle a life of law and serious side interests simultaneously.

  4. Problems:

    — You're dating "girls" and not women.

    — Abandon the adverb "basically." Readers know that a mere column is only going to cover the basics. Plus you can also google for how rarely if ever reputable columnists have used the word "basically" in the last century.

    — Cease starting sentences with "Look." "Look…" was old the second time President Obama used it in 2008. Plus I suspect the President is the wrong political party and so you do not want to sound like him.

    I hear Priory is taking a vote on whether to excommunicate from its ranks alum, students and staff who use the words "basically" and "Look… " As for "girls" and Priory: Gender segregated classes are a good idea until one gender or the other gets the idea that the opposite sex is a different species. Incredibly enough, many young women can happily discuss for example the advantages of EMR over BUD and be a BFF and maybe life partner.

  5. says:

    Having a good life is more than being wealthy. Good social (as reflected in a good marriage) and physical life is also important as well. If you prepare yourself well for your career and get the right job, the odds are in favour of you having a good job security. If you keep yourself in reasonable shape, don't smoke, you shift the odds to your favour.

    Really investing, getting married, exercise, do your day job are all about having common sense and decency.

    I can tell you from my personal experience, my father's old classmate son was shot dead in a violent crime in Toronto. He wasn't very careful who he messed with, so he certainly didn't play the odds to his favour. As a bit more of a tragedy, my cousin had cancer when she was 30 years old (she is all right for now after chemotherapy and a surgery) and her brother died in a young age from heart disease. Bad things just happen, but I am not sure it helps much when you mess with the wrong people.

    As for now, try to live well, earn well, and enjoy life 🙂

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