In preparation for a speech I am giving tomorrow night, I have identified the most powerful financial principles in the Universe:
1. Compound Interest - identified by Einstein as "the most powerful force in the Universe." More so than nuclear fission, I guess. Understanding how compounding works is critical to both wealth generation, and avoiding debt.
2. The Difference Between Pre and Post-Tax Income - it is very hard to accumulate wealth by focusing on only pre-tax income.
3. Never Invest Unless You Understand How it Works - perhaps hindsight is 20-20 but no clear-headed analysis would ever had led to an investment with Bernie Madoff.
4. 62.8% of Financial Products Are Designed for the Seller, not the Buyer - of course the number is made up but too many financial products are designed by marketers. I submit as evidence the creative mortgage products that caused so much heartache in the last few years.
5. Always Add Value to YOU, INC. - there are no safe jobs anymore. Do everything you can do make yourself as valuable as possible.
6. It's 10 Times Easier to Spend Than Save, 20 Times Easier to Spend Than Earn - we are deluged with thousands of financial inducements every day - 99% of which are pushing purchases. It's no coincidence that credits cards are so small and thin - easy to whip out of your wallet.
7. What Goes Up Will Go Down - I submit the housing crisis into evidence.
8. Passive Income Is Freedom - the goal is to produce investments and assets that make you money when you are sleeping.
9. Entrepreneurism Is all-Powerful - spend some percentage of your time and capital seeking life-changing returns... risk has a tendency to bring focus.
10. Passion is Paramount - no one ever got wealthy spending their days watching the clock. Find something you love doing and then do it with all your might. The wealth will follow.
Jim Randel is the Founder of The Skinny On™ book series. See www.theskinnyon.com.
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And see http://www.chrismartenson.com/crashcourse for a rather depressing look at reality, not our symbols for it (money, bank accounts, etc.).
On the other hand, we can live quite comfortably if we learn to share. As part of that sharing, we can't continue to build suburban sprawl. We can build transit- and pedestrian-friendly neighborhoods, though, and share a ride on the bus, or the train.
Sustainable living certainly cannot rely on farms that burn ten calories of petroleum to produce one calorie of food. The U.S. is only 5% of the world's population but burns 25% of its energy (and has 25% of the world's prisoners too...an interesting correlation of energy over-consumption to gulags).
So in this scenario, interest, and the "value" of whatever currency we select, keeps compounding, regardless of the actual earth's capacity to provide goods and services. To continue to believe it's possible to collect compound interest without crashes, or bubbles bursting strains credulity and is the opposite of sustainability. The ancients knew this -- hence the "Jubilee year" in which debts were forgiven, and all compounding stopped (apparently even the Babylonians did this). It was their alternative to crashes.
The big problem we have now is that people are worshiping the golden idol of compounding without any reference to reality. Herman Daly's "Beyond Growth" (the source of the example above) says this unreasoning acceptance of concepts is the economist's equivalent of Alfred North Whitehead's "fallacy of misplaced concreteness." Roughly like going to a restaurant and devouring the menu rather than the food. Daly doesn't confine this observation to economists endorsing compound interest, either.