Last week, a new lawyer asked my advice on a business question. I responded with a simple equation:
revenues – expenses = profit
Obvious as this may be, it seems to elude a great many people, particularly young lawyers who fail to connect the cost of the crap they spend money on to the purpose of a business. “But, but, but,” he stuttered, “don’t we practice law to serve clients?” Of course we do. That’s the reason why we’ve chosen to be lawyers. But the reason we go to work in the morning is to make money. Otherwise, we would practice law without charging anyone a fee.
There are fundamental rules of life that every person, including every young lawyer, needs to know. They range from “never eat anything bigger than your head” to “never face down 7 mean hombres when all you’re packing is a six-shooter.” Seth Godin offers a list that covers the rules of money, and it’s mandatory that every semi-conscious person know and understand them.
- The amount of money you have has nothing to do with whether or not you’re a good person. Being good with money is a little like being good with cards. People who are good at playing cards aren’t better or worse than anyone else, they’re just better at playing crazy eights.
- Money spent on one thing is still the same as money spent on something else. A $500 needless fee on a million-dollar mortgage closing is just as much money as a $500 tip at McDonalds.
- If you borrow money to make money, you’ve done something magical. On the other hand, if you go into debt to pay your bills or buy something you want but don’t need, you’ve done something stupid. Stupid and short-sighted and ultimately life-changing for the worse.
- To go along with #3: getting out of debt as fast as you possibly can is the smartest thing you can do with your money. If you need proof to confirm this, ask anyone with money to show you the math. Hint: credit card companies make more profit than just about any other companies in the world.
- There’s no difference (in terms of the money you have) between spending money and not earning money, no difference between not-spending money and getting a raise (actually, because of taxes, you’re even better off not-spending). If you’ve got cable TV and a cell phone, you’re spending $4,000 a year. $6,000 before taxes.
- If money is an emotional issue for you, you’ve just put your finger on a big part of the problem. No one who is good at building houses has an emotional problem with hammers. Place your emotional problems where they belong, and focus on seeing money as a tool.
- Like many important, professional endeavors, money has its own vocabulary. It won’t take you long to learn what opportunity cost, investment, debt, leverage, basis points and sunk costs mean, but it’ll be worth your time.
- Never sign a contract or make an investment that you don’t understand at least as well as the person on the other side of the transaction.
- If you’ve got a job, a steady day job, now’s the time to figure out a way to earn extra income in your spare time. Freelancing, selling items on Etsy, building a side business–two hundred extra dollars every week for the next twenty years can create peace of mind for a lifetime.
- The chances that a small-time investor will get lucky by timing the stock market or with other opaque investments are slim, fat and none.
- The way you feel about giving money to good causes has a lot to do with the way you feel about money.
- Don’t get caught confusing money with security. There are lots of ways to build a life that’s more secure, starting with the stories you tell yourself, the people you surround yourself with and the cost of living you embrace. Money is one way to feel more secure, but money alone won’t deliver this.
- Rich guys busted for insider trading weren’t risking everything to make more money for the security that money can bring. In fact, the very opposite is starkly shown here. The insatiable need for more money is directly (and ironically) related to not being clear about what will ultimately bring security. Like many on this path, now they have neither money nor security.
- In our culture, making more money feels like winning, and winning feels like the point.
- Within very wide bands, more money doesn’t make people happier. Learning how to think about money, though, usually does.
- In the long run, doing work that’s important leads to more happiness than doing work that’s merely profitable.
Some are more fundamental than others. Some could benefit from a bit of fleshing out. But some points on this list, most notably Number 2, are utterly foundational and yet almost universally ignored. That shiny iToy you simply had to have so all the other kids at Starbucks will think you are the coolest person ever, and for which you ran up your credit card debt, will be the reason you can’t save enough money to buy a home for your family. Do you see how it works?
Once you’ve worked hard enough, saved enough, delayed your gratification and used your money wisely, you may find yourself in a position to buy the goofy things that make you happy. It may take years. It may never happen. But it will most assuredly never happen if you spend more than you earn, squander your efforts for trinkets, are incapable of distinguishing things you need from things you want, or refuse to substitute the hard work of thinking for handing over what little money you have to some fast-talking schemer who plays you for a fool.
Your life. Your choice. But these are the rules by which we live.
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There was an economist on TV (yes, I know) not too long ago who pointed out that a daily Starbucks over a four-year course of education added up to $12K. If you’re paying for your Starbucks out of your student loan, well you deserve what happens to you.
But, but, but . . . it’s Starbucks, the nectar of life?
About 20 years ago, I was on a flight (I forget where) and was sitting next to a guy. We started talking, and he told me he was from Seattle, and that he was starting a chain of gourmet coffee shops where they were going to sell the greatest coffee anyone had ever tasted. He explained they were going to charge a few bucks per cup, but people would buy it because it was going to be that much better.
I told him he was nuts, that nobody was going to spend a few bucks to buy a cuppa joe when they could get it for 50 cents anywhere. No coffee was that good. He may have been nuts, but it was I who was wrong.
“Money spent on one thing is still the same as money spent on something else. A $500 needless fee on a million-dollar mortgage closing is just as much money as a $500 tip at McDonalds.”
Rubbish! The former is losing money to some sleazy mortgage company. The latter is an act of generosity that will make a hard-worker with a low-paying job very happy.
Yes, Max. Rubbish indeed. Looking forward to when you open your own firm. I’m sure you will get excellent service at McDonald’s.
A lot of people talk about starbucks and the five dollar cup of coffee. But a cup of coffee at starbucks doesn’t actually cost five dollars- the other drinks, e.g., carmel machawhatso’s with an extra shot of double whipped foam cost five dollars. But that isn’t really coffee, its just foam.
An actual cup of coffee at starbucks costs just about the same as a cup of coffee at a diner or a deli or somewhere else. In part, those other establishments have raised their prices because they saw what starbucks could get away with charging.
What’s my point and how does this relate to the post or comments? I don’t know. But not having money sucks, and life can still suck even if you do have money.
It may not be $5 for a regular cup of coffee, but it’s not $1 either. The reason its held out as an example is that it broke the barrier between basic thrift and wasteful, self-indulgent spending for many young people. Even if its a bit hyperbolic, everybody gets the point.
You, sir, are not what I and most people think of when we think of he legal profession. That’s too bad, for I’d have like to have been your neighbor. I enjoy animated conversation with intelligent people, and I don’t have to agree with them. I never let it get personal.
I happen to work in the medical field, although not an MD, but make a comfortable living and you are absolutely correct in that money does not make people “good”. We have numerous radiology offices and when I took over one of the offices in an affluent area of Long Island, the number of miserable, demanding and generally angry human beings skyrocketed.
My brother-in-law is an options trader, has an income of seven figures (including bonuses and options) and never forgot where he came from. You’d never know he had a nickel. You ever know who you’ll encounter.
I agree with almost all of your points, but the one that resonates most is that money does not equal security. Not to put on my tin-foil hat, but many people who “appear” well-off will, in my opinion, one day face a serious day of reckoning.
There’s very little use for overweight accountants with no other tangible skills when society goes in the proverbial crapper. Ditto “economists”, who above all people, should realize the pickle we face. Having money is great. Having it and being debt free is better still. Having both situations, some land in a sparsely populated region that you can get to in times of trouble and having the skills necessary to survive and thrive in a drastically altered economic reality is true security. Few people understand that. They might one day, but I hope it doesn’t come to that, for all of our sakes.
Knowing some “affluent areas of Long Island,” I know exactly what you’re talking about.
I’ve been teaching this for about 15 years, to absolutely no effect:
First Law of Money: Adding money without adding thought accelerates the direction you are already heading.
Second Law of Money: Finances are either improving or getting worse. The world doesn’t stand still, so if your money flow is stagnant, you are losing ground.
Third Law of Money: Whatever your biggest fears are about money is what you are currently manifesting.
Corollary: When you need money most, it’s hardest to get.
Fourth Law of Money: Results take time to measure.
Fifth Law of Money: Making and keeping money is a skill, not a talent.
“Shirtsleeve to Shirtsleeve in 3 generations” isn’t a joke: it’s a manifestation of people not understanding money except as “money is the stuff you use to buy stuff” meeting basic slothfulness.
Excellent. Thanks.