It's not quite an axiom, but it seems like people unused to money who come to have a lot of it, shortly thereafter have no money again.
It's easy to understand why someone who wins the lottery and fritters it away goes down that path, but cash is just as dangerous in the hands of someone who is legitimately disciplined and working hard for their money, putting together good transactions, and building up a base of cash.
Money does all sorts of strange things to your psychology. Here are three big ones:
*It makes you think you're smarter than you are: when you've earned well, you tend to think it's because you're brilliant. You systematically underestimate the effects of market conditions and being in the right place at the right time, both of which can be tricky to replicate without large amounts of experience (and, even then).
*It makes you think you've reached a new level permanently: once you've gotten good at earning money, it's therefore permanently easier. This may or may not actually be true, and almost never to the extent you think with the first successes you have.
*It makes you think your time is incredibly valuable, because you're brilliant and you've reached this new level permanently.
These have all sorts of negative corollaries. You'll see people:
*Work less hard, because they've got it all figured out and don't need to work as hard.
*Put less effort into the long-term development efforts that pay dividends far down the road.
*Make quick "good spending decisions" instead of "best spending decisions" -- doing quick calculations and spending more liberally on purchases that seem okay, and not looking to get particularly good prices for things any more. This is easy to rationalize when you think your time is incredibly valuable, you're brilliant, and you've reached a high level permanently.
*Greatly overestimate how good they are at domains unrelated to what they're skilled in.
The last two are what make you go broke. When you're starting out, you eat off the dollar menu. You scrap and save. When soup goes on sale 2-for-1 at the store, you haul 60 cans of soup home on foot four blocks during a blizzard. By ceasing to do that, overhead and expenses grow which chip away at your bottom line and net worth.
That's not what kills you, though.
What kills you is thinking you're brilliant and underestimating the effects of being in the right market at the right time, underestimating the effects of hard work and doing things upstream, and getting cocky... and then putting money into something you don't understand.
That's a bad idea anyways, unless you're willing to outright lose whatever you're speculating with (speculating because, really, you can't call it "investing" if you don't know what you're doing).
The only people I've seen avoid this are people who had a specific, illiquid good investment place to put money, who put it religiously there, and didn't keep too much cash on hand.
"Stay modest" or "keep working hard" isn't particularly good advice -- not because it's wrong, but because no-one follows it. Even among the best and most driven and grounded people I've known, almost everyone falls prey to overestimating themselves and underestimating external and largely uncontrollable market forces in their success at first.
If you accept that premise, then having a lot of money in the bank is dangerous to your net worth. Almost everyone I've seen get there for the first time tends to waste the majority of it. Again, through frugality disappearing and spending chipping away at it partially, but especially through mentally sainting yourself and then making bad investments.
The people I've seen break this trend are people who put their money into something they understand highly well, know the in's and out's of, that is rather illiquid and is regularly doable. Real estate is the most common one, and I've seen people who earn and gain a lot put money into real estate and get cashflows back, hold their properties forever, and not get into too much trouble by having too much cash on hand. There's other possibilities, but you'd have to know them exceedingly well.
So, that's worth considering -- if you think you're at risk of having your cash go away anyways (since it tends to happen so very frequently), you might learn about an investment class and diligently carefully deploy a bulk of your funds there.
Cash in an inexperienced person's bank account seems hazardous. Experience and character building is the long-term answer; putting that cash somewhere you understand very well and can't burn through it might be the short-term answer.
I'm one of the most frugal people I know. After suddenly "making it", I feel like my "frugality" is now just for show. Logically, I know frugality saves money, but when a few week's work brings in five figures, saving $2 here and there feels weird...
I know that my success is largely based on luck. But even with that knowledge, and that attempt at "frugality", it's hard to make financial decisions. One day you're skimping and watching your grocery budget, the next day you're a "success" making a decent income - when it's all a big shock and you have so many new options suddenly available to you, where do you draw the line on "splurging"?
Another effect of the "I'm so brilliant" fallacy that I'm seeing, is that I find making trivial decisions exhausting and pointless. Now I know why Steve Jobs always wore the same outfits!
I totally see what you mean. I'm not even making good money, but I do hate making minor decisions. I'm the sort of person who ends up spend the money he has in the pocket just because it feels lazy to make every goddamn decision about prices of coffee, cake, etc.
I usually keep all I have on savings (in the bank), away from credit card and my wallet. You know, it's not even that I'm a compulsive buyer, but I don't like the cognitive costs of comparing prices to save one dolar or two, I don't know. Geez, seriously I should spend my cognitive cycles to decide that? And I go on and buy it anyway.
It's part of "I'm too smart to worry with that" and part of "I don't really think money is that special, so I won't worry".
I can only think of hiring someone to manage my money for me in the upcoming years.
There is a related behavior - people who are used to having money, if they loose it, then they quickly make it back again. Donald Trump has done this several times.
I think people have a comfort zone about what levels of money they have, kinda like a money thermostat. If they have more money than they are comfortable with they (or their subconscious) creates new expenses, screws up etc to reduce the money tempurature. On the other hand if their money level drops too low for their personal comfort level then they will hustle or bring in unexpected income.
So the key to me is raising my money thermostat, by deleting non-useful beliefs I have about money.
I was never more neurotic in my life than after I reached my highest levels of liquid cash. Seeing a larger number than I was used to seeing in my bank brought about complacency and an underestimation to risk. As you describe, I felt, entitled and invincible.
I decided to make a vertical move into owning my own retail location. Up until that point I had simply worked closely with other people's stores in order to help them facilitate transactions of their own. I thought that I was somehow smarter than the other people in the business, so I was sure I would succeed. Obviously, I was too cocky for my own good.
The store eventually ended in failure and between the lease and employee salaries, I was financially depleted. Even so, I'm thankful I made the move that I did. Losing that money kicked me off my pedestal and forced me to be creative again. It might sound odd, but I'm sure I would be further behind where I am now if I'd simply held on to the cash.
I recall that most people think that they are above average drivers, and that their kids are smarter than average. I hadn't thought of that in the context of managing money and preserving capital, but it makes perfect sense. http://en.wikipedia.org/wiki/Illusory_superiority
When I moved some money to a self directed 401k account I made some of the worst investments known to man. And then I used debt to chase one of those investments into a business that wasn't working. It has turned out to be a very costly lesson.
I think you're right. Unless you are atypically disciplined and can effectively avoid illusory superiority bias, best to go for "boring", "safe" long term investments that are not easily liquidated or reduced.
I've been thinking about people who are "good with money" lately. Certainly, being "good with money" is superior to being "bad with money" - people who are bad with money spend a lot of their life in unnecessary stress. Generally, being "bad with money" would mean not being in control of your spending, having debt unnecessarily (if you're just carrying around a lump of debt, you only need to cut your spending in the short term to get rid of it, and then you can go back to your old spending levels debt free), and otherwise not managing their finances well.
Yet, "good with money" by itself doesn't predict success all that well. Oh, to be sure, it helps a lot. But we all know people who you'd call good with money who aren't successful in general.
I've been thinking on the reason why - and I think it's because money is only one of many resources. You've also assets, both securitized assets (stocks, bonds, real estate, whatever) and assets that are more intangible and impossible to buy/sell/trade as a security - more amorphous things like prestige, credentials, and of course, skills and experience.
I also think the word "resource" isn't the best particular word, since there's a lot of things that are resource-like that aren't really resources... obviously our relationships aren't resources, but can also be invested in similar to a resource. You can go out of your way to do nice things for people who have done right by you, you can be thoughtful, you can go out of your way to travel to a place if someone you really admire is there.
Being good with money guarantees none of the above.
In my last post i talked about what NOW is the right time for. The implication, of course, is that there are certain periods of time where you can actually take advantage of opportunities that come your way. Let's call that your Opportunity Window. In the Standard American Lifestyle, that window is narrow. Really narrow. It probably starts somewhere at the end of senior year in college and ends a few months afterwards.
There are small blips of opportunity afterwards, too. Getting fired creates a window. Some sort of windfall income might create a window.
That sucks. Someone with a Standard American Life probably has no more than a year of Opportunity Window in their lifetime. It's only during those times that they can start a new business, leave their lives behind and try something new and exciting, or just make a drastic change.