Which is the fastest lane towards financial freedom?
Well … the Fastlane of course!
But how do you get there? And why aren’t you there today?
Today I will use MJ DeMarco’s book The millionaire Fastlane to explain this for you. Basically, the book describes three different financial personalities – the Sidewalkers, the Slowlaners and the Fastlaners. Find out why you might be stucked in the Slowlane, or even worse, standing on the Sidewalk, and how you can enter the Fastlane today with these top 10 takeaways from DeMarco’s modern classic.
This will be an unusually long post, so I’ll head right to the takeaways:
- Wealth is a process, not an event.
- Focus on your beliefs.
- ULL makes the Slowlane fundamentally flawed.
- CUL makes the Fastlane fundamentally advantageous.
- Swap from consumer to producer.
- Deploy WCCA and WADM.
- Fulfill the 5 commandments.
- Wealth is not material possessions.
- Someone else is doing it. SO WHAT?
- The game of rapid wealth creation: Chess.
Now, let’s dig deeper.
1. Wealth is a process, not an event.
“Wealth doesn’t drop from the sky or come from a game show. It doesn’t ring the doorbell and await you on the front porch with balloons and a check the size of a refrigerator.”
People love to hear wealth stories. You see and hear only the events though, because events sell. News reporters gladly reported when Zlatan Ibrahimović scored his €46 million contract with Barcelona, but they fail to tell the story of how he practiced many hours every day to achieve that.
When Markus Persson in 2014 sold his gaming company Mojang to Microsoft, for a staggering $2,5 billion, headlines were made. Before this event, he didn’t get much attention, and especially not before the release of Minecraft in 2011.
This fool the public into believing that wealth is an event, which is complete rubbish. These rich individuals are thought of, by the majority of people, as lucky. Yet, luck played only a minor, if any, part of it.
The analogy used by DeMarco in The millionaire Fastlane for explaining the wealth process, is a road trip. For it to be well executed, four things are needed:
- A roadmap. This point is about financial beliefs and preconceived convictions about money.
- A vehicle. You are the vehicle, and you need to have the right knowledge and motivation.
- A road. There are many roads to financial success. In The millionaire Fastlane, the entrepreneurial road is argued to be the preferable choice.
- A speed. The execution of your plan.
2. Focus on your beliefs.
Your road map is made up of beliefs. Beliefs leads to choices. Choices leads to actions. Actions determines your wealth. Beliefs are strong drivers for action, whether they are true or false. The Vikings believed that they would end up in Valhalla after death, therefore they were able to fight without fear and overcome many enemies. To pick the right belief system is therefore critical!
There are three kinds of belief systems presented in The millionaire Fastlane. Each system has a natural predisposition towards a specific destination. These are:
- The Sidewalk -> Poorness
- The Slowlane -> Mediocrity
- The Fastlane -> Wealth
Additionally, each system has its own wealth equation, that determines the possibilities of wealth in a mathematical way:
- The Sidewalk: Wealth = Income + Debt
- The Slowlane: Wealth = Job + Market investments
- The Fastlane: Wealth = Net profit + Asset value
You might be a Sidewalker if you:
- Have learned almost nothing since graduating school.
- Hope that politicians change the system, rather than adapting to it.
- Think that credit cards are a great tool for additional income.
- Live from paycheck to paycheck.
- Are a frequent visitor of alternate realities, including gossip blogs, video games and soap operas.
You are probably riding the Slowlane if you:
- Aim for an advanced degree.
- Are all about climbing the corporate ladder.
- Save X % of your paycheck every month.
- Live below your means.
- Diversify and invest in mutual funds.
Note that these points (contrary to the points made earlier regarding the Sidewalk) aren’t bad in a wealth strategy, but they shouldn’t be the strategy. In this matter, The millionaire Fastlane is different from, for instance, the “save-10%-strategy” suggested in The richest man in Babylon, the “save-in-index-funds-strategy” from The little book of common sense investing, and even the “Scuttlebutt-strategy” recommended in Common stocks and uncommon profits.
3. ULL makes the Slowlane fundamentally flawed.
ULL means uncontrollable limited leverage. The Slowlane’s wealth equation is made up of two variables, both limited when it comes to leverage and control. The Slowlane’s wealth equation:
Wealth = Job + Market investments
Job = Hourly rate * Hours worked OR Job = Monthly salary * Months worked
Market investments = Initial wealth * YieldYears
Job, or salary, is the first one. A normal job pays you either hourly or monthly. Either way, the amount of money you can earn is restricted by time. Simply put, it cannot be leveraged.
“If you are shackled to a job, you’re engaged to a glorified exchange of your time (your life) for pieces of paper that grant you freedom. You sell your freedom to get freedom. Pretty stupid, huh?”
A job also limits your control. One day you might be fired. This can be manipulated in your favor by working more, so that you are less likely to be next in line when such displacements occur. In this case, you sell even more freedom to get even less. And still, the company itself might go bankrupt.
Moreover, you can’t control your salary. Have you ever seen anyone get a 1000% pay raise from one year to another? This isn’t possible, even for the fastest climber of the corporate ladder, but it is possible if you own the ladder.
Furthermore, you lose the possibility to pay yourself first. The government will always get their share of your hard-earned money before you do.
The second variable is market investments.
“Used correctly, “compound interest” is a powerful ally to wealth, but used for Slowlane purposes it dredges the wealth road trip to a crawl.”
Market investments also fails to be the creator of huge wealth, according to DeMarco, because it cannot be leveraged nor controlled. Your return is capped at maybe 20 % yearly returns. Already from the get-go, it should be realized that it takes quite a few years to transform a lean purse into a fat one this way. Moreover, your returns are out of your control. You cannot guarantee that the stock market will rise, the world might actually be on the brink of a long recession.
It must be clarified that DeMarco isn’t against market investments. He simply states that for market investments to have a significant impact, you need a considerable sum of money. That initial amount shouldn’t be obtained through stocks, but somewhere else. Then you rely on market investments to keep you wealthy/create even more wealth.
Notice that the wealth that a Slowlaner can produce is always bound by time.
4. CUL makes the Fastlane fundamentally advantageous.
The Fastlane, or the entrepreneurial lane, possess traits that makes it far more appealing than the Sidewalk and the Slowlane. This is because it operates under CUL, controllable, unlimited leverage. Mathematically, it is easy to see why. The Fastlane equation is:
Wealth = Net profit + Asset Value
Net profit = Units sold * Unit profit
Asset value (your company) = Net profit * Industry multiplier
The first part, Net profits, can be exposed to large numbers, and can therefore generate a lot of wealth. If you sell 100,000 of anything, you are likely to get a lot of money. Even if the profit of each unit is small. Notice too, that the control is greater than in the Slowlane. If an increase in wealth is wanted, there are multiple ways of doing this:
- Starting a market campaign, and therefore increasing the units sold.
- Raising price per unit, and therefore the per unit profit.
- Cutting costs, and therefore increasing the per unit profit.
In the case of a normal job, all you can do is to go to your boss and ask for a raise.
Furthermore, the Fastlane can be decoupled from time. If you, for instance, write a book, the initial investment might be 1000 hours. No matter if you sell 100, 5,000 or 100,000 books, the invested time remains the same. Also, earnings might come many years after the hours have been invested. Notice how this is different from the Slowlane, where your wealth is heavily dependent on time.
The second part, the Asset value equation, is even more leveraged. This is a huge one. Once you own a company you have even more opportunities (control) for creating wealth. Instead of collecting your monthly profit from it, you can decide to sell the business. In the selling process, you’ll instantly get your yearly profit times an industry multiplier.
This multiplier is known as the P/E ratio, and for Swedish stocks, it might be as low as 10, but can also be as high as 50.
Compare this to a normal job situation. What if you could go to your boss and tell him that you wish to quit your job today, and, in doing that, you want 10 times your yearly salary? Wouldn’t that be great?
Notice that the wealth that a Fastlaner can produce isn’t bound by time.
5. Swap from consumer to producer.
Before you can become a consumer of services and goods, you need to be a producer. Applied, this means, for instance:
- Instead of reading other’s blogs, create your own (please keep reading mine though).
- Instead of paying for other people’s financial advices, sell your own (me = exception, please?).
- Instead of buying books from other people’s affiliate links, link to your own products (… please?).
Once you’ve succeeded as a producer, consuming won’t be a problem. Many people get this backwards though, and starts to consume first. This is natural, as everyone wants to look successful/rich. Change your mindset, and be successful/rich before looking so.
6. Deploy WCCA and WADM.
WCCA is the daily analysis that you should use for every risky choice you make. It means Worse Case Consequence Analysis. Treasonous choices are lurking behind every corner, and you should expose them before they jump you. It consists of three steps:
- What’s the worst thing that could happen when doing this?
- What’s the probability for it?
- Is the risk acceptable compared to the reward?
In the streets of Stockholm, one cold November night, you spot a polar bear mother with its two cubs. You’ve wanted a cub as a pet for a long time. One of them is wandering off on its own. The mother hasn’t noticed you yet. You have practiced a few times for the upcoming Stockholm Marathon, and feel fit as ever. Before you make a run for and try to catch the cub, you apply WCCA: What’s the worst thing that could happen?
- The mother catches you and feasts on your flesh. Probability: 10%.
- Some animal rights person notices, calls the cops, and puts you in jail. Probability: 1%.
- You wake up. There are no polar bears in Stockholm. Probability: 100%.
Is it worth the risk?
WADM is a more advanced tool. It stands for Weighted Average Decision Matrix, and is meant for more complex decisions. For instance:
- Stay or move?
- Pick Chalmers or KTH as college? (JK, not even a choice, you obviously pick Chalmers)
- Have another kid?
You need at least two choices and then you need factors that are important for you when picking between the two. Rate every factor on a scale of 1-10 on importance. Then give each choice a mark for that factor. Multiply factor by mark and sum them all up. The choice with the most points wins.
Sweden manages to score in the most important categories and is therefore declared the winner of this round of WADM. No need to rename the blog to TheAmericanInvestor just yet (hooray!).
7. Fulfill the 5 commandments.
Unfortunately, it is not enough as an entrepreneur to start a corporation and devote a lot of time and dedication to create a future money tree. The seed from which the tree will grow must also be planted in fertile soil. Such business fulfills the 5 commandments:
I. The commandment of need
A house built on a sand foundation will crumble. A business built on anything other than a customer need will crumble as well. Instead of chasing money, chase to solve people’s needs. Money will follow naturally. Solving problems, making things easier, and raising positive emotions are three ways of solving needs, but there are many more.
II. The commandment of entry
While the first point can’t be violated in the creation of a fruitful business, this argument could be violated – it just makes it a hell lot harder to succeed. The commandment is about barriers of entry. If you need to possess a certain skill, a certain amount of money, or a certain patent to be in the market, this fulfills the commandment of entry. Football, music and blogging (ouch) are three examples where the commandment is violated. This leads to crowded markets and high competition. The only way to succeed in such a market is by being exceptional.
III. The commandment of control
Don’t be the hitchhiker, be the driver! Your business should be created so that you can decide your organization, your pricing, your products, and your revenue model. While a hitchhiker can make good money too, it’s the driver who’ll make the big bucks. There is another problem too; you are exposed to the mercy of the driver. If the driver decides to cancel his product/service that you are hitchhiking, your business might be over.
IV. The commandment of scale
“The more prople whose lives you affect in an environment you control, the more money you will make. Impact millions and you will make millions.”
“The law of effection”. Affect many, or affect a few a lot. If you are going for the second option, the few people you affect better be filthy rich.
V. The commandment of time
Your business should allow automatization. It should be able to operate without you being present, otherwise it might just become a well-paid job, but you will never be free. If the margins of the business it thick enough it could be possible for you to hire someone else to get the job done though.
8. Wealth is not material possessions.
Ask people in the street and they will probably tell you that wealth is:
- Having the latest furniture from IKEA. Preferably assembled by someone else.
- Having individual Spotify premium accounts for every member of the family, instead of picking a family account, just because you can.
- Having the Blu-rays, rather than downloaded copies from The Pirate Bay.
Yet, wealth is not defined by the materials that you own. Looking wealthy is easy, being wealthy is not. This is called “Faux wealth”. Everyone knows at least one person within this category. They wear designer’s cloths, use VIP services in the club, and drive cheap BMWs. According to DeMarco, true wealth comes from the three fundamental F’s:
- Family (relationships)
- Fitness (health)
- Freedom (choices)
The problem with Faux wealth is that it destroys real wealth. That BMW you couldn’t afford will force you to work many years to pay off the debt, stealing your freedom. When you work all day, you won’t have time to meet your family, ruining your relationships. And finally, ruining your relationships will make you depressed, so you will also lose your health.
Now, do you still want that BMW?
9. Someone else is doing it. SO WHAT?
In the process of coming up with business ideas it’s likely that you’ll encounter others that have the same idea. Often, this leads to you questioning the whole thing, and quitting. Sometimes, an industry is saturated and changing your idea for another is a smart choice. Often though, it’s a bad idea.
If someone else is doing it already, just do it better! There is a reason why you though the idea was innovative to begin with – that “someone else” haven’t marketed their product well enough. The opportunity isn’t closed because someone else already discovered it.
10. The game of rapid wealth creation: Chess.
The tenths takeaway from The millionair Fastlane. In a game of chess, all your pieces must be used to win the game. Entrepreneurial wealth creation is similar. Each piece symbolizes a function. Use them well, and wealth shall come:
The king: Execution
This is the process that will ultimately lead to a wealth event that newspapers write about. This is where you can be different from competitors. Therefore, it doesn’t matter that “someone else is already doing it”. The same idea executed in diverse ways gives different results.
The queen: Marketing
You should aim to build a brand and not a business. Especially if you are in a saturated market, this is vital. It’s the only way to be different from competitors! How to rise above the noise:
- Have extreme viewpoints.
- Involve sex in one way or another.
- Make customers feel strong emotions – joy, hate, safety, fame.
- Customer interaction
- Be unconventional. Your marketing should make customers ask: What’s the catch?
The bishop: Customer service
DeMarco reasons that complaints from customers are the best sources of information for improving your business. He even keeps track of all complaints he ever had in a book that has served him for over a decade. You can make Google alerts give you a notification any time your company is mentioned on the web. Use SUCS, Superior unexpected customer service. Not only will you keep your customers, but you’ll receive ambassadors – free marketing – for your company.
The knight: Product
Your product must fulfill a need, as mentioned earlier in the commandment of need. If your product isn’t a knight in shining armor for someone (hopefully many someones), it will fail.
The rook (castle): People
Getting a business partner is like getting married. Be very careful in choosing this person. A few questions should be answered before getting involved in such a business marriage (ask more than listed here):
- Do you have matching work ethic?
- Is your vision aligned?
- Do you entrust this person with your life?
The pawn: Ideas
“Will you sign my non-disclosure agreement before I tell you my idea?”
Notice that ideas are pawns and execution is king. Although you shouldn’t source me on this one, I bet that every person who gets to live until retirement at least has 100 ideas that could have turned him into a millionaire. Yet, most people are not millionaires. Execution is king, ideas are just pawns.
“If you have an OK product (a weak knight), poor customer service (drunk bishops), and incompetent people (a castle full of idiots), you can still survive with a powerful queen.”
PUH! That was a long one. If you managed to get here, well done. Now do you agree with the list? Which ones are the main takeaways from DeMarco’s The millionaire Fastlane in your opinion? Should I expand on any of the takeaways? Let us know in the comments!
If you would like to have the full read, and find out about the 33 takeaways that I couldn’t include in this post, buy it from Amazon today. This way you’ll help me into the Fastlane (and probably give me a speeding ticket).
For a smorgasbord of investment tips delivered every Sunday, stay tuned!