Being part of a certain profession, or earning a certain amount of money does not ensure your exit from the middle-class. Most people are stuck there because of math.
We focus on the only 3 sources of negative cash flow that matter: taxes, housing and in the case of a scalable business – payroll. Even the highest earners stay middle-class if they don’t focus on taxes and housing.
Taxes: Everything you pay for really costs you 1.5x-1.8x more since you would be paying for it with after-tax dollars rather than pre-tax dollars. The only expenditures exempt from this rule are business assets and expenditures bought inside a corporation.
Housing: In combination with the taxes above, depending on your tax bracket, your mortgage and your interest rate, a $1 million house will cost you at least $1.5 million (no mortgage and extremely low level of living requirements) and as much as $4 million of gross earnings.
Now Here’s the Math
Regression To The Mean & Bimodal Extremes: How is that so many high-earners are trapped into the middle-class mediocrity of trading their limited time for money? In any group, people of high-value/high net worth/high IQ are dragged down by people of lower-value/lower net worth/lower IQ due to osmosis. If you take advice tailored to the middle-class, by a middle-class advisor, you should not be surprised if you end up middle-class. You need to find someone who is living a life that you want and take guidance from there. So in short, ignore anything average, and advice from/for average people are to be avoided at all costs. The solution is bimodal approaches from the extremes. 90% safe investments + 10% high-risk investments vs. a mediocre portfolio with limited upside and a possible unlimited downside. Or mediocre jogging vs. extreme high-intensity training. Other bimodal strategies with exponential benefits: intermittent fasting. The framework to pursue bimodal extremes involves ranking your options in descending order of optionality and open-endedness of pay-offs.
Dunbar’s Number & Via Negativa: The solution to this is to be mindful of the upper limit to how many interpersonal relationships your brain can process (150). I can never have more than 150 contacts (this does not apply to mass-market businesses, but something so sensitive as advisory to HNWIs can never be mass-market). Most problems are better addressed with subtraction (Via Negativa – Nassim Taleb) To keep negative osmosis from happening in my life, I removed the bottom 50% of people from my life and doubled-down my time on the top 50%. I repeated this process many times until I was down from 1000+ to 150 contacts. Everyone in my life is either moving up or moving out of my life. This eliminates the negative osmosis that would otherwise cloud my thoughts with middle-class thinking.
Chaos Theory Feedback Loops: Its nearly impossible to remain middle-class if you focus your actions on receiving a recurring benefit. The best way to start is to reframe all your problems as a function of time and improve year over year (YoY). This means you will get richer due to superior/scalable abilities and your riches will beget more riches. This will result in a knee in the curve non-linearity compared to the linearity of the middle-class. All decisions compound (both for and against you), and this makes money eventually become perpetual so the path is clear: prioritize the maximum effort to get compounding on your side (make sure your inflows compound more than your outflows).
Chaos Theory and Dynamics: The middle-class think in simple terms of cause and effect, when the reality is that the outcome in sensitively depending on initial conditions, so the cause will result in empirically complex 2nd, 3rd, 4th, …. nth steps. It’s better to fix systems Via Negativa – Nassim Taleb, since the middle-class solution to add more things to their life make things worst.
Inversion: A famous problem-solving technique in mathematics can be easily used to re-frame everyday problems. Whatever question you ask yourself – ask yourself the inverse question. The path to success is not as clear as the path to failure. So by doing the opposite of the path of failure ensures you survive, and as Taleb reminds us you first must survive in order to succeed.
Pareto’s principle: The majority of a given effect is due to a minority of the possible causes. You have a limited store of attention and time, so to create the aforementioned feedback loop you need to prioritize high-impact activities. Maximize the results by minimizing the stuff that doesn’t count: don’t check your e-mail more than 3 times a day, stop watching TV, surfing the net, playing video games, and taking unnecessary vacations. Make your own life great instead of engaging in escapism. Make your life so good you don’t need a vacation. The more you shift your attention/time to high-impact activities the higher your overall benefit due to the compounding.
Game Theory and the Prisoner’s Dilemma: Will allow you to recognize and exploit the irrational decisions of others.
Calculus: Marginal cost bisects average cost at the minima of the average cost. The optimal point of production in terms of profit by maximizing your output variables can be determined by cost and revenue functions.
Here are some more math hacks for your scalable business.