Archives for October 2016

I joined the bandwagon and finished reading Grit: The Power of Passion and Perseverance by Angela Duckworth. (It’s not like I could just give up in the middle…) You’ve probably heard of this NYT bestseller. Either the book, the MacArthur fellow author, or the research discussed has been profiled in nearly every major media outlet. This makes sense due to its broad appeal, from dating/marriage to professional/career to parenting.

Instead of a traditional book review, I’ll try to relate the major conclusions from the book to the pursuit of financial indepedence and retiring early (FIRE).

Grit is both perseverance and passion. Perseverance is the act of trying or continuing to do something, even if it is difficult. Passion is a strong interest that aligns with your values, beliefs, and self-identity. This second part is sometimes overlooked or dismissed. You need both determination and direction. Sometimes it takes time to develop a passion, but nobody works doggedly on something they don’t love.

One test for passion is to ask yourself – Are you excited about the minutiae? I’m not sure how many people find themselves lost in though about withdrawal rate statistics, IRS publications on tax strategies, or optimal asset allocation. 🙂

Grit predicts success more reliably than talent. Research has also shown that talent is not correlated with grit. Talent is certainly still important. However, grit is just as, if not more important, than talent when it comes to success. While grit alone won’t make you an Olympic athlete, talent alone certainly won’t get you there either. When people idolize the idea of natural talent, it lets them off the hook in terms of achievement. “I couldn’t do that because I wasn’t innately talented enough, so it’s not my fault.”

Effort counts twice. Instead of the theory that talent produces achievement, Duckworth presents this alternative model.

Talent x Effort = Skill

Skill x Effort = Achievement

Talent is how quickly we can improve our skill. But you still need to apply effort to build that skill. Think of skills like cooking, throwing a football, writing, coding, or mathematical analysis. Next, effort makes that skill productive. You need effort again to become a successful chef with multiple restaurants, a quarterback with a record number of touchdown passes, an author of several books, or an engineer that designed important products. Effort counts twice.

Now, in terms of financial freedom, I would say the closest analogue to skill is income. To increase your net worth, you need to first make money. Your talents may or may not naturally align to making money. Applying effort with your talent creates income. Next, it’s not what you make, it’s what you keep. That takes saving, which is a different kind of effort. Thus, we can rewrite the equations as follows:

Talent x Effort (Working) = Income

Income x Effort (Saving) = Financial Freedom

Researcher Catharine Cox analyzed high-achieving historical figures and came to the conclusion that “high but not the highest intelligence, combined with the greatest degree of persistence will achieve greater eminence than the highest degree of intelligence with somewhat less persistence.” Perhaps we could also extend this to say a high (above-average) income but not the highest income combined with more grit is better than the highest income and less grit.

Enthusiasm is common. Endurance is rare. Nearly everyone thinks the idea of financial independence is great. Who wouldn’t want that? Only a fraction of people actually follow through with it. I really liked this quote from the book… “A high level of achievement is often an accretion of mundane acts.”

Goal hierarchies. Set a top level goal first, which lets you develop sub-goals, which leads to specific actions. Don’t spend your limited time on other unrelated and/or conflicting sub-goals. If a related sub-goal is not working, replace it with something different. Here’s a figure taken from a US Army whitepaper on Grit [pdf]:

Now, financial freedom may not be your top-level goal. But it might be related if you aren’t able to work on your top-level goal because you’re working 40 hours a week to pay the mortgage.

In any case, I think this diagram does a good job illustrating the concept that there are many ways to get closer to FIRE. You could advance in your career and grow your salary. You could build up a collection of rental units. You could move into a smaller house with a shorter commute. You could buy index funds. You could max out your 401(k). You could buy dividend stocks or REITs. You could create websites that create semi-passive income. If one way doesn’t work, you can try another.

You can improve your grittiness. Your grit isn’t fixed. Here are some ways you can get better:

• Explore different interests. A passion doesn’t just appear instantly. Read some different perspectives. See which one fits you. Some people focus on entrepreneurship and starting a successful business (make more money). Some focus on frugality and controlling household expenses (spend less money). Some focus on investing (make the difference grow faster).
• Deliberate practice. You should force yourself outside your comfort zone. It should be at least a little hard! Focus on your weaknesses, try to improve, get feedback, try to improve some more. Acquire a habit of discipline.
• Focus on a higher purpose. Cultivate meaning. To reach FIRE, you need a good job that you find worth doing. You need purpose. If you don’t like your job, try to reflect on your existing work can help society. Are you a bricklayer, or someone building a school to teach children or a church to serve God? Alternatively, change or alter your work to match your own interests and values.
• Find a good role model or mentor. Someone you can talk to and get constant feedback from is best, but sometimes you have to settle for books or blog authors. Ideally, they should also inspire hope.
• Use group conformity and the power of culture to your benefit. Merge your goals with your self-identity. Join local groups or online forums with people with similar interests. Each has a different culture, be it Early Retirement Forums or Mr. Money Mustache Forums or Bogleheads.

Bottom line: When people think of early retirement, they often think of the 20-year-old Silicon Valley entrepreneur, a big inheritance, or the lottery ticket winner. This focuses on luck and talent – things you can’t control – and thus thinking you’ll never be able to do it yourself. In most cases, achieving financial freedom requires a lot of mundane acts over many years. Over time, you develop working skills that create an above-average income. Then you develop saving skills that create a large net worth. Luck and talent still matter, but you really need grit – the combination of perseverance and passion. The good news is that grit is something you can control and improve.

For more on this topic, take her Grit Scale test and also watch her TED Talk.