Author: vishalkirti
Protected: Two months and counting since that fateful night.
How to motivate your children? Find the secrets here.
How do you motivate someone who is living a comfortable life? We will find out today what drives you and your children and what can you do to influence a child’s motivation.
Recently, my friend interviewed me for his YouTube channel and we discussed parenting differences, especially between how we were raised in the East and how we are raising our children in the West. Since that interview was a casual chit chat, we did not go deep into the nuances of parenting and education. My core message was that the Western education system emphasizes on internal motivation and drive versus external pressures. But this message is simplistic and naive unless we qualify it with more details. We need to describe how internal motivation correlates with the enjoyment of work and how parenting styles can influence internal motivation.
Delving a little deeper into parenting styles, there are four types as you can see in the diagram.
The four Parenting Styles: Yes, I drew this diagram for you instead of committing any copyright violation.
Authoritarian: This style is very common in Eastern cultures and is also prevalent in the West in traditional families. This style is focused on obedience and punishment. For eg., the parent with this style is more likely to say “You do this because I said so and I am your parent”. This parenting style is low on sensitivity.
Uninvolved: I have not seen many uninvolved parents in my social circles but I am aware that there are plenty of such parents in both the East and the West. These parents are neither interested in enforcing rules nor interested in connecting deeply with their children. This parenting style is low on sensitivity as well.
Permissive: This is another common parenting style. These parents are sensitive but they don’t enforce rules. The children become entitled and run over their parents.
Authoritative: This is considered the best parenting style. The parents are sensitive and also enforce rules. This parent is most likely to explain why the rules exist in the first place. They are also more likely to build internal motivation in their children.
Whether you enjoy what you do depends on many constraints and factors- your responsibilities, your financial commitment, and the availability of desirable work in your geography. These are external constraints and factors but there are also internal factors- the most important of which is internal motivation. Imagine, you grew up in relative prosperity and the external factors were not enough to motivate you. How can you motivate yourself or how can your parents motivate you?
The theory of internal motivation: Daniel Pink in his groundbreaking book Drive writes about this theory in great detail. The idea is that parents and educators can help build internal motivation in children. We are not naive to suggest that the children can build internal motivation for all their tasks and goals. We still need to apply external factors of carrots and sticks for humdrum activities around cleanliness, routine, and discipline. However, for educational and career goals, building an internal drive is the way to go, if external circumstances like money is not a roadblock. If the parents and educators fail to build internal drive in children, they will have to eventually resort to putting external pressure on children if they want them to become financially independent. An example of this would be kicking a child out of the house after college if the now-adult child doesn’t exhibit a drive to become financially independent (Of course, they can stay at home with parents till the time they are not doing it to avoid building their own careers). The question is which strategy works better- focusing on external pressures right from an early age or focusing on external pressures only if you were unsuccessful in building internal motivation in children? I would argue that it depends on the economic circumstances of the family and the opportunities available in that culture or country. For eg. if the children are highly motivated to pursuing useless college degrees, it’s a parent’s responsibility to inform them about the financial implications of such decisions. The parents should also choose to not pay for such degrees and warn their children about the long term consequences of high student debt. If despite such warnings, children choose that path, then they should be informed that the consequences of their decisions are only theirs and not their parents’.
With this background information, let’s come to the meat of the issue- how to inculcate internal motivation?
The Right Mindset: Researchers call it The Growth Mindset. The idea is that if parents and educators praise the effort of children instead of their inherent abilities, children become internally motivated to put effort. What happens is that this reinforces in their brain that success and failure are functions of effort and not some inherent ability. Such kids are less likely to say things like- “I did not get the Math gene“. When they see failure as not an inherent ability problem, they push themselves harder to grow in any given discipline. They are likely to try hard problems even if they might fail since they don’t see failing as a reflection of their character. Authoritative parents are more likely to engage in such exercise with their children.
Autonomy, Competence, and Relatedness:
Autonomy: Kids have to be given agency and sense of control. Agency means that children feel that they have a say in the matter and this improves their internal locus of control. This helps kids in owning up to their responsibilities instead of blaming external circumstances. A funny example from my culture would be, if you had the autonomy to marry whomever you wanted to, you cannot blame your parents for a bad marriage. You would be internally motivated to own up to your responsibilities instead of blaming your parents for a bad match, which you can if you were married away in a traditional arranged marriage. In a traditional arranged marriage, it’s easier to blame the parents for ruining your life. A more relevant example would be choosing classes, interests, sports, and careers. All other things being equal, a child is more likely to be motivated if she had a say in choosing what she wanted to do with her life. Again, Authoritative parents are more likely to take their kids’ opinions into consideration, over Authoritarian parents. Permissive parents on the other hand can run the danger of going completely by their kids’ whims and impulses.
Competence: When parents and educators help children build competence, that increases children’s internal drive. The better they get at something, the more motivated they are to work towards it. But competence should not be the sole focus, at the expense of Autonomy and The Right Mindset. If you don’t believe me, read Andre Agassi’s autobiography “Open”. While he was highly competent and his father helped build that competence, it was done against his will (complete lack of Autonomy) and he detested playing Tennis and felt miserable throughout his career, despite the external theatrics.
Relatedness: This is about having adults show genuine interest in their children’s work. While this may sound like an external motivator, it helps build internal motivation because humans are social animals. For eg. a child tends to enjoy a subject if he likes the teacher. Educators and parents who connect well with children build a strong sense of internal motivation for learning that subject or discipline. Sometimes, scientists also use the word Purpose. When humans feel strongly about a Purpose, they tend to be internally motivated towards that Purpose.
Optimal Amount of Dopamine: Finally, we are talking about the neurotransmitter Dopamine. You might ask how, as a parent or an educator, can I influence the amount of a neurotransmitter in a child’s brain. Dopamine flows when the external rewards are a surprise because Dopamine works on a principle, the scientific term of which is called “reward prediction error”. When an unexpected reward is received, then Dopamine flows, and internal motivation increases. The keyword here is unexpected. If a reward is expected, then it erodes internal motivation. Dopamine also flows in an optimal way when challenges and skills are of a match. When a task is more challenging than your skills, then you tend to get frustrated. When a task is less challenging than your skills, then you get bored. Hence, as your skills improve, your challenges should be raised as well, so that the optimal flow of Dopamine happens and the internal motivation sustains. This can also happen when the other pieces of The Right Mindset, Autonomy, Competence/Mastery, and Relatedness/Purpose fall into place and Flow ( a term for describing the state of experience when challenges and skills match and it leads to intense absorption in the activity) is experienced.
That was a long discussion on internal motivation and it warrants all the nuances since it is a very difficult topic, especially in situations where external motivation is not enough to keep people interested in their careers and jobs. I personally believe that life is not one size fits all and all solutions should be contextual. But at the same time, I also believe that we should understand the latest science behind motivation instead of just operating with a single-minded approach of carrots and sticks, which might work in some contexts while not work in others. It is also important to understand your goals since that will help you in choosing the right strategy for your child. Enjoy the journey and you will, especially if you are internally motivated!
Coronavirus and investing
Amid the Pandemic, this is a great time to remind ourselves of the long term thinking when it comes to saving money and investing. The keyword being “long term”. Those who have started very recently might be getting dissuaded by the humongous drop in the market and I am very mindful of that.
I started earning reasonable money in 2008. Anything I earned before 2008 was mostly stipends from Graduate school and minor internships here and there. When the 2008 financial crisis happened, I did not have any sizable portfolio invested in the market. I had just started a family (my daughter was born in April 2008) and my wife had started school. We were paying all those bills and were still saving money. That first year, we just saved money in our savings account since we wanted to buy a house ASAP while the market was at its knees. We bought our first home in December 2009. The next couple of years went mostly in paying the bills, child care, wife’s tuition, traveling and the new mortgage. We started stock market investing seriously only in 2012, although I was still buying ESPP (Employee Stocks) at a discount from my employer before then, which can be considered single stock investing. In December of 2014, we sold our first home and signed the contract for the new home we live in now.
As of March 21st, 2020, Dow Jones in the last 40 years has grown by 2365%, yes you read that right- two thousand three hundred and sixty-five percent. If we were crunching this number on Feb. 12th,2020, this number would have been 3700% since Dow Jones was at its peak ever of 29,551.42
I want to share from the experience of these 8-9 years of investing so that people don’t lose faith in this downturn. Yes, there will be a big reduction in everyone’s portfolio and it will hurt. But, we will still turn out to be winners in the long term.
I will use my 401K account to bring the point home. My 401K shows me that my portfolio’s return this year (YTD) has been -27.3% and that sounds horrible. Despite that, there is a silver lining. Every pretax dollar I ever contributed to my 401K is still cumulatively up by 45% (as of March 21st, 2020). There are two victories here. One, the fact that I have not paid taxes on this money and two that instead of keeping this money in my checking account (or under the mattress) or worse yet spending it away, this money has grown by 45%. If I use simpleton Math and average out my marginal tax brackets since 2012, the taxes would still have been close to 35% (remember California has high taxes). This is an 80% victory despite today’s low market valuation. For all this gain to be wiped off, the market has to fall 45% more (close to 2010 levels), which is extremely unlikely, although not impossible. For the Math folks, the reason it only takes 45% fall to wipe off 80% gain is that 45% of 1.8 is ~ 0.8.
There are a few things to remember here in summary. Always have some portion of your portfolio in cash so that during a downturn, you won’t have to touch your portfolio invested in the market. Second, money invested for the long term in the market will always win over not investing or not saving altogether. If someone started investing in 2018, their portfolios will be showing negative results since inception but if they ride out this bear market and keep investing during the bear market if they can, there will always be a bull market on the other side of the horizon (over long periods of time, the stock market only rises cumulatively (see the image), despite the peaks and troughs on its journey)). So unless it is an emergency, please don’t pull out of the market at this time.
This is a message of hope to all my readers. Take care of your health and well-being and don’t touch your 401K and your face :-), unless necessary.
Get Wealthy Slowly
Well, the title isn’t exciting, is it? An exciting title would have been “Get Rich Quick” but I am here to show you that “Get Wealthy Slowly” is a more exciting proposition. I will give some reasons as to why it’s exciting, even though it sounds boring.
We will get into the why before the how.
First question: What is the difference between rich and wealthy?
Most people don’t realize but these are two very different things. Being rich means having good material things in life; like a nice house, great cars and a membership at the country club. One can be rich without being wealthy. A wealthy person, on the other hand, has plenty of assets. She may drive a Honda Civic but she might have a couple of million dollars in assets to her name (it’s not necessary that she drives a Honda Civic but the example was chosen to make the point). Wealth comes from accumulating assets, notwithstanding your income. Feeling rich comes from spending, it doesn’t matter whether you have borrowed that money or are living paycheck to paycheck despite a very high income.
Table 1: Look at the age and the Top 1% Net Worth column to understand who is considered the top 1% in America at various ages
The First Why? Why do we want to be wealthy?
There are some good reasons for the desire to be wealthy and there are some poor reasons for the same. There are lots of myths about wealth which we can bust along the way.
- Good Reasons
- You want financial security for yourself and your family.
- You enjoy fine things in life in moderation.
- You want to leave a meaningful positive impact in the world. This one is tricky because a lot of work we do leaves a negative impact in the world, even though we are working towards a good cause. An example would be to send tons of wheat and rice to Africa in an effort to eliminate hunger while destroying the self-sufficiency of the farmers by depressing the selling price of their crops and driving them out of the market. The positive impact, in this case, could be achieved differently by helping the farmers become more efficient instead and also helping improve the distribution channel. So, you have to think deeply about how you can use your wealth to positively impact the world.
- Bad Reasons
- You are enamored by the “rich” lifestyle and that’s your prime motivation.
- You have a strong sense of FOMO and that drives you to become wealthy. BTW, if baby boomers are reading this, FOMO stands for “Fear Of Missing Out”.
- You think that endless material consumption will keep you satisfied or in other words you want to enjoy the fine things in life ALL the time.
- You want to mask your other insecurities with wealth.
- You are doing it chiefly for social validation or because of envy.
Myth Buster #1: Having a lot of wealth will make you incredibly happy
There is absolutely no doubt about it that wealth can solve a lot of problems. If you don’t have to worry about money for your children’s education and your family’s retirement, your stress level absolutely goes down. But, it has been biologically as well as psychologically proven that we humans adapt hedonically very quickly. This means two things. First, we get used to the good things in life and they do not increase our average happiness beyond a certain point. Second, any additional wealth beyond a certain point does not bring any additional happiness. Our happiness levels actually stay pretty stable for the most part of our lives. This means that acquiring your first million dollars might increase your happiness to a certain level since you are out of major worry zones but going from ten to eleven million in wealth doesn’t do much for us.
Bill Gates in 2019
Myth Buster#2: Wealthy people are geniuses or really bad people
While it is true that some wealthy people are geniuses (read my article on geniuses here: Are you a genius? ) and some are rotten apples, while some others are both; these myths are not necessarily true. Yes, you have Bill Gates and Martin Shkreli on two ends of the spectrum while Jeff Epstein straddles both the boundaries; but most wealthy people are of average or above average intelligence and average moral character. The demonization of wealthy is as wrong as the worshipping of them. Just because someone is wealthy doesn’t mean that they have good advice to offer or we should look up to them. Neither should we look down upon them for their wealth.
The Second Why? Why “Get Wealthy Slowly” and not “Get Rich Quick”
The biggest reason is the scientific research done in this arena tells us that it is more satisfying for ourselves and less detrimental to society and the environment as well. People who consume resources slowly and mindfully tend to enjoy those resources more and have a more satisfying relationship with wealth. Hence, people who invest in assets while consuming a smaller portion of their income, tend to have a more satisfying material experience. And these are the people who are building wealth slowly. On the other hand, in the get rich quick scheme, success is harder but once you succeed in getting rich quick by scoring a windfall or a high-income gig early on and don’t rein in your consumption, you will be trapped on the hedonic treadmill and you might be adversely impacting the environment at a faster pace (Please don’t forget that it’s not ONLY global warming but the overall impact of the human economic activity on ecology has been terrible. Of course, we can never avoid the ecological impact but can keep it in check with better technologies, controlled population, and mindful consumption ). You might also be jeopardizing your health along the way. Keeping these things in mind, I recommend “Get Wealthy Slowly”.
But how?
If you have read Warren Buffet’s biography, you have heard the term “The Snowball Effect”. If you notice the Table 1 above, you might see that with the progress in age, the wealth of the top 1% grows more than linearly. This is the compounding effect as used in the term Snowball. Wealth invested in an asset which grows at 10% in the first year, increases by 11% on the original base in the second year and 12.1% in the third. As a rule of thumb (following the rule of 72), a 10% growth rate doubles the asset’s value in (72/10)~7 years. Hence, a person who is investing $30,000 per year in assets (which is growing at say 12%), starting at age 22 and increasing his investment by 10% each year, would have a net worth of $3.2m by the age 40. Look at the table above, this person is top 1% in America (This person is also at the $1.35m level at age 35). With engineers making 6 figures as starting salaries at age 22, this is very doable. You don’t have to strike it big in a startup or win a lottery to achieve this feat. This is slow and sweet and relatively mindful to the planet. If you are saving $30,000 in the first year of your career, you are certainly not a consumption-driven person.
I hope you enjoyed the post. Let me know if you would like to learn more about the math behind all this magic.
SAT Format: Click on the link below
SAT: Tips and Techniques
SAT/ACTs are important for college admissions. That begs the question if parents should be heavily involved in the SAT prep or not? I have always enjoyed standardized tests because I have always been good at them. However, standardized tests are not fun for everyone. Hence, we have to be careful about how we approach the topic of SAT with kids.
My daughter is finishing up her 5th grade and has six more years before she takes the test. However, I have my own experience with standardized tests and I will use that in addition to the numerous books I have read on this topic, to shine some perspective on this important process.
Responsibility: First and foremost, it should be very clear that the test prep is the child’s responsibility and not the parents’. This is very important because this creates a sense of control in the child’s mind which is very healthy for internal motivation. Fear tactics might work in the short run but for the long run, a healthy sense of self-motivation is a much better alternative. And we as parents, need to let that blossom by not taking on our child’s responsibility as ours. Of course, that doesn’t mean not being involved, it just means that our job is to provide information, exposure, and tools but it’s the child’s job to decide whether he/she wants to use them. There are tons of worldly successful people battling depression and anxiety. They made it to the Ivy League schools but were robbed of their control and creativity by years of regimented instruction. And there are others who made it to the Ivy Leagues with a very healthy sense of self-motivation and self-discipline. We want our children to be self-disciplined, not well-disciplined.
Stress: The neuroscientist Sonia Lupien uses an acronym for stress generators called N.U.T.S.We all agree that a small amount of stress is necessary for good performance but a lot of stress will clearly undermine performance. So, the parents’ role here would be to cut out the large stressors.
N- Novelty: Anything new or Novel tends to create some amount of stress in human beings. For eg. going to the test center for the first time on the day of the test, finding parking, trying to find the way from the parking to the exam room, etc. Another example could be not taking a practice test so the test seeming very novel on the day of the test. Here, parents can help by taking the child to the test center a day or so before the test day so that the child can familiarize herself with the surroundings. Parents can also suggest that their child take some practice tests before the real test.
U- Unpredictability: Unpredictability is also a known stress generator. A child could have practiced all sorts of problems and could have prepared to answer questions in a predictable manner by following certain processes. However, she could get surprised by a completely unpredictable type of question. In that event, children should be able to try other techniques like “plugging numbers in”, trying to eliminate answers which look unlikely and other creative strategies. In simple words, children should know that the tests, like life, are not always predictable and they should be ready with some creative strategies on the fly to deal with them. Also, parents should try to keep the atmosphere at home fairly predictable in the days leading to the test day.
T- Threat to Ego: This is probably one of the most important issues to handle in the context of SAT tests. Parents should have a clear understanding with children that SAT scores are not a reflection of their intelligence and self-worth. Parents should themselves not try to derive any self-worth from their children’s SAT scores. When humans feel a threat and are under stress, their cognitive capacity diminishes. In a wonderful book called The Self-Driven Child, the authors suggest that the kids should be in the predator mode instead of the prey mode on the test day. They can prep for this by listening to uplifting, motivational music and feeling confident and ready for the kill (not literally please!).
S- Sense of lack of Control: Control is fundamentally important to living anxiety and stress-free lives. Unless you are spiritually enlightened, lack of control could induce a lot of stress in you. We talked about control in our discussion of responsibility. Kids should know that they are in control of their future and the outcome of the test and college admissions is partially in their control as well. It’s important here to note that we can never be fully in control of everything but partial control or even an illusion of control helps in cutting down stress. Talk to your child about the fact that doing well at SAT is well within the child’s control. The child should also feel that she is driving the decisions around the test prep and test taking so that she feels internally motivated to put in the hours needed to do well on the test.
At a later point, I will post some specific tips around the preparation material itself. It’s more important to first lay down the psychological framework before talking about the technical framework. So, stay tuned.
Who is bribing their way to college?
This article is in the wake of Hollywood celebrities buying their children’s way through college admissions. It is probably not surprising at all. However, its egregious to cheat the system, at least until these institutions change their rules. It’s like it’s acceptable in America for lobbyists to literally propose laws so we cannot question the lobbyists since they are not doing anything illegal. Just like that, there are countless such schools where it’s pay to play. However, the schools on the list are not pay to play. They are some of the better private and public schools of America. And that’s why this is so problematic. These schools are not NPU, Fremont but Yale, Stanford, UCLA and USC. However, it is not the schools themselves that committed crimes, it’s the people employed in different areas of the entire college admission process and the parents of children who played foul.
Not to single out Lori but she and her husband Mossimo Giannulli agreed to pay $500,000 to get their two daughters into USC
So, are there any better solutions than the subjective American college admissions scheme? It depends on the objective of college. Is the objective of college, life experience and networking? Or is it strictly building hard skills and employ-ability? Or is it a mixed set of both? Most will agree that it’s a mixed set of both and that’s why we have landed at this subjective college admissions procedure in America.
To throw some international perspective, when I was growing up, there were clearly three kinds of colleges- the pay-to-play types, the strict admission criteria types and the admission criteria types with pay-to-play under the table. I went obviously to the “strict admission criteria type”. There used to be a college entrance exam for this college with 1% selection rate. In my year, 300,000 students appeared for the test, 3000 got selected (strictly based on the test score) and my rank was 981 (in the top 0.33%). To compare, Stanford and Harvard have 5% acceptance rates. Let’s say if Harvard and Stanford just look at SAT scores and GPAs as admission criteria, somebody like me can get in with my work ethic and education focused mindset.
However, the story is different in America. There is no strict formula for undergraduate admissions. It’s a combination of SAT scores, GPA, letters of recommendation, personal essays, legacy and a more holistic resume with volunteer/entrepreneurship/leadership experience or otherwise some exceptional talent/performance in one area. I could have still eked into Stanford or Harvard, based on SAT scores, GPA, letters of recommendation and personal essays; had I applied for undergraduate admissions in the US and had I taken the SAT. I can say this because I have always been good at academics and understanding how things work conceptually has never been a problem for me because of my reading habits. However, to achieve this, I should have gotten perfect scores at SAT and an extremely high GPA to balance out my lack of holistic resume. Most kids from my socioeconomic and geographic background lacked the holistic resumes we speak of today. The only “paid” extracurricular classes I ever went to was “cricket practice classes” at the neighborhood park for a season or two. In contrast to that, just to check out my daughter’s interest, I have taken her to ballet, voice lessons, basketball, cross country, track and field, golf and martial arts, to name a few and she is just 10. Of course, I am not imposing any of these “paid” extracurricular activities on her. We are taking her for the experience to see if she can develop interest in anything particular. From trial and error, we did find out that she truly enjoys “long jump” (and track and field in general) and does very well at them.
Despite the lack of this holistic resume, I was able to attend the best engineering school in India and this is because the school’s admission criterion was extremely objective- the test score of their entrance examination. This makes sense since the objective of the school was to produce technical engineers. However, once we were at the school, we realized that the school had much more to offer than a great engineering degree, it offered us life experience, holistic education and awesome networking opportunities in addition. The school has since (I went there in 2002) changed it’s admission criteria but I am sure it’s still somewhat more objective than American schools.
So which schools in America are somewhat like my school in India? I think the schools which come closest are California Institute of Technology aka Caltech and Massachusetts Institute of Technology aka MIT. I am not saying that these schools don’t look at subjective things but their objective criteria are so strong that few students make the cut. I am adding some videos to this post to make the knowledge gathering session more “holistic” instead of an objective reading.
Shashi Tharoor’s somewhat exaggerated take on IITs
So the premise of this post is that if the objective of a school is specialization, the admission criteria will be more objective than subjective and if the objective leans more towards a holistic well-rounded education, the admission criteria will be more subjective. Foul play can happen with objective criteria as well (you can pay someone to fudge the scores, who knows) but it is more likely to happen with subjective criteria since “subjective” is a matter of perception. One of the universal rules of life is: “whenever performance is not clearly measurable, networking plays a bigger role in success”.
So every society is free to decide what kind of schools they want and what kinds of graduates they want. We need both kinds- we need the well-rounded, people savvy sales guys and we also need the uber specialized engineers, doctors and scientists. We either send them to the same schools with same criteria or different schools with different criteria, that’s our call. There are other things to think about though- privilege, legacy and endowments. Social currency has always been one of the most important currencies since humans existed; hence we will never be able to eliminate the “who we know” phenomena. But we have to think creatively about leveling the playing field. Ideas are welcome. Remember, life is not fair but we can try to make it fairer, not always, not everywhere, but at least when and where we can.
Can you pay federal income taxes at Warren Buffet’s tax rate?
The US tax code gives a massive advantage to one group of people: long-term investors. This is how people like Warren Buffet keep their taxes low. I am here to tell you that you can take advantage of that as well.
You would be surprised to know that if your AGI (Adjusted Gross Income) is less than $77,200 and if you are married and filing taxes jointly, you don’t pay any federal taxes on your long-term capital gains. Surprising, isn’t it?
Source: NerdWallet
And let’s say your AGI is $600,000 and let’s say all of that income is from long-term capital gains, then you pay only $84,470 in federal taxes. To simplify, I have ignored standard/itemized deductions.
However, if $600,000 of AGI came from a W2 job, can you guess what your federal tax bill will be? It will be a whopping ($1905+$7002 + $19,272 + $36,000 + $29,350 + $70,000) = $163,529, yes roughly $80,000 more. You need to also remember that to make AGI of $600,000 via your job, your real gross income has to be probably closer to $700,000, to fund social security, Medicare and Disability Insurance.
If we were to compare the overall tax rate with the $600,000 example above, the investor pays 14% while the wage earner pays 27.25% (roughly double tax rate). And that’s how Buffet’s secretary pays a higher tax rate than Buffet himself.
You can devise your life around long-term capital gains. Invest as much as you can in long-term investments. Then reap the rewards later by dropping off the job bandwagon early and live off your investments, paying very little taxes on your way.
If you find saving taxes like this morally discomforting, then ask your lawmakers to change the tax code. Well, most of them won’t listen to you but you can try nonetheless!
Why the startup won’t make you filthy rich?
At the outset, this sounds like a negative post. However, it is not. This post centers around the reasons to start that startup you have been pining to start (this is probably the only sentence I have seen with the incessant use of the word “start”).
“Start” is a very positive word and we all love starting something new. I have started a company in the past and have started a small business with my wife. What I want to talk about here are the reasons why one should start a company or even join an early stage startup.
You should start a “traditional startup” (I define it as any startup which takes funding from outside and has an exit goal of either IPO or acquisition) or join an early stage startup if you have the following traits/goals:
- Have developed Interest and passion in the area.
- To accelerate your career by learning a lot in a shorter amount of time.
- Love creating jobs and creating a difference in people’s lives.
- Entrepreneurship feels meaningful to you.
- Making a reasonable living but not necessarily aiming to become filthy rich.
I think people understand the first four points well. For eg., if you work for a decent startup for a few years and then move to a bigger company later, you are more likely to score a better position for yourself. Interest and passion are no-brainers because once you have developed interest and passion in a certain area, the process is more exciting than the goal itself. (To clarify, I don’t believe that people have innate interests and passions. What they have innately are predispositions which are honed into interests and passions over time). For eg., an entrepreneur should think: will I be ok building this product/service even if I don’t end up making tons of money but don’t devastate myself financially either? If the answer is yes for sure, then that’s a go. However, if the answer is: no, the only reason I am doing this is to make tons of money, then it’s surely a red flag.
My fifth bullet is the bone of contention. You keep hearing about acquisitions like Instagram and WhatsApp and IPOs like Facebook and you wonder why the author is leading you away from billions of dollars. The answer to that question is the statistics. If you are of the mentality of “Go big or go home”, then you might attempt a traditional startup (eyeing for an acquisition/IPO as an exit strategy) for money reasons. Otherwise, if you are interested only in making decent money, you can focus on small businesses, high-income jobs, and asset building, instead of the traditional startup path, as an alternative.
Here are some stats to support my claim (the best place for double checking these stats is Rand Fishkin’s book- Lost And Founder. You can read/buy the book here: Book: Lost And Founder):
- only 25% of tech startups survive past year 5 of operation.
- Roughly 40% of the high potential US startups fail completely (completely means investor lose all the money).
- Only 5% of US startups deliver the expected return on investment for VCs(yes, Instagram, you know you did it).
- The target is to beat S&P 500 very handsomely over the period of 10 years as far as VC funding is concerned. If we take 12% as average return for S&P 500, the target is to return more than $300 million on a $100 million investment in 10 years.
- Only 5% of startups succeed at this target.
- A further 10% startups will return between $200 million and $300 million. (The VC was better off invested in an index fund.)
- The next 35% return between $100 million and $200 million. (The VC was better off keeping his money in a high yield CD/bond/savings account in this case.)
- The remaining 50% return less than the initial investment. (A checking account with 0% interest rate would have done better in this case)
- The founders and employees in a startup make lesser income and get worse benefits compared to their big company counterparts on average. The rationale for this is that they get equity (common stock for founders and employee options for employees; the VCs keep the preferred stocks for themselves).
- The equity is illiquid, hence worthless if the company does not go through an exit event, like IPO or acquisition.
Entrepreneurship is supremely important for innovation, creating jobs and keeping the economy vibrant. However, for an individual, being an entrepreneur with a traditional startup with VC money might not be the “get rich quick” scheme they were hoping for, even though it could be their best life decision. So, go start that startup of yours, but for the right reasons.
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