Invert, Always Invert

Perhaps you recognize the quote, “Invert, always invert” by the mathematician Jacobi, perhaps you do not, but it is one of the most powerful tools you can use in your arsenal to get the life you want.  If you have ideas for what you want to get out of your life, such as being a multimillionaire, finding true love, or going on vacation twice a year, you have to have a plan to get there.  This is where the power of inversion is so powerful.  Let’s say you want to retire with five million dollars in net worth when you are 65.  Such an amount will drown you in hundreds of thousands of dollars a year.  Such a net worth in the US today would buy you luxuries that would have been inconceivable to John D Rockefeller a century ago.  How would you want to go about accomplishing this?   Well let’s take a look.

Our Case Study: Andy

Andy is a young 23 year old engineer who is making about $50,000 a year.  He is a recent college graduate, and at age 23, doesn’t have any savings whatsoever.  However, he has a dream to have a net worth of $5,000,000 when he is 65.  With that money he could take his kids and grandkids to Disneyland every summer.  Andy can take a vacation to the Bahamas with his wife.  He can enjoy a fully stocked larder, and spend his days fly fishing.  He knows that in order for this dream to be fulfilled, he has to plan out his life to get to that point.

Assuming a 10% rate of return, between the time Andy is 23 and 65, he has to save $9,300.59 a year.  THAT is the number Andy has to focus on.  How does he save $9,300.59 a year.  Does he cut his current spending so he can just pull out that money out of his paycheck?  Can he try to use tax breaks and other programs that the government offers?  Does he try to start a business on the side that pays him that money?

For a lot of people, that is going to sound extremely difficult, but it is very doable if you are willing to make the sacrifices.  If the firm Andy works at has a 401k plan, but isn’t particularly charitable, it makes it somewhat easier.  Let’s say his company only matches 50% on the first 6% of his salary.  That means that Andy will be saving $4500 in his 401k, but a third of that money didn’t have to come out of his pocket, and he is a little less than halfway there.

Now let’s go into the esoteric.  Andy is looking at buying a house, and hears about Mortgage Credit Certificates.  These are tax credits that put a maximum of $2000 back into your pocket come tax day.  That brings the total to $6,500.  He is two thirds of the way there, and only has to find $2,800.

Next Andy goes to Upromise, and applies for their credit card program with accompanying card that gives him 10% cash back.  If Andy is smart about where he shops with $10,000 in discretionary income, he can get $1,000 that he can use to pay off his student loans that didn’t have to come out of his pocket.  That move brings the total amount of money he has to save down to $1,800.

Invert, Always Invert

There are so many ways for Andy to get that final $1,800 on a $50,000 salary.  He can buy a more fuel efficient vehicle.  He can carpool, or he can start an engineering advisory website where he brings in advertising income.  Hell, he can just take that money which represents less than four percent of his income, and invest it in a Roth IRA for tax free income during his retirement.  The point is that Jacobi’s statement of “invert, always invert” is so important to getting the life you want.

Inversion is one of life’s great tools to get the outcomes that you want.  There is a reason that Charlie Munger states that the key to solving problems in your life is to “Invert, always invert.”  If you want to see a separate example, Charlie Munger actually used this process to highlight how he would build a two trillion dollar corporation.