In this episode, I discuss the mental model of Gradualism and how to become a millionaire by investing only $1 a day. Gradualism is a mental model built upon biology and geography which can be leveraged to enable you to achieve financial independence.
An approximate transcript follows below:
Hello and welcome to Episode 2 of the DIY Investing Podcast. My name is Trey Henninger and I’m your host. Today, I will be sharing the secret of how you can become a millionaire by saving only $1 per day.
Well actually, it’s not exactly a secret but it is something which many people have yet to fully grasp and install into their daily understanding of the world.
The concept we’re going to discuss today is called Gradualism. Gradualism is a mental model. A tool to add to your toolbox to improve your critical thinking, and help you become a better investor.
The outline for today’s show is:
- First, I will give a very brief overview of mental models for those who aren’t familiar with the concept.
- Second, I will dive into the background of Gradualism and it’s native use.
- Third, I will provide some examples of Gradualism in the real world, to help you spot it’s effects when you see it.
- Finally, I will wrap up the show by relating Gradualism directly to personal finance, financial independence, and investing.
So, that’s the basic overview of today’s show. Now, let’s dive right on into the overview of mental models.
Mental models are at the foundation of my approach to investing. Specifically a Latticework of Mental Models. This approach was made famous by billionaire Charlie Munger, who is most commonly known as Warren Buffett’s partner with Berkshire Hathaway. Warren Buffett has on numerous occasions credited Charlie Munger for making him a better investor and influencing him to change from a deep value investor to the blue chip value investor he is today.
The simplest way to explain Mental models is to quote Charlie Munger directly. This quote comes from page 55 of Poor Charlie’s Almanack.*
“You must know the big ideas in the big disciplines and use them routinely – all of them, not just a few. Most people are trained in one model – economics, for example – and try to solve all problems in one way. You know the old saying: “To the man with a hammer, the world looks like a nail.” This is a dumb way of handling problems.”
These mental models are the “big ideas” which Charlie Munger is referring to. I continue quoting the book now on page 56:
“When properly collected and organized, his Multiple Mental Models (about one hundred in number, he estimates) provide a context or “latticework” that leads to remarkable insights as to the purpose and nature of life. More pertinent to our purpose here, his models supply the analytical structure that enables him to reduce the inherent chaos and confusion of a complex investment problem into a clarified set of fundamentals.”
So, the basic idea behind investing using mental models is that you have these approximately one hundred different overarching ideas. Individually, they each provide a snapshot into better understanding the world, business, and your investments. All combined together, they provide a framework for ensuring that you invest at a higher degree of proficiency than other investors. This includes professional investors, such as mutual fund or hedge fund managers.
- Background of Gradualism
The mental model that we are going to cover today is Gradualism. Gradualism is:
The concept in biology and geography that large changes occur from very small incremental actions taken consistently over long periods of time.
Geography: Changes in the structure of the earth, land features, and shapes of continents. Canyons, Mountains, Rivers, Valleys.
- Growth of Mt. Everest
- Movements of Glaciers across continents
- Creation of river valleys and canyons like the Grand Canyon
Biology: Changes in evolution through species and speciation.
- Dinosaurs becoming birds, lizards, and other animals.
- Evolution of mammals and eventually humans
- Other examples of Gradualism
- Overnight success
- Blogs, making seven figures
- Football Players (went from nothing to millionaires with the NFL signing bonus)
- American Idol
- Actors and Actresses
- Olympic Athletes
- “Get Rich Quick Schemes” – simply don’t exist. But, it’s this idea that you want to make it all now and without the time and effort, which is so alluring to people.
All of these examples have in common that you had to work hard, put in small amounts of effort (or large amounts of effort) each day, every day, for years and decades before you had success.
- Investing and Financial Independence
Investing: Small actions taken on a daily, weekly, or monthly basis over the course of decades will gradually make you rich. Save $1 a day and you’ll steadily build wealth.
- Save $1 per day, every day, for 57 years and you’ll become a millionaire with $1.08 million. (At 10% interest rate, compounded daily)
- After 1 year only: $383.92
- 5 years: $2,368.07
- 10 years: $6,272.09
- 20 years: $23,319.06
- 30 years: $69,651.17 (It’s still not even $100,000. It’s not until year 34 that you pass $100k.)
- 40 years: $195,577.67
- 50 years: $537,834.50
- 57 years: $1,086,662.36
- Also utilizes the miracle of compound interest, which is another mental model which I’ve covered on my blog at DIYInvesting.org.
- Save $5 per day, every day, for 41 years and you’ll become a millionaire with $1.08 million. (At 10% interest rate)
- Save $10 per day every day, for 34 years and you’ll become a millionaire with $1.08 million. (Now this is about $300 per month).
- What if you could triple this and save $1000/month or $33 per day, now you are a millionaire in 23 years.
- Finally, Save $100 per day every day, and you’ll be a millionaire in 14 years.
The basic takeaway from all of this, is that no matter how much money you save, you can eventually build wealth by harnessing the mental model of gradualism. Large investments aren’t necessary to become wealthy. You don’t need to start with Ten thousand, or one hundred thousand dollars to get rich through investing. You just need to take regular action every day to save money and invest it wisely.
Even $1 per day will eventually make you a millionaire. Before you act like 57 years is unrealistic, someone could start saving $1 per day at 16 years old, and they’ll have $1 million by the time they turn 73, assuming they NEVER increase their savings rate. That’s easily achievable. As they save even more money per day, their wealth will increase even faster.
The lesson I want you all to take away from the mental model of Gradualism, is that there is NO excuse now for you to not become wealthy in the future. This concept alone, that small changes taken consistently and reliably every day for decades can cause large effects. Don’t discount the day of small beginnings. Even if you have no money today, or if you’re in debt you can eventually become rich. Just get started.
If you only take one thing away from this podcast today, let it be this: Start saving today. Even if it’s only $1, set it aside. Put it in a piggy bank, or open a savings account. (Many only banks will let you open an account with no minimum deposit). If you have more money great, save more, but do it every single day and start now. Your future self will thank you.
Thank you for listening to today’s podcast. If you liked this content and found it valuable, please consider taking 10 seconds of your time and rate the podcast in ITunes, along with a 1 to 2 sentence review. You don’t need more than that. That will help the podcast be found by other listeners and help me build my audience.
If you’d like to find the show notes, you can find them at diyinvesting.org/epsiode2.
Thank you for listening.
2. Prior knowledge