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Behavioral Finance Financial Advice Relationships

A New Year’s Toast

A New Year’s Toast

Cheers!

By Scot Whiskeyman

In the spirit of New Year’s Eve, I’d like to make a toast. If you’re reading this, join me in raising your glass, coffee mug, water bottle, or whatever.

It seems like just yesterday 2018 was beginning. Scary how the years seem to zip by faster and faster as we get older, isn’t it? But that’s not what this toast is about.

This New Year’s Eve, I’d like to make a toast in your honor. I may not know you, but I believe you have the power to be great – so here goes.

Here’s to your potential. To the greatness and success that lies just around the corner from you. To your wealth, our prosperity, and generosity. To your success.

Here’s to all of the love you have to give, and all of the love you were born to receive. To new beginnings, and to the great places they’ll lead.

I’m not saying it will all be easy. In fact, the average person may cower away when challenges arise. But not you. You’re anything but average. So here’s to your bravery in the face of the impossible, and your ability to overcome it.

You are brave – braver than you knew in 2018. In 2019, you’ll worry less, because you know there’s plenty of time, and plenty of love to give and to get. And you know that you’re edge greatness. Any challenge life might decide to throw in your way is only temporary, and yours to overcome.

Because in 2019, you’ll be fearless. Whatever you’re faced with – financially, professionally, or personally, you’ll think to yourself “I’ve got this.” And you’ll be right.

Here’s to fearlessness.

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Behavioral Finance Financial Planning Investing Stocks

When It Comes to Investing, Don’t Go With Your Gut

When It Comes to Investing, Don’t Go With Your Gut

When it comes to investing, “go with your gut” does not apply.

There’s an interesting phenomenon that affects us humans known as consumer utility. I first learned of it in business school, because it has a big role in how people make decisions, and therefore has a big role in how businesses market their products and services to us. But the phenomenon extends far beyond business. It’s affected each of us, and happens every time you lose your car keys or find a penny on the street.

What is consumer utility? It’s is a system of measurement used to quantify negative and positive feelings we each experience. We measure car trips in miles. We measure body weight in pounds. For our purposes here, we’ll be uncreative and call it a “pain unit.” How many units of pain a traumatic event is worth varies from person to person, and isn’t really relevant. What is relevant is that a pain unit is heavier than its opposite, which we’ll call a “gain unit.”

What’s the opposite of one step forward? One step backward. But not in this case. What I’m getting at is that it takes more than a single gain unit to counter-balance a single pain unit.

To illustrate this point, take two random investors, who each start with $100,000 before trading. The two investors don’t know each other and their investments are made in different years. We’ll assume they both have average skill and experience with investing.

Remember: this example isn’t about the investment results, but rather the investors’ attitudes towards those results.

Investor A has $100,000 in stocks. The account loses 40% of its value (a loss event). Investor A now has $60,000 in stocks.

Investor B has $100,000 of different stocks. The account gains 40% in value (a gain event). Investor B now has $140,000 in stocks.

How do you suppose it feels to lose $40,000? Pretty terrible, right?

On the other hand, it probably feels pretty great to make $40,000. 

Either way, we can all agree that $40,000 was the absolute value that affected each investor – just in different ways. But because of the consumer utility phenomenon, good = good, and bad = terrible. One pain unit actually has the weight of about three gain units.

In order for the emotional weight of a gain event to equal the emotional weight carried with a loss event, investor B would need to have made $120,000, taking their account to $220,000. Yes, that’s right, they would have had to more than doubled their money.

In short, negative emotions “weigh” a lot more than positive emotions. This explains why stock market volatility causes noticeably irrational panic, and why investors make the mistake of buying high (hey, the market’s going up, time to get in!) and selling low (oh man, the market’s doing terrible, I better cut my losses and get out).

When it comes to investing, don’t go with your gut. A financial advisor can help you guide you through emotionally tumultuous times – such as recessions – so that you don’t make mistakes that cost you down the road. And because no one quite knows exactly when the next wild market swing will occur, now is a terrific time to get to know, like, and trust (hello PRE!) an advisor that can help you manage your money and your emotions – so that you meet your goals.

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Behavioral Finance Credit Credit Score Debt Emergency Funds Financial Planning Investing Retirement Savings Student Loans

Accomplishing Your Financial Goals by Weighing Each Part

Accomplishing Your Financial Goals by Weighing Each Part

A man walks into his doctor’s office for his annual checkup. After checking his heart beat, taking his blood pressure readings, and flipping through his chart, the doctor breaks bad news to the man: that he’s got to lose some weight, or suffer some serious health consequences very soon. The man, very annoyed, explains to his doctor that he has tried to lose weight, but “nothing works.” He eats a salad for lunch every day. He cut out soda and beer. He has vegetables with every meal. It’s just genetics!

Not so fast. Further prompting from his doctor reveals the problem: the man dumps croutons, breaded chicken, and ranch dressing on his salads, making them no better than a fast food sandwich – and he does this daily. The vegetables he eats are always accompanied by high calorie dips. And his daily snacks of ice cream and M&Ms add nearly 1500 calories to his daily intake. Turns out they’re more than just a treat – they make up half his diet.

For anyone who cares about their health, filling in the blanks is easy: calories in > calories out. For this man, it’s confusing. He eats vegetables and some sweets, so what?

A good habit does not cancel out a bad one. When it comes to accomplishing one’s goals, the summation of all of his actions are what results in the consequences, whether desired or not. It’s not the lettuce that’s the problem, it’s the deep fried chicken and carb loaded extras on it.

The same is true when it comes to money. It’s not saving money that’s the problem, it’s avoiding wasting it. Would lower interest on my credit card help? Sure, but if I keep swiping it to buy useless junk, how much will my balance decrease?

Successful people look at how their individual financial habits impact their financial situation as a whole. By addressing their financial situation in parts, they feel more empowered to make real changes for the better.

Consider your financial situation and it’s parts. What can you cut out of the budget, however tiny? How much extra change can you throw into savings, or at your credit card balance?

Whether it’s improving cash flow, saving for a vacation, or paying off a credit card, big change happens when the weight of each part is tackled bit by bit. Cutting out croutons from a salad can reduce it by hundreds of calories. Give it time, and the impact of cutting out croutons will speak for itself. The same is true for your bottom line.

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Behavioral Finance Credit Credit Score Financial Planning

3 Ways to Boost Your Credit by the 4th of July

3 Ways to Boost Your Credit by the 4th of July

It’s no secret: improving your credit score can mean more leverage for you, and less leverage for your lender – which means keeping more of your money, and giving less of it away.

On the flip-side, what actually could be considered “secret”­ is that dramatic score improvement can happen for you. Fast.

Think improving your credit score quickly can’t be done?

Here are some tried and true methods real people have used to improve their credit scores by as much as 92 points in 30 days.

1. Pay a little extra towards principal.

We’ve all heard this advice before. But if you’re in a bad credit situation, then you know first-hand that paying the minimum looks more appealing as its due date approaches. To avoid this pitfall, try Micro-payments, or multiple payments throughout the month, in lieu of paying above the minimum. “Credit card issuers typically report to the bureaus every month,” explains Deb O’Shea, finance columnist at NerdWallet1, who also says that you can expect to reap the benefits quickly. “As soon as your creditor reports your lower balance, the better utilization will be reflected in your scores.” Which leads us to our next section:

2. Request a credit line increase (or accept a pending offer.)

Take it from Janna Harron, Bankrate.com’s own Credit Card Advisor2. “Your issuer is actually helping your utilization rate by increasing your limit,” she says in an explanation to a reader. “Say you are charging that same $600 balance, but your limit is only $1,500. Then, you have a 40 percent utilization rate. If your issuer bumps the limit to $3,000, now your utilization rate has fallen to 20 percent and helps your credit score.”

3. Reduce your credit utilization ratio.

Author Kari Luckett, contributor at Clark.com, is living, breathing proof of just how well this works3. “I had managed to raise my credit score by 92 points in just one month,” she says. “The major contributing factor to improving my credit score in just 30 days was decreasing my credit utilization ratio.” Just how much did she lower her utilization ratio? An astonishing 19%! (A fair trade-off for a near 100 point improvement.)

In Short

If you’re struggling to improve your credit score, take heart – the odds of dramatic improvement are in your favor.

“The lower a person’s score, the more likely they are to achieve a 100-point increase,” says Rod Delaney, director of public education at Experian. “That’s simply because there is much more upside, and small changes can result in greater score increases.”

 

1http://www.nerdwallet.com/blog/finance/raise-credit-score-fast/

2http://www.bankrate.com/finance/credit/will-credit-limit-increase-hurt-score.aspx

3http://clark.com/personal-finance-credit/how-to-improve-credit-score-quickly/

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Just start!

Just start!

Editor’s note: this article was first published on LinkedIn on November 26, 2017.

In the 1973 classic Time, Pink Floyd member David Gilmour eloquently states how time can slip away, working against us if we aren’t careful:

You are young and life is long and there is time to kill today

And then one day you find ten years have got behind you

No one told you when to run, you missed the starting gun

Doubtful that Gilmour was talking about compounding interest, but these lyrics sum up an interesting point about life and how we move through it. As humans, we tend to focus on the immediate, and find thinking too far ahead difficult. The consequences of this are that by the time we get into a “distant” future, we take look around and have no idea how we got there. My hope is that after reading this article, you may feel empowered to not end up ten years older, trying to get your bearings and feeling broke, but rather happy that you took the time to be a diligent saver.

Three Lives, Three Different Choices

Let’s imagine three friends – Chris, Susan and Bill – graduate from college. They each enter into their respective career fields, fully employed. Their incomes are the same. Their decisions are drastically different.

Out of the three of them, two (Chris and Susan) begin saving right away.

Susan saves money for ten years, and then stops – perhaps she gets married, has kids, and her spouse is the sole bread winner.

Chris saves the same amount, but instead of stopping ten years from now, he continues to save all the way to age 65.

Bill doesn’t worry about saving. He decides that he needs to focus on paying down student loan debt. He uses this as an excuse not to keep a budget. Because he doesn’t budget, he unwittingly spends lots of money on drinks, shopping, and new furniture.

All three of them:

– Save $5,000 annually

– Earn the same rate of return

– Retire at age 65

Who comes out ahead?

The Results

Susan saves $50,000 over her lifetime. Bill saves $150,000 over his lifetime – and he didn’t begin until 10 years after Susan – when he realized that he needed to spend less money on partying. What does this mean for their retirement? Astonishingly, Susan will have over $60,000 more than Bill, who saved three times as much.

Now consider Chris, who started saving right away, and didn’t stop until he retired. By saving $50,000 more than his college friend over the course of his career, he ended up with over $1 million – nearly double both of his classmates.

Of course, this is all just a thought experiment – in real life, each of the three would like have different incomes, different amounts of debt, and different life circumstances. Nevertheless – the choices they made rippled through the years until washing ashore in retirement.

The Bottom Line

Time moves quickly, and it’s easy to let it move you forward without being aware of what you’re leaving behind. If you aren’t saving, start now. If you’ve been considering putting away a little more, start now. It doesn’t matter how much, how often or where – just start. Review your savings strategy on a regular basis – the difference could be hundreds of thousands at retirement, when you need it most.

What do you think? How have you overcome financial challenges to continue saving? Comment below!

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Budget Myths Busted

Budget Myths Busted

Intro

One late night in winter 2010, I was heading home from visiting a friend at Bloomsburg University, when snow began to fall. My commute took me over a series of Pennsylvania mountains with some very steep climbs. It was upon descent from one of these climbs that slippery roads decided to take control of my front-wheel drive sedan. Panic took complete control as my car began to careen into the left lane.

What does that have to do with budgeting? Is it that I should have budgeted in advance for a car with all-wheel drive? (Would have helped.) The fact is, like driving, there can be a lot of unexpected outside factors that can send us off of our chosen path. And very much like those scenarios in which we’re sent off course, what’s most important about budgeting isn’t controlling the unexpected, but controlling how we respond.

The Myths

Myth: I can’t keep a budget, because I don’t know what my income is. This is a common misconception, particularly for self-employed individuals, or those whose compensation is performance-based. The truth is that budgeting is not about controlling what comes in, it is about controlling what goes out. It is important to draw a line between cash flow planning and expense management. Once you do, you may find you have more control than you originally thought.

Myth: I made a budget, but I couldn’t stick with it because of (insert unexpected expense.) If you have made a budget in the past, congratulations – if you had trouble sticking with it, that’s okay. It’s important to understand that budgeting is a dynamic process. Unexpected expenses will always pop up. You can work these expenses into your budget, but you have to be prepared to give you dollars a different job. It’s not all or nothing. Reducing your dining out budget may be required. Budgeting can also help you be prepared by seeing the power of building in monthly savings to prepare for just such an emergency.

Myth: Budgeting means giving up control.In the words of Dwight Schrute: False. Budgeting means taking control. Now, repeat that 5 times. “But wait,” you say, “you just said that budgeting isn’t about taking control! You’re a liar.” First of all, ouch. Second of all, think of it this way: what is it in life that we have complete and utter control of? The truth is, very little. For example, if you’re a golfer, you may know that getting out and swinging your clubs every day will help you. But that won’t have any impact on a course that has bad turf-grass management. However, it will impact your overall score less if you decided you were going to focus on improving your swing, and not worry about outside circumstances. Budgeting is very much the same way: the more disciplined you are with what you can control, the less of an impact outside circumstances will have on your success.

The Bottom Line

The night that I lost control of my car, I could have blamed the weather, or made an excuse about the lack of the right vehicle for the conditions. Fortunately, I was taught – and had practiced – tapping the breaks and counter-steering. These two techniques kept my car (and me) in perfect condition, and allowed for a safe return home. The alternative could have been much worse.

Discipline and preparation could help keep you on course next time, too.

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Why Charting a Course First is Critical to Navigating Unpredictable Stock Market Weather

Why Charting a Course First is Critical to Navigating Unpredictable Stock Market Weather

In the recent weeks we’ve seen the tumultuous return of stock market volatility. In might be causing panic, but it’s important to keep things in perspective. While they’re a nuisance, Hurricanes to begin forming in the Atlantic at the end of every summer in the United States. In fact, it’s been happening for a long time – at least since about the year 830, when a presumed Category 4 or 5 hurricane struck Alabama. The same goes for stock market volatility – it’s been happening forever, and now it’s back.

What Does It Mean For Me?

Your stage in life and taste for investments will dictate what it means for you. For our purposes here and now, I want to focus on what it means for the individual that depends on their investments for income. Not that there isn’t any opportunity for you to take advantage of savers – but skip this article, because it’s more important for your parents.

What Goes Down                                                                       

Walter has a retirement account worth about $100,000, and decides to start using it. He’s saved all these years, why not? He does some research, talks to some friends, and decides that he’s comfortable taking $5,000 per year, or about 5%. (Don’t nod off just yet, these numbers matter.) One year later, he’s satisfied (not thrilled) with his decision: he’s taken five thousand dollars as income as planned, and managed to maintain his principal investment of $100,000. Not bad, he thinks. He fancies himself a good stock picker and congratulates himself.

Two years after retirement, Walter nearly has a panic attack when he checks his account online. His account has plummeted to $60,000 including withdrawals. He remembers hearing on the news that the stock market dropped. He decides to stay the course knowing that the media blowing things out of proportion probably has something to do with this.

Did Walter make the right decision?

Let’s look at Jean, who, like Walter, wanted $5,000 per year from a $100,000 account, beginning at the exact same time he did. Unlike Walker, she decides to split her investments: one half, or $50,000, will be invested in a stock market portfolio, and the other half, $50,000, will be invested in an account that is guaranteed (either by an insurance company or the FDIC) not to lose principal, no matter what. As a trade-off for taking less risk, her “guaranteed” account earns a low interest rate. She decides she won’t touch this account unless the stock market does really bad, and will take her $5,000 from the stocks only.

Okay, let’s recap Jean’s situation: she has a guaranteed account worth $50,000, and a stock account worth $50,000. For the next year, her income comes from the stock account only. At the end of the year, her stock account is worth $48,000, and her guaranteed account is worth $51,500, for a grand total of $98,500.

I know what you’re thinking – in this situation, I’d rather be Walter, $1,500 richer. But the story’s not over, and I’m about to tell you why there’s a serious flaw in that thinking that can spell disaster for any retirement plan.

When the stock market course corrects, Jean decides to switch at the end of the year to let her stock account recover. She’s not happy that the stock market has done serious damage to her account, but this was her plan all along.  She leaves her stock account (now worth $28,800) alone and starts drawing her $5,000 from her guaranteed account (now worth over $53,000.)

Recovering from the Storm

It’s much easier to rebuild the city that had planned for an emergency than one that didn’t. Recovering a loss on investments is no different.

When we last left Walter, his investments were squashed, leaving him with $60,000. He’s excited that his misfortunes have turned around when he hears the market recovered by an astonishing 50%. Great! He logs on to check his account balance and feels his heart sink into his stomach.

His balance? $82,500.

What a disaster! He thinks to himself, proceeding to blame (insert unrelated external force/politician.) I’ve taken $10,000 from this account and now it’s only come back to $82,500. I’ll never make back what I lost!

And you know what? He’s probably right.

Let’s revisit Jean, who decided to go the much wiser route of splitting her investments between stocks and a guaranteed account. The stock market recovery is welcome news to her too. A 50% surge has pulled her account all the way back up to just over $43,000. Her guaranteed account is now worth about $49,500, putting her at $92,500. Still less? Factor in the $10,000 she took in income, and Jean is now the one in the black.

In Short

Walter took a gamble. He decided that he was prepared to take on the risk of loss without doing the math. Because the market had a negative year early on his retirement, his account balance didn’t balloon like he had expected it to. And it cost him.

How about Jean? By splitting up her investments, the pull back in the stock market didn’t affect her nearly as much as it affected Walter. Did she still suffer from some loss when the market abruptly about-faced? Sure. But the net loss in her stocks after the recovery was only 4%. Compare that to Walter’s 17.5%. Not bad, Jean.

The Bottom Line

This isn’t just a case for diversification. It’s a case for understanding how having a retirement income plan can (and likely will) make a difference to retirees. And with interest rates on the rebound, there’s a stronger case than in the last 10 years for including some guarantees in your income strategy.

http://en.wikipedia.org/wiki/List_of_Atlantic_hurricanes_before_1600#Pre-1500

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What It Really Means To Pay Yourself First

What It Really Means To Pay Yourself First

This article was originally posted by Scot on LinkedIn in 2017.

You’ve likely heard the statement “pay yourself first” before.

But what does it actually mean to pay yourself first? In short: it means saving for the future so that you can live a life of financial independence that you someday hope to achieve. Paying yourself first means saving for future you.

Not saving? You’re not alone. The average American couple only has only $5,000 saved for retirement, and only 1/3 are contributing to company retirement plans (if they’re lucky enough to have one.) It’s clear that there is very big gap between where people are and where they want to be. The gap is widened by what they’re doing with their money.

Saving Enough means Saving Excuses

It’s not unusual to hear the a few of these lines when talking retirement savings:

  • I can’t afford to save for retirement.
  • Saving (or saving too much) will interfere with my lifestyle.
  • I need to focus on paying down my debt.
  • I need to pay for my kids’ college/car/etc.

Do any sound familiar? The reasons above are at odds with most people’s (and likely your) financial goals. I’m not here to argue that the above items are unimportant. What I am here to argue, however, is that saving for the future needs to take priority. Here’s why.

Consider the following data on life expectancy, courtesy of the Social Security Administration.

A man reaching age 65 today can expect to live, on average, until age 84.3.

A woman turning age 65 today can expect to live, on average, until age 86.6.

And those are just averages. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.

So, on average, someone who wants to retire at 65 should plan on at least 20 years of retirement. Anecdotally, most of the people I talk to have their hearts set on retiring earlier (age 60 is not uncommon.) Also, planning for a longer retirement is a more conservative approach.

Can’t Envision Retirement? Try This

Many younger individuals and families I talk to have a difficult time knowing how to plan for retirement because it is just so far down the road.

Here’s what I tell them: Imagine yourself retiring today. You have no debt, and no kids with expensive college bills. Your sole purpose: living the life you want. You have complete and total financial independence. What does that mean for you? World travel? A quiet lifestyle at home? Your vision of financial independence should serve as a guiding light towards the person you’ll eventually become – older you.

“I Don’t Want to Retire”

Often, I talk to people who tell me they’ll never retire (I include myself in this category.) It’s admirable to be passionate about your profession, but it’s naive to assume your body and mind will last forever. Whether you want to fully stop working, have a work-optional lifestyle, or continue working until the day you die, you should come face to face with the fact that one day, you might have not have a choice.

Breaking It Down

Now that I’ve sold you on the idea of saving for retirement (I hope), I’ll acknowledge that it can be a challenge to determine how much to properly save. In order to determine that, there are multiple factors that need to be considered. Some helpful questions to ask yourself include:

  • What does financial independence mean to me?
  • What would a monthly budget look like for me, if I were completely independent? (tip: break it down, item by item.)
  • How much can I reasonably expect my investments to grow each year, until I retire?
  • How much can I reasonably expect my investments to grow after I retire? (this is a separate question – remember, you can’t afford big losses after you retire, so you shouldn’t take as much risk.)
  • To what degree do I want to count on social security and/or a pension? (Fun Fact: 60% of millenials expect social security to be bankrupt by the time they retire. For younger generations, this means that in order to properly plan, you need to know what it will take to fully self-fund a very long retirement.)

Finally – don’t forget to factor in inflation – the inevitable fact that the cost of living goes up. Consider the 1987 prices of the following items, provided by bureau of labor statistics:

  • Gasoline, 97.0 cents/gallon
  • Apples, 73.0 cents/pound
  • Potatoes, 24.7 cents/pound
  • White bread 57.1 cents/pound (the avearge loaf of bread is 1 pound, 6 ounces)
  • Milk, $1.09/half gallon

In short: if you’re planning on a long life in retirement, you need to plan on things getting more expensive over time.

The Bottom Line

There’s no time like the present to start saving. With fewer financial certainties and longer lifespans, it’s up to you to take control of your financial future. That means saving early, and saving often – future you is counting on it.

Sources:

http://www.ssa.gov/planners/lifeexpectancy.html

http://www.forbes.com/sites/alexandratalty/2015/06/30/forget-social-security-pensions-millennials-need-to-plan-for-retirement-now/#3f1047d63f10

http://www.bls.gov/opub/mlr/2014/article/one-hundred-years-of-price-change-the-consumer-price-index-and-the-american-inflation-experience.htm

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Pressure & Time

Pressure & Time

One of my favorite movies of all time is The Shawshank Redemption. For those that have yet to see it, consider this your 20+ year late spoiler alert.

What makes this such a successful movie is that its message aligns so well with my philosophy: that simple, routine actions can lead to long-term, massive success. I didn’t believe this until I read Jeff Olson’s “The Slight Edge” Be– but then I realized that the examples of this are everywhere. And even though he’s a fictional character, Andy Dufresne is one such example.

After Andy arrives in Shawshank Prison, he befriends Red, who – upon request – provides him with a rock hammer, and asks if he plans on using it to escape. After initially examining the tool, he sees how laughable the thought is, remarking that it would take a man 600 years to tunnel out with it.

When Red said “a man,” he was right. But if he was referring to Andy, he was wrong, a point he admitted at the end of the movie, in one of my favorite quotes:

“I remember thinking it would take a man six hundred years to tunnel through the wall with it. Old Andy did it in less than twenty. Oh, Andy loved geology. I imagine it appealed to his meticulous nature. An ice age here, million years of mountain building there. Geology is the study of pressure and time. That’s all it takes, really. Pressure, and time.”

Jeff Olson refers to those who couldn’t have succeeded as “the 95%.” Those were the types of men Red was used to encountering. Those who give up, consider themselves victims, and settle for an ordinary life. Andy was anything but ordinary.

Andy may be a fictional character, but the philosophy is anything but. You see, just like Andy, real life heroes don’t wait for their ship to come in. They don’t wait for it all to come at once. They use the tools they have and put them to work every day.

You put an extra fifty cents away towards retirement today, and it feels like nothing. You spend one evening scraping at prison wall, and – we know how that story turns out. Pressure, and time.

The massive success you’re waiting for depends on these little, seemingly insignificant things that are totally in your control.

Instead of a rock hammer – imagine you are the tool. With the right amount of pressure, and time, what could you achieve?

You have that power every day.

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