Charlie Munger’s wisdom revisited: 5 missteps to avoid on your journey to financial freedom

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Poor Charlie's Almanack

INTRODUCTION

After reading 100+ books on personal finance and investing, listening to more than a 1.000 hours of podcasts, I’ve learned that the possible strategies to reach financial freedom are huge. From extreme frugality, to side hustles, from salary negotiations to business ventures, from stock picking or the hottest crypto coin and from real estate to ETF’s.

What if the secret to achieving financial freedom isn’t about finding the right path, but about avoiding the wrong one? Imagine building wealth not by obsessing over “must-do” lists, but by sidestepping financial landmines that lead to failure. Sounds a little backward, right? But that’s exactly what legendary investor Charlie Munger had in mind with his favorite strategy: Invert, Always Invert. Instead of asking, "How do I succeed?" Munger suggests asking, "How do I avoid failure?"

Here’s how it works: instead of asking, “How do I get rich?” try asking, “What would make me go broke?” Instead of hunting for a magic formula to financial freedom, ask yourself what behaviors or habits are likely to sabotage your progress. It's like trying to win a game of chess by thinking of the moves that would guarantee a loss. Sometimes, knowing what not to do is half the battle.

It's like that old joke about the sculptor who, when asked how he carved such a beautiful elephant from marble, replied, "Simple. I just remove everything that doesn't look like an elephant."

This might feel a bit unusual because most of us are conditioned to believe that success is about constantly adding more—more knowledge, more strategies, more clever tricks. But what if the real trick is in subtraction? By filtering out actions that could lead to setbacks, distractions, or even disaster, we simplify the journey and sidestep the classic pitfalls along the way.

Today, we’ll dive into the major things you should avoid on the path to financial freedom. By inverting the question of financial freedom, we may just find a clearer path to it. Whatever your strategy to financial freedom is.

So let’s take a look at what not to do—and make Charlie Munger proud.

For some extra understanding we will use the basic template for reaching financial freedom: spend less than you make and invest the difference wisely. Out of the five topics well 2 are related to spending less, 1 about making more and to about planning and investing wisely.

1.      Reaching the end of Netflix

"Alright, let's talk about the biggest asset you have: YOU. That's right, you're a multi-million dollar asset, and not investing in yourself is like leaving money on the table. So, why are you being stupid about it?"

"Think about it. Your lifetime earning potential is huge. But too many people treat their personal development like it's an optional extra. Newsflash: it's not. Not investing in yourself is like driving a Ferrari without ever changing the oil. Sure, it might run for a while, but eventually, it's going to break down."

"So, what does invest in yourself look like? It's about lifelong learning. And no, I don't mean just reading a book once a year. I mean actively seeking out new skills, knowledge, and experiences. Whether it's job-related training, financial education, or even learning how to be happier, every bit of knowledge you gain is an investment in your future."

"But here's where people get stupid. They think learning stops after school or college. Wrong! The world is changing faster than ever, and if you're not keeping up, you're falling behind. Don't be the person who's still using a flip phone in the age of smartphones."

"And it's not just about formal education. It's about career development. Taking on new responsibilities, making strategic job changes, networking actively, and regularly negotiating your salary. Building your unique expertise and personal branding. These are the things that set you apart and make you valuable."

"For business owners, staying small is another opportunity missed. You need to build systems and processes, delegate tasks, so you have time for more growth. Don't be the bottleneck in your own business. Remember, the goal is to work on your business, not in it."

"So, don't be stupid. Invest in yourself. Read books, take courses, attend seminars, and surround yourself with people who challenge you. Your future self will thank you, and so will your bank account."

"Remember, the best investment you can make is in yourself. It's the one asset you have complete control over. So, stop being stupid and start being smart. Your financial freedom depends on it."

"Now, take a moment to think about one skill or area of knowledge you want to improve. Write it down, find a resource, and commit to learning something new today. Your journey to financial freedom starts with you."

2.      Debt accumulation

Let's talk about debt, the financial equivalent of inviting a vampire into your home - once it's in, it's hard to get rid of and it sucks you dry. Whether you're overspending like there's no tomorrow or caught off guard by life's curveballs without an emergency fund, debt can turn your path to financial freedom into a game of Snakes and Ladders - mostly snakes.

High-interest debt, especially from credit cards, is like compound interest's evil twin. While compound interest works tirelessly to grow your wealth, high-interest debt works just as hard to shrink it. It's like trying to fill a pool with a garden hose while someone's draining it with a fire hose. Spoiler alert: you're not winning that battle.

Now, I know what you're thinking. "But what about good debt?" Sure, there's a case for "good debt" - like low-interest mortgages or loans that someone else pays (hello, rental property income!). It's like inviting a polite vampire who brings his own snacks and helps with the dishes. But remember, even well-behaved vampires can turn on you if you're not careful.

The truth is, debt is a bit like fire. Used carefully, it can cook your food and keep you warm. Used recklessly, it can burn your financial house down. And rebuilding from financial ashes? That's a lot harder than just not playing with matches in the first place.

So, how do we keep the debt monster at bay? First, treat your emergency fund like it's your personal financial superhero - because it is. It's there to save the day when life throws you a financial curveball, so you don't have to resort to high-interest debt. Second, live below your means. It's not as sexy as living large, but neither is being in debt up to your eyeballs.

Remember, every dollar of debt is a little weight on your shoulders, slowing you down on your journey to financial freedom. The more you owe, the less you can save, invest, and build toward your own freedom.

In the end, the road to financial freedom is a lot smoother without the potholes of debt. Sure, some forms of debt might be necessary or even beneficial in certain circumstances. But in general, if debt were a person, it wouldn't be invited to the financial freedom party. So, create an emergency fund of 6 times your fixed monthly expenses and start paying op any high-interest rate debt today. Your future self will thank you.

3.      Lifestyle inflation

When Your Expenses Rise Faster Than Your Common Sense"

Remember your first job? When a $5 coffee was a luxury, and you could list everything you owned in under two minutes? Fast forward to today, and somehow that same coffee is now a "basic human right," your car payments could feed a small village, and your Amazon Prime account has its own line in the federal budget.

Welcome to lifestyle inflation, the sneakiest wealth-killer since someone invented monthly subscriptions. It's like playing a video game where every time you level up, the prices in the shop double - except this game is using your real money, and there are no cheat codes.

Here's how it usually goes: You get a raise (congratulations!), and for about 3.7 seconds, you think about all the smart financial moves you could make. Then your brain helpfully reminds you that your couch is looking a bit sad, your phone is practically ancient (it's been 8 months!), and wouldn't a bigger apartment be nice? Before you know it, your new, higher salary feels just as tight as the old one, as increased spending quickly consumes any additional income.

The weird part? This isn't just bad financial planning - it's hard-wired into our primal instincts. Humans are remarkably good at adjusting to new normals, whether that's a pandemic or a premium cable package. We're also wired to keep up with the Joneses, constantly comparing our cars, homes, and vacation photos to our peers' highlight reels on social media. Psychologists call the baseline shift "hedonic adaptation,". I call the combined effect the "lifestyle creep monster" - it eats raises for breakfast and feeds on social validation.

So how do we fight this budget-eating beast? It starts with the most uncomfortable question in personal finance: What is enough? Not your neighbor's enough, not Instagram's enough, but your enough. Because here's the truth: if you can't define "enough," you'll never have it.

Try this mental exercise: Imagine your life five years ago. Would that version of you think your current life is luxurious? Probably. Now imagine explaining to that past you why it suddenly feels "normal" to spend $200 on dinner or why you "need" a car that costs half your annual salary. Past you would probably have some choice words about your definition of necessity.

The secret to beating lifestyle inflation isn't never upgrading your life - it's being intentional about which upgrades actually matter to you. Maybe you really do value that fancy coffee because it's your daily moment of zen. Great! But then maybe you don't need the premium gym membership you use twice a year (we both know those abs aren't coming from the membership alone).

Here's a practical strategy: Every time you get a raise, immediately divert at least 50% of it to savings or investments before your lifestyle has a chance to inflate. It's like catching the lifestyle creep monster while it's still a baby. The other 50%? Sure, use it to upgrade your life - but do it consciously, not on autopilot.

And here's the plot twist that nobody talks about: The real luxury in life isn't buying whatever you want - it's having the freedom to not buy things you don't need to impress people you don't like. That's what financial freedom is really about: building a life where your wants naturally stay below your means, not constantly stretching your means to meet expanding wants.

Remember, the goal isn't to live like a monk (unless that's your thing, in which case, rock on). It's about being intentional with your upgrades. Ask yourself, "Will this really make me happier, or am I just trying to impress my neighbor's cat?" Chances are, that cat couldn't care less about your new smart fridge.

4.      Neglect long term planning: the ostrich approach to finances

Neglecting your financial future is like playing hide-and-seek in the dark – you can't find what you're not willing to look for. Many people approach their finances with the same strategy ostriches supposedly use for danger: head firmly in the sand, hoping their money problems will magically resolve themselves. They'll check every notification on their phone but scroll past their banking app like it's showing a horror movie. They'll meticulously plan their weekend activities but treat their retirement planning like it's an optional hobby.

The fastest way to financial failure is treating your money like that mysterious drawer in your kitchen. You know the one – it's full of things that might be useful someday, but you haven't checked its contents since 5 years ago). Too many people treat their finances the same way: tossing receipts into a shoebox, avoiding their bank statements like they're letters from an ex, and setting financial goals with all the precision of throwing darts blindfolded.

Want to guarantee financial mediocrity? Just wing it! Don't bother tracking your spending – that's what your anxiety at 3 AM is for, right? Skip creating a budget because "you know roughly what you spend" (narrator: they didn't). Set vague financial goals like "become rich someday" or "retire comfortably" without defining what those actually mean. It's like trying to drive cross-country without a map, GPS, or even knowing which state you're heading to. Sure, you might end up somewhere interesting, but it probably won't be where you wanted to go.

The real kicker? When these same folks finally peek at their finances, they act shocked – SHOCKED – that their money didn't magically organize itself into a perfect retirement plan while they weren't looking. It's like expecting your dishes to wash themselves while you binge-watch another season of your favorite show. (Spoiler alert: they won't, and neither will your finances sort themselves out.)

The antidote to this financial self-sabotage is embarrassingly simple: pay attention. Track your spending like you track your Amazon packages. Set specific, measurable goals – and no, "having more money than my annoying cousin Brad" doesn't count as specific. Review your progress regularly, not just when your credit card declines at Starbucks. And perhaps most importantly, adjust your plan when life throws curveballs, because this will for sure happen.

5.      Thinking you are investment genius – the fastest way to go broke

Let's finish with a hard truth: you're probably not the next Warren Buffett. Neither am I. And that's okay! The fastest way to shrink your investment portfolio is to convince yourself you're smarter than the market. You know that neighbor who always brags about their latest stock pick at barbecues? The one who put their life savings into crypto right before the crash because "this time it's different"? Don't be that neighbor.

Here's a fun fact: studies show that the more confident someone is about their investment skills, the more likely they are to lose money. It's like that old saying: "In the market, there are two types of investors - those who don't know where the market is going, and those who don't know they don't know." The second group usually ends up eating ramen for dinner.

The real path to building wealth isn't about finding the next Amazon or timing the market perfectly. It's about being consistently not stupid (thanks, Charlie Munger!). Some of the stupid things include:

1.       Trade like a maniac. Treating the stock market like an all-you-can-eat buffet: piling your plate with everything that looks tasty. Every hot stock tip, every crypto moonshot, every "can't-miss" opportunity. Here's the thing: your stomach (and your portfolio) can only handle so much. The more you stuff yourself with random picks, the more you pay in fees and taxes, turning your investment account into a generous tip jar for your broker. [insert example what a 2% fee does to your nest egg]

2.       Emotional decision making. Probably your biggest enemy is yourself. Panic selling during market crashes (selling low), then buying back in when all your friends are screaming about the money they’ve been making and you suffer from FOMO (buying high). Volatility (the price-swings in the market) is the price you pay to reap the long term rewards. Don’t panic, build a portfolio that let’s you sleep well.

3.       Poor diversification. Thinking diversification means owning five different tech stocks. Sorry, but having shares in Apple, Microsoft, Google, Meta, and Amazon isn't diversification – it's just being really, really sure you like Silicon Valley. This is a surprisingly common trap, whether it's from home country bias ("I only invest in U.S. stocks because I understand them"), hot stock tips from your brother-in-law, or a blind faith in a particular sector. You want to spread your investments across different places (geographic diversification) and different asset classes (asset classes like real estate, bonds, cash, and yes, maybe even a bit of gold or crypto). It's about not putting all your eggs in one basket – or all your money in one country, sector, or type of investment.

4.       Using too much leverage (using debt to invest). Using leverage without understanding its double-edged nature. Let's be clear: debt isn't always bad – just look at real estate, where a reasonable mortgage can help you build wealth through property ownership. But there's a world of difference between a 30-year fixed mortgage on a rental property and borrowing money to day-trade meme stocks. Smart leverage is like a power tool – useful in skilled hands for specific purposes. Dangerous leverage is like trying to juggle chainsaws – it might look impressive when it works, but when it goes wrong, it goes spectacularly wrong. Just ask anyone who maxed out their credit cards to buy crypto at the peak, or the real estate investors who over-leveraged just before the 2008 housing crash. The key is understanding that leverage amplifies everything – both gains and losses – prevent to use it for stocks, bonds or crypto, and use it wisely for real estate.

5.       Not understanding what you’re investing in. You wouldn't buy a house without an inspection, so why invest your money without understanding what you're buying? Yet too many people throw money at investments based on Reddit posts or their neighbor's "hot tip." I've seen people invest in companies without knowing what they actually do (beyond having a cool ticker symbol), or buy crypto tokens because they liked the dog mascot. Really it turned out bad for many individual investors and even crashed the whole economy in 2008; If you want a sobering reminder of what happens when we chase complicated investments we don't understand, watch "The Big Short" – it's like a horror movie for your portfolio, but with better jokes and a valuable lesson: if you can't explain an investment to a 10-year-old, maybe you shouldn't be putting your money in it.

6.       No plan. Investing without a game plan – or worse, abandoning it mid-journey. Imagine starting a road trip without a destination or map – that's what most new investors do with their money. They buy some stocks here, some crypto there, maybe panic-sell during a downturn, then chase whatever's hot next. It's like playing darts blindfolded: you might hit something, but probably not what you were aiming for. A real investment strategy means knowing your destination (retirement? kids' college?), your timeline (next year or next decade?), and your route (how much in stocks, bonds, real estate?). And here's the kicker – if you don't stick to your route, you'll likely end up lost in the financial wilderness, watching your goals disappear in the rearview mirror.

The truth is, sustainable wealth building is usually boring. It's about making consistent, reasonable decisions over a long period. It's like watching paint dry, except the paint is money, and it's slowly but surely covering your future.

Remember: The cemetery of failed investors is filled with people who thought they were geniuses. The successful ones? They're the ones who admitted they weren't that smart and focused on not doing anything too stupid. As Munger would say, "It is remarkable how much long-term-advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."

So, before you convince yourself you're an investment genius, maybe start with trying to be consistently not stupid. It's a lower bar, but ironically, it might just make you rich. The secret to successful investing isn't about being a genius - it's about not being your own worst enemy. Warren Buffett's first rule of investing is "Don't lose money." His second rule? "Never forget rule number one." Once money is lost, it cannot work for you anymore.

So: if you haven’t started yet, start investing monthly in a broadly diversified index fund like the S&P500 and take advantage of any tax advantaged retirement planning that is at your disposal.         

So that’s it

-          Don’t ignore the largest asset you already have – invest in yourself, probably the best investment in your life, it will make sure will make more money

-          Avoid debt accumulation – ensure you have an emergency fund and stay very far away from high interest debt, it will make sure you will spend less

-          Take care of lifestyle inflation – spend your money intentionally on the things you love and invest the rest, also this it will make sure you will spend less

-          For all the ostriches – take your head out of the sand and make that plan and follow it, it will make sure you invest wisely

-          Don’t think you’re an investment genius – be humble, or the market will make you humble, and this is probably the surest thing to investment wisdom

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