Should you always “protect the principal?”

Elon Musk was nearly broke in 2008, borrowing money from his homies to cover his rent. “About four months ago, I ran out of cash,” he stated during his divorce proceedings. His brother Kimball confirmed his precarious position, “Oh yeah. [He’s] in debt. More than broke.” And then-girlfriend, Talulah Riley remarked on his physical condition: “I remember thinking this guy would have a heart attack and die. He seemed like a man on the brink.” Yet six years earlier, Musk had personally pocketed a whopping $220 million when eBay bought Paypal. How on earth could he possibly end up in such dire straights? Why didn’t he protect the principal?

We all grows up with aphorisms that define our relationship with money. You’ve all heard folksy phrases like “Money doesn’t matter” or “If you have to ask the price, you can’t afford it?” And when it comes to protecting your baseline, even farmers know that you shouldn’t “eat your seed corn.” Yet despite having hundreds of millions in the bank, Musk chose to put the principal at risk – every damn penny – because he didn’t want to pick a favorite between Tesla and SpaceX. He told Bloomberg’s Ashlee Vance:

“If I split the money, maybe both of them would die. If I gave the money to just one company, the probability of it surviving was greater, but then it would mean certain death for the other company.”

Putting all the principal on the line has paid off famously for Musk. But would that work if you had a smaller amounts of assets in the bank? Yes, protecting the principal seems like prudent strategy. But it can also be a self-limiting strategy when it comes to changing careers, becoming an entrepreneur and investing.

We should all lose our brokerage account passwords

In my money coaching practice, I ask my clients “If I stole 15% from your investment accounts, would you notice?” There’s the rare “Hellz yeah” from the penny-tracker whose multi-tabbed spreadsheet monitors the movement of every Latté. However, most clients wouldn’t notice this larceny for a handful of reasons.

Some know that the monthly and quarterly movements don’t matter (and that the best investors are those who forget that they even have an account). Others (especially those with kids) may have lumpier expenses (i.e. tuition, life insurance, summer vacations) that obfuscate any linearity of cash flows. And finally, there’s also the avoiders, who explicitly choose not to know.

If you’re investing, your assets bounce around (sometimes a lot)

So if we accept that one’s net worth will bounce around, why is it that when faced with a life transition, our anchoring bias kicks in. In the same way we anchor to our “buy” price in refusing to sell a stock or home that’s lost some value, when we change careers we anchor to an imaginary red line. We protect the principal.

The longer I’ve been an entrepreneur, the less I care about protecting the principal. And it’s not because I’ve made more money (in fact, I haven’t.) I recently received an email from a concerned and puzzled RadReader about my decision to stay in the red — to fund RadReads out of my savings. Having been in similar shoes, he wrote:

How do you reconcile the values of independence and duty to family with not breaking even for so long. I believe that I owe it to my family to run my business at a cash profit every year, even though I could afford not to turn a profit for a while.

As he continued, I could relate to the tension between my own fulfillment and the sense of duty I have (particularly as the sole breadwinner) to my family:

[I also left finance to pursue my own] quest for professional fulfillment has exposed my family to risks, and it is my duty to mitigate those risks.

As I detailed in my full response, protecting the principal was no longer a sacrosanct belief. And while I’m not ready to pull an Elon Musk and risk it all, the red line that’s our family’s principal is just one (of many) variables that impact how we spend our time and money.

Protecting the principal = vigilance, right?

Eating into our principal used to give me the terrors. So when I left the stability of my cushy finance job for the unknowns of entrepreneurship, I specifically tried to limit my downside by making an angel investment in myself:

Looking at our savings, my wife and I determined an amount that we were ok “losing” (in finance parlance, the “monthly burn”) during this transition period. We took this “willing to lose number” and divided it by “monthly burn” (and multiplied it by 1.3 for a margin of safety). The result: the number of months (18) that could comfortably support my transition into entrepreneurship.

I was willing to put 8% of our total assets at risk to take a stab at becoming an entrepreneur. But akin to life, entrepreneurship doesn’t follow a linear path. Mike Tyson famously said “Everybody has a plan until they get punched in the mouth.”

I got punched in the mouth a few times

I can tell you to the penny our total family assets when I quit BlackRock (and by extension, 8% of that number.) But then life happens. Spending, when you don’t have a day job is – shall I say – much looser. Accountants make tax errors. Out of pocket healthcare is damn expensive. Markets move around a lot (thankfully, in my case, mostly in the right direction.)

The 8% became arbitrary. Then it became irrelevant. Four years into entrepreneurship, I don’t even really think about it anymore. Put a gun to my head and asked me how much I’d dip into the principal today, it’s definitely greater than 50%. Yes, we’d be comfortable spending half of the principal to continue on this life path.

Have you gone mad?

How did this risk-averse scarcity-based thinker stop protecting the principal? I believe it came from six mindset shifts, each of which can be applied to anyone looking change jobs, become an entrepreneur, or step off the well-traveled path.

1. Redefining risk on your own terms

To most people, quitting a lucrative job without a plan was risky. Financially, it was. But you know what else was risky? Mailing it in at a job that wasn’t fulfilling just to get a paycheck. And then having your kids see you live that misery and passiveness every single day.

I believed that the financial risk was one that could be mitigated. I wasn’t burning any bridges and had the 8% cushion to lean on. Staying a day longer was the true risk.

2. Chipping away at the scarcity mindset

It’s going to be hard to make a big life change if you have a belief that with a snap of two fingers, everything you’ve ever built up can be taken away from you. Scarcity thinking is a protective (and reptilian) instinct, particularly if you didn’t grow up with much money.

Scarcity triggers our brains to over-index on the worst case. Yet with a little intention and planning, you can throw some guard rails around the worst case:


  • What does the worst-case market scenario look like to you?
  • How correlated is your income to this scenario?
  • What are different spending tiers you could shed as things got worse?


Two modules from our Financial Independence Workshop

And while we should still heed Tyson’s advice about planning, these approaches will help you determine your own buffer you when you eat into the principal.

3. Sharing the details with your partner

It takes two to tango, especially when it comes to money and personal finances. If ceasing to protect the principal engages the primary breadwinner’s reptilian instincts, imagine what it does to the partner who doesn’t interact with the finances? (Now math geeks, imagine the joint probability of the two!)

In my post on conducting a money review with your significant other I shared a few daunting marital statistics:

Even within the safe confines your relationship talking about money can be taboo and silent source of resentmentfour in 10 married people don’t know how much their spouse makes and 40% of couples don’t even talk about money. 

The post contains a six-part approach to communicating this tricky topic with your better half, which includes:


  • Share the agency
  • Measure the key metrics
  • Create exceptions and thresholds
  • Automate away
  • Stress test your assumptions
  • Determine your money values


4. Acknowledging that time isn’t always substitutable

Imagine you’re Bill Gates. Even with all the money in the world, he’s still subject to numerous life constraints. For instance, unless he home schools his kids (and I believe they aren’t), the Gates family can only take a month-long vacation once a year, during the summer.

I stopped vigilantly protecting the principal because I saw a similar window with our own kids. The number of years during which they need Lisa and I physically (as opposed to emotionally) is a finite window. And I’m willing to work less, eat into the principal, to be with them during those formative and early years (even if it means getting back on the treadmill when they are teens.)

Time is not a perfectly “substitutable good” – I’m never sure I want to trade an hour today for an hour ten years from now. We can’t predict our future health and life circumstances; so we should exercise some trepidation in the sacrifices we make today.

5. Don’t undervalue investments in yourself

Jeff Bezos and Amazon broke Wall Street’s long-held code around profitability. The way Amazon sees profitability is akin to not protecting the principal. In its two-decade history, they’ve only posted a handful of profitable quarters. Yes, a handful. Yet the company’s worth close to a trillion dollars.

A trillion dollars with only a few quarters of profitability? Whether you call it being a contrarian, playing the long game, or re-investing in yourself, we should remember that in those early days people thought Bezos was insane.

To an outsider, not protecting the principal can look insane. But a constant reinvestment in your own human capital – over an extended period of time – could be the most economically rewarding decision one can make.

6. Making work feel like play

All bets are off when work feels like play. The Number disappears, retirement becomes moot and work-life balance turns into a beautiful harmony. Silicon Valley investor (and contemporary philosopher) Naval Ravikant summarized this succinctly:

In fact, many of us are searching for financial stability just so we can make work feel like play. But it’s not sequential. You don’t just wake up and know what play feels like. It takes self-inquiry, risk-taking, ego gut-checks, and a little bit of faith that you’ll figure it all out.

And maybe some principal too.

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