You might be thinking, “what can a multi-billionaire teach me about living a frugal lifestyle?”
After all, he lives in a 20,000 sq. ft home, flies a private plane, & has been known to drink 8 diet cokes a day.*
The diet coke habit alone is a ~$5,000/year set back.
Despite his spending habits, Musk has adopted a pioneering vision based on a few of his internal disciplines.
The way he views a problem often yields results and that is what I want to share here with you.
If you’re not familiar with Elon Musk, here’s his one sentence bio: he has developed three, multi-billion dollar businesses: an electric car company that is creating innovative car technology (Tesla), a rocket company that brings cargo into space (SpaceX), and a solar panel installer that sells renewable energy (SolarCity).
What he’s best known for (at least for me) is his approach to finding a solution when faced with a problem. Elon himself will credit this approach to physicists who pioneered the approach when trying to determine counterintuitive concepts, such as quantum mechanics.
Elon’s problem solving process is known as first principles.
What is a first principles approach?
First, I’ll define it and then I’ll describe it using a few real world examples.
A first principles approach has two steps:
- First, boil down everything to the most fundamental truths.
- Second, build your reasons up from these basic truths.
Sounds simple, right?
Let’s walk through that example now to better understand what this multi-billionaire entrepreneur/space cowboy is talking about.
Elon Musk drove (pun intended) into the electric car market with a few basic understandings about batteries. From a business perspective, the view on batteries is translated into cost per kilowatt hour.
The single largest cost component of a Tesla car is the battery. This was also the biggest obstacle in the market: to reduce the cost of battery packs.
Before Musk’s first principles approach, many people took the common path of reasoning by analogy.
If we look at someone else doing something, we can often mimic their behavior and tweak a few things to achieve a better result or the same result in a slightly more efficient manner.
With first principles, we start from scratch. This alone makes this approach much more difficult.
Here’s the approach in action, creating a $32 billion dollar car/tech company.
In an interview with Elon Musk he explained this example. I’m adding quotations but this is really paraphrased from what I can recall:
Somebody could say battery packs are really expensive, and that’s just the way it’ll always be because that’s the way they’ve been in the past.
Well, no, that’s really dumb. If we apply that reasoning to anything new, then we wouldn’t be able to get to the next level.
For batteries, historically, it has cost $600 per kilowatt hour. So, it is not going to be much better than that in the future.
First principles would say, ‘What are the component parts that make up a battery? What is the spot market value of each component?’
Okay, so a battery has cobalt, nickel, aluminum, carbon, some polymers for separation, and a steel can.
If we bought each piece on the London metal exchange what would it cost?
Turns out it is only $80 per kilowatt hour.
Clearly, we only need to think of clever ways to combine those materials into the shape of a battery cell and we can have batteries that are much cheaper than what anyone realizes.
Elon Musk took this approach and reduced the cost of battery packs by nearly 75%, down to between $150 and $200 per kilowatt hour. The industry average has also dropped from $600 to ~$350.**
On a personal level, we applied the physics first principles approach to developing a more frugal and happier lifestyle.
If we were to reason by analogy, we might look at the common advice to save 10% of our money and stop there. We might try to be above average and save 12% or 15%.
Instead of saying, “We want to save more than average so that we can retire earlier than the average age,” we decided to start from scratch.
We asked ourselves, “What are we seeking from developing our personal finances?”
The top of our list: More freedom, more security, and more confidence.
The theme in this approach is that the reasons come from within rather than coming from an external source.
If our neighbor’s buy a $60,000 car and we want to save money, then it would make sense to spend only $50,000 to “save” ourselves $10,000. We could pat ourselves on the back and move on.
Instead of looking to save $10,000, we would start with more fundamental questions, such as, “What function does a car serve?”
If the sole function is to get us from point A to point B, then we could begin to ask, “Is a car the only form of transportation?” Or, “Does it make sense to buy a $50,000 car when a less expensive car would be just as safe and get us from point A to point B in the same manner?”
Or, “Do we need a car to get from point A to point B safely?”
This type of approach led to my girlfriend and I moving close enough to work so that we can both walk. Before our move, I would occasionally drive but more often, we would both take public transportation.
The first principles approach helped us identify ways to save time on our commute, gain more confidence in our spending habits & live a more frugal life.
By focusing our spend, we essentially remove the unnecessary items out of our life.
Once we narrow down to our first principles, we learn that there IS A LOT OF CLUTTER outside of that.
We feel better because we’ve honed in on a clearer path.
Not everyone has the ability to move closer to work, so I wanted to share a 2nd example that we have used to boil down to our principles.
My girlfriend and I are pursuing financial independence so we asked ourselves, “What does financial independence mean to us?”
On a simple level, FI means having enough income from our assets to cover our expenses. Put another way, having enough income means we would have enough money.
We started to dive deeper by asking each other, “What does money mean to you?”
If it means security or freedom, then we would ask ourselves, “What does security or freedom mean to you?” If security or freedom means “x” to you, then keep asking what does ‘x’ mean as you dive deeper?
When we did this exercise we came up with security and freedom.
Security represented the ability to help our families. The ability to help our families makes us feel happy, at ease, and brings joy to our lives.
Our initial answer to have security for ourselves was expanded because we wanted to feel security for our tribe.
Our answer brought out a deeper level understanding of why we seek financial independence.
Our version of freedom wasn’t about buying what we wanted, it was about spending time where we wanted and with whomever we wanted.
Applying the first principles approach from Elon Musk deepened our resolve to live a more frugal lifestyle because we could see the end results in detail.
If you follow a first principles approach to pursuing financial independence, what would be your answer?
Have you applied a first principles approach in your life? Do you think you’ll try this approach soon?
*Source: beginning of this youtube video.
**For more information on the current price of batteries at Tesla and the car industry in general, check out this link.
***Credit for the cover photo: OnInnovation/Flickr/CC BY-ND 2.0