Elon Musk and a First Principles Approach to Frugality

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?

Master Distiller

*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

20 comments… add one
  • The Green Swan Apr 12, 2016, 3:41 pm

    Interesting approach from Elon Musk. And don’t forget PayPal too! The guy is pretty impressive. The first principles approach is key. It is challenging the status quo. I think my wife and I have followed it in recent years without knowing it. When we track expenses and budget we ask ourselves why we need to spend so much on X, can’t we do Y and save all that money? It’s a great way to save (live a frugal life) without necessarily sacrificing. Thanks for the post, Matt.

    • Distilled Dollar Apr 13, 2016, 5:45 pm

      When I first heard about First Principles, I felt the same way. To some degree I had practiced it before, but I didn’t have the exact process or a name for it. Now I find myself reevaluating more and more based on this approach. It takes time, but it leads to more clarity on the topic.

  • Isabel Apr 12, 2016, 3:50 pm

    Looking at things in retrospect ….. The living closer to work is very wise and something I thought of often and based a lot of decisions on even if not applied to work! I based my present accomodation on drawing a circle l km from main things I wanted to use and be close to and have lived more happily, conveniently and frugally there!

    • Distilled Dollar Apr 13, 2016, 5:49 pm

      Thank you Isabel. Great minds must think alike if you also moved to a location based on where you were commonly going each week!

      We found that one adjustment, to live within walking distance of everything, led to more happiness than any other decision we made in the past year.

  • Apathy Ends Apr 12, 2016, 3:51 pm

    I work at a SaaS company and we practice Agile Methodology – basically we try to show our work early and often to stakeholders to make sure we are going down the right path. The alternative is to build everything and have a large release, where stakeholders are seeing it for the first time after it is “done”. You can guess what process yields better results.

    People have adapted the Agile approach to everyday goals (weight loss for example) and had success. I could see it being adapted to personal finance also, try something, show results, adjust and monitor.

    I love anytime someone comes up with new applications of existing theories – I am going to give this a shot.

    • Distilled Dollar Apr 13, 2016, 5:55 pm

      Agile development sounds a lot like an idea I got from reading The Lean Startup by Eric Reis. It basically said to get a prototype out to an audience as soon as practical and then work on fine tuning it.

      It was basically the same approach I took with this blog as I’m still tweaking some of the back end stuff.

      The book also goes into AB testing and having different metrics to establish validated learning, so I’m curious if that is part of Agile Development as well.

  • amber tree Apr 13, 2016, 2:50 pm

    The elon musk story is new to me. I like the approach that you highlight here.
    With my wife, we have had a start to this: what are our life goals, what does Financial independence mean. Clearly, we can go way further in this.
    The car is a good example: we have 2, we used to have 1. What would it take to go back to one?

    • Distilled Dollar Apr 13, 2016, 5:59 pm

      For many people, you don’t need to dive that deep, but for us, it has made a difference.

      While it might be tough to dive deep, it doesn’t necessarily take much time. If you’re hesitant to try it out together, you can do it on your own to see what some of the deeper motivators are.

  • Nurse on Fire - Brandon Apr 14, 2016, 2:06 am

    While I had, of course, heard the name Elon Musk, I had no idea of the concept of First Principles. I love your tie-in to personal finance and how this concept can really be utilized in all aspect of our lives. While I can’t say that we’ve consciously put this idea to use, reflecting on the idea makes me think about our decision to change the flooring in our house this past summer.

    We rent our house through my employer (federal government on an Indian reservation) and they kept giving me the run-around about getting new carpeting because they had all these other “projects” that had to be done. Anyway, rather than waiting God-only-knows-how-long, we decided to pay to have it done ourselves. Our rent is incredibly cheap and when we figured the overall cost of the flooring divided by the number of months we anticipate continuing to live here, it increased our monthly rent by about $80. We were okay with that idea…until my wife came up with the plan for us to buy (incredibly awesome) snap-together laminate flooring that was even cheaper and for me to install it myself. This accomplished two key things: 1) it saved us money, increasing our average monthly rent by about $25 instead of $80 and 2) it allowed me the opportunity to learn a new skill set, providing me with a sense of pride and know-how that I will be able to continue using in the future. Either option, doing the job myself with cheaper materials or paying a company to do the work, accomplished the same overall goal…we got new flooring. It was a win-win for us.

    Thanks for this well-written and thought-provoking article; keep up the awesome work Matt!

    • Distilled Dollar Apr 14, 2016, 5:05 am

      You two make a great team!

      I like how you capitalized the flooring cost over the life of your lease instead of counting it as a one time expense. That’s a great way to look at the expense of such a project.

      That also sounds like an interesting living arrangement, so I’m curious to read more about it on your site.

      I’m happy to hear you liked the post — and thanks for the compliments as well!

  • I have never heard the concept of first principles in my entire life. Having said that, my wife and I have always dissected just about anything we buy. Because I work as a financial analyst/budget analyst, I tend to always go down to the part level. For example, if I want to buy a computer set, I would look at the cost of a complete set and cost of the individual piece put together (individual piece meaning desktop, keyboard, etc.). Then, I would apply a factor for discounts and a factor for warranty.

    Even with wood products, I would ask myself how much is it going to cost me (material and labor costs wise) if I just create it myself than buying.

    I guess I should say that we’ve been applying the concept of first principles even without our knowing.

    • Distilled Dollar Apr 16, 2016, 11:01 am

      Yep, I feel everyone has had this approach to some degree in their life. It is not uncommon to see and I didn’t realize it had a name until I learned about via Elon Musk.

      Now that I know the approach, I’ve basically added it to my list of approaches when encountering something new.

  • pamela Apr 17, 2016, 10:00 pm

    This is pretty interesting. You can pretty much get to the reasoning behind most things by looking at these first principle approaches. so simple but can be so easily overlooked.

    • Distilled Dollar Apr 19, 2016, 4:47 am

      Yep, exactly! This is a simple approach, but it takes up more time and energy, at least on the front end.

  • Graham Apr 22, 2016, 1:46 pm

    Great post!
    Firstly, Elon Musk’s approach is the perfect way to look at things.
    And second, I’m totally with you on not needing a car. It’s simply a point A to point B thing for me and it’s a sacrifice I’m willing to make for financial independence.

    I guess not everyone has the same goals. I have family members are willing to go to a job they despise so they can afford a brand new car. To each their own.

    Thanks for sharing!

    • Distilled Dollar Apr 22, 2016, 6:38 pm

      Yep, to each their own!

      Not having a car has been a huge help for us both physically and financially. The topic has been hashed out many times before but I’m sure I’ll write a post on all the benefits we see from walking everywhere.

  • Cathy @MonetizeMyMins May 10, 2016, 5:41 pm

    That is an intriguing way of breaking down a “problem” in order to find the truth behind it. I think many people get trapped behind the idea of the way something has always been that it is hard for them to let go of it.

    “I’ve always had debt, so it must be unavoidable,” may be one of those classics in the realm of personal finance. Being able to remove the perception of a situation from the reality gives you the opportunity to venture into new territory, consider the what-ifs and see if there is a better way.

    • Distilled Dollar May 10, 2016, 8:59 pm

      That is a great way to put it and I haven’t thought about it like that before!

      My girlfriend was very much in that headspace when we started dating and I think she literally meant forever when she said talked about her debt. As you put it, once you gain a shift in perspective, things can start to change rapidly after that.

  • The Money Wizard Aug 10, 2016, 9:42 am

    Brilliant article Matt. Love the comparison of first principles to the average person’s car shopping. We see that usual line of thinking everywhere: “I’m going to retire early… at age 60 instead of 62” or “Living is expensive, so a little bit of credit card debt is okay.” The first principles approach is what most frugal people are using and don’t even realize it.

    When I started apartment hunting, I didn’t say to myself, “Well, the average cost of a one bedroom here is $1,500 per month, so let me look around for something around that cost.” Instead, I asked myself what was most important to me in a home. It turned out trendiness, granite countertops, and stainless steel appliances didn’t make the cut. A close location to work, the gym, and a biking trail did. I found all of those features for around $800 a month.

    This article is a great reminder to follow what’s important to you rather than the crowds.

    • Distilled Dollar Aug 11, 2016, 8:43 pm

      Nice example! I can’t help but agree how frugal people are already on board without even thinking about it.

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