There are three circles I aim to operate my entire life within.
These circles are mental models that, together, combine to form one of the greatest and most important principles of my life.
Living my life within these circles has helped me tremendously in terms of achieving financial independence, retiring in my early 30s, and setting up a very happy and successful life.
I believe that almost anyone else out there can achieve the same for themselves, as I lay out in my best-selling book, 5 Steps To Retire In 5 Years.
Seeing as how I went from growing up on welfare in a Detroit crack house to financially free and retired in my early 30s, I think I’m a pretty good example of what can work really well for someone coming from relatively modest means.
I’m sharing these circles today because I believe that all of you readers could benefit by operating within them.
Now, before I get into this, I want to note that the circles aren’t limited to only my investing activities.
I try to live my entire life within these circles. I aim to apply all elements of my identity toward the confines of these circles.
Thinking in broader application terms across all of life, while simultaneously being constrained to fairly small circles in each area, is immensely important. This is because investing will probably only be a relatively small part of one’s life and overall measure of success.
I also want to note, before we discuss this, that defining these circles is far more important than having circles with large diameters. It’s about knowing where the circles begin and end, and then operating within that perimeter.
Let’s dig in…
Circle Of Competence
The “circle of competence” is the breadth of your skills and expertise measured against all possible skills and expertise.
Everything outside the circle of competence is your incompetence.
Warren Buffett and Charlie Munger developed this mental model decades ago. And it’s been greatly popularized since then, being adapted across the entire investment community.
While it’s undoubtedly important to invest within your circle of competence, I think it’s even more important to live your entire life within your circle of competence.
The key, however, isn’t to have a circle of competence with great circumference; the key is to know the boundaries of that circle and try to avoid straying outside said boundaries.
Buffett and Munger have put it quite simply when they said that anything outside their circle of competence immediately goes into a “too hard pile”.
There’s a bit of a catch-22 at play here, though.
The more incompetent you are, the more likely you are to overestimate your own competencies. That’s the Dunning–Kruger effect at work.
A perceived circle of competence can, in reality, be quite different than an actual circle of competence. This difference between the perceived and the actual is possible for all three circles I’m discussing today. That’s why it’s vital to continue to grow, learn, progress, and “level up” as a human being, which gives you a great opportunity to expand your circle of competence while simultaneously being more aware of its boundaries.
When I look at my FIRE Fund, I’ve tried to invest in a way that makes sense for me.
I’ve always aimed to invest in companies that I can understand to a reasonable degree.
I don’t think it’s necessary to understand every iota of every business model, but I need to have a material understanding of a company’s “story” and how it makes money. If I can’t quickly and easily understand this, I avoid the investment. Mortgage REITs are a good example of investments I’ve always avoided because I didn’t feel they were within my circle of competence. I suppose I try to keep it simple.
Likewise, I try to live my entire life within my circle of competence.
I try to keep my entire life simple.
If I meet someone for a potential relationship (be it platonic or otherwise) and they start acting in a way that I can’t understand or rationalize, I put them in the “too hard pile”. I move on. Quickly.
When I started looking to move away from the US in 2017, I looked at countries all over the world. But many countries have policies, regulations, issues, or cultures that fall into my “too hard pile”. I didn’t understand a lot of it. So I just felt like it was going to be too difficult to try to make it work.
Thailand, meanwhile, seemed to gel for me right away. I quickly and easily understood many aspects of living here for the long term. It was a good fit right away.
Also, I write and coach. I could do many other things instead. For instance, I could try to start up a woodworking business. But that would be way outside my circle of competence.
I enjoy writing and helping others make their dreams come true, and I feel like I’m pretty good at it. It’s within my circle of competence, which is why I stick with it.
The more I’ve learned about the world and myself, the more I’ve realized just how limited that circle of competence really is. Honestly, I suck at most things in life. And I’m okay admitting that. I’m even more okay with admitting that once I realized how important it is to do so.
I’m no genius, but I’m smart in spots, and I stay around those spots.
-Tom Watson, Sr.
Fortunately, however, financial independence at a young age has given me immense opportunities. I have far more resources at my disposal. I try to make the most of this in many ways, including constantly consuming content, gaining experience, and growing as a human being. This has allowed me to both slowly expand my circle of competence and mentally solidify its boundaries.
Circle Of Control
The “circle of control” is the breadth of actions you can control measured against all possible actions.
As one might expect, what you can control is actually incredibly limited. This circle is, in reality, tiny. It’s minuscule.
What someone said about some political ideology is outside your circle of control, for example. So is how someone chooses to drive down the highway. The vast, vast majority of life is outside your circle of control.
Focusing any number of your resources on that which you can’t control is a total waste. Our valuable resources – like time and energy – are finite. And they’re becoming more limited by the day. To spend them on the uncontrollable is irrational and wasteful.
Instead, harnessing those resources on that which lies within your circle of control can be significantly profound and helpful toward achieving your goals.
Aspects of your life like how hard you work, what you study, how much money you spend, whether or not you choose to invest your money, where you live, and who you spend time with as an adult are all within your control.
Now, it’s extremely important to realize that most events that will occur throughout your life are outside your circle of control. In fact, many will be way outside that circle.
I’ve learned what I can control, though, is how I respond to these events.
Someone may choose to do me wrong. I mean, just look at the two sets of parents I was given. I can’t control that.
However, I can control how I respond to this. And how I go about responding – if I respond at all – is probably going to impact me in some way.
I am convinced that life is 10% what happens to me and 90% of how I react to it.
-Charles R. Swindoll
Taking all of these responses in aggregate, over the course of your entire life, is obviously going to have a significant impact on the totality of your lifetime. Every action you take within your circle of control thus matters a great deal.
I can’t control how a company goes about making its money, nor can I control how people go about spending their money. But I can control how I invest my money and how I spend my money.
Likewise, I can’t control how people act. But I can control whether or not I spend time around them.
I can’t control how a city, state, or country regulates, taxes, or otherwise treats its citizens. But I can control where I choose to live.
So on and so forth.
I look at the world as it is, not as I wish it were.
And then I aim to operate solely within my circle of control.
Every action I take has an opportunity cost attached to it. Thus, spending valuable and finite resources on actions outside that circle means I’m giving up the fantastic opportunity to affect actions within the circle. And that compounds over one’s life in a dramatic way if they choose to repeat that mistake over and over again.
It’s a frustrating burden and a waste to bang your head up against the giant wall that makes up all of which you can’t control. Stop it.
This is the one circle, out of the three, that has limited expansion potential. And it’ll probably be the smallest circle of all.
Circle of Advantageousness
The “circle of advantageousness” is the breadth of that which is advantageous for you measured against all that is disadvantageous.
Look, this is expediency. I’m a survivor. Growing up in abject poverty, I’ve learned to use my wits.
This circle might be looked at as a selfish, cold, and insular way to operate one’s life. As someone who is very calculated, I see it as the only rational way to live.
However, one can’t be myopic about it.
Speaking on what I noted earlier, the only way to live within your circle of advantageousness is to learn and grow in a way that allows you to know what’s advantageous and what’s disadvantageous.
Again, knowing the boundaries of each of these circles is far more important than making sure any of them have a substantial circumference.
Stated simply, I try to make sure every choice I make is somehow more advantageous to me than all of the other available known choices.
I always consider the opportunity cost of every choice. The greater the degree of advantageousness a choice appears to have, the better off I’ll be and the more likely I am to quickly act on that.
To ascertain the degree of advantageousness, I quickly run each high-level decision through a cost-benefit analysis.
A great example of this is investing.
I used to spend all of my money. Actually, I spent more than all of my money. That’s how I ended up in debt.
Then one day I decided to take a good look at that and ask myself whether or not that was advantageous to me, especially when measured against investing that capital instead.
Well, the advantageousness, when looked at in that way, became quite clear.
Another element of my life that I felt was outside my circle of advantageousness was having a job.
To me, having a job is like being in prison. I’m told when to wake up, where to go, what to do, what to say, how fast I have to eat, when to rest, when to sleep, etc. I see a boss like I would see a warden.
Having a job is highly disadvantageous when looking at how my time is spent, how I earn money, how my money is taxed, the potential of my income and wealth, my level of freedom, etc.
Meanwhile, moving from the worker class to the investor class is clearly very advantageous.
Operating as an investor, with that investor mindset, is very much within that circle of advantageousness. It’s a no-brainer to move from worker to investor.
Another example of operating within that circle of advantageousness is in choosing where to live.
I first moved from Michigan to Florida back in 2009 because I felt like the latter would be a more advantageous place to seek out and achieve FIRE. Florida had a more dynamic economy, warmer weather, cheaper COL, and no state income tax.
Committing domestic geographic arbitrage, which was operating in my circle of advantageousness at that time, later gave birth to international geographic arbitrage.
This led to taking a good look at living in the US and whether or not it was most advantageous for me.
Becoming financially independent means becoming geographically independent. Knowing this, it made sense to me to analyze whether or not continuing to live in the US was as advantageous as living in any other number of available countries across the world. Realizing that it would be remarkably more advantageous to live elsewhere has had as much of an impact on me and my life as realizing how advantageous financial independence could and would be.
I came across Nomad Capitalist some time ago. While I don’t agree with some of the things Andrew espouses, I do like his mantra:
Go where you’re treated best.
Andrew recommends living and doing business in a place (or set of places) that will treat you and your money best.
It’s a simple concept. And it’s powerful.
But it’s not just about where you live.
I like to go where I’m treated best in terms of the country I live in, the companies I invest my capital in, the apartment I reside at, whom I enter relationships with, the work I take on, the people I work with, where I choose to spend my time, the coffee shops I visit, the restaurants I eat at, etc.
If I’m not as highly valued as I probably would be elsewhere, regardless of the context, I don’t see a very good reason to bother with that. I see no good reason to sell myself short in any element of my life.
Routinely and repeatedly putting yourself in situations that are advantageous has a way of compounding your results.
Being with a great partner can make you a better person and investor, for example, which can then lead to much more freedom and options down the road.
However, choosing to partner up with someone who doesn’t have your best interests at heart will probably act as a huge headwind on your entire life. Being with someone who undermines you will limit your possibilities and outcome.
The circle of advantageousness isn’t terribly big. At least, not for me.
But intelligently, thoughtfully, and carefully operating within it can have an outstanding impact on your happiness, success, and freedom.
I believe that operating one’s life within their circles of competence, control, and advantageousness will lead to a much more favorable outcome in terms of financial and personal success. And it’ll likely make you a much happier person across the board.
It took me a long time to realize what these circles were. I had to form these mental models for myself.
Then I had to work on expanding them while at the same time acknowledging and defining their boundaries.
Finally, I had to step up and take actions that seemed to make sense across all three circles. Any large-scale life choice I make has to fit inside of all three circles, simultaneously.
While each one is important in isolation, it’s not enough. It’s necessary to use all three at the same time.
Moreover, they tend to complement one another.
For instance, if you’re highly competent in a particular area, it’s more likely that you’ll come out in an advantageous position that you have a large degree of control over.
Another example would be achieving financial freedom by operating within the circles of competence and advantageousness in a way that allows you to invest and build significant wealth at a young age. This expands your circle of control by giving you far more control over your life and options.
I would say that operating my life within these three circles forms one of the greatest and most important principles as it relates to who I’ve become.
If achieving financial independence and living a dream life at a young age is a goal of yours, I would strongly recommend to take some time to develop these circles for yourself. Then get busy living within them.
What do you think? Do you try to operate your life within any circles? How has that worked out for you?
Thanks for reading.
P.S. If you’re ready to live your life within these circles and achieve financial freedom, check out some fantastic tools and services I personally used on my way to becoming financially free at 33!