From: alexhormozi
The concept of “passive income” is often a misconception; instead, all income exists on a spectrum of activity. Every individual’s earning capacity can be quantified as a “dollars per hour” rate, or Return on Time (ROT) [00:00:14]. The focus should shift from distinguishing between “active” and “passive” income to understanding the return on the time invested in any activity [00:00:46].
Understanding Return on Time (ROT)
Money is fundamentally an encapsulated form of time [00:11:47]. When you earn money, you are trading your time for it, regardless of whether it’s perceived as active or passive [00:00:59]. For wealthier individuals, the same denomination of money represents less time, indicating a higher ROT [00:11:58].
This perspective leads to two significant behavioral changes:
- Avoiding “Quick Money” Obsession: An obsession with quick, easy, low-effort money can lead to spending on things that require no time to make, while neglecting to invest time in actively making money [00:01:10].
- Rethinking Scalability: The notion that active income must be scalable to be “worth it” is flawed. If an active pursuit yields 15 times your average hourly rate, it should be prioritized until all your time can be dedicated to such high-return activities [00:01:37].
Calculating Your Hourly Rate
To understand your personal ROT, a humbling exercise is to calculate your hourly earnings [00:02:09]:
- For a 40-hour work week: Divide your last year’s total earnings by 2,000 [00:02:12].
- For actual hours alive: Divide your last year’s total earnings by approximately 8,000, or take your 40-hour work week hourly rate and divide it by four [00:02:21].
By understanding this number, you can assess whether an activity is truly “worth your time” [00:02:31].
Shifting Investment Focus
Instead of investing active income into “passive” endeavors, the focus should be on investing money into what is currently generating active income to multiply its returns [00:02:40]. This perspective also impacts spending habits. Every purchase represents a certain amount of time spent earning the money for it [00:03:07]. By feeling the “pain” of the time required to earn money for a purchase, buying behavior can dramatically shift [00:04:22].
ROT and Time Management
Learning to manage time is inextricably linked to managing money [00:11:25]. Those who achieve the best returns on their money are adept at investing their time wisely [00:11:40]. A constant appraisal of one’s calendar is necessary to identify opportunities to trade time for higher monetary returns [00:12:12]. While there are transaction costs for time spent on personal life, being aware of these costs allows for informed decisions [00:12:27].
The Cost of Ignorance
The biggest cost an individual faces is ignorance [00:20:08]. The difference between current income and desired income represents the cost of not knowing how to achieve higher earnings [00:20:44]. Therefore, the highest priority should be to “pay down ignorance” as quickly as possible through learning and acquiring information [00:21:01].
There are two types of knowledge to acquire [00:24:05]:
- Declarative Knowledge: Learning about something that exists, providing awareness of new strategies or models [00:24:19]. This often reveals “unknown unknowns” and can lead to significant breakthroughs [00:25:20].
- Procedural Knowledge: Learning how to do something, which is more predictable and focuses on clarifying steps to acquire skills [00:24:22].
Leveraging High-Value Time
To optimize ROT, it’s crucial to understand that time is your most potent weapon if invested wisely [00:29:21]. This means:
- Buying back low-income time: Outsource tasks like cleaning, grocery shopping, or food preparation. These activities cost time that could be spent on higher-income earning activities [00:29:31].
- Doubling down on work: When starting, working not only generates income but also prevents spending, creating a double effect [00:17:10]. Work also improves skills, leading to faster progress [00:31:39].
- Prioritize learning and skill development: Investing in oneself by dedicating time to learning and acquiring skills will significantly increase annual earnings [00:15:49].
The Long-Term Perspective
Most people overestimate what they can achieve in a year and underestimate what they can achieve in a decade [00:06:07]. Significant wealth and transformation are achievable over a decade [00:06:46]. This long-term focus means making “unreasonable” bets on personal growth that compound over time, making success inevitable rather than a game of chance [00:07:23].
Invest, Then Spend the Rest
A key principle for wealth creation is to invest first and then spend what remains [00:36:47]. This means prioritizing your future self over your current self [00:37:20]. Automate investments (e.g., direct deposit into investment accounts) and create friction around spending (e.g., manually paying bills, removing saved credit card information online) [00:37:33].
The Power of Focus
Thinking bigger and aiming for higher financial goals (e.g., 100,000) forces a change in the solution set [00:40:08]. Achieving larger sums often requires adopting different tools and developing new skills, rather than simply working harder within existing frameworks [00:40:52]. This connects directly to developing a unique skill stack that differentiates you in the market [00:44:21].
Ultimately, “money loves speed, wealth loves time, and poverty loves indecision” [00:52:25]. By prioritizing ROT, continuous learning, and strategic investment of time and money, individuals can build lasting wealth and productivity.