From: alexhormozi
Many individuals find themselves in a challenging financial position, with the average American holding a negative net worth, meaning babies are “richer” than adults who have accumulated debt [00:00:07]. Despite this, the average U.S. minimum wage employee will earn over a million dollars in their lifetime, and those at the median U.S. income can expect to earn $3 million [00:00:16]. This suggests that staying poor is often a conscious decision, as continuous work generates millions, but this money is frequently mismanaged [00:00:27].
The key to shifting this paradigm is understanding that wealth is a ratio between what you earn and what you need [00:01:28]. The fundamental rule of money is to spend less than you make [00:01:35]. To become wealthy, one must first decide to be wealthy and recognize that this outcome is within their control, moving from a victim mentality to a victor mindset [00:02:00].
A significant challenge to wealth accumulation is debt; approximately 35% of every paycheck in the U.S. goes towards paying banks and lenders [00:02:17]. People often don’t perceive mortgages, car payments, or credit card balances as debt [00:02:30]. These financial institutions thrive because “money is their product,” and consumers continuously buy it at a compounding price that increases annually [00:02:44]. While many seek 9-10% returns in the stock market, they often face 24% interest rates on credit cards [00:02:57]. Therefore, the easiest initial step is to pay off liabilities with guaranteed negative returns, as fighting compound interest is a “bad idea” [00:03:04].
Six Steps to Financial Freedom
If earning enough money and having the right habits are in place, being broke is a temporary status [00:03:27].
Step 1: Save for an Emergency Fund
Begin by saving a starter emergency fund of 5,000 [00:03:45]. The reason many fail to hit savings goals is unexpected events [00:03:49]. While the specific emergency is unknown, the occurrence of unexpected expenses can be anticipated about once a month [00:03:57]. This initial saving phase teaches the habit of watching money grow [00:04:18]. The speaker personally saved every dollar they made, accumulating $50,000 after taxes, even on modest college-graduate salaries [00:04:56].
“Saving money won’t make you money, but it will allow you to think further out and make bigger bets, which absolutely will make you more money.” [00:08:08]
Saving reduces personal risk, enabling individuals to take calculated business risks and increase their “shots on goal” [00:06:40]. The ability to live on minimal expenses provides resilience to failure, allowing for recovery from multiple failed businesses or partnerships [00:07:27].
Step 2: Pay Off Consumer Debt
There are two approaches to debt repayment: logical (highest interest first) and psychological (fastest payoff first) [00:08:39]. The psychological approach is recommended to build momentum and achieve quicker “wins” by paying off the smallest debts first, regardless of interest rate [00:08:57]. This step primarily targets consumer debt and credit cards [00:09:41], not house debt.
Step 3: Expand Emergency Savings
After building the initial fund, the next step is to expand emergency savings to cover 3 to 6 months of living expenses [00:11:36]. This money should be kept in an interest-bearing account (e.g., yielding 5-6%) but should not be invested [00:11:49]. Having this financial buffer significantly reduces anxiety and allows one to shift focus from living paycheck-to-paycheck to identifying new opportunities [00:12:00].
Step 4: Eliminate Risky Spending
Downgrade significant expenses that represent “risky spending.”
- Cars: Turn in car leases and buy a cheaper, used car for cash (e.g., 10,000) [00:13:57]. Opt for vehicles with high mileage and low insurance/repair costs [00:12:44]. If applicable, downgrade to a single family car [00:13:06].
- Vices: Identify personal “vices” that incur significant costs, such as expensive food, shoes, clothes, or vacations [00:14:10].
- Housing: If renting, downgrade to the cheapest possible option [00:19:22].
The speaker emphasizes that convenience comes at a high cost, illustrating that a 2 million [00:14:01]. It’s crucial to translate money spent into “time” worked, as expensive fixed costs can consume a large portion of one’s working days [00:14:55]. This requires sacrificing ego and appearances [00:15:33]. The core question becomes: “What are you willing to give up to be a millionaire?” [00:16:32], focusing on elimination rather than addition [00:16:40].
“Do you want to look rich or do you want to be rich?” [00:17:45]
The speaker advises getting the first 150,000-$200,000 today) saved by any means necessary, making it a “fun” game to watch the number grow on a spreadsheet [00:18:47].
Step 5: Invest 15% of Pre-Tax Income
Automate investments by taking 15% of pre-tax income off the top [00:20:21]. Make it difficult to spend and easy to save and invest [00:20:28].
Consider allocating another 15% of pre-tax income to investing in education and skills development [00:21:04]. The goal of the initial educational investment is to cover its own cost, after which all further returns are “gravy” [00:21:18]. Stopping self-education and skill development is a decision to cap earning potential [00:21:26].
Checking financial accounts daily, especially before reaching significant savings goals (like $20 million), helps maintain a “pulse” on money flow, understand inflows and outflows, and identify where returns are being generated [00:21:42].
A powerful example of longterm investment in personal growth is the potential for significant wealth creation: by working an extra job to earn an additional 2,500 per month and investing that into the S&P 500 for 55 years (starting at age 20), one could accumulate 52 million [00:22:23]. This highlights that wealth is a decision and a controllable outcome [00:23:37].
Between investing in the S&P 500 and investing in personal growth and mentorship, the speaker strongly recommends the latter, stating that “your ability to earn more using money is going to always be higher than the S&P 500” [00:24:20]. For instance, investing $10,000 into a snowblower to increase active earning capacity from 3 driveways to 20 would yield far more than a 10% passive return [00:24:36].
Step 6: Pay Off Your Mortgage
The final step is to pay off your mortgage [00:25:51]. Once cars and houses are paid for in cash, fixed living expenses are covered [00:19:53]. This dramatically reduces monthly overhead, freeing up significant income for investment in self-improvement or assets [00:20:00], allowing for even more aggressive long-term legacy investments [00:26:00].
The 30x12 Working Challenge
To accelerate progress, consider the “30x12 working challenge”: work 30 consecutive days, 12 hours a day, with no days off [00:26:10]. This intense, short-term effort helps realize that you can work harder than previously imagined [00:26:25]. By stopping wasteful spending and using that time to earn money, you double your positive impact by reducing the negative and increasing the positive [00:26:49]. This challenge can help determine if the desired outcomes are worth the effort [00:27:01]. This emphasizes the importance of starting personal growth and learning early.