From: alexhormozi
Becoming wealthy is a decision within your control, not a matter of luck [00:02:00]. It requires a shift from a victim mindset to a victor mindset, taking charge of your financial situation [00:02:04]. Wealth is defined as the 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].
Many people believe that making a lot of money equates to having a lot of money, but often this is not the case [00:17:34]. Instead of aiming to “look rich,” the focus should be on actually “being rich” [00:17:45]. Being rich offers security and reduces financial stress [00:17:54].
Financial Realities
- The average American has a negative net worth, meaning babies who haven’t gone into debt are richer [00:00:07].
- An average U.S. minimum wage employee will earn over a million dollars in their lifetime [00:00:16].
- The median U.S. income will yield $3 million over a lifetime [00:00:21]. This highlights that a significant amount of money passes through individuals’ hands, often going to places that “don’t make sense” [00:00:36].
Six Steps to Financial Wellness
These steps are similar to Dave Ramsey’s “baby steps” and emphasize modeling proven success [00:03:37].
Step 1: Save for an Emergency Fund (Initial)
Start by saving an initial emergency fund of 5,000 [00:03:45]. Many people fail to reach savings goals because unexpected events occur [00:03:49]. You can expect unexpected things to happen about once a month [00:04:04]. The goal is to prepare for the expense, not a specific one [00:04:10]. Learning to save money first and seeing the balance grow is crucial [00:04:17]. This habit should stick even as income grows [00:04:31].
Step 2: Pay Off Debt (Psychological Approach)
Prioritize paying off consumer debt, like credit cards, rather than mortgage or house debt [00:09:41]. While logic might suggest paying off the highest interest debt first, a psychological approach recommends paying off the smallest debts fastest to gain quick wins [00:08:40]. In the U.S., 35% of every paycheck goes towards paying banks and lenders for debt [00:02:17]. People often don’t perceive mortgages, car payments, or credit card balances as debt [00:02:30]. Banks profit immensely from money as their product [00:02:44], and consumers buy their money at a compounding price [00:02:49]. Credit cards often have 24% interest rates working against you [00:03:00], which are guaranteed negative returns [00:03:09]. This is a battle against compound interest, “the Eighth Wonder” [00:03:16].
Step 3: Expand Emergency Savings
After proving you can save and paying off initial debts, expand your emergency savings to 3 to 6 months of living expenses [00:11:36]. This money should be kept in an interest-bearing account, not invested, as it serves as a “brick of safety” [00:11:49]. Having this cash reserve reduces anxiety and allows you to look beyond paycheck-to-paycheck living, seeing opportunities for offense [00:12:00].
Step 4: Eliminate Risky Spending (Downgrade Lifestyle)
This step focuses on eliminating high-cost expenses and making drastic lifestyle changes to reduce personal financial risk, allowing you to take “business risks” later [00:06:47].
- Cars: Turn in car leases and buy a cheaper, used car for cash (e.g., 10,000) [00:12:31]. Look for vehicles with over 100,000 miles, low insurance, and low repair costs [00:12:57]. Consider downgrading to a single car if you have multiple [00:13:06]. The convenience of a second car or an expensive car comes at a high cost, potentially equivalent to millions of dollars over 40 years through lost investment potential [00:14:01]. A $600/month car lease can mean working 6 out of 22 working days just to pay for it [00:14:55].
- Identify Vices: Recognize personal spending weaknesses like dining out, shoes, clothes, vacations, or expensive neighborhoods [00:14:10]. Translate these expenses into time spent working or future money lost [00:14:22].
- Live Frugally: Be willing to give up luxuries and “posturing” to achieve financial goals [00:16:32]. The initial phase is about elimination, not addition [00:16:40]. The speaker himself lived with roommates, split a bedroom, and lived on less than 1 million/month [00:01:07]. He even lived in his gym to avoid rent [00:16:02]. This frugal mindset allows for more attempts at business ventures and resilience after failures [00:07:19]. Saving money won’t directly make you money, but it allows you to think long-term and make bigger, more profitable bets [00:08:08].
Step 5: Invest and Increase Earning Capacity
- Automate Investments: Invest 15% of your pre-tax income into assets that will appreciate over time, such as the S&P 500 [00:20:17]. Make saving and investing easy, and spending hard [00:20:28].
- Invest in Yourself: Consider investing another 15% of pre-tax income into your education to increase your earning capacity [00:21:04]. Your ability to earn more through skill development often yields higher returns than passive investments [00:24:24]. The goal of initial educational investments is to cover their cost; everything after that is “gravy” [00:21:18].
- Track Finances Daily: Regularly check your accounts (daily when starting out) to maintain a pulse on your money, understanding inflows and outflows [00:21:41]. This awareness helps in making informed spending decisions [00:22:16].
- Increase Active Income: Work an extra job or shifts to earn an additional 3,000 per month [00:22:34]. If a 20-year-old invested an extra 2,500 per month into the S&P 500 for 55 years at 9.7%, they would have over 52 million [00:23:01]. This wealth is always being made; the question is who it belongs to – you or the banks [00:25:16].
- The “30x12” Challenge: Work for 30 consecutive days, 12 hours a day, with no days off [00:26:10]. This temporary challenge helps you realize your capacity to work harder and makes you less likely to spend money, as you’re constantly working [00:26:25]. By reducing negative spending and adding to positive income, you double your financial impact [00:26:49].
Step 6: Pay Off Your Mortgage
Once your other debts are managed and investments are in place, focus on paying off your mortgage [00:25:51]. If renting, downgrade to the cheapest possible option [00:19:22]. If you have a mortgage, consider refinancing to a lower rate or switching to a 15-year fixed mortgage to pay it off faster [00:19:30]. Living in a cash-paid-for house and car is “very chill” [00:19:49]. Eliminating these fixed costs means your earning capacity snowballs; you work fewer days for expenses, freeing up more time and money for investments and long-term legacy [00:19:57].
Charlie Munger's "First 100 Grand" Rule
“The first 100 Grand is a b****, but you got to do it” [00:18:47]. This initial amount, now closer to 200,000, is the hardest to accumulate but essential [00:19:03]. Make it a game to see how quickly you can achieve this milestone [00:19:09].
Ultimately, achieving financial independence and wealth is a journey of intentional habits and mindset [00:03:28]. It’s about being willing to give up short-term gratifications for long-term security and freedom [00:16:32].