From: alexhormozi
Achieving significant wealth often involves understanding the true nature of income and challenging conventional wisdom. One perspective posits that the traditional distinction between active and passive income is misleading, suggesting a more nuanced view focused on the “return on time” invested [00:00:14].
The “Passive Income is a Lie” Premise
The concept of “passive income” is considered a misnomer, as all money is made over time, meaning every individual has a “dollars per hour” earning rate [00:00:14]. Rather than a strict dichotomy, active and passive income exist on a spectrum, defined by how engaged one must be relative to the time invested [00:00:38]. The crucial metric for wealth creation becomes “return on time” or how much one makes per hour [00:00:51].
Many people fear the idea of “trading hours for money,” but this is an inherent aspect of earning; the money simply isn’t denoted in hours upon receipt [00:00:59]. A common pitfall is the obsession with finding quick, easy, low-effort money schemes, which often leads to spending money on these supposed “passive” ventures while neglecting to invest enough time into activities that are actively generating income [00:01:10].
Instead of seeking purely passive income, the focus should be on significantly increasing one’s active income and ensuring that every active endeavor is scalable [00:01:32]. To gain a humbling perspective on earning, one can calculate their hourly rate by dividing last year’s earnings by 2,000 (for a 40-hour work week) or 8,000 (for actual hours alive, roughly one-fourth of the total hours in a year) [00:02:09].
“What changed for me was that I stopped trying to invest my money from my active into trying to find more passive things and try to say how do I invest my money more into my active to multiply my active that I know is working” [00:02:40]
Time as the Ultimate Currency
Understanding money as an encapsulated version of time is fundamental [00:11:47]. The wealthier one becomes, the less time a certain denomination of money represents for them [00:11:58]. This perspective encourages constant appraisal of one’s calendar to identify opportunities to trade time for more money [00:12:12]. While personal time is valuable, recognizing its “transaction cost” helps in making informed decisions about its allocation [00:12:27]. Continuously “trading up” how time is invested for higher returns leads to year-over-year income growth [00:12:41].
Prioritizing Skill Acquisition and Long-Term Growth
A critical rule for wealth accumulation is to first learn how to actively make money before attempting to make money “make money” (i.e., investing) [00:15:11]. Young individuals often make the mistake of trying to invest small sums (e.g., $1,000) hoping for high returns, which can easily lead to losses [00:15:16].
Instead, that money should be invested in improving one’s skills and actions to increase earning capacity [00:15:46]. Investing in oneself, the “500,” is considered a superior asset compared to the S&P 500, as an individual’s asset (their skills and potential) will always outperform the stock market [00:09:01].
The 10-Year Million-Dollar Contract
Most people overestimate what they can accomplish in a year but underestimate what they can achieve in a decade [00:06:07]. It’s possible to add a zero or two to one’s net worth within a decade by making “reasonable bets” that compound over time, leading to inevitable success rather than a game of chance [00:06:26].
“We the asset that we invest in and the currency we invest into ourselves in is time experience and skills” [00:08:29]
This involves making strategic long-term decisions, such as opting for an internship that offers 10x potential earning in three years, even if it pays less initially, over a higher-paying job that offers less growth [00:08:11]. Sacrificing immediate gratification for long-term skill development is crucial [00:08:49].
The Cost of Ignorance
The biggest cost an individual faces is ignorance [00:20:08]. The difference between one’s current income and their financial goals represents the cost of not knowing how to achieve those goals [00:20:44]. Therefore, paying down “ignorance” as quickly as possible should be a top priority, whether through relational capital (leveraging networks), favors, or direct financial investment in education [00:21:01].
Investing in education and access to knowledge, even if expensive, allows one to “grab their future and pull it towards them” [00:22:01]. Learning can be categorized into two types:
- Declarative knowledge: Learning about something that exists [00:24:19]. This often reveals “unknown unknowns” and provides breakthroughs by seeing the world through the eyes of those more successful [00:25:15].
- Procedural knowledge: Learning how to do something [00:24:22]. This is more predictable and involves clarifying specific steps to acquire a skill [00:25:31].
The speaker demonstrates paying a high hourly rate ($750/hour) for procedural knowledge to master a skill, documenting, demonstrating, and duplicating the process until proficiency was achieved [00:26:31].
Financial Discipline and Mindset
- “If you can’t buy it twice, don’t buy it once.” [00:02:53] This rule shifts spending habits by calculating the post-tax time required to earn an item [00:03:07]. Saving money enables taking on bigger risks, which can lead to greater earnings [00:04:40].
- Check your bank account before social media. Regularly confronting one’s financial reality, even if painful, leads to increased awareness and, consequently, better management of money [00:12:52]. This habit builds disciplined wealth building skills [00:15:01].
- You should only have to get rich once. Avoid betting what you have and need for something you don’t have and don’t need [00:19:12]. This includes risky partnerships where one gives up equity without a clear contribution from the partner in terms of money, experience, or time/energy [00:09:15]. Understanding potential downsides and overestimating their likelihood is crucial to avoid losses [00:19:22].
- Don’t love money, love making money. Money is neutral potential energy, akin to “bottled time,” which can be used for good or ill [00:42:44]. The ability to create value for others is directly proportional to the money one makes, influenced by the total value created, negotiation skills, and the uniqueness of one’s skill set [00:43:25]. A unique skill set is often a stack of varied experiences that no one else can easily replicate [00:44:21].
- Compare yourself to those you aspire to be. Motivation comes from lacking something, and to be motivated to make money, one must desire more [00:32:25]. Surrounding oneself with or comparing oneself to individuals who embody the desired level of wealth and discipline can be a powerful motivator [00:32:42].
- Invest then spend the rest. The principle of automating investments and creating friction around spending is key to wealth accumulation [00:37:33]. Automating money movement to investments before it’s seen helps to prioritize future self over current desires [00:37:40]. As income grows, maintaining a fixed living expense while increasing investment percentages accelerates wealth building [00:38:02].
- **It’s easier to make a million dollars than 100,000 often assumes trading time for wages, but making a million requires different skills and strategies [00:41:03].
- “Buy time like a rich person, buy stuff like a poor person.” [00:29:12] This means investing money to outsource low-income or time-consuming tasks (like cleaning, cooking, laundry) to free up higher-earning time [00:29:31]. This not only saves time but also allows for more hours dedicated to high-energy, skill-building work, leading to exponential personal and financial growth [00:31:37].
Ultimately, money loves speed, wealth loves time, and poverty loves indecision [00:32:27]. The journey to wealth involves consistent investment in oneself, strategic time allocation, and a disciplined mindset geared towards long-term growth and skill development.