From: alexhormozi
Effective personal finance strategies often involve avoiding common pitfalls, especially in one’s twenties [00:00:00]. Adopting smart money habits early can prevent long-term financial struggles [00:00:09].
Prioritize Learning and Earning Capacity
One significant mistake is underspending on education while overspending on status symbols like expensive phones, cars, or watches [00:00:14]. Instead, focus on investing money into your ability to earn more [00:00:45].
It is crucial to take jobs primarily to learn rather than just to earn [00:01:04]. The extra earning potential of 25,000 annually in your twenties is minor over the long term compared to the value of acquiring skills [00:01:43]. Wealthy individuals prioritize long-term growth over immediate income [00:00:51].
Strategic Investment in Yourself
Rather than simply “saving” money, it is more effective to invest it [00:01:55]. For those aiming to become “filthy rich,” the primary investment should be in oneself and one’s earning capacity [00:02:13]. While dollar-cost averaging into an S&P 500 fund is a good long-term strategy, the focus in your twenties should be on increasing your earning potential [00:02:07]. Doubling or tripling your earning capacity by investing $10,000 now will yield far greater returns than traditional savings, especially when accounting for inflation [00:02:36].
Investment Prioritization
Prioritize how much you will invest before spending any money [00:02:47]. Allocate money for your learning and education first [00:02:58]. This means setting aside funds into a separate account for learning opportunities and deploying that capital when the right opportunity arises, rather than investing only what’s left at the end of the month [00:03:03].
Automate and Manualize
Automate investments into yourself to make it easy, and manualize spending on non-essential items to make it harder [00:03:17]. Using cash instead of credit cards for purchases can create a psychological “pain” that discourages unnecessary spending [00:03:29]. Implement a system of separate accounts for different expenses (e.g., rent, personal investing, food, car) to control where your money goes [00:03:38].
Prudent Spending Habits
- Avoid Aimless Shopping: Do not go shopping without a specific agenda or list [00:03:49]. Stick to a pre-approved budget and only buy what is on your list [00:03:57]. This simple habit can provide lifelong dividends [00:04:04].
- Time vs. Money on Food: Once you earn more than $15 an hour, it may be more financially sensible to buy takeout food and save the time you would have spent on meal preparation, cooking, and cleaning [00:04:07]. This reallocates your time towards higher-earning activities, effectively investing in yourself [00:04:38].
Social Environment and Micro-Community
Living with the right people is crucial for financial success [00:04:41]. Avoid roommates who are irresponsible or who do not share your goals [00:04:43]. It is important to live with people who encourage you and are pursuing similar aspirations [00:05:16]. In your twenties, living with multiple people can also be significantly cheaper [00:05:26].
Your micro-community matters significantly [00:05:36]. Overpay for convenience, such as living close to highways, gyms, and affordable food options, as this saves time and ancillary costs like gas [00:05:38]. Living with more people in a better, more convenient area is preferable to living with fewer people in a less desirable one [00:06:01].
Measuring Money and Modeling Success
Measure money in terms of how long it took you to earn it [00:06:30]. For example, a 20 an hour (after taxes) might equate to 6 hours of work [00:06:32]. This perspective helps in understanding the true cost of purchases [00:06:44].
It is vital to model the correct “season of life” when looking at successful individuals [00:06:06]. Instead of imitating their current lifestyle, model what they did to achieve their success in their earlier, learning phases [00:06:17].
Developing Financial Discipline
Become competitive with how much money you are saving and investing in yourself, rather than focusing on how much you are making [00:07:09]. Set personal records for the amount you put into your investment account each month [00:07:34]. This aligns with long-term planning.
Daily Financial Check-Ins
Check your bank account every single morning [00:07:37]. While it might be uncomfortable initially, confronting financial reality is necessary to change it [00:07:47]. This habit helps you understand your spending patterns and gain a “pulse” on your money, similar to how daily weigh-ins can help with weight loss [00:07:51]. Tracking finances daily to improve money habits is a cornerstone of sound financial management.
Balancing Experiences and Goals
While the focus should be on becoming a millionaire through investment in self, it is acceptable to spend on one-time experiences that are unique to your twenties [00:08:05]. These are experiences you may not be able to have later in life, such as backpacking through Europe [00:08:12]. This aligns with balancing life priorities and financial goals. Give yourself permission to spend on these in a limited fashion, without draining your investment account [00:08:32].