From: alexhormozi
Achieving financial independence requires a conscious decision and a systematic approach to personal finance. Many people are not financially independent despite significant lifetime earnings. The average American has a negative net worth, meaning babies are richer because they haven’t accumulated debt [00:00:07]. An average US minimum wage employee will earn over 3 million over their life [00:00:16]. This indicates that staying poor is often a decision, as a significant portion of earnings goes towards expenses that don’t build wealth [00:00:26].
Fundamental Principles
Wealth is a Ratio
Wealth is defined as the ratio between what you earn and what you need [00:01:28]. The number one rule of money is to spend less than you make [00:01:35].
Mindset Shift
To become wealthy, you must decide to be wealthy and believe it is under your control [00:02:00]. This requires a mindset shift from victim to victor, taking ownership of your financial situation [00:02:04].
Understanding the Cost of Debt
A significant portion of American paychecks, about 35%, goes towards paying banks and lenders for debt [00:02:17]. This includes mortgages, car payments, and credit card debt, often not perceived as true debt [00:02:30]. Banks profit immensely from lending money at compounding interest rates, with credit cards often charging 24% against you [00:02:44]. Compound interest can work against you if you’re in debt [00:03:16].
Six Steps to Financial Independence
If you’re earning enough money and develop the right habits, being broke is a temporary status [00:03:27].
Step 1: Save for an Emergency Fund
Begin by saving an emergency fund of 5,000 [00:03:34]. This initial fund helps cover unexpected expenses like car repairs or home maintenance, preventing new debt [00:03:49]. This step teaches the habit of saving money and seeing the balance grow [00:04:17].
“The first 100 Grand is a b****, but you got to do it… find a way to get your hands on a hundred grand” [00:18:47]. (Note: This is estimated to be 200,000 in today’s terms [00:19:03]).
Step 2: Begin Paying Off Debt
This step primarily focuses on consumer debt and credit cards [00:09:41].
- Psychological Approach: Rather than paying off the debt with the highest interest rate first, prioritize paying off the smallest debt fastest [00:08:52]. This strategy provides quicker wins and psychological reinforcement, motivating you to continue [00:09:14].
- Address Car Debt: If you have a car payment, consider getting rid of it and trading down to a cheaper, used car paid for in cash [00:09:48]. The goal is to own your car outright [00:12:44].
Step 3: Expand Your Emergency Savings
Once you’ve built an initial fund and started debt repayment, expand your emergency savings to cover 3 to 6 months of living expenses [00:11:43]. Keep this money in an interest-bearing account (e.g., 5-6% interest rates) [00:11:49]. Having this financial cushion significantly reduces anxiety and allows you to identify and pursue opportunities, shifting your focus from living paycheck to paycheck [00:12:00]. This money is for safety, not investment [00:12:20].
Step 4: Eliminate Risky Spending
Reduce or eliminate spending on items that don’t build wealth or are disproportionately expensive for your income:
- Car Leases/Expensive Cars: Turn in car leases and buy an affordable, used car (e.g., 10,000 in cash) [00:13:31]. Downgrade to one car if you have multiple [00:13:06].
- Identify Your Vices: Recognize and address personal spending vices like expensive shoes, clothes, vacations, or living in an unnecessarily expensive neighborhood [00:14:10].
- Translate Spending to Time and Future Money: Understand the true cost of purchases. A 500 a month for 40 years at 9% return can result in 500/month convenience could cost $2 million in future wealth [00:14:01].
- Sacrifice and Humility: Be willing to sacrifice to achieve your financial goals [00:16:32]. It’s often about elimination (of bad habits, unnecessary expenses, posturing) rather than addition [00:16:41]. The goal is to be rich, not just look rich [00:17:45].
- Reduce Fixed Costs: Drive down fixed expenses as much as possible, as these consume a large portion of your working days [00:15:29]. By reducing personal financial risk, you increase your ability to take business risks and recover from failures [00:06:51].
Step 5: Invest 15% of Pre-Tax Income
Automate investments to make saving and investing easy, and spending difficult [00:20:24].
- Prioritize Investments: Set aside investment money off the top of your income before other expenses [00:20:36].
- Invest in Yourself: Consider allocating a portion (e.g., another 15% pre-tax) into your own education and skill development [00:21:04]. Increasing your earning capacity through education can yield higher returns than passive investments like the S&P 500 [00:24:24].
- Check Accounts Daily: Regularly monitoring your accounts helps you stay aware of your financial flow, identify areas for improvement, and feel the impact of both inflows and outflows [00:21:42]. This habit should continue until you reach a significant level of wealth (e.g., $20 million) [00:21:51].
The Power of Accelerated Saving
- Extra Income: Consider taking on an extra job or shift to earn an additional $2,500 a month [00:22:34].
- Long-Term Compounding: Investing this extra 2,500 monthly into the S&P 500 for 55 years (starting at age 20 and compounding at 9.7%) could result in over 52 million [00:23:03]. This illustrates that wealth is a decision and within your control [00:23:40].
Step 6: Pay Off Your Mortgage
The final step is to pay off your mortgage [00:25:51].
- Refinance: If rates are lower, consider refinancing to a 15-year fixed mortgage to pay it down faster [00:19:32].
- Freedom from Fixed Costs: Once your car and house are paid off in cash, your basic living expenses are covered, and fixed costs are eliminated [00:19:53]. This frees up significantly more income for investments and long-term legacy building [00:20:00].
Complementary Strategies
- “Buy Nothing Challenge”: Disconnect credit cards, leave your wallet at home, and only buy essentials (e.g., discounted groceries, packed lunches) [00:00:40]. This extreme approach helps to reset spending habits.
- The 30x12 Working Challenge: Work 30 days straight, 12 hours a day, with no days off [00:26:10]. While not sustainable long-term, this challenge demonstrates your capacity for hard work and can significantly accelerate savings by reducing spending opportunities and increasing earning [00:26:46]. This doubles the positive effect by reducing negative spending and adding to income [00:26:54].