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Whether we like it or not, money plays a huge role in our society. It serves as a medium of exchange so that you can put food on the table, experience new things such as traveling, or even put you or your kids through school. Today we're going to take a time machine back 15 years, and I'm going to share with you the eight most important and practical lessons about money that I learned in my 20s. Had I known these earlier, I feel like I would have saved a ton of time. So let's get started.
The first lesson is that money has diminishing returns. I've spoken to dozens of self-made millionaires in my life, and I usually ask them what their biggest takeaway about money is. Most of them have pretty similar answers, but they usually share two or three common answers across all of them. The first takeaway is that money isn't everything. After a certain point, you see the difference between having a million dollars or 1.05 million dollars in your bank account. I feel bad for saying this, but for a millionaire, that's pretty negligible. That extra 0.05 million, or 50k, isn't going to change that person's life. However, on the flip side, if you gave that fifty thousand dollars to someone who's broke, all of a sudden their life is completely flipped upside down. They can now afford to pay off their credit card debt, they now have an emergency fund, and they can sock away some money for their living expenses for quite some time. In other words, having money isn't everything, but not having it is.
People who tend to start earning more money usually become obsessed with making more money. Not everybody, but some people do get obsessed, and when you do, they're usually working. We all have that one friend. You know exactly what they're doing at any given moment: they're usually working, and that's to the detriment of their life and their family. The lesson here is that the more money that you make, save, and invest, the less that money actually matters. Obviously, we want to have enough money to cover our recurring expenses, such as our bills, but money doesn't necessarily bring you happiness past a certain point. So after a certain point, we really need to be honest with ourselves and actually examine whether or not our relationship with money is a toxic one.
The next money lesson that I wish I knew in my 20s was that I actually needed a lot less money than I thought. I used to think I would need to make 300K a year just to be happy. I would talk to a lot of my friends, and we all thought that we would make it whenever we started to make a million or two million dollars a year. For many of us, we all have some number in our heads where we think, okay, once I get to that number, I'm going to be super happy, whether that's 500k or 100K or whatever it is. But the fact is that these are all arbitrary numbers that we make up in our heads. I had a mentor in my 20s who changed my mindset on this exact topic, and this is an exercise that you guys can do at home that will easily change your life. The exercise he had me do was sit down and estimate how much I would need for every single category of spending to live my ideal lifestyle, and figure out what that would be on a pre-tax salary basis. I took an afternoon to do this exact exercise in 2016, and my dream spend at the time was to spend a thousand dollars a month on travel and 500 a month on clothes, in addition to my food, utilities, and rent. My desired lifestyle would have cost me six thousand dollars after-tax money a month. If you do the math on that, that's actually a pre-tax salary of a hundred and nine thousand dollars. If I wanted to put some money aside for savings as well, I realized I probably would have to save around 150,000 pre-tax in income to reach my desired level of living. That's still a lot of money, but it's far from the arbitrary number of three hundred thousand dollars in my head. In fact, it was fifty percent less. So I challenge you guys to do this exercise for yourself and let me know in the comments what your number is. You'll probably find that you don't actually need as much money as you think in your head to live the lifestyle that you want. Even for me right now, 500 a month on clothing seems ridiculously excessive.
All right, money lesson number three is to separate your income from your time. According to Naval Ravikant, you're not going to get rich renting out your time. He states that lawyers and doctors who can charge 300, 400, or 500 an hour are still capped on their income, and with lifestyle creep they might not even be saving that much money. You want to strive for an extra income source that doesn't directly depend on your time. That could look like a rental property where the cash flows are bigger than the expenses, or it could look like a part of a business that pays you out every month, or it could just be dividend stock income. If you're curious about dividend stocks, I have a bunch of videos on my channel about that. The whole point here is that we all have a limited time every single day, and if we're always bound to our time, then it's going to be a lot harder to make a large income or become wealthy. If all we're doing is renting out our time, having some income that isn't tied to your time will actually free you up, especially in times of economic distress, because you're going to feel less pressure and less stress at work.
Speaking of time, that brings me to money lesson number four: it takes time. Making money takes time. Basically, if you have a new side hustle, it'll take you three, six, or twelve months to really get rolling. If you start a new business, it's going to take you three years to usually break even or make a profit, and most investments don't actually yield any capital until after many, many years. I would say most people start and give up too early on the endeavors that could make them a lot of money. In this day and age of instant gratification, that totally makes sense. You see someone on social media who gets rich within 30 days, and you're like, hey, why can't I do that? But the truth is that most money and most wealth is not built in 30 days. So one of the biggest advantages in your life is that if you give yourself a super long time horizon to do things, you're going to operate at a much better level and make the right decisions. For example, if you wanted to get really physically fit, that would be really difficult to do within 30 days. But if you change your time horizon to one or two years, you might start making lifestyle choices that will actually get you physically fit in that time span. You're going to put less pressure on yourself, and you're more likely to hit your goal of being physically fit.
Think about this another way in terms of money. If you're trying to make as much money as possible in 30 days, you might compromise your values, and you might take some actions that aren't in line with your long-term vision. The easiest example I can think of is someone who wants to start drop shipping as a business. Drop shipping as a business model can make you a lot of money within 30 days. If you don't know what it is, it's usually where you set up a website, you sell a product directly from China, and you profit from the difference in the margin by sending that product straight from China to your end customer. But in my opinion, drop shipping is just a mere means to prove out a business model, because most drop shipping products will die within six to twelve months. Now, if you were thinking on a longer-term time horizon, perhaps you would actually find a better way to source the product, especially source it within your home country. You would then be able to build a real brand, and maybe you can even differentiate on the product with some innovation. Having a company with a strong brand and a competitive advantage will allow you to keep making money for a long period of time, and it will actually extend the runway of your drop shipping business model past six to twelve months. By pursuing a long-term time horizon, you might actually be willing to take short-term losses in favor of long-term gains later on, and that's something that someone with a short-term mindset simply will not do.
Before we move on to money lesson number five, I want to let you guys know that this video is not sponsored in any way, but it is brought to you by my own newsletter, Hump Days, which is almost at 10,000 readers. We come out with business news twice a week, on Wednesdays and Sundays, and it's completely free to sign up. It's free information. If you'd like to sign up, the link is in the description below.
All right, money lesson number five is that making more money is actually more important than cutting back expenses. This was another huge takeaway from all the self-made millionaires I talked to. While both income and expenses definitely matter, I would argue that if you're just cutting back on your expenses, there is a limit to how much you can actually do. You can cut back on subscriptions, you can cut back on unnecessary purchases, and you can buy things that are used versus new. But for the person making twenty-five thousand dollars a year, frugality is only going to go so far. You're going to hear a lot of personal finance advice online about not buying certain things. Not buying coffee is usually a very common thing that people say: if you spend four dollars on your Starbucks coffee every single day and invest that money, it's going to be worth millions of dollars in the future. I think that advice is more geared toward not spending frivolously and being frugal with your money. But as long as you already have those down, what's really going to move the needle with financial independence is making more income. Here's another good question: would you really care if you spent four dollars a day on coffee if your income was not 50k but instead five hundred thousand dollars? Probably not.
So how do we increase our income? A temporary solution would be to ask for more hours at work. You can definitely do that, but I think a longer-term solution is to try to get a new job or a promotion at work so that you can earn more money. For side income, you can create another income stream by doing a side hustle or finding a passive investment that could really help. But I think the best long-term thing is to really educate yourself and increase your skills so that you can earn more in the marketplace. If you're increasing your income, the other thing we need to watch out for is lifestyle inflation, because you could be making double, but if you're also spending double, then you're not really getting anywhere. At the end of the day, we want to make more income, but we also want to save a bunch of that income, because if we can save and invest it, we're going to be a lot better off and more financially independent.
Money lesson number six is to have a mid-month check-in. When you're first starting to get in the habit of being aware of your finances, I think having a minimum check-in to see how you're progressing is a really good idea. I personally like to check my bank statements, my credit card statements, and any other statements where I spend money on the 15th of every month. Then I assess how much I spent in the first 15 days, and I see if I can tailor my behavior or my spending for the latter half of the month to reach my goals. The idea here is that if you're only checking your finances once a month, that might not be frequent enough. If you have mid-month check-ins, you're doubling the number of times you check in on your finances. I would say managing your money is a process, like eating healthy or going to the gym, and the more check-ins we have and the more honest we can be with ourselves, the better off we're going to be. So this mid-month check-in is pretty vital. If you really want to go above and beyond, you can also add some more check-ins: a quarterly check-in to see how you're progressing for the year, or even a mid-year check-in.
The next lesson is to pay yourself first. This is a simple strategy that many of us don't do, but the idea is that you want to set aside some money for yourself in the future, because if you're not going to do it, who is? An easy way to do this is, whenever you get paid every single month, if you know the exact day, set up an automatic withdrawal within your bank account so that when the money comes into your main checking, a portion of it gets siphoned over to a savings account for you to save and invest. Say you make a thousand dollars a week. Perhaps a thousand dollars goes into your checking account, and then 200 of that goes into a savings account every single week. By the end of the month, you have 800 extra dollars for saving and investing. Once you pay yourself first, you can think about your bills and your discretionary income. The idea is that you don't touch the 800 you've automatically put away for discretionary expenses, and you just focus on what's left for whatever you need to spend on.
All right, money lesson number eight is, I think, the most important one, and many self-made millionaires actually agreed with me: if you can't buy something twice, then you can't afford it. This is mostly in reference to luxury goods and things we really want to buy, so maybe not our necessities. The idea is that if you can't buy something two times over, you should really rethink your purchase. This is just a good rule of thumb so that you're not succumbing to lifestyle inflation. This also brings up an interesting tangent about math. Most of us in America are on what's called W-2 income, or salary income. We have an employer who pays us for the work that we do, which also means whatever you make, you're going to pay taxes on. So if you make fifty thousand dollars a year, your tax rate is going to be 27 percent. That means for every one hundred dollars you make, only 73 of those dollars are actually what you keep in your pocket. So when you go and buy a luxury item, let's say you go to the Louis Vuitton store and see a wallet you really enjoy that's 500 dollars sitting on the rack, that might be 500 dollars you spend in the store itself, but it actually was 684 pre-tax dollars that you had to earn to afford that 500 after tax. Almost everything you buy is going to be bought with after-tax dollars. That's something extra to consider: when you're making your pre-tax income of, say, a hundred thousand dollars, what can that actually buy you after tax? So while money lesson number eight is about if you can't buy something twice, you can't afford it, the real lesson I think is that everything you buy is with after-tax money, and everything we make in our income is with pre-tax money. That's something you need to consider.
All right, make sure to sign up for my free newsletter, Hump Days. That will be linked in the description below if you'd like to check it out, and let me know if any of these money lessons really help you, because all of these are lessons I wish I knew in my 20s. I hope you're having a good day, and I'll see you guys in the next video. Peace.