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Start for freeThe Truth About Passive Income
Many people dream of passive income, but the reality is that all income requires some degree of effort. Instead of thinking in terms of active vs passive income, it's more useful to consider your return on time invested.
Every person has an effective hourly rate based on their total income divided by hours worked. The goal should be to maximize this rate by focusing on high-value activities that generate the most income per hour.
Rather than chasing "passive" income streams that often require significant upfront work, look for ways to increase your active income and make it more scalable over time. Invest your money and energy into multiplying your active income sources that are already working.
The Rule of Buying Twice
A powerful mindset shift is to ask yourself if you could afford to buy something twice before purchasing it once. This forces you to consider the true cost and value.
Take it a step further by calculating how many hours you need to work to afford a purchase. For example, if you make $20/hour after taxes and are considering a $100 item, ask yourself if it's worth 5 hours of your labor.
This perspective often changes buying behavior by making you feel the "pain" associated with the work required. It helps curb impulse purchases and unnecessary spending.
While saving alone won't make you rich, it allows you to accumulate capital that can be invested for greater returns. Having savings gives you the ability to take calculated risks and seize opportunities.
Think Long-Term
Most people overestimate what they can accomplish in a year but underestimate what's possible in a decade. Adopting a long-term mindset is crucial for building significant wealth.
Many of today's most valuable companies went from inception to billions in valuation in less than 10 years. While that's not typical, it shows what's possible with sustained focus over time.
Ask yourself: If you could guarantee adding a zero to your net worth in 10 years by making no money for the first 9 years, would you do it? If yes, start acting accordingly.
This long-term perspective helps you make reasonable "bets" that compound over time, rather than chasing get-rich-quick schemes. It allows you to invest in your skills and potential earnings, even if it means lower income in the short-term.
Choose Partners Wisely
One of the biggest potential pitfalls when building wealth is entering into bad partnerships. Only partner with people who bring something essential that you lack:
- Money you don't have
- Experience you don't have
- Time and energy you don't have
Ensure their contribution is clearly defined. Many partnerships fail due to misaligned expectations or uneven effort. Be wary of partnering just because you're insecure about going it alone.
Manage Your Time to Manage Your Money
Time management is a prerequisite for money management. We all have the same 24 hours in a day - those who get the best returns on their money are those who invest their time most effectively.
Money represents encapsulated time. As you become wealthier, each dollar represents less of your time. Constantly evaluate how you can trade your time for more money.
This doesn't mean neglecting important relationships or personal time. But be aware of the opportunity cost of how you spend your hours. Aim to continually increase your effective hourly rate by focusing on high-value activities.
Track Your Finances Daily
Make it a habit to check your bank account before looking at social media each morning. If it's painful to look at your finances, that's even more reason to do it regularly.
What gets measured gets managed. Simply tracking your finances daily will start to influence your behavior and decision-making, even without consciously trying to change.
As your wealth grows, you may need to extend this to weekly or monthly check-ins. But in the early stages of building wealth, daily awareness is key.
Focus on Earning Before Investing
Many people with limited savings obsess over how to invest small amounts for maximum returns. While investing is important, your primary focus early on should be increasing your earning power.
Invest in developing skills and experience that will boost your income potential. An extra $10,000 per year in earnings will compound far more over time than squeezing out an extra 2% return on $1,000 invested.
Don't neglect investing entirely, but recognize that your own earning ability is likely your greatest asset in the wealth-building journey.
Make Time for Growth
A common excuse for not pursuing growth opportunities is lack of time. But everyone has the same 168 hours per week. It's about priorities and trade-offs.
Even with a full-time job, most people have 4 hours each weekday evening and 16 hours each weekend day. That's 52 hours per week of potential growth time.
Be willing to sacrifice short-term comfort for long-term gain. Reframe discomfort as the price of future success. Stay busy working on your goals - it prevents wasteful spending and accelerates progress.
Understand Risk Before Investing
If you can't identify how you could potentially lose money in an investment, you're likely to lose it. Overconfidence often comes from ignorance of the risks.
Before investing, thoroughly research the potential downsides and assign reasonable probabilities to different scenarios. Then multiply those probabilities by about 3x to account for optimism bias.
Knowing how you can lose money is an indicator of how well you understand an investment. If you can't see the risks, you likely don't know enough yet.
Invest in Knowledge
The biggest cost for most people isn't their living expenses - it's the opportunity cost of what they don't know. Your "ignorance debt" is the difference between your current situation and where you could be with the right knowledge and skills.
Make paying down ignorance your top priority. Invest aggressively in education, whether through courses, mentors, books, or real-world experience. Be willing to trade money, time, and even social capital to gain valuable knowledge.
When investing in education, understand whether you're gaining declarative knowledge (knowing that something exists) or procedural knowledge (knowing how to do something). Both are valuable but serve different purposes in your growth.
Buy Time Like You're Rich
As your income grows, look for opportunities to "buy back" your time. This means outsourcing low-value tasks so you can focus on high-value work.
For example, if you can earn $100/hour in your work, it makes sense to pay someone $20/hour to clean your house or do your laundry. This frees up your time for more productive activities.
The average American spends about 96 hours per month on household chores. If you can earn more than $15/hour, it's often worth outsourcing these tasks to focus on higher-value work.
This not only increases your immediate earnings but also allows you to invest more time in skill development, compounding your earning power over time.
Choose Your Comparisons Carefully
Who you compare yourself to is often a stronger predictor of your financial success than who you spend time with. Your reference group shapes your ambitions and standards.
Seek out examples of people who have achieved what you aspire to, even if you don't know them personally. Use their success as motivation and a benchmark for what's possible.
As you progress, your reference point may shift from real people to an idealized future version of yourself. This keeps you growing even when you've surpassed your initial role models.
Invest First, Spend the Rest
Most people spend first and try to save what's left. Flip this by automatically investing a portion of your income before you have a chance to spend it.
Set up automatic transfers to investment or savings accounts. Then create some friction around spending - use manual payments instead of auto-pay where possible, delete shopping apps, don't save payment info on websites.
As your income grows, try to keep your spending at a fixed amount rather than a percentage. This allows you to invest an increasingly large portion of your growing income.
Think Bigger to Earn Bigger
Paradoxically, it's often easier to make a million dollars than it is to make $100,000. This is because the bigger goal forces you to think differently about the problem.
Making $100,000 through traditional employment often requires trading all your available time. But to make a million dollars, you have to leverage different tools and strategies - which can actually be accomplished in less time with the right approach.
By setting ambitious goals, you expand your solution set and think more creatively about how to create value.
Love the Process, Not the Money
Rather than loving money itself, learn to love the process of making money. This keeps you focused on value creation rather than accumulation for its own sake.
Money is neither inherently good nor evil - it's simply stored energy that amplifies your ability to achieve goals and create impact. If you have positive intentions, making more money increases your capacity to do good in the world.
Understand the Wealth Equation
Your earning potential is based on three key factors:
- The total value you create for others
- Your ability to capture a portion of that value
- The scarcity of people who can create similar value
To maximize your earnings, focus on creating unique value through a combination of skills and experiences that are difficult for others to replicate. Your diverse background becomes your competitive advantage.
Embrace Speed and Patience
Remember these principles:
- Money loves speed
- Wealth loves time
- Poverty loves indecision
Act quickly on opportunities, but be patient in allowing your wealth to compound. Avoid analysis paralysis - imperfect action beats perfect inaction.
By following these rules and maintaining a long-term perspective, you can build significant wealth while avoiding common pitfalls. Focus on continuous learning, creating value, and making strategic investments in yourself and your earning potential.
Article created from: https://www.youtube.com/watch?v=oZ-H_TjSzok
