Personal Finance Lessons are the key to achieving long-term wealth and financial independence. Learning delayed gratification, smart investing, and tracking money will lead you to a healthier financial future. Find valuable secrets to financial wealth in this article.
Lesson 1: Delayed Gratification is Crucial to Everything
If you can resist the temptation of an immediate reward, then usually your payoff will be a lot greater later on in life. This happens often in the investing world. So let’s say you invest in the stock market. If you buy and hold for a very long time, let’s say 10, 30, or even 50 years, the bigger and bigger your gains are going to be. It’s the same reason why so many financial experts recommend not touching your savings or your 401k because they know that if you have your money in one of those accounts, the longer that it has to compound, it usually is better for your retirement.
In terms of everyday purchases, delayed gratification can be boiled down to a simple phrase: “If you can’t buy it twice, don’t buy it.” Hopefully, that phrase is pretty self-explanatory. But if you can buy an item twice, then that probably means you’re in a pretty good financial position in order to buy that said item.
For example,
Let’s pretend you want to buy something worth $500—so maybe a new Xbox or PS5—and you can afford it once, but the idea of a purchase that’s over $11,000 seems kind of daunting. That’s when I’d probably argue you can’t afford the $500 purchase in the first place because if the $1,000 purchase makes you uncomfortable, then it’s probably not a good idea.
Delayed gratification can also help with your decision-making. I find that whenever you have a decision presented to you, and especially if it’s a big decision in your life, such as a career change, if you zoom out 10, 10 or 20 years, usually the picture becomes a lot clearer.
So I remember a situation of my friend at work, he told me that I was in. I was working in the monetization department at a mobile video game company, and I wanted to switch to marketing because they had a higher base salary for their employees. The short-term thinking in me wanted the extra salary of 10 or 20K by switching over to marketing and doing roughly the same amount of hours of work, but the idea was like, okay, if I zoom out 10 or 20 years, I didn’t really want to be doing marketing in 20 years, so it really didn’t make any sense for me.
If you can combine long-term thinking and delayed gratification, that’s when I think you become unstoppable in life.
Lesson 2: Track Three Numbers
I like to call them the Big Three, and those three numbers are your expenses, your savings rate, and your net worth. I find that if you’re able to track these three numbers and make improvements to them over time, your personal financial position will just get better and better, and there’s no doubt in my mind that you will become financially free.
When it comes to your expenses, the first thing you want to track are your fixed expenses—so things like your transportation, your housing, your utilities, healthcare, insurance, etc.—and you want to make sure that as a percentage of your income, it’s not making up more than 50 to 60%. If they are larger than 60% of your income, that’s when things get a little bit dicey, and you might not have enough money in your other parts of your budget for things like discretionary expenses or even savings and investments.
When it comes to discretionary expenses, I like to keep my personal expenses in check, so I do that by tracking everything that I spend. Then I just have frequent check-ins throughout the month. Let’s say your target spend per month is $1,500 in discretionary expenses. Then what you can do is just have a check-in, let’s say on the 15th of the month. So halfway through the month, your discretionary expenses should be around $750.
Now, if you are ahead of that, so let’s say you’ve spent $800 or maybe even $900 by the 15th day, you know that you need to cut back a little bit for the rest of the month.
When it comes to tracking your personal savings rate percentage, I would try to aim for a percentage of savings of your income of around 10%, and then slowly try to ramp it up from there. Ideally, if you’re tracking your savings rate, you have more of an eye on it at all times, you’re more aware of it, and hopefully, it’s going up over time because as your savings rate increases, that means you’re going to have more money for activities such as investing.
Lesson 3: You Don’t Have to Invest in Too Many Things
I see this situation a lot with some of my friends as well as my subscribers’ investment portfolios. Often times people invest in way too many ETFs and way too many stocks for their own good, and often times people think that they’re doing a good job by investing in let’s say 10 or 12 ETFs.
But the thing is, is that usually they have overlapping holdings with one another.
Like for example,
If you took ticker symbol VO, which is Vanguard’s S&P 500 ETF, and then you also bought VOE, which is Vanguard’s Midcap Value ETF, you can see that 92.1% of VOE’s holdings are in VO already. So, while you think you could be diversifying your portfolio by investing in a bunch of ETFs, you could actually be doing the opposite and probably doing more harm than good.
Most post-index tracking ETFs are super simple and very well-diversified, so oftentimes you just need one, two, or maybe even a maximum of three. And if you are having way more than that, you might just be making it more confusing for yourself.
Investing should be simple and passive, and most casual investors that just buy an S&P 500 ETF, for example, over the past 15 years, they would have outperformed 92% of large active fund managers, according to S&P Global.
Lesson 4: Be Aware of Big Purchases That Are Depreciating Assets
We all know things like cars depreciate, but other things depreciate as well, such as jewelry and watches, clothing, books, smartphones, and even computers. So, if you’re spending money on one of these assets that are depreciating, the worst thing that you can do is actually borrow money to finance it.
Because at that point, you are borrowing money from let’s say a bank at a high interest rate, and you are not only paying the bank to finance your purchase, but you are financing something that is going down in value over time. You are paying money to lose money in this case.
Now, I’m usually referring to things like jewelry, clothing, or even furniture. I mean, when was the last time you bought, let’s say, a new couch? It was $2,000, but then only 3 years later, you throw it up on Facebook Marketplace, and it’s selling for $200. You just lost $1,800 on your purchase, plus the fact they might not even actually come to pick it up. Have you ever talked to somebody on Facebook Marketplace? They literally say they’re coming, then they ghost you. It’s a whole emotional rollercoaster.
Enough with Facebook Marketplace, let’s get into lesson five.
Lesson 5: If You Invest for More Than 20 Years, It Should Typically Yield Positively
In the infamous blog post from the website of Dollars and Data, there’s a really strong argument as to why the retail investor should stay invested over a long period of time. He points out that as stocks get more expensive (he’s using the PE ratio to gauge whether a stock is expensive or not), but essentially as the PE ratio goes up, their future returns generally decrease.
This kind of makes sense. If you buy an overvalued stock, it probably won’t return as high as if you bought an undervalued stock. You can see here that as PE ratios increase, so as stocks get more expensive, there’s a negative correlation with your returns for the next 5 years.
There are more red dots in the 30 to 40 PE range than the 10 to 20 range, so red represents a negative return for the next 5 years. But the fascinating thing here is that as long as you hold for a longer period of time, you can see that as the years pass by 5, 10, 15, 20, 25, etc., the number of red dots slowly decreases.
The author states that, quote, “Over any 20-year period, U.S. stocks have had no real negative returns when including dividends, and over a 30-year period, the returns have generally converged despite some dispersion.”
So, he’s basically telling us that if we want to accumulate our wealth no matter what, we should just keep buying into the stock market as long as our holding period can be longer than 20 years. It’s unlikely that we’re going to lose money.
Lesson 6: Saving Money specially if via side hustle is Very Important, Especially in the Beginning
Yes, saving money is very important, but at the beginning, it’s the most important. Something that’s not so obvious to people is that they think making money has to do with how good their investments do or how good their business venture does. But when you don’t have that much to your name, what you should actually be doing instead is relentlessly saving—so saving very aggressively.
The whole idea of this is that you want to build up an initial nest egg so that it can compound for you later on, and then your money can make money on itself. So famously, the first $100K will probably be more comprised of savings rather than investment returns.
So if we actually look at this calculator from the Four Pillar Freedom blog, you can see that right here: If you save $13,000 a year for 6 years, and you’re able to attain a 7.5% return on your savings, you will have $101,000 after 6 years. But guess what? 77% of that $101k will be comprised of savings.
In another case, let’s say you have $10K per year that you’re saving, and you’re averaging an even higher return, so 10% on your money. It will take you 7 years at a 10% return, but your savings still comprise 67% of your total $104,000 balance at the end.
So with compound interest, we all know that friction is in the very beginning. Therefore, if you’re able to save money when you have no money to your name, every dollar is going to be worth way more for you in the future because it’s working for you as it’s compounding.
There really is no secret to getting over the hump—so getting your initial nest egg going. It really just takes a lot of discipline and savings and a lot of diligence. So, if you are new to it, just stick with it.
Lesson 7: Investing Should Be Boring
You likely aren’t going to get rich by day trading, but what will get you wealthy over the long term is buying and holding into, let’s say, an index fund and just simply forgetting about it.
I want to share with you guys a snippet from my podcast with the psychology of money author, Morgan Housel, and it is really genius. Your book taught me that successful investing is when you lose the password to your investment account.
Yes, that’s exactly it. I don’t actually think you said that in there, but that’s like when I lose the password to my investment account, I’m so proud of myself because it means I haven’t checked it in forever, and I think this is really true. Like we should be aiming to forget our investment account passwords.
So long as we are well-diversified in our total investing portfolio, if you are invested for the 10, 20, or even 30+ year time horizon and beyond, the best thing that you can do is just to hold and continue to dollar cost average into those investments.
So that means continue contributing and investing. This strategy is boring and average—I get it. But listen in on this next quote from the same podcast on why you shouldn’t try to beat the market and try to just aim for average returns:
“I think it’s extremely hard to beat the market and very few people will do it, but I think there are really people who can do it and people who I know who I could invest with. The reason I don’t is not because I don’t believe it can be done, it’s because the variable that I want to maximize for in my investments is endurance. If I can just earn average returns for an above-average period of time, it’s going to lead to an amount of success that will literally put you in the top 5% of investors.”
So yeah, right there you have it: Top 5% of all investors just by being average and doing boring things such as investing in an index fund and just kind of stepping away.
Lesson 8: Don’t Pay Attention to Your Peers
Not in terms of life—like you definitely want to pay attention to them—but don’t compare yourself to others. Personal finance lesson is a lifelong pursuit, and you might be tempted to draw comparisons to other people in your life, such as your friends, your colleagues, or even people that are the same age as you.
And even with social media these days, it’s going to be in your face 24/7. But it’s important to remember that everybody’s on their own path, and your situation might be a lot different than your friend’s situation, and your goals are going to be completely different as well. And these people on social media, don’t even pay attention to them. You don’t even know what’s going on behind the scenes. They’re really just showing you the highlights of their life.
The truth is, no one’s going to just go up to you and show you their bank account and be like, “Yo, this is how much money I got. You should feel bad for yourself.” No, that’s not going to happen. Drawing a comparison is just going to waste your time and mental energy, and you could use that time and energy to focus on yourself.
Some people love spending everything that they make. Some people love saving everything that they make. And some people are just in between. Also, when it comes to spending, everyone has different values as well. It’s easier said than done, but I find that if I’m not comparing myself to other people, then the amount of impulse purchases that I make also goes down.
Lesson 9: Avoid Becoming the 30K Millionaire
This is a phrase I learned about in Texas, and a 30K millionaire, according to Urban Dictionary, is individuals that make $30,000 per year but act like they make millions.
So for example, check out this 30K millionaire driving the loaned BMW who still lives at home with his parents or someone who goes to a club and pays to get the VIP table and then can’t buy any drinks because they spent all the money on the table. What a 30K millionaire!
So the lesson here is that people who look like they have money, they probably don’t have money, and the wealthy people that actually do have money, they won’t dress or even act like they have money at all. According to a study of millionaires, most wealthy people live well below their means—that’s how they got there in the first place.
The best quote of the book The Millionaire Next Door is that, “If your goal is to become financially secure, you’ll likely attain it. But if your motive is to make money to spend money on the good life, you’re never going to make it.”
It’s a good reminder that if we focus on our own goals and living within our means, we’ll probably hit financial freedom and financial security. And that’s probably what you want to do. Don’t become the 30K millionaire at all.
Lesson 10: What’s Risky for You is Not Risky for Someone Else, and Vice Versa
Just like not comparing yourself to others, don’t make the same decisions as somebody else just because they do it. I mean, your risk profile is going to be very different than, let’s say, your neighbors. You want to make sure that if you’re getting financial information or financial advice from anybody, that you’re doing your own critical thinking and really thinking through if it makes sense for you.
General advice is not a one-size-fits-all. Even on this page or any other page you see, you should always be applying a filter to it, which is like, “Is this decision right for me?” I don’t mind if you’re getting inspiration and ideas and starting points from online, TV, your friends, wherever you get that information. I think that’s totally fine, but you really want to be conscious of whatever you put into place in your own life.