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Everything You Need to Know About Money

Updated: Apr 17

Personal finance can be summarized in five words: spend less than you make.

It really is that simple. So why is the median savings account balance for 45-54-year olds, just $6,500?

Most people rag on millennials about the inability to save and I’m not saying they are any better.

The median savings for under 35-year olds is $1,580. That’s less than a month of rent in LA or San Francisco.

First though, two things to point out.


These are median numbers. The mean is much higher because good decisions and good opportunities compound (not a commentary on the wealth gap, simply a fact). Not sure how and where these numbers were collected.

But the main point remains, why don’t we save even though we know we should?

Here are four over-looked reasons (eleven sub-reasons and four sub-sub-reasons) why this is reality.

1. People have different priorities

To illustrate this, here’s a story.

Nearly 60 years ago, Walter Mischel and his team of Stanford psychologists, performed one of the most popular studies ever.

Mischel tested hundreds of young children by giving them a simple choice. They could either eat a marshmallow now or wait 15 minutes and receive two marshmallows. Then, the researcher would leave the fluffy dessert on the table and leave the room.

As you can imagine, the video footage of the kids is quite entertaining. Fidgeting, squirming, drooling. 

The study seems innocent, but over a decade later, the results of the famed Marshmallow Experiment were eye-opening.

The kids who delayed gratification and received two marshmallows, went on to get better SAT scores, had lower levels of drug and alcohol abuse, and were even healthier.

Further, the researchers followed up with the test subjects over 40 years later and the results were the same. The ones who delayed gratification as children, were more likely to succeed in life.

As this proves, people have different priorities. While it is easy to judge them as the wrong priorities, let’s do some re-framing.

Would you rather live a full, incredible life and die broke or live an ok life and die rich?

The answer to this question will drive your spending habits. Should you go on that trip or just save the money? Should you give your money away or store it up? Should you indulge and eat out or cook-in to save?

I’m not saying either one is better than the other. Each choice results from different priorities.

But there is a line. Responsibility exists.

If you have a family, it might not be wise to spend $100k on a souped-up car for the sake of “living a full life.” No, that’s just irresponsibility.

So each of us has to look inward to figure out our own priorities and then decide where the line-of-responsibility lies.

Rather than pitting the savers and spenders against each other, we can see that everyone has different priorities. And these priorities typically change over time.

Young people may live like pigs to save early and then once they feel comfortable, ramp up the spending. Or some people, spoiled early on, may be forced to limit spending as they age. The point is: these priorities aren’t fixed; they’re dependent on many factors.

2. Deeper implications

Ok, now you’ve figured out your priorities and you think it would be a good idea to save more. But you find yourself failing repeatedly.

The first question you need to ask yourself is: “why?”

Is it because you don’t truly grasp the power of compounding? Or because you care too much about what others think? Or are you trying to fill a gap in your life?

The answers to these questions matter…a lot, so let’s go through these one-by-one.

a. You don’t understand compounding

Go back and read our piece that is hyper-linked above if you haven’t. If you’re lazy and don’t want to read that, the main idea is that our brains don’t understand compounding because it is an exponential function.

It can be boiled down to this: the more you save, the younger you are, the better off you will be.

Compounding rewards time. So if you’re young, my best advice is to play around with a compound interest calculator. It could change your spending habits immediately.

One trick I use is thinking about how much money I am taking away from my future self when I spend money in the present.

For instance, if I spend $100 on some new shoes, compounded at 12%, I am taking $28,900 away from my 71 year old self. That sure puts things into perspective.

So that $3.50 coffee you buy every morning, you’re taking about $1,000 away from yourself in 50 years.

Don’t get me started on buying an expensive car…

b. You care too much about what others think

If you find yourself spending to impress others, you need to do some soul-searching (in fact, we all do so don’t think I’m singling you out.)

But you need to ask yourself “why” you need constant approval? And then face that demon head-on. Running away from it won’t do you any good.

c. You are filling a gap

Same here. Are you spending money to make yourself happy for just a short time, then find yourself regretting it? You’re not alone. There’s even a name for it: buyer’s remorse.

As humans, we adapt better than we can imagine. That thing you really, really want. You’ll get used to it quickly and the excitement will wear off. That’s the thing about humans. We become obsessed with the idea of something and soon, the idea, is more enticing than the actual thing.

Instead, fill your gap with things that last: friends, meaningful work, purpose, hopefully family, and even faith.

These deeper implications are often overlooked in personal finance, but they can really drive our actions. As Einstein once said, "Problems cannot be solved by the same level of thinking that created them.”

3. You don’t know how

Ok, now you have your priorities, you’ve faced the deeper implications, but you still aren’t making progress. Or maybe you just don’t know where to start? You want to save and you are really trying, but no one ever taught you about saving so you’re having a tough time.

All of those are plausible situations so let’s dig in.

a. Get the big three right

If you get the “big three” right, skipping the daily latte won’t be so important. Here’s what they are: school, house, and car.

These are considered the big three because they can dig you into a debt-hole (don’t particularly like the way this term sounds). 

Taking out huge loans for school, while it may seem like the only option, it is not. It has become a cultural norm to take on huge debt for the sake of an education, but, yet again, it depends on your priorities and interests.

If you want to go into investment banking, you’ll need a degree. Software, on the other hand, a coding boot-camp, like Lambda School, would be more effective. So I won’t give blanket advice here either, but you need to be smart about it because debt limits your freedom.

Many people become stuck in a job they hate because they need to pay off debt. While that is the reality for many, I do think the internet has opened up opportunities immensely. If your goal is to get a job and make money, there’s a simple formula.

Learn a difficult skill that will become more important in the future.

Here are a few examples:

- Plumbers (robots won’t be taking this over any time soon, not much competition, and you have crazy pricing power)

- Software engineers (if you’re a good coder, you’ll have a job, period.)

- Sales (if you’re good with people and competitive, sales positions will always be open).

- Nurses (as the population ages, demand will be there. Robots won’t take this over for a long, long time).

Of these examples, nurses need the most schooling but you don’t need to go to an expensive school.

Second, housing is typically the biggest expense. Buying a big house before you can afford one will put you in a deep hole. Plus, the upfront cost will eat into your ability to compound that money.

Think about a 30 year mortgage.

20% down on a one-million dollar house is $200k.

Compounded at 12% for those 30 years, you’re left with $6 million.

Once again though, people have different priorities than only making the most money possible. And rightly so. Some people may want the extra space for kids. You need to take this advice into your own context.

So the alternative is renting, but how much should you spend on rent? The conventional advice says no more than 30% of your monthly income. But if you don’t have any debt, up to 40% is considered fine.

Here’s a chart that makes it easy:



If you live in a big city you may be looking at that chart in disbelief. Again, I’ll beat this til I go blue in the face, different priorities. Your priorities, right now, might not be saving the most, but building up social capital to eventually make more money. Or just to get a big-city experience.

Moving onto the last of the big three: your car.

Cars are depreciating assets. What that means is that the value goes down over time. Whereas, a house in a good location might appreciate, a car always depreciates (fun fact, the Toyota Tundra and the Toyota Tacoma maintain their value better than any other car).

This means you should, if you can, never take out a loan for a car. This is because you are paying interest on a depreciating asset. In English, you are paying more for something that is losing its value.

With school and housing loans, there is a chance the assets (your earning power and the house) will appreciate, covering the costs of the interest you are paying. But this is not so with a car.

Some people may need a car badly. But still, there are public transportation options. This might sound like heresy, especially in LA, but it is better than digging yourself into a debt-hole (ah, there it is again).

Ok, phew, those are the big three. Get those right, with as little debt as possible and you can have the fancy latte from Starbucks every day of your life. Just remember, you’ll be stealing from your future self :).

b. Second step, make a budget and stick to it

Budget is a scary word but it’s easier than you may think. Here’s how to do it:


Then, all you do is set up an automatic program, where you send $600 every month to your savings account or preferably an investment account like an IRA or a 401k.

c. Think through retirement accounts

If you have a job, max out your 401k and if you can’t, at least contribute up until the match. If you haven’t figured this out, make a meeting to sit down with HR.

A match is when your company gives you free money to incentivize you to contribute to the 401k plan.

The good thing about a 401k is that the money goes in un-taxed and there is a big contribution limit, $18,000 annually if you’re under 50 and $24,000 if you’re over 50.

The downside is that it has very limited investment options but you can most likely find low-expense index funds.

On the other hand, there is something called an IRA (individual retirement account). The contribution limits are lower, $6,000 (as of 2019) but you don’t need a company-sponsor to set up this account. You also can deduct this amount from your taxable income which could be enough to get you into a lower tax bracket.

Lastly, there is a Roth IRA where, unlike a 401k or a normal IRA, the money is taxed as it goes into the account. However, after 59 and 1/2, you don’t pay any taxes on the capital gains. So your money grows tax-free. This can be a better option if you intend to try your hand at some active investing as you can do a bit more trading without the tax considerations.

Here’s a chart to break all of this down because it is confusing:



So let’s take a breather. That was a lot.

The goal is to think about taxes so you can make more money. Everything is about opportunity costs.

For instance, if you contributed $18,000 every year to a 401k, and returned 6% for 20 years, you’d be left with about $700k, but then taxed at whatever bracket your income is at the point of withdrawal.

On the other hand, if you contributed $6,000 to a Roth IRA and returned 15% (much more difficult), you’d be left with a tax-free $700k after 20 years.

So again, the choice depends on your interests and how much you like investing and how much time you can afford to put towards learning about it.

d. Automate as much as possible

If you have to make difficult decisions every month, you’ll fail. Use technology to your advantage to automate as much as you can. This can be in the form of setting up bill auto-pay so you never miss a credit card payment (very important!).

Ok, let’s talk about credit cards real fast. ALWAYS pay off your credit cards! Implicitly that is a 16-20% return on your money. Because, if you don’t pay them off, that’s what the bank will charge you for an interest rate. Consistently paying them off will also build your credit score which will give you a better rate if you ever take out a mortgage. This could save you tens of thousands of dollars in the long run.

Back to automation. Bill-pay? Check. Savings and investments? Hopefully. If you want to dabble in individual stocks, check out our memberships, but if you don’t want to deal with that, set up an automatic withdrawal from your checking account to your retirement account and buy a low-expense index fund (Vanguard typically has the lowest fees).

Make it brain-less so you don’t have to make decisions. The more decisions you have to make, the more likely you won’t stick to your savings plan.

4. You don’t build your personal capital (skills, relationships, knowledge)

Before getting into this last point, let’s quickly recap what we’ve been through thus far to answer the question: why don’t we save even though we know we should?

1. People have different priorities

2. Deeper implications

2a. Don’t know the power of compounding 2b. Try to impress others 2c. Fill a gap in our lives

Don’t know how

3a. Get the “big three right” 3b. Make a budget and stick to it. 3c. Figure out retirement accounts 3d. Automate as much as possible

And now onto the last point, the one that is rarely ever talked about in personal finance circles.

Nearly all of conventional personal finance advice focuses on the spending side of the equation. But remember our budget, there were TWO columns. Expenses AND Income.

A fool-proof way to save more money is to make more while keeping your spending habits the same. And there is a reason this is the last point. If you don’t figure out your priorities, the deeper implications and how to save, making more money will just result in you spending more money. If you don’t deal with that stuff now, you’ll simply live up to your means and the extra income won’t matter.

However, if you do figure out 1-3, then 4 will be the cherry on top and you can potentially become wealthy. Now, there is a difference between rich and wealthy.

Rich means you make a lot of money. Wealthy means you have a lot of money.

There’s a big difference. Rich people make sure you know they’re rich. Wealthy people, on the other hand, are usually unassuming.

The determining factor between being rich and being wealthy is how long could you survive without working? If you need to grind to keep bringing in money to pay for your fancy house and your fancy car, you’re not wealthy, you’re just rich.

To be clear, point #4 is about increasing your earning power (rich) but points #1-3 are ensuring you become wealthy. It is important to build the foundation before layering #4. But #4 is important nonetheless.

a. Invest in yourself

Much like if you never invest in the stock market, your net-worth won’t grow, we can think of our skills in the same way. If we never invest in ourselves, we’ll just stay the same.

To further the analogy, knowledge compounds as well. If we take small steps to invest in present-self, our future-self will thank us.

You may ask, what are some examples? - Buying an online course to learn a new skill that will differentiate you

- Getting more certifications or degrees (taking the cost into account)

- Buying books

- Finding mentors or coaches

The options are plentiful, especially now with the internet.

b. The four types of leverage (h/t Naval)

Understanding the four types of leverage will expedite the wealth-building process.

They are: code, media, capital and people.

Leverage can be roughly defined as a means to make something easier. If you have leverage in a negotiation, you will be more likely to walk away with a better deal. If you use leverage in investing, you can multiply your returns.

As the Greek philosopher, Archimedes explained, “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”

b1. Code

Learning how to code is scalable. If you write a software program, you can distribute it through the internet seamlessly. This is easier than building a restaurant that takes up physical space. It’s the difference between atoms and bits. While coding is incredibly difficult to learn, it is inherently scalable.

b2. Media

Media is also scalable due to the internet. Think about newspapers. Buying trucks and huge printing presses to deliver millions of daily papers. Versus, a dude on his laptop typing out words.

Internet companies are a form of leverage.

b3. Capital

Money provides optionality, or the ability to do more stuff. If this isn’t leverage, I don’t know what is.

b4. People

Getting people to work for you means you don’t need to work and you can still make money. Boom, leverage.

c. Improving your understanding of business

How do people make money?

By providing something valuable, something that somebody will pay money for, to a lot of people. These business-people then pay other people to make that happen at a great scale.

Think about it. Even NBA players, who you wouldn’t necessarily think of as business-people are just employees. Granted, well-compensated employees, but employees nonetheless. The owners leverage the players to make more money at scale. Sounds de-humanizing, but it doesn’t have to be; there is meaning and competition involved.

The point is: understanding business will give you an advantage. Whether that be improving your sales skills, design skills, people skills, or financial skills, you will become more valuable and provide more value to others, who will pay you for that additional value.

Plus, you can better invest in companies in public or private markets which will boost your investment returns and allow your money to make money. Talk about leverage!

d. Investing in businesses

Up until now, we haven’t talked about the specifics of investing much at all. If you want more, check out our e-book here. That will go over the process in way more detail than we have time for (this article is already a bit long, isn’t it?!)

The important thing is to keep learning and asking questions. The whole point of Investing City is to help people learn more about this, so explore our site if you want more.

I’m Ending I Promise

Now our outline looks like this: 1. People have different priorities

2. Deeper implications

2a. Don’t know the power of compounding 2b. Try to impress others 2c. Fill a gap in our lives

3. Don’t know how

3a. Get the “big three right” 3b. Make a budget and stick to it. 3c. Figure out retirement accounts 3d. Automate as much as possible

4. Build your personal capital

4a. Invest in yourself 4b. Understanding the four types of leverage 4b1. Code 4b2. Media 4b3. Capital 4b4. People 4c. Learn more about business 4d. Investing in businesses

There are two sides of the equation. Making money and spending money. You want to increase the former while decreasing the latter.

Though it is a good idea to always be working on your personal capital, without a foundation grounded in lessons on how to save money, you’ll spend it all. Think about how many professional athletes and musicians go bankrupt!

I would like to end with some food for thought.

Money isn’t everything. I know that might be weird to hear after reading 3,500 words about how to make more of it, but it’s a point I want to drive home.

We can spend our entire lives trying to make as much money as possible. But remember the question I posed earlier: Would you rather live a full, incredible life and die broke or live an ok life and die rich?

Money is about freedom and how we can do what we want with our time.

But it’s also about making an impact and being generous. Everyone likes generous people. Think about the most generous person you know. Do you hate them? Probably not.

Money is a tool to leverage your life. The thing about leverage, though, is that improperly used, it can be dangerous.

If it becomes the only thing you’re chasing, you’ll be sorely disappointed. Instead, chase things with lasting value.

Here’s to your money journey. May you go far and do good.



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