10 Greatest Personal Finance Lessons That Changed My Life
I’ve made many money mistakes in my life. To be honest, too many to count. But through each one, I learned some hard earned lessons. So in this post I want to share with you 10 of my greatest personal finance lessons that have essentially changed my life.
01 - Buy To Impress = Less Money
I know, as obvious as this sounds, I really didn’t learn this until I was well into my adulthood.
“Spending money to show people how much money you have is the fastest way to have less money.” - Morgan Housel, the author of The Psychology of Money
We are all social beings. So it's not a surprise that we all need social validation. The problem is that we most often try to find this through things we buy and own. And I struggled with this pretty much my whole twenties.
Why did I rent an apartment that ate up 50% of my take home pay? So I could impress my parents when they visited. Why did I offer to pay for dinner when I could barely afford to eat out on my own? So I could impress my friends to make them think I was rich. Why did I buy a brand new car at the age of 24 with ridiculous financing? So I could impress random people on the street.
What is sad is that after all that effort, I realized too late that no one really cared. My parents didn’t care that I lived in a fancy apartment. They were actually worried for me seeing that I was over stretching myself. My friends weren't impressed by my willingness to pay for dinner. They were just happy that they got a free meal. And random people on the street? They could care less. I mean when was the last time we were impressed by some random guy driving a brand new car on the road? If you are like me, you probably were more annoyed than impressed.
If you are going to spend money, spend it on things that really add value. Never spend money to impress anyone. Because not only does no one care, but you end up holding all the bills without anything to show for it.
02 - Real Millionaires Are Frugal
Dr. Thomas Stanley published a book titled The Millionaire Next Door in 1996 which was based on his survey of thousands of actual millionaires in America. Contrary to what the media makes out millionaires to look like; wearing expensive clothes, watches, and other status artifacts, in reality most real life millionaires were actually the opposite.
“Typical millionaire lives in a middle-class home, drives a two-year-old or older paid-for car, and buys blue jeans at Wal-Mart.” - Dave Ramsey
While many of them did indeed have high income from their lucrative careers or businesses, the key characteristic that led them to becoming a millionaire in the first place was their frugality. They learned to live well below their means. They wore inexpensive clothes and suits. They most often drove used cars rather than the current model. Some even called themselves “tightwad.”
For me, this fact was really eye opening news because growing up in an immigrant family, I truly believed that real millionaires were lavish spenders. And they spent because they could afford to. Even my parents thought that as well. When we first immigrated from Korea to the United States, we saw people driving fancy cars, living in nice beautiful homes and going on lavish vacations every year.
Though South Korea is a wealthier country today, it wasn’t so in the 80s. It was still struggling to find its footing in the world so when I saw all the wealth around me, I told myself this is what I must do and have. Become a millionaire one day so I could own all these nice things as well. But the reality is that real millionaires became millionaires because they didn’t live like the millionaires we see on TV. True wealth is built on the foundation of frugality, not lavish lifestyle.
03 - Average Friends = Average Life
Most often our friends and our networks are formed by the circumstance we were born into. The neighborhood we grew up in. The schools we attended and the coworkers we worked together with. It’s rare that we go out of our comfort zone to intentionally seek out new relationships that could further our lives. More often than not, we stay within our comfort zones and just keep hanging out with people that we know and do what we’ve always done.
“We are the average of the five people we spend the most time with.” - Jim Rohn
But what happens if the people that are within our natural circles all have negative life and money habits? If all the people that we know in our lives are broke, what do you think are the chances that we will become financially successful? It's the same with our health and our education. If the people that are naturally within our circle are unhealthy and uneducated what are the chances that we miraculously become super fit and highly educated? If we want to improve ourselves, we have to level up our network.
This was one of the biggest changes that my wife and I made when we decided to radically change our finances. Though we didn’t know anyone in the personal finance space, we forced ourselves to leave our comfort zone and attend seminars, events and retreats that focused on improving our finances.
To give you one extreme example, we even attended a week-long money focused event in England. Mind you we live in California and we didn’t know anyone at this event. But it ended up becoming one of the most life transforming events of our lives and many people we met remain good friends today. If you want to really level up your life and your finances, you have to level up your network. And this doesn’t mean you are abandoning your current friends and network. Just push yourself outside your normal comfort zone so you are improving your “average of the five people you spend the most time with.”
04 - Marry For Money
Both my wife and I didn’t come from money. We both came from working class immigrant families and learned the harsh lessons of money well into our adulthood through mistakes. However despite the precarious financial situation we found ourselves in right after our wedding, broke with $105,000 of student debt, we were able to achieve financial security today because we had each other.
“It is very difficult for a married couple to accumulate wealth if one is a spendthrift. A household divided in its financial orientation is unlikely to accumulate significant wealth.” - Dr. Thomas Stanley, The Millionaire Next Door
Not only did my wife and I share the philosophy of frugality and long-term perspective, we had each other to lean on throughout our financial journey. On-going money discussions became normal in our household; especially when we were knee deep in our debt paydown journey. We would often write down and talk about our monthly budget, net worth, financial problems, opportunities, and future financial goals.
The great aspect about this was that it also expanded to other aspects of our marriage; more open and honest mariage. So when it comes to finding your perfect spouse, marry for money. It will serve you well in the long run.
05 - Investing Should Be Boring
The media likes to make it seem like investing should be fast, exciting and exhilarating. And sadly too many people believe this. You don’t need to look far to see this in play. Just look at the recent craze around cryptocurrency and NFTs. Majority of people investing in these risky assets don’t really understand what they are buying. They are driven by emotion rather than logic. They think just because people are making quick money from it, it is smart investing.
But this is far from the truth. The most effective way to invest is also the most boring. For example, the most effective way to grow our wealth through the stock market is to buy low cost broad market index funds like Vanguard's Total Stock Market Index Fund also known as VTSAX. And to hold it forever. It is a cheap, simple and effective way to invest in the market.
"Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." - Paul Samuelson, American Economist
However, compared to exciting investments like crypto and NFTs, it is very boring. You won’t get rich overnight investing in investments like VTSAX. It will take years. Even decades. You are investing in the whole market at a low cost and you are trusting that the compounding will eventually multiply your investment.
This way of investing is smart, but it requires patience and frankly, no emotion. We need to disassociate our emotions from our money for this strategy. We are looking at the long-term trend of the market and investing for the long run. However, if you are looking to get rich next week or next month, you can’t accept this kind of strategy. And you start looking for quick get rich investments which are oftentimes sold to you taking advantage of your vulnerable emotion.
Thousands of people lost money when the crypto market recently crashed. They were investing with emotion rather than logic and paid the price for it. Don’t expect investing to be sexy and exciting. Smart investing should be as boring as watching paint dry. If you are getting emotional about your investments, you are closer to gambling versus really investing.
06 - Investing Should Be Simple
The media loves to highlight the image of investing as being super complicated and risky. It throws out fancy jargons like Alpha, Dividends and Capital Gains. And if you don’t understand it, it goes out of its way to make you feel like you are the dumbest person in the room. But it only sounds and feels complicated because the financial industry is working hard to make you feel that way. It’s the ultimate financial marketing machine at work.
“When there are multiple solutions to a problem, choose the simplest one.” - Jack Bogle
And what happens to many of us is that we get so overwhelmed we never pull the trigger to investing in the market. Or we rely on a so-called professional to manage our money for us. And this can be detrimental to our wealth. The truth is, investing doesn’t have to be complicated. You don’t need to understand all the jargon to start reaping the rewards of compounding returns.
I remember when I first started out, I was so overwhelmed by everything I read and heard about investing that I didn’t know where to start. I was scared of making the wrong move and losing all my hard-earned money. What finally got me started was taking baby steps. I began by investing in a very simple index fund that tracked the total market. And over time, I became more comfortable and confident.
And what I learned along the way was that creating an effective investment portfolio doesn’t require a degree in rocket science. With just two or three simple funds and no more than maybe 30 minutes a year, any one of us can become a bonafide investor. Don’t believe the lie that investing is complicated. It can be as easy and simple as picking what to eat for dinner today. And the best part is, unlike dinner, you only have to do this once every few years.
07 - Investing Should Be Long
Warren Buffet doesn’t invest in index funds. He finds good quality companies. However, Warren Buffett tries to find stocks that are worthy of being held for many years down the line. Instead of focusing on the short-term opportunities of a stock, he considers the fundamentals — the company’s ability to innovate in its market and consistently boost its profitability.
“Our favorite holding period is forever.” - Warren Buffet
The lesson here isn’t that we should try to stock pick like Warren Buffet because there is a reason why there is only one Warren Buffet. Rather it is his philosophy on long-term investing. None of the companies purchased or investments made by Berkshire Hathaway was ever done with a short-term mind mindset. Warren Buffet and Charlie Munger didn’t choose companies or stocks because they thought the price was going to rise this week, this month or even this year. They bought and invested in companies because they wanted to own those businesses for the long-term.
Yes, they still sell stocks occasionally and for a variety of reasons. But their primary approach is still with the mindset of owning them forever. For example, Berkshire Hathaway has owned Coca Cola, which it owns about 10% of its shares, for 34 years. American Express, 29 years. Costco, 22 years. Now compare that to an average investor who holds a share for 5.5 months.
So, when we are approaching our own investment, we should have a longer term mindset. That once we buy a specific fund, we should plan on holding it forever. Not trying to time the market. Not trying to buy stocks for cheap so we can sell them for a hefty profit quickly. There are countless studies that show that market timing is a fool's errand. Motley Fools defines market timing most accurately.
“A strategy based on predicting short- term price changes in securities, which is virtually impossible to do.” - Motley Fools.
Learn from the best and focus on long-term investments, not short-term.
08 - Cash Is King
Strong cash positions are the base foundation of strong personal finance. You wouldn’t build a house without a solid foundation. So in the same way, we want to have our emergency fund in place before we jump into investing. Emergency funds are there for the unplanned and unexpected life events. Losing your job, a car repair, or a medical emergency. Without it, our grandiose plans to invest will always get derailed. Something will always come up that will require us to funnel money from our investments to the new emergency because we don’t have a financial cushion.
“We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.” - Warren Buffet.
Warren Buffet and Charlie Munger have said in their 2014 Berkshire Hathaway annual report that they vowed never to keep less than $20 billion dollars in cash. They never want to be caught in a position where they have a shortage of liquidity. When COVID-19 caused a market crash in 2020, Berkshire had $137 billion in cash. While everyone else was panicking from uncertainty, Warren Buffet and Charlie Munger were making Berkshire Hathaway even more indestructible in the face of many unknowns.
And their cash strategy isn’t just so that they can sleep soundly at night. Even though that is a major reason. Berkshire Hathaway holds a lot of cash so when good deals come up, Warren Buffet and Charlie Munger could be at the front of the line to take full advantage. During the financial crisis of 2008, Warren Buffett was able to pump $5 billion into Goldman Sachs shortly after the Lehman Brothers collapse. Serving as a massive boost of confidence for Goldman Sach and helping to stabilize an already shaky market. However, it also netted Buffet a hefty profit of approximately $3 billion - all because he had the cash to do so.
09 - Spend Money Extravagantly
One major purpose of having money is so we can buy the lifestyle that we want. So it really doesn’t make sense when we spend our hard earned money on things we don’t love just because they are on sale. Because every dollar we spend on frivolous things takes away from our ability to spend money on things we truly care for and love.
“Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.” - Ramit Sethi, I Will Teach You to Be Rich
For example, I love a good book, especially a hardcover book, but I could care less what I wear. As you can probably tell in all my youtube videos - I wear the same shirt for all of them. So I spend extravagantly on books. But I cut back mercilessly when it comes to anything related to clothes. My wife has to literally force me to buy a new pair of socks when they have holes in them - I say why bother, I like the ventilation.
This balance of spending extravagantly on the things you love and cutting back mercilessly on the things that aren’t important to you is one of the most powerful personal finance lessons out there. It shows that good money management isn’t actually about just cutting back on everything, rather it is about good prioritization.
10 - Money Buys Freedom
Money gives us the freedom to be our own boss, the freedom to create something of lasting value, and the freedom to live a life that is truly fulfilling on our own terms. And that was the case for my wife and I as well. Though we haven’t reached complete financial independence yet, we have amassed enough resources to buy some of our time and freedom back.
“There are many things money can buy, but the most valuable of all is freedom. Freedom to do what you want and to work for whom you respect.” - JL Collins, The Simple Path to Wealth
And this freedom has allowed us to spend more time at home with our kids, explore our other interests such as my youtube channel and frankly more brain space to just pontificate about life. So if you are at a crossroad debating how best you should spend your hard earned money, consider buying freedom. It will be the greatest purchase that money can buy.
