In the past 30 years, I have read over 1,500 nonfiction books across various topics to apply to my life in the pursuit of success. I have read over 200 books about personal finance and money and over 400 books about trading and investing.
Let me explain the ten money lessons that I found to be the most powerful and life-changing when it came to the psychology of money and the execution of wealth building.
10 Most Important Money Lessons To Learn
- Money is neither good nor bad; its meaning comes from how it’s earned and used.
- How and where money flows is governed by a set of rules.
- A paycheck should only be the first step in your financial journey.
- Having a high income is not the same as being wealthy.
- You grow wealthy by separating how you earn money from selling your time.
- Cash-flowing assets are more critical than your earned income.
- There are many ways to make money in investing and trading, but all successful people have a system with an edge.
- Compounding capital gains is more important than your income.
- There are legal ways to optimize for paying minimum taxes.
- Building a successful business is the best path to building wealth.
Money is neither good nor bad; its meaning comes from how it’s earned and used.
Money, in itself, is neither good nor bad. Its value comes from how we earn and use it. If we earn money ethically and honestly and use it to support ourselves and our loved ones, it’s a positive force in our lives. However, if we earn it through illegal or unethical methods and use it to harm others, it becomes an opposing force.
If we make money by building businesses that create good-paying jobs and products people want, along with rewarding investors for putting capital at risk, it’s a good thing for everyone. If wealth is made by exploiting workers, selling products that don’t work as promised, or losing money investors put at risk, it’s terrible.
Understanding these principles is crucial to making sound financial decisions and creating long-term success.
How and where money flows is governed by a set of rules.
Money doesn’t just flow randomly. There’s a set of rules that govern how it works. Understanding these rules and how they impact our finances is critical to making informed financial decisions. These rules include the principles of supply and demand, inflation, interest rates, and monetary policies, among others.
Capital flows to investments that are believed to be going up in value in the future. Employees are paid based on the supply and demand of a skillset in an industry and how much their employer values them. Sports stars, singers, and actors are paid based on the cash flow they can create from their fans.
Inflation eats away at the value of your savings when not in investments. Central Bank monetary policy determines the speed and volume of money through the economy.
A paycheck should only be the first step in your financial journey.
Having a job and a regular paycheck is an excellent starting point in building your financial future. However, it’s only the first step. To achieve financial freedom, you must learn to manage your money, invest it wisely, and create multiple income streams. A paycheck alone won’t give you the financial security and freedom you seek.
You must convert your earned income into capital for investing, acquiring assets, trading, and building a business.
Having a high income is not the same as being wealthy.
Many people equate having a high income with being wealthy. However, income alone doesn’t make us rich. Wealth is the accumulation of assets that generate income and appreciate in value over time. You must focus on accumulating assets to provide you with long-term financial security.
It’s not how much you earn but how much you keep that builds wealth. Being rich is measured in net worth and cash flow, not through the size of your paycheck. The wealthiest people have high net worths, not jobs.
You grow wealthy by separating how you earn money from selling your time.
To achieve wealth, we need to find ways to generate income without trading our time for money. This can be done through investing in stocks, real estate, and other assets that generate cash flow and appreciate in value over time. Most wealthy also build businesses they can eventually disconnect from as they hire employees and managers to operate them. You can create long-term financial security and freedom by separating your income from selling your time.
Think of assets that pay you to own them instead of buying things with payments. Spend your time building something of value, like businesses, intellectual property, rental properties, or investing and trading systems that can be leveraged for income in the future. Your time is limited; you can’t leverage it directly with an employer for wealth. You can build something with your time to make you wealthy long-term.
Cash-flowing assets are more critical than your earned income.
Cash-flowing assets, like rental properties, businesses, intellectual property, royalties, and dividend-paying stocks, are more critical to our financial future than your income. These assets generate a passive income that can pay your personal expenses even when you’re not working. By investing in cash-flowing assets, we can create a reliable source of income that will provide us with financial security and freedom.
There are many ways to make money in investing and trading, but all successful people have a system with an edge.
Investing and trading can be great ways to generate wealth and compound capital. However, successful investors and traders have a system that gives them an edge over the market. They use fundamental analysis, technical analysis, or a combination of both to make informed investment and trading decisions inside the context of their system’s parameters and guidelines. By having a system with an edge, we can increase our chances of success in the stock market.
All the investors and traders that made fortunes in the stock market had a few things in common:
- They created good risk/reward ratios at entry.
- They understood their edge in the markets and stayed in their circle of competence.
- Their perspective was their long-term performance, not on any one trade or investment.
- They stayed disciplined and level-headed through all market environments.
- They managed their risk.
Whether value investors, trend followers, day traders, or growth investors, the profitable ones all had shared characteristics.
Compounding capital gains is more important than your income.
Compounding capital gains is the process of reinvesting your investment returns to generate even more significant returns over time. This is more critical to your financial future than earning a high income. By reinvesting our returns, we can grow our wealth exponentially over time.
Compounding returns is the art of money-making money. When your capital grows big enough, and your returns are positive, you will be stunned at how much this grows your wealth and how it increases in speed over time.
There are legal ways to optimize for paying minimum taxes.
Paying taxes is a necessary part of living in society. However, there are legal ways to minimize our tax burden. We can use deductions, credits, tax-deferred accounts, and other tax optimization strategies.
The key things to understand about taxes and money:
- Employees pay income taxes first, then expenses. Business owners pay expenses first and then taxes on earnings.
- Investors only pay capital gains taxes when they sell for a profit, not when they hold.
- Most of the wealthiest people in the world hold the bulk of their net worth in stock of the companies they founded to avoid capital gains taxes on their net worth.
- Traditional tax-deferred 401ks and IRAs allow you to lower your income tax burden when you deposit capital there.
- Traditional tax-deferred 401ks and IRAs allow you to harvest capital gains and compound returns tax-free until you withdraw money at retirement.
- Whether a Roth or traditional 401K or IRA is best for you depends on your income tax rate now versus what you believe it will be at retirement.
Key Principles Summary
Money is essential, but you must know how to use it well. You learned that money is like a tool, and you need to earn and use it in good ways to acquire assets. Some rules govern how money works, and you need to understand them to make intelligent financial decisions. Getting a paycheck is just the start, and you need to focus on accumulating assets that make money without having to work all the time. Cash-flowing assets are essential, buying things that pay you. You need a system to invest and trade successfully. Compounding your returns is more important than just earning a high income. You can also legally minimize your taxes to save money. You can achieve financial security and live your best life by learning and using these ten money lessons.
