10 Crucial Personal Finance Lessons That Transformed My Life

hey guys welcome back to the channel in this video I'm going over 10 key lessons in personal finance that have transformed my life and I think that they will transform yours as well as long as you put them into place so let's waste no time here and get into personal finance lesson number one which is that 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 which is that if you can't buy it twice don't buy it so 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 ,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 personally remember a situation at work that I was in so 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 so if you can com find long-term thinking and delayed gratification that's when I think you become Unstoppable in life personal finance lesson number two is to track three numbers I like to call them the big three and those three numbers are your expenses your savings rate as well as 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 and 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 look at all this war space so much aerobics in here so many activities do step class it's making my head spin how many activities we can do now speaking of net worth this is the last number that I like to track and the whole idea of tracking it is mostly for peace of mind I think it's a wonderful thing to track because it'll give you perspective on your financial life and so sometimes I'll even look back to my expense tracker from say 2021 or 2020 and just see how much my net worth has grown over the years if you'd like a link to my own net worth tracker I actually made one a couple years ago and I made it completely free so I will leave a link to that down below in the description personal finance lesson number three that transformed my life is that you don't actually 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 is that 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 Vee's Holdings are in Vu 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 often times you just need one two or maybe even 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 all right personal finance lesson number four today is to 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 refering 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 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 roller coaster all right enough with Facebook Marketplace let's get into personal finance lesson number five which is that 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 so 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 and this kind of makes sense like if you buy an overvalued stock it probably won't return as high as if you bought an undervalued stock and you can see here that as PE ratios increase so as stocks get more expensive there's a negative correlation here 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 US 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 often times people think that the stock market is overvalued and then they end up not investing into the market at all the author used a really excellent example to drive this home in his blog post so for example if you search stock market overvalued 2012 and you put that into Google there are many articles that will come up detailing what investors believed at the time which was that the market was overpriced by 50% but if you look at this graph from the S&P in 2012 it was trading for around the 1400 is levels and if you had believed it was overpriced back then you would have missed out on some serious gains over the past 10 years personal finance lesson number six is that saving money is very important yes but at the beginning it's the most important something that's not so obvious to people is that they think that 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 and 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 $133,000 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 so all the friction is at the beginning so 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 personal finance lesson number seven that transformed my life is that 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 so 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 30e 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 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 personal finance lesson number eight today is to not 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 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 is that 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 know 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 and also when it comes to spending everyone has different values as well it's easier send than done but I find that if I'm not comparing myself to other people then the amount of impulse purchases that I make as well it goes down personal finance lesson number nine today is along the same vein and that is to 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 $330,000 per year but act like they make millions so for example check out this 30k millionaire driving the Lan 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 that 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 quote 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 personal finance lesson number 10 that changed my life is that 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 and even on this channel or any other YouTube channel that 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 all right so those were my top 10 personal finance lessons let me know what you thought in the comments you might want to also check out this video right here it's on the 21 money lessons everyone should know to be financially literate make sure to hit the Subscribe button on the channel down below it takes .1 seconds and I will see you guys in the next video or that video all right peace [Music]

Channel: Humphrey Yang

Views: 156,186

Keywords: humphreytalks, humphrey yang, personal finance, investing, budgeting, wealth, cryptocurrency, stocks

Id: Izw-xaVkO0g

Length: 14min 50sec (890 seconds)

Published: Mon Jun 10 2024