Why I Used To Be Poor? Misunderstanding of Risk, Volatility, & Return

Summary

• If people giving you financial advice make less money than you, do not listen to them. Aim to get advice from those who are far more financially successful, even billionaires.
• Do not confuse volatility with risk. A volatile income stream like sales is not necessarily risky. Salespeople, who generate revenue, are low-risk within a company despite paycheck fluctuations.
• Lower your living expenses to below your salary, even if you're in a high-volatility job. Save as much as you can and invest the difference, ideally in the S&P 500 for long-term growth.
• Wealth is a ratio of expenses to income, not a fixed amount of money you need to have. Aim for a high income-to-expense ratio to build wealth quickly.
• Focus on paying off high-interest debts like credit cards first because it’s equivalent to getting a guaranteed return on investment by avoiding high compounding interest.
• Invest consistently through dollar-cost averaging into the S&P 500 to participate in the market regardless of its fluctuations.
• To increase value in your company and potential income, tie yourself to an acquisition channel by mastering it and potentially leading a team.
• Understand the risk before deciding to become an entrepreneur. Many salespeople can earn more with less risk compared to managing a business.
• Track your net worth regularly to make informed decisions about your finances, find areas to save, and to see your progress toward increasing wealth.
• Prioritize decreasing expenses and understand that a lavish lifestyle is often not as fulfilling as having financial freedom and peace of mind.
• Learn to differentiate between volatility and risk in your career and financial decisions, as this distinction can lead to better choices.

Video

How To Take Action

A good way to handle financial growth is to seek advice from those who have achieved high levels of financial success. Prioritize their insights because they have navigated bigger financial challenges and can offer you proven strategies.

To maintain a strong wealth ratio, it's essential to live below your means. By doing so, any extra income you make becomes an opportunity to invest and build wealth, such as investing in the S&P 500. This investment strategy takes advantage of dollar-cost averaging, which helps participate in market growth over time regardless of fluctuations.

Focusing on high-interest debt is crucial. Pay off credit cards first as they usually have the highest interest rates. It's like earning a return on investment because you're avoiding that high compounding interest.

For professional growth, learn to master an acquisition channel at work. This can increase your value within your company and potentially lead to higher income.

To track financial progress, regularly monitor your net worth. This helps you to see where you can save more and the progress you're making towards increasing wealth. By reviewing your finances, you'll be able to spot unnecessary expenses and cut them out.

Lastly, understand the difference between volatility and risk in your career and finances. Being comfortable with volatility can often lead to better financial outcomes, as it doesn't equate to high risk.

Implementing these tips can lead to financial growth and stability—a foundation for lasting wealth and peace of mind.

Quotes by Alex Hormozi

"Rule number one do not listen to people poorer than you about advice on money"

– Alex Hormozi

"Wealth is a ratio. It's a ratio between how much you spend versus how much you make"

– Alex Hormozi

"Track, don't slack"

– Alex Hormozi

"Dollar cost average all of the money that you make in excess of your expenses into the S&P"

– Alex Hormozi

"Tie yourself to an acquisition channel…and then build a team underneath of you that can do the thing that you just learned how to do"

– Alex Hormozi

Full Transcript

what's going on everyone alex was here ceo of joomlas prestige labs and alan and a number of other portfolio companies that we have we did 120 plus million so what i want to do is show you some of the the lessons that we have learned along the way so uh volatility and risk so i had a conversation with um somebody on my team and it was such a good conversation i wish i had recorded it and so this is going to be my attempt to break this down for you so this is if you are an entrepreneur and you have a sales team you can send this to your sales team if you are kind of still in the selling mode this will apply to you and if you're an employee and you're looking at making more money and you want to become wealthy this will also apply to you too all right so the employee question came to me you requested like a 15 minute time which i knew something important because it doesn't happen very often and so i was i was kind of looking forward i was like hey what's up man and what was interesting in the first you know four to five minutes of the call you know the person was just like i just really want to pick your brain on like the direction of my life and i was like well that's a really big amorphous topic like what problem are we solving right which is always if you ever talk to me it's usually like what problem are we solving right because then we can start tackling it and i don't think they knew what the problem that they were solving was because what it was is in reality they had family members who were saying hey you you shouldn't you shouldn't be in this job you need something that's more secure all right and so as i dug deeper into this conversation there were so many nuggets that came out of it that i think i've wrote them all down on a list and i'm going to try and hit as many as i can all right and so the first thing was this person in particular is on our sales team we have a lot of you know 20 plus sales people and they they uh their family said you should get out of sales you need something that is less risky all right and so the first thing i asked was do these people who are giving you this advice make more money than you and he said no and i was like rule number one do not listen to people poorer than you about advice on money so for everyone who has family or friends or parents who make less money than you or make the same amount of money than you at a at an older age uh don't listen to them all right listen to people who make far far far more money i don't even think you should listen to millionaires listen to billionaires i think that's great advice from grant cardone listen to billionaires so number one number two they had a misunderstanding of volatility and risk all right this is a classic poor person thing all right so i'm gonna break this down for you with an example let's say i own an insurance company okay and i know statistically that every nine years there's going to be a super catastrophe there's gonna be a hurricane katrina hurricane maria something that's gonna destroy everything and i'm going to lose a butt load okay now that means that one out of nine years i'm going to get destroyed but the other eight years i'm probably going to make a lot of money right right so the question is is my insurance business risky the answer is no i'm going to make the assumptions that i have a sound business model and margins and all that stuff but the reality is that my insurance business is not risky it is volatile those are not the same things all right and so if you if you flatten out the curve over the nine years and look at the growth that's going to occur in my business based on those metrics i will be far better off than something that might be less volatile less up and down but not grow as quickly alright sales is an example of a highly volatile profession that still is low risk and let me explain why who do you think is the most secure in the company somebody who generates revenue or someone who costs overhead someone who generates revenue so sales people are by definition people who generate revenue which means they are the lowest risk in a company now for them they may have more volatility from paycheck to paycheck but in general people in sales generate make more money than people who are not in sales right and if you're good at sales even more so which this individual is right and so with the concept of volatility versus risk i said what you should do if you want to decrease the volatility in your life and get the upside benefit of your position is you need to decrease your expenses to your salary all right so his salary and i said now your salary is what you need to assume your is all you're going to make now i'm not saying live on your salary i'm saying you should be saving off of your salary now think about this let's say this individual is living as it has a salary of let's say 40 000 a year all right now if i can get them to live on 25k right a year then that delta can be invested in the s p 500 and within 20 years they're top 1 percent crazy i know and if you split where you live with other people and you really try and live down you can do that faster right but the reality is that this isn't all the person's going to make but you should plan like it is because then what happens is all of this becomes gravy and even if you have a bad month which there's no sales person in our company that would not that would not make any sales it does it doesn't even make sense right but even if you had a bad month they still this person would still feel like they're making progress towards their wealth freedom and independence goals all right but the reality is that they would probably make you know another 100k per year on top of that but now they've set up their lifestyle such that their expense income ratio is so favorable that that they can save so much of their money they get to their goal faster which is the next point which is wealth and i've said this before and i will say it again is not a number and this is one of the things that i had to tease out in this conversation wealth is a ratio it's a ratio between how much you spend versus how much you make it's inflow versus outflow not i need to make x to be free now if you want to have a crazy lifestyle i have another video about about what living like the ultra wealthy is but the reality is it's a not that fun not definitely not fulfilling and i'll tell you what is way more fulfilling having the freedom and the peace of mind which is actually what people want knowing that you're going to be set up for life and the way to do that is to have a strong income to expense ratio and so this individual if he's making 140 000 and he lives on 25 he's making nine times more or whatever the math is there whatever six times six times more he's making six times more than he's spending that's a great income to expense ratio his wealth is going to build very very quickly right and with that that extra money will more than cover his 25 000 a year right like the 140 that or sorry the one 115 that he's saving in this example right every year in pure cash he's already saving four and a half years of income every year now let alone the fact that if he's just gaining at 10 right s p is nine but like just for math sake let's just say 10 that he's he's going to be generating himself compounding growth with which means that in two years two years he'll be at 230 right he would technically be able to retire on his current income think about that right now if you want to if you want to spend more then fine but literally there's a 24-month way of of saving your way to wealth right now would i want to retire in 230 000 no but if you worked for a decade by the end of that period of time you'd have two you know two point something right and at that point then he could he could he can totally just retire and not only that if he keeps his expense ratio at 25 000 maybe even bumps himself to 40 or 50 000 which for most people is is a really comfortable living you know it's like you're not doing anything crazy right and if you do it that way life will be better now the next point that uh that that came up was he was like okay well i've got i've got some debt um so what should i do he's like so i've got student loan debt i've got credit card debt that's that's about i can't remember i think it was 20 grand right between both of those and i was like okay your student loans have super super super low interest so let's not worry about those let's worry about your credit card because the credit card has 16 compounding and so if you think about that it's like a negative investment right you've got something that's compounding against you versus something that's compounding for you so the way to guarantee a 16 compounding rate of return is to d is to take away the drags that are at negative 16 right so if you're in this situation the first thing you do is you pay off your credit card debt all right number one after that you're gonna have your your student loans and then your investments the reality is the student loans the interest because with the government's setting them you know have set them up it's it's basically just it's the cost of you learning this however long ago i think it's horribly uh unethical that they they do student loans i think i'm so wildly against student loans in general in what world would someone ever give an 18 year old access to 200 000 who has no skills whatsoever to then get something that has no return more than what their current earning potential is it makes no sense and if you if you if you can't even bankrupt your way out of it it is purely a scheme by banks to make more money purely it makes you a slave to the bank for the rest of your life but there's no interest on it and so i'm not going to think about that for right now all right so credit card loans first and then you stack into investments now me personally i just don't like having any debt and so if you want to it's a personal choice it doesn't even make mathematical sense it makes emotional sense you can pay off the student loans and then everything else gets plowed into the s p 500. the reason i say that is because warren buffett the own the advice that he's given the people who are managing his will is that he just wants everything put in the s p 500 smartest investor of of all time that's what he's doing so i think it is worthwhile advice and very easy to follow all right next one and you do this every month it's called dollar cost averaging so that even when it goes down and goes up you're gonna participate at all times so when it's overpriced you're still buying and when it's underpriced you're still buying don't try and time it i have another video about trying to time the market you're gonna lose so just dollar cost average in and then get rid of any of the anxiety around getting a good deal all right next one so he's like okay i want to make uh you know i want to know how i can grow all right so this is for anyone who's in any company the closer you can tie yourself to an acquisition channel the more valuable are the company because you're you're driving revenue right and so what i what i explained to him was i said listen you've gone through all my trainings you know you know you know the different ways of getting clients pick a channel that we're not currently using and in your in your off time try and figure that channel out and we pay more for for leads or for sales that come that don't that that someone goes and brings out brings in on their own compared to stuff that comes in from our marketing right i was like so you're gonna get disproportionately paid for those off the bat and then as soon as you figure out that system i said come to me and say hey alex i figured out the system i figured this process is getting us more clients i want to build a team and i think that i can show five other guys how to do this and generate revenue and i just would like a piece of all of their of their um of their sales and i would say absolutely and so if he does this he would be able to two or three x's income as a result of that right and so that is a way of figuring out how to provide more value now the next thing was a debate i think this came up from the family too was going off on your own right now obviously as the owner of the business you would think that my incentive is to keep it keep everyone and over time my my incentive has shifted my incentive is i want to to be the best human i possibly can be and if that means that that this it's time for that person to go and spread their wings then that's fine and i encourage them and i and i wish them the absolute best and i mean that genuinely because i never want to be the person who holds someone back from accomplishing their dreams that being said understanding risk is important so many many many many many people many many many of my sales people make more than many entrepreneurs do in fact it probably got the stats i think the average small business owner makes like 78 000 a year all right so if my sales people make 150 or 200 000 a year and if he does all this thing he could make five times with the average small business owner makes five times five times and that's income right that's what's important and so sometimes you can see the alert and this is a classic employee mistake is you look at all the revenue and you say oh that must be the owners that must be alex's and every business owner who's watching this is laughing to themselves because they know that is so far from the truth that is is hilarious um but but people still make that logical fallacy and so for perspective if you if you are a 200 000 a year sales person you own in my mind a million dollar business because if you're running a 20 net margin after everything that and the thing is is it's not just profit in the business but it's net free cash flows the amount of money that you as an owner can take out after reinvesting in the business right and so if you have a if you're a salesperson and you're making 2000 a year it's the same as you owning a million dollar business and so many times and in this instance depending on your skill set you may not want to deal with hr and finance and and figuring out fulfillment and generating leads on your own all the other aspects that come with owning a business legal and all the other crap right and so i'm not saying don't be an entrepreneur obviously i'm an entrepreneur but i'm saying understand adequately understand the risk and i think that if i adequately understand the risk i'm being very very honest with everyone here i don't know if i would have become an entrepreneur i really don't know because i'm pretty risk-averse believe it or not and i think i've told you i had a really good paying job before i uh before i quit and it was because i was so miserable that i decided to do something else but i did not have the typical entrepreneur story of like i was always bad at school and i knew i had to do my like i didn't have that at all i was good at school i got a good job and i i just i was miserable so i did something else anyways next point oh last one okay so i'll give you another saying to work off of track don't slack all right easy to remember and so one of the easiest things that you can do to increase your net worth is start by tracking it all right this is one of the easiest things so right now every week i get a i get an email that has every single one of my assets every single one of my bank accounts all of my portfolio and it has one number at the bottom and so i know every week how i'm doing and whether i'm going up and up now you might be like well man isn't the market volatile sure but i also have other investments too etc but the point is especially the earlier on you are you can you can decrease that cycle now you could do that every quarter i'm just i tend to be obsessive about it i like looking at it because i like making progress if right now you are the sole provider in your household or you're a solo business owner or an entrepreneur or even you know you have a seven or eight figure business right but you haven't like your your actual net worth hasn't surpassed you know a million five million tracking every day the cumulative amount of your bank accounts is one of the single greatest things that i ever did ever like ever ever ever and so it became this habit that first thing in the morning i would open up my my my chase app i would and the nice thing is if you have one of the big commercial banks you can you can they give you dashboards you can you can pull all your accounts in together so if you have you know two business accounts and then you have a savings and checking personal and then you maybe have like a portfolio all of that stuff you can have in one place so it's actually pretty cool but anyways i had an excel sheet that had all my assets on them all my bank accounts all my investments and everything and i would take five minutes in the morning and i would update it and every single and i did it daily so i saw every single day and i could just scroll over time and watch my bottom number continue to go up and here's what's magical about this is that when you look at your bank accounts every day you start to get a pulse on the flow of money you start to get a feeling for oh yeah tuesdays is when this goes out oh yeah on the first week of the month this is when this goes out but then what happens is all of a sudden you're like hey i went down by 200 bucks let me examine let me investigate and you look in there and you're like holy crap i've been using the software for however long cancel right and so as soon as you start doing this you'll start decreasing you'll plug the holes you'll decrease the uh the outflows of money in your life because you're tracking and not slacking so as long as you're not a slacker become a tracker track your net worth all right and so for this individual the the action plan that i made for him so that he could create the wealth that he wanted was this kind of recap for you all right number one track don't slack you have to track your net worth if you wanted to improve so how can you even track like how can you prove something you don't even know what it is track track don't slack now your debt should also be on there so if he's paying down debt his net worth will go up because right now he's got 20 000 net so his net worth is negative 20 000 compared to his cash right so boom track don't slack next pay off high interest credit cards or high interest loan debt first next dollar cost average all of the money that you that you make in excess of your expenses into the s p mind you this is not investment advice i'll probably post a legal disclaimer under the video do whatever the hell you want investment has risks there's no guaranteed returns life is risky you know no one comes out alive okay back to the main point so dollar cost averages to the s p and actively decrease your expenses as much as humanly possible if you have a salary with variable compensation on top of it try and save off of living off your salary and if that sounds crazy cool don't be ordinary be extraordinary do things different because the average person literally retires with nothing don't be like that you can be different and the thing is is all of these things that we aspire for which i made this other video about right all these things we aspire for private jets exotic cars penthouses uh expensive clothing fancy restaurants i can tell you firsthand they're not what they're cracked up to be i like i like bj's and chili's more than i like ruth chris i really like the cheap my cheap jorts more than any of the fancy pants that are out of fancy pants i can tell you that when i lived in a 1200 a month apartment um in in in albuquerque new mexico which is a really nice place um i was happy as could be it my happiness is in no way changed having the place that i have now i regret the exotic car that i have and private jets are wildly expensive and you can you can get anywhere you want on spirit for way less all right so decrease your expenses all right and um in terms of increasing the income tie yourself to an acquisition channel try and find a new way of acquiring customers that the business that you're currently in is not doing do that and then build a team underneath of you that can do the thing that you just learned how to do all right because then you will be closer to what i call a rainmaker and rainmakers are always paid the most in every business and understand that when you do that if you even getting to 200 000 a year you own a million dollar business it's the same thing right except you have way less risk because if you want a million dollar business you can work your ass off two months in a row and become poorer whereas if you work your ass off for two months in a row in a business you're gonna get richer all right and that's the difference between being an entrepreneur and employees that a lot of people don't adequately um monitor the risk all right and finally understand the difference in volatility and risk overall something that goes up and down a lot is not necessarily risky it's just volatile and if you can understand that words matter and how you describe things matter and understanding the definition of words you can put better concepts and frameworks around your thought process and make better quality decisions so anyways i hope you found this valuable um this was a great conversation i wish i had recorded it but hopefully you got the the nuggets uh from that you can apply to your own life and business keeping awesome leave a comment and i'll catch you guys next vid bye