The Ultimate Strategy For Young People To Build Wealth - Scott Galloway

Summary

The speaker deconstructs the concept of wealth, defining it as having passive income exceeding one's expenses. He contrasts two lifestyles, emphasizing the importance of financial security and the absence of anxiety. The speaker advocates for focusing on one's strengths, practicing stoicism, and the power of time and compound interest. He also stresses the significance of diversification in investments to protect against market dynamics, and concludes by highlighting the importance of character and building alliances for long-term wealth accumulation.

Takeaways

• 💡 Define wealth as having a passive income greater than your expenses to achieve financial security.
• 🏦 High income does not equate to wealth; a high earner with high expenses may still be financially stressed.
• 👨‍👧‍👦 Your lifestyle and spending habits, like owning a luxury home or maintaining a lavish lifestyle, can impact your financial stability.
• 💰 The importance of saving and investing to build wealth, even if it means living below your means initially.
• 📈 Understanding the power of compound interest and how it can significantly grow your wealth over time.
• 🎯 Focus on what you're naturally good at and aim to become exceptional in that area to increase your earning potential.
• 🚫 Avoid side hustles that distract from your main income source; focus on improving your primary career.
• 🤔 Practice stoicism by recognizing what is within and outside of your control, especially regarding financial matters.
• 🕰 Time is a powerful tool for wealth accumulation, especially when starting early and investing wisely.
• 🏫 Consider the long-term financial implications of choices like private school tuition and weigh them against potential investment returns.
• 🔒 Diversification is key to protecting your wealth against market dynamics and individual performance fluctuations.
• 🤝 Building wealth often requires the support of allies and maintaining a reputation of character and generosity.

Q & A

What is the definition of wealth according to the speaker?

The speaker defines wealth as having a passive income that is greater than your burn rate.

Why does the speaker consider his friend who makes millions a year as 'Poor or the Working Poor'?

Despite his high income, the friend has a high tax rate, significant expenses, and doesn't save much, leading to financial stress and anxiety.

How does the speaker's father achieve financial security with a modest income?

His father has a passive income from a pension and collecting quarters from washing machines, which is greater than his spending, making him 'rich' by the speaker's definition.

What is the importance of focusing on one's main hustle according to the speaker?

The speaker believes that reinvesting effort into one's main hustle will provide greater returns than the distraction caused by a side hustle.

What is the role of time in achieving financial security as discussed in the script?

Time is a significant advantage for young people, and the power of compound interest can be harnessed by investing early and consistently.

Why does the speaker suggest that sending children to expensive private schools may not be the best financial decision?

The speaker argues that the money spent on private school could be better invested in low-cost ETFs, potentially yielding a much larger sum by the time the child is an adult.

What is the speaker's view on the 'should bucket' in life?

The speaker suggests that with financial security, one can eliminate the 'should bucket', focusing only on things they have to do and want to do, leading to a more liberating life.

How does the speaker define 'sticking to one's discipline' in terms of financial management?

The speaker advises being disciplined about saving and investing in low-cost ETFs and index funds, and recognizing what is within one's control, such as spending and saving habits.

What is the significance of diversification in the speaker's approach to investments?

Diversification is crucial for protecting against market dynamics that can affect individual investments, and it allows for resilience in the face of investment failures.

Why does the speaker emphasize the importance of character and generosity in building wealth?

The speaker believes that collecting allies and being seen as a person of high character is essential for long-term wealth creation, as it opens doors to opportunities and deals.

What is the connection between the speaker's advice on financial security and the product Element mentioned in the script?

The product Element is presented as a health supplement that can improve one's well-being, which indirectly supports the overall theme of the script about making smart choices for long-term benefits.

Outlines

00:00

💰 Defining Wealth and Financial Security

The speaker begins by defining wealth as having a passive income greater than one's expenses, using two contrasting examples. The first is a high-earning friend who, despite a substantial income, lives paycheck to paycheck due to high living costs and lack of savings, causing stress. The second example is the speaker's father, who lives frugally on a modest income from a pension and coin-operated machines, achieving financial security through low expenses. The speaker emphasizes the importance of investing and saving to reach a point where passive income exceeds spending, thus achieving financial security and reducing anxiety.

05:02

🚀 Harnessing Time and Diversification for Wealth Building

The speaker discusses the power of time and compound interest, highlighting the advantage of being young and having a long time horizon to grow wealth. He suggests focusing on investments like low-cost ETFs and index funds, and the importance of discipline in saving and investing. The speaker also touches on the financial implications of lifestyle choices, such as education expenses for children, and argues for the value of reinvesting that money instead. The latter part of the paragraph stresses the importance of diversification in investments to protect against market volatility and personal financial ruin, sharing personal experiences of financial setbacks due to lack of diversification.

10:03

🛡️ Embracing Diversification and Stoicism for Financial Health

The speaker concludes with a discussion on the importance of diversification, never investing more than 3% of one's net worth in a single investment to mitigate risk. He shares an anecdote of a significant investment loss due to lack of diversification and how it impacted his financial stability. The speaker advocates for a stoic approach to recognize what is within one's control, such as spending and saving habits, and to focus on those areas. He emphasizes the psychological benefits of financial security and the importance of building wealth as a 'full person project,' suggesting that character and generosity play a significant role in long-term success.

Keywords

💡Wealth

Wealth in the context of the video is defined as having a passive income that exceeds one's expenses, signifying financial security and independence. The speaker contrasts this with high-earning individuals who, despite their income, do not save and thus do not achieve this state of wealth. The concept is central to the video's theme of financial well-being and the strategies to achieve it.

💡Passive Income

Passive income refers to earnings generated with little to no effort from the individual, such as rental income, dividends, or earnings from investments. In the video, it is highlighted as a key component of wealth, as it allows individuals to cover their living expenses without active work, providing a buffer against financial stress.

💡Financial Security

Financial security is the state of being free from worry about meeting one's financial needs and obligations. The video discusses achieving this state through building wealth, which includes having passive income and making wise investment choices, allowing individuals to live without constant financial anxiety.

💡Burn Rate

Burn rate is a term used to describe the speed at which a company or individual is spending money to fund operations or lifestyle, without corresponding revenue. In the script, it is used to illustrate the importance of having a passive income that exceeds one's burn rate as a measure of wealth.

💡Investment

Investment is the act of committing money or capital to an asset with the expectation of generating income or profit. The video emphasizes the importance of strategic investments, particularly in low-cost index funds and ETFs, as a means to grow wealth and achieve financial security.

💡Stoicism

Stoicism, in the context of the video, refers to the philosophy of accepting things that are beyond one's control and focusing on what can be controlled, such as personal spending and saving habits. It is presented as a mental approach to managing financial stress and making rational financial decisions.

💡Compound Interest

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. The video underscores the power of compound interest in growing wealth over time, especially when invested wisely in assets like ETFs.

💡Diversification

Diversification is the strategy of spreading investments across various financial instruments, industries, or other categories to mitigate risk. The speaker shares personal experiences to stress the importance of diversification in protecting one's wealth from market volatility and individual investment failures.

💡Economic Anxiety

Economic anxiety refers to the stress and worry caused by concerns about financial stability and the ability to meet financial obligations. The video discusses how achieving wealth, through strategies like passive income and wise investments, can alleviate this anxiety.

💡Philanthropy

Philanthropy is the act of promoting the welfare of others, typically through the donation of money to good causes. In the script, it is mentioned in the context of school selection and the financial strain it can place on families, suggesting that reinvesting in other areas, like low-cost ETFs, could yield greater long-term benefits.

💡Character

Character, in the video, is presented as an essential attribute for accumulating wealth and maintaining it over time. It involves demonstrating generosity, trustworthiness, and integrity, which can attract allies and opportunities, contributing to long-term financial success.

Highlights

Definition of wealth as having passive income greater than one's burn rate.

Example of a high-earning individual living paycheck to paycheck due to lifestyle choices.

Contrasting example of a modestly earning individual with passive income and financial security.

The importance of calculating how much one needs to save for financial independence.

Emphasis on the value of low-cost index funds for long-term savings.

The psychological benefits of achieving financial security and the freedom it provides.

Concept of eliminating the 'should' bucket in life for greater personal satisfaction.

Importance of focusing on one's strengths and becoming top-tier in a high-demand industry.

Critique of side hustles and the recommendation to double down on one's main hustle.

The concept of stoicism in recognizing what is and isn't within one's control.

The power of time and compound interest in building wealth over the long term.

The financial implications of choosing expensive private schools versus investing in ETFs.

The potential for significant wealth accumulation through disciplined reinvestment of education costs.

The pitfalls of lack of diversification and its impact on financial stability.

Personal anecdote on the importance of not putting more than 3% of net worth into a single investment.

The protective value of diversification against market dynamics and individual performance.

The full-person project of wealth accumulation and the importance of character in building alliances.

Endorsement of a product that supports health and well-being, as an example of a practical application.

Transcripts

how do you think about deconstructing

what wealth looks like what should

people do in order to achieve Financial

Security well the first of Define what

wealth is I I'm I Define rich as the

following passive income that's greater

than your burn and I'll give you two

examples I have a close friend who runs

the m&a group of a large bulge bracket

Investment Bank he makes 3 million in a

bad year 14 million in a great year

because it's all current

income and he lives in Connecticut he

pays about 52% tax rate uh but that's

still a lot of money but between his

ex-wife his alimony his child support

his home in the Hamptons his master of

the universe lifestyle that he thinks he

needs and wants to signal to his friends

I know firsthand he doesn't save a lot

of money and it is an enormous source of

stress for him and on his marriage and

then uh he's what I call Poor or the

Working Poor despite how much money he's

making he's hugely stressed out it's a

money and the need for money is a huge

source of stress for him my father

between his Royal Navy pension and

social security and he owns about a

dozen washing machines that he collects

quarters from in trailer parks he makes

about $52,000 a year without really

working he enjoys going and collecting

quarters my dad is Scottish he's like

tragically cheap I'm pretty sure he goes

home lays the quarters out on his bed

and rolls around them in them I think

that's probably fun for him but his

passive income he and he spends

$48,000 he's Rich his passive income is

greater than his burn that's the

definition of rich and so that's a point

you want to get to a point where you

have enough Investments that are

spinning off capital or growing such

that your passive income is greater than

your burn and you can do the math right

well okay if I'm going to need $120,000

a year and I think I'll get eight% or

six% on that I need to save two million

all right this is how many years I have

to work I'll assume the market will go

up eight% a year you can kind of do the

math around how much you should be

saving and putting in to lowcost index

funds so that's the goal you want to be

rich you want an absence from anxiety

you want to be able to live well without

having obligation if you decide to keep

working which I would suggest anyone

does it's a choice and that that in

itself is like a when I sold my company

in 2017 and I was finally kind of dun

dun dun I felt like I exhaled relief for

a good two years it was just like Jesus

Christ now this is all this is all

things I wanted get to

choose just to digress one of my role

models a guy named Barry Rosen Senor

start janana partner said there's three

buckets in life there's things you have

to do your biggest investors in town you

have to do it you know you you get

invited on Joe Rogan and this is the

date the window you have to get there

for that date right there's things you

want to do oh I'm going to can to the

creativity festival or your mates are

meeting up for you know in New York all

your friends from the UK right you want

to do that and then there's things

you should do you know my co-workers kid

is having a wedding I really should go

to this there's this it's South by

Southwest I got invited to a party with

all these podcasters I should go and

network I should I should I should the

great thing about having economic

security and Barry taught me is he said

you can totally delete the should bucket

I no longer do things I should and it's

actually a bit of a point attention with

my partner but she'll often say oh we

should do this they're nice people and

I'm like I don't want to do this and I

don't need to do this I should do it so

I'm not doing it and that is so

liberating to just say okay there's just

some things you have to do the stuff you

want to do that's easy but get rid of

the should bucket but the algorithm

itself or the equation itself is the

following the first is focus and it goes

back to what we said earlier find

something that you're naturally good at

that you could become in the top 10 or

top 1% in an industry that has a 90 plus

per perc employment rate and focus on it

I hate side hustles side hustle is fine

for exploration if you're not happy with

your main hustle and you can't give it

up because you need the money but it's

exploratory and if your side hustles are

going on too long it means you got to

change your main hustle because I would

bet and I'm fairly confident the

research shows this that the incremental

10 or 20% effort reinvested into your

main hustle will provide greater return

than the distraction caused by an

incremental side hustle so find

something you're good at that you could

become great at through focus and that's

your job find that thing that's not easy

the rest is a the product of the

following and this is probably the wrong

word but I like the word I said stoicism

recognize or something's out of your

control my company when chapter 11 in

2008 after Wills Fargo analyst pulled

our credit credit line because they did

some equation showing that the market

recently was going into a credit crisis

I can't control that um I can't control

that I got in in some ways a lot of my

wealth since 2008 isn't my fault isn't

my fault the Market's ripped up but I

can't control my spending I can control

I can recognize that no one's thinking

about my as much as I'm thinking

about my and I don't probably need

a BMW at a young age I first thing I did

with my first bonus uh Morgan Stanley I

got a $28,000 Bonus I went and bought a

$35,000 BMW and I hung swimming goggles

from the rearview mirror despite the

fact I didn't swim thinking that would

you know impress women and I thought

about it I thought okay of course you're

not smart enough to do this but if I had

just bought a Hyundai for $112,000 and

invested the other 20 in the markets I

think that money would be worth like 3.1

million now so recognize there are some

things within your control uh

specifically how much you you spend how

much you save being thoughtful about

trying to be disciplined about putting

some money in lowcost ETFs and index

funds that you do have some control

focus on the things you can control uh

the next thing is time one of our

species great flaws is that because for

the majority of our time on this planet

we haven't lived past 35 we just can't

calibrate time and strategy answers one

question what can I do that's really

hard that's basically leaning into your

advantages when you're young you have

one advantage you have time most young

people at 25 don't really recognize two

things one they're probably going to be

be here for another 80 years at this

point if they're 25 right now and and

this is the hard part and you have to

ignore your brain because your brain

isn't wired this way it's going to go a

hell of a lot faster than you think it's

just like I look at you and I immed

think oh I'm his age because I was 30 or

whatever the you are you know

yesterday it wow life has gone so slow

said no one ever and if I could give you

a magic box at 25 and said if you find a

th000 bucks to put in here in an instant

and it will feel like an instant in 30

years you're going to have 12 16 24,000

what kind of effort would you make to

find that thousand bucks the power of

compound interest is amazing I've been

doing I'm kind of on this idea of at

some point we're going to move back to

the US and in New York you signal with

your clothes your your home but you also

signal with where you send your kids to

school and I'm a narcissist and big ego

and I thought okay I would want my kids

to go to First Presbyterian Grace Church

we sort of these two Tony schools

downtown the tuition is 62 Grand it's

probably more than that in the interview

when we were here 10 years ago they

asked they ask you how philanthropic you

are which is how much money are you

going to give us but college is 62,000

you're the you're the people who don't

spend any money or giv any money now why

do you do that we I bet for two-thirds

of the people that send their kids there

it's a sacrifice probably a third don't

care it's like they're so rich in New

York they just don't care but if you're

talking about 62 Grand you're really

talking about a 100 Grand at least

pre-tax I mean it's real money that's

real money every year and if you got

three kids 300 Grand so for people it's

a financial strain which you could argue

put strain on the whole household kids

pick up on that strain and why are you

doing it well I want to give my kids

everything what's everything well I want

to give them the best chance to get in a

great College okay why so they can have

you know more options than I did Growing

Up what do you mean by that what do they

get well a better job more more

opportunity well why do they need more

opportunity better job well so that at

the end of the day they can do what they

want and maybe get some economic

security and afford a home and and have

a family and and have Economic Security

and have an absence from stress line

okay got it instead of sending them to

First Presbyterian and Grace and I've

heard you talk about this there's a lot

of research showing that the best school

for kids is the one closest to their

home and then take in reinvest that

commute time and studying sleep play and

try and be disciplined take that $62,000

a year from the age of 4 to 18 and

invested in lowcost ETFs on average

they've returned 9% since 2008 8% now

11% since 2008 8% since the beginning of

the market assume it does 8% assume you

are wrong you sent that kid to public

school and you screwed up they didn't

get into the best college they ended up

with a mediocre career they have trouble

buying their first home they don't have

they can't live the life that you got to

lead or that you'd really H for them

here's what's going to ease your pain if

you were disciplined and reinvested that

money you would have spent on Grace

Church by the time they are 35 you'll

have $5.3 million to give to them that

will ease a lot of economic anxiety so I

would just love to have a banner that

says public school or 5.3

million you know it's it's or public

school and four 5.3 like Grace Church or

5.3 million because people just don't

realize how P how fast time goes and how

powerful compounding is and then the

last thing and this is something you

know do as I say not as I do it really

killed me a couple times took me from

wealthy to not wealthy I've been Rich

three times this is the third time and

I'm really hoping it sticks this time

but the first two it went away and it's

because I didn't understand

diversification I was assumed that if I

threw myself into anything that I should

go 110% in not only with my time but my

capital and that anything I devoted 110%

of me to because I was so awesome that I

could move mountains and you need to

recognize that market dynamics Will

trump individual performance all of the

time most of my success and my failure

is not my

fault

and the way you protect against that is

diversification and now so for example I

don't put more than 3% of my net worth

in any one investment and last week if

you'd asked me what is the best

investment you had that has the most

potential to be a 10xer I would have

said it's this company I invested in

this Healthcare company that does

preventive me message uh excuse me

preved medicine through taxt based

messaging selling into the Enterprise

baller CEO Tier 1 V see huge huge

hitters investors had to Elbow my way in

to get in what a thrill I got to invest

went out of business last week zero zero

right my investment goes to zero and but

here's the thing it bummed me out for

about an hour because diversification is

your Kevlar okay I lost 3% of my net

worth doesn't mean anything whereas in

2008 when I was um running or when my

biggest investment was a public

e-commerce company called Red Envelope

which was doing really well at the time

when I met with my Investment Bank they

you know I think I owned 10 million in

stock and I said well how much can I

borrow against it and I said you could

probably brought three million and they

said what are you gonna do with it buy

out I'm like no I'm gonna buy more Red

Envelope stock and there Steve bomber

did the same thing with Microsoft and it

worked out you should assume you're not

Steve bomber because when my company

went bankrupt it meant that I owed $3

million I went from being worth 10

million to owing three million the tax

on my emotional and mental well-being

was enormous and

diversification is your Kevlar because

you don't need to be a hero you need

don't need to find the needle and the Hy

stack you can buy the whole hay stack

and again see above time will go fast

you'll be financially secure and conoman

wrote about loss aversion Theory The Joy

you'll get from being smart enough to

pick Nvidia two years ago which most of

us were not the joy you'll get of like a

lack of diversification in the potential

upside it offers is a fraction of the

pain you will feel when Nvidia gets cut

by 90% so for your own Financial

well-being much less your own mental

well-being Embrace

diversification because now I just don't

I don't want to say I don't think about

my investments I'm constantly looking

for new opportunity but because I never

put more than 3% in any one thing it's

like give me your best shot I can take

anything it's a bullet to the chest when

it goes to zero but I got Kevlar yeah

knocks me off my feet and then I get up

and I got a bruise and I'm like I'm fine

nothing's ever critical much less f F

whereas before when I got shot in the

chest in 2000 with a do bomb explosion

or implosion and the great financial

recession in 2008 I almost never could

get up again I mean I came very close to

just never getting up again so Focus

find what you're good at Double Down On

It um uh

diversification stoicism save more than

you or spend less than you make so you

can save and appreciate just how

powerful time and compound interest is

and the kind of the way I would wrap it

up is I know to get you rich that's the

good news the bad news is slowly and

then it's all wrapped in and I didn't

know how to put this into equation but I

call Wealth a full person project and

that is there's a myth that really

wealthy people crawled over other people

to get there that they're billionaires

lighting their cigars with $100 bills

that's the majority of

self-made people are actually good

people they're High character and the

reason why is if you want to be really

wealthy you need to collect allies along

the way people have to want to put you

in a room room of opportunities even

when you're not physically in the room

they want to give you the benefit of the

doubt they want to go easy on you when

you up they want to include you in

Deals they want to come to work with you

they want to present opportunities to

you and the only way that's going to

happen is if you show generosity and

character from from an early age uh so

like I said greatness greatness and

wealth is in the agency of others this

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