The video discusses the two stressful aspects of money: making and managing it, but focuses primarily on the theory of investing. The creator outlines how to make money work harder through investments once basic financial stability is achieved. The video promises an exploration into how the wealthy think about investments and various investing terms.

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Key Vocabularies and Common Phrases:

1. heartache [ˈhɑːr.teɪk] - (noun) - Emotional anguish or distress caused by challenges or difficulties. - Synonyms: (sorrow, grief, distress)

And in particular, there's two aspects of money which have caused me the most heartache.

2. counterintuitive [ˌkaʊn.tə.rɪnˈtjuː.ɪ.tɪv] - (adjective) - Contrary to what one would intuitively expect. - Synonyms: (illogical, paradoxical, illogical)

They're pretty counterintuitive and they're probably not going to come naturally at first, which is why truthfully, most people aren't winning the money game.

3. framework [ˈfreɪmˌwɜːk] - (noun) - A basic structure underlying a system, concept, or text. - Synonyms: (structure, system, plan)

In this video, I'm going to break down the secret framework that wealthy people use to think about investing.

4. appreciating asset [əˈpriːʃiˌeɪtɪŋ ˈæset] - (noun) - An asset whose value increases over time. - Synonyms: (growing asset, value-increasing asset)

This is what we call an appreciating asset, which just means the thing gets more valuable over time.

5. inflation [ɪnˈfleɪʃən] - (noun) - The rate at which the general level of prices for goods and services is rising. - Synonyms: (price increase, cost inflation, devaluation)

This burglar's name is inflation. And this is a fundamental concept to understand why we even invest in the first place.

6. liquidity [lɪˈkwɪdɪti] - (noun) - The ease with which an asset can be converted into ready cash without affecting its market price. - Synonyms: (accessibility, availability, fluidity)

And exchange, you got to keep easy access to your money in this. Easy access has a special name that we call liquidity.

7. compounding interest [ˈkɒm.paʊn.dɪŋ ˈɪntrəst] - (noun) - The addition of interest to the principal sum of a loan or deposit, or simply put, interest on interest. - Synonyms: (interest accumulation, compound interest)

This is called compounding interest. And this might just be one of the most powerful concepts in the world of investing.

8. wisdom of the crowds [ˈwɪzdəm əv ðə kraʊdz] - (noun) - The collective opinion or decision of a group of individuals rather than that of a single expert. - Synonyms: (collective intelligence, crowd wisdom, mass opinion)

We call this the wisdom of the crowds.

9. russian roulette [ˌrʌʃən ruːˈlet] - (noun) - A potentially very dangerous endeavor with unfavorable odds. - Synonyms: (risky gamble, dangerous attempt, hazardous chance)

I mean, you wouldn't play russian roulette for five bucks, right?

10. esoteric [ˌɛsəˈtɛrɪk] - (adjective) - Intended for or likely to be understood by only a small number of people with a specialized knowledge. - Synonyms: (obscure, mysterious, abstruse)

You don't need to waste your time learning about exotic or esoteric investment opportunities.

This theory of INVESTING changed my life

Money has been the single greatest source of stress in my life for just about as long as I can remember. And in particular, there's two aspects of money which have caused me the most heartache. First, how to actually make money, and second, how to manage money. Now, we all have to solve for the making money problem first, but I've already done that in a lot of videos on this channel, walking through the process that I followed to go from $80,000 in debt to multiple million dollar net worth in only a few years. So if that's where you're at in the journey, I highly recommend you go check out those videos.

However, once you've made your first bit of money and you have around six months of funds set aside in case of an emergency, it's time to start making your money work harder for you than you worked for it, which we do by way of a little thing called investing. Now, investing is a really big topic that I think of in two distinct parts. The first is the theory of investing, which is like what are the unique ways that wealthy people tend to think about investing, which you need to adopt if you want to win the money game? The second is the practice of investing, which is getting more into the weeds of the different investment vehicles like real estate, stocks and bonds and how to manage your portfolio. In this video, we are just going to focus on what I believe to be the most important part, the theory of investing. And the reason this is so important is because how you think about money dictates how you act towards money. If you don't know how to think about investing, then you're inevitably going to make really bad decisions which is going to negatively impact your results.

So in this video, I'm not going to offer any tactical tips on which investment vehicles you should pursue or how to go set up an account on Vanguard. If that's something you'd like to see, then I'll make you a deal. Go drop a comment down below and if there's enough interest, I'll host a live subscriber only workshop going through the tactics of investing.

Also, don't forget to hit the subscribe button while you're down there. Yes, I am officially the YouTuber who asks for subscribers. Now here's the thing. It's important that we start here with the theory of investing, because the ways that we think about money that'll actually help you win the money game, they're pretty counterintuitive and they're probably not going to come naturally at first, which is why truthfully, most people aren't winning the money game.

In this video, I'm going to break down the secret framework that wealthy people use to think about investing. And I promise, if you apply this mindset, it's going to change how you play the money game and it's going to put you on the fast track to financial security. So let's dive in to the theory of investing for beginners.

Now, I'm going to say something here that will at first sound incredibly wrong and your instinct will be to call me an idiot. But bear with me, I will explain. In the world of money, we tend to overcomplicate things. But the truth is this. There is only one thing you can do with money. You can spend it, and that's it. Now, I can already hear the click clack of keyboards. You type out your angry comments like, nuh. You could save it, you could invest it, you could give it away.

So here's the thing. You're right. But here's how wealthy people think about money. The thing that dictates whether or not you're saving or investing money simply depends on what you've spent it on. If you spend money acquiring something that you expect to make you more than what it cost you, then we call that an investment in an asset. If you spend money acquiring something that simply takes money out of your pocket, such as buying a beer at the bar, then we call that an expense or a liability.

So let's use an example. Imagine we buy an ice cream machine for $100. Is this an investment or is it an expense? Well, it depends on what we do with the machine. Now if we just use that machine to make ourselves a tasty treat every week, Well, I mean, ice cream is great and all, but it's not money going back into our pocket. So this is just an expense and a liability. We spent money and all we got was ice cream. Now that's not a bad trade, but it's not great either.

Now here's the thing. It doesn't have to stay a liability. There's two things we could do to magically turn this ice cream machine into an investment. First, we could start a business and we could sell ice cream cones for a dollar each. Now if we sell 100 cones, we'll have recovered our initial investment into the machine and we're going to have an asset that's producing ongoing profit. This is what we call a cash flowing asset. That is it's pumping out more money to us than what it cost us on a regular basis.

Now the second thing we could do to turn that ice cream machine into an investment is to sell it for more than what we paid for it. For example, if I can sell that machine in the future for $150, then ultimately that machine made me $50 more than what I paid for it. This is what we call an appreciating asset, which just means the thing gets more valuable over time.

Here's the problem with appreciating assets. You never really know what you're going to be able to sell a thing for down the road. At best, you're just making an educated guess. Now, some guesses are better than others, right? Like a duplex in a highly desirable market is probably going to be worth more in the future than it is today. Whereas that ice cream machine you bought from Walmart for $100. Sorry, but it's probably never going to be worth more than what you paid for it.

Now, this all leads us to one of the most important investing concepts that the vast majority of people just don't understand. Whether or not something is a good investment largely depends on the time frame in which you measure it. So if you bought a house tomorrow and it produces $10,000 of profit in year one, you might say, damn, that's a pretty good investment. But what if in year two, the roof caves in and now you have to spend $50,000 to fix it? Well, now it's cost you more than it's made you. So does that mean it's a bad investment?

Maybe, maybe not. Because what if a guy knocks on your door the day after you finish fixing the roof and he offers to buy the house for $100,000 more than what you paid for it? All told, after accounting for the fifty thousand dollar roof repair and the ten thousand dollars of profit in year one, you could stand to make a total of sixty thousand dollars on this house. So here's the question. Was this house ultimately a good investment?

The answer to that is. Again, it depends. See, the formal definition of investing is to spend money with the expectation of achieving a profit. So whether or not something is a good investment depends on what we expected to happen when we bought the thing. So if you thought you were going to generate at least $15,000 of cash flow every single year and sell your hypothetical house in year three for $300,000 more than what you paid for it, then no, this wasn't a good investment. Because a good investment is one that meets or exceeds our expectations.

Now, I get it. Like, this is a pretty advanced concept, but it's important to Start thinking about investing in this way, because unfortunately most people just throw money at the stock market or at crypto without any reasonably informed expectation of return. They're just, they're following the herd and that's not investing. In fact, we have a different name for that. It's called gambling, which is just about the most unreliable way of winning the money game that I can think of.

Alright, now let's circle back to what I said at the very beginning, which is that the only thing you can do with money is spend it. We just covered how we call investing when you spend money with the expectation of acquiring profit generating assets. But what about saving money? Can't you just stick it in a savings account at the bank or stuff it under your mattress?

Well, sure, you can do that, but what most people don't realize is that they're actually losing money when they do this. And the reason for this is because saving is an illusion, thanks to a concept called the time value of money, which simply states that a dollar today is worth more than a dollar tomorrow. Here's a thought experiment to show how this works.

Imagine you bury $100 in your backyard. That seems pretty safe and secure, right? Well, no, because what you can't see is that every year an invisible burglar slips into your yard and he steals $2.50. This burglar's name is inflation. And this is a fundamental concept to understand why we even invest in the first place.

See, inflation occurs for a lot of reasons, but one of them is because the cost of goods and services, it tends to increase over time. So for instance, a gallon of milk in 1950 would have cost you like 83 cents, whereas today it's more like $4.28.

This occurs because of an economic principle called supply and demand. See, over time, as an economy improves, people start to make more money. And as they make more money, they have more disposable income, which increases total amount of demand the marketplace can exert on products. Now, if the supply of these products doesn't grow faster than the demand, this means we have more people competing for the same amount of goods, which leads to prices increasing. We call this rate of increase inflation.

And over the past 30 years in the U.S. it's hovered right around 2 1/2 percent, depending on how you measure it. Now here's what this means for you and your attempt to save money in the backyard. If you dig up your cash in 10 years, you're going to be shocked to discover that what could originally have bought you $100 worth of stuff is now only going to get you $75 worth of stuff.

And the way to think about this is that you have effectively spent $25. And in exchange, you got to keep easy access to your money in this. Easy access has a special name that we call liquidity. And this is a concept that makes up one side of what's known as the magic triangle of investing.

See, the triangle includes the three characteristics of every investment that you have to balance depending on your investment goals. It includes security, profitability and liquidity. Or put another way, risk, returns, and accessibility. Now, the theory of the magic triangle of investing says there's no way to maximize for all three sides simultaneously. You can't have a high return investment that's also low risk and easily accessible. There is always a trade off.

So let's break down this magic triangle to understand how we can push and pull these different levers. Starting with liquidity. The easier it is to get your money, the more liquid it is. But that easy accessibility, it comes at a cost.

For example, inflation is the price you pay for keeping your money under the mattress or in a checking account where you can get to it at a moment's notice. One step up from this might be a high yield savings account, where it might take just a bit longer to get your money, but in exchange, you do get to collect some interest. And historically, this is between 1 and 2%.

Now, the thing to notice here is that your return is still below the rate of inflation, which means even in a high yield savings account, you're still losing money over time because you're paying for low risk liquidity, which comes at the expense of a higher return. And this is the reason that saving money is an illusion. Because the only way to truly save money is by spending it on an investment that matches or outpaces inflation.

And to do that, you're either going to have to compromise on how much risk you take or how accessible you want your money to be. For example, there are investment vehicles like government bonds and Treasuries, where you can get a rate of return that's slightly higher than inflation and has low overall risk. But the trade off with these investments is that you have to lock up your money for anywhere between a couple of months and a couple of years.

So here's the question you have to answer for yourself. Is the increased security and profitability worth the lower liquidity? Or would you rather keep your money in a savings account where it's maybe not earning as much, but you can get to it and Use it more easily.

And the answer for all of us is simply it depends. It depends on your individual context and what you're hoping to get out of your investments. But here's a structure that served me pretty well. I like to keep around three months of living expenses. That's like groceries and rent payments in a checking or a savings account so I can get to it at a moment's notice. To pay the everyday bills of life.

I keep another six to nine months of living expenses cycling through three to six month treasuries, which at the time of this recording was right around 5%. Now this works for me psychologically, knowing I always have around 12 months of savings just put away that I can get to relatively easily for the rest of my investments.

I focus on opportunities that range all along the spectrum of risk and reward, which comprise the other two sides of the magic investing triangle. So let's break those down real quick, starting with returns. When I first started learning about investing, I read a book that had a really profound effect on how I thought about money. It's a classic within the personal finance space called the Richest man in Babylon. This is a really great book that I think everybody should read.

And maybe what I love most about it, besides the fact that it's a really quick read, is that all the lessons are super timeless. But within this book, there is one concept in particular that reframed the way that I thought about investing. It's this. You need to think about your money as though they were workers whose primary job is to go out and get you more workers.

This is called investing. And the speed at which your workers bring you back more workers is your rate of return. Now this is great, but where things get really crazy is when those new workers also start bringing you back more workers. And this has a special name that we call compounding interest. And this might just be one of the most powerful concepts in the world of investing.

At least that's what Einstein believed. Now let me tell you a story to show how this works. Once upon a time, there was a wealthy dude on his deathbed who he turned to his son and his daughter and he gave them a choice. If they chose option A, they could take their full $5 million of inheritance in cash right there at that moment. But if they chose option B, they would only get one single dollar in that moment.

Now here's the catch, is that tomorrow that dollar would double and it would continue doubling for the next 31 days. But not only that, the dollars that that dollar produced would also double. So here's how it works. On day one, you'd get $1. On day two, you get two. On day three, you'd get four, and then eight, and then 16, and then so on and so forth.

Now, the wealthy man's son was impetuous, and he took the $5 million right now. But the daughter, she was patient. And more importantly, she understood the power of compounding interest. So she took option B. The brother, he thought she was a fool, because by day 20, with only 11 days left in the month, she had only made $5,242.

But the daughter knew that time is an investor's best friend, and that the most important thing is to do, as legendary investor Charlie Munger once encouraged us, is to never interrupt compounding unnecessarily. So she kept the faith, and by day 25, her inheritance had ballooned to $167,772. Then on the next day, it was 335,544, and then $671,088.

And this continued until, remarkably, on day 30, her inheritance finally surpassed her brothers at $5,368,709. But there was still one day left in the month. And on that day, her total inheritance hit $10,737,418, over 5 million more than her brother, who simply couldn't be bothered to do the math and wait for one month.

Now, here's the thing. This might seem like an extreme example, and it is. But this is how compounding works. You're going to spend years with barely any progress because it takes a really long time to get the flywheel going. But once it does, your growth is going to take off like a rocket ship.

And to see a real life example of this, you have to look no further than Warren Buffett, who is widely considered to be one of the greatest living investors. If you were to plot out Warren's net worth over time, you would see this incredible exponential curve that starts right around the time that he turns 50 years old. Now, at this point, he'd been investing since he was 14 years old, so that is 36 years worth of compounding interest.

And his net worth is right around $250 million, which is nothing to sneeze at, but it's peanuts compared to what the number grew to see 40 years later when Warren turned 90, that 250 million had transformed into $100 billion. And that is just such a big number that it is really hard to even comprehend.

Now, you might be tempted to think it only grew to such massive number because of the insane returns that Buffett was able to generate. But the truth is, he has averaged 22% return over the course of his entire life, which is great, don't get me wrong. But what this really demonstrates is that massive wealth can be created by generating moderate returns that are compounded over incredibly long periods of time.

And this is why you've probably heard that you should start investing as early in life as possible. Because, again, if there's one concept you take away from this video, let it be this. Time is an investor's best friend. So start investing as soon as possible. And then whatever you do, follow Warren Buffett's two golden rules of investing, which is rule number one, don't lose money. Rule number two, never forget rule number one.

Now, to avoid losing money, you really need to understand the third side of the magic triangle of investing risk. Okay, let's start by defining our terms. Risk is the likelihood of losses compared to the expected return on an investment. Now, this is really easy to say, but the reality is this risk is actually incredibly difficult to measure. Because in the world of investing, we're never dealing with perfect information, which means we often have to make our own best educated guess as to what will or will not happen in the future.

And as always, is the case where humans start guessing. It's a good bet that we're all going to guess a bit differently, depending on a whole slew of variables unique to our personalities, our education, and our worldview. And this means that the perception of risk in an investment is often subjective. However, one of the really interesting things about humans is that while we will all probably guess a little bit differently, if you were to aggregate and average all the individual guesses, you would end up with a collective guess that is remarkably accurate.

We call this the wisdom of the crowds. And to show how it works, let me share with you another story. A couple hundred years ago, there's this fellow named Francis galton. He asked 800 attendees at a livestock fair to try and guess the weight of an ox that's on display. He gets numbers ranging all over the place. Some are way too high. Others are way too low.

But when he calculated the median of all estimates, the wisdom of the crowd was only off by £9. That's less than 0.01% off. Okay, so here's what this means. When it comes to investment risk, the investment wisdom of the market as a whole is generally pretty damn accurate.

Now, when I say the market, I'M really talking about the big three here, which is the stock market, the bond market, and the real estate market. I'm not going to go into detail here on the technical side, but each of these markets typically prices assets along a spectrum of risk and reward. And as an asset gets riskier, your desired return also increases so as to justify the additional risk you're taking.

I mean, you wouldn't play russian roulette for five bucks, right? No, you would only take that level of risk for like a life changing sum of money. And for most sane people there is actually no dollar amount that would make that game worth playing because the risk is just too high.

Now here's the really unsexy truth that most people don't want to hear about investing. Unless you are an extreme outlier with some unique skills and resources, you are not going to consistently outperform the market. So I recommend you don't even waste the mental bandwidth trying. The vast majority of investors would be best served by simply trusting in the wisdom of the crowd and pursuing stable investment opportunities that historically have moderate risk paired with moderate returns thinking between 5 and 15% annually.

So this probably means you don't need to waste your time learning about exotic or esoteric investment opportunities that are going to generate a 10x return on your money. Sure, investing in crypto and luxury watches, it sounds fun on paper, but honestly, instead of trying to eke out a few more percentage points of return, what most wealthy people do is they put their money into something safe and boring and then they focus all their time and energy on increasing their earning potential so that they have more money to invest in the first place.

And this leads us to the last thing you really need to understand about investing. It's this. Investing is inherently risky. There is no such thing as a guaranteed return. None. Anybody telling you that there is, they are lying to you and they are going to take advantage of you. So the most important thing is that you never invest money you can't stand to lose. If it's your last hundred dollars, do not put it in the stock market. Hang on to it so you can pay your bills.

In fact, I mentioned this at the beginning of the video, but it's so important that it's worth revisiting. You are not ready to start investing until you have at least six to nine months of an emergency fund set aside to cover your living expenses. Now the best way to get to that first hurdle is by increasing your income and decreasing your expenses, which I talk about in a lot of the other videos on this channel, so I encourage you to go check them out next.

But remember, this is just part one. We've now covered the theory of investing and you now have the tools for thinking about money in the right way. What comes next is the practice of investing. Where and how do you actually invest your money? If there's enough interest, I will host a free live training for subscribers breaking this down. So if that's something that you'd like to see, get down to the comments and let me know and we'll see you in the next video.

Investment, Economics, Finance, Theory Of Investing, Personal Finance, Wealth Management, Anthony Vicino