The 7 Money Rules 95% of Americans Break (And Why They'll Never Retire)

The average American saves 4.6% of their income. At that rate, most people will never retire. I've been teaching finance at the university level for years, and I have clients with multi-million dollar salaries. And most of these people are making the same money mistakes over and over. Honestly, most break three of these seven money rules that I'm about to share with you. These aren't complicated. That's the frustrated part. They're seriously simple. But simple's not the same thing as easy, and almost nobody completes all seven of these. The people who build real wealth, the people that actually get to retire on their own terms, they all follow the same basic principles. And those that have to continue working, or just never seem to have enough left over at the end of each month, are all breaking these basic same rules. I'm going to walk you through all seven rules, some of them you probably have heard before. But I bet at least two or three are going to hit different when you hear them explained this way. And rule number five is the one that changed how I think about building wealth entirely. Stick around for that one, because it goes against what pretty much all financial media tells you. All right. Rule number one. I know you've probably heard this before on so many different financial podcasts, but listen to this explanation. Rule number one is pay yourself first, not when everything else is all paid for. Most people pay their bills, then go out to eat, then buy whatever they want. And then if there's something left over, that's what they're adding to their savings account, or that's what they're putting in their investing account. And that's just so backwards. The data backs this up. According to the Bureau of Economic Analysis, the average American personal savings rate is about 4.6%. That means for every $1,000 earned, only $46 gets saved. Compare that to somebody who automates 20% into investments before they touch their paycheck. At a $75,000 salary, that's $15,000 a year going to work for you. Over 30 years at 10% average returns, that 20% automation turns into $2,468,000. The person saving 4.6% over that same period, $568,000. Same salary, same timeframe, completely different outcome. Rule number two, never invest any money that you think you're going to need in the next three years. This is the rule that I see broken so often. Someone has a house down payment saved up. They see the market ripping and think, why not grow this money faster? Then the market corrects 20% and their down payment just became a much smaller down payment. The S&P 500 has had negative five-year returns about 12% of the time historically. Short term, even worse. In any given year, the market drops at least 10%, about one out of every three years. Money you need within three years, and especially if you need within two, and definitely if you need it in the next one year, should go into short-term treasuries, even cash that earns a very high interest. So something like a high-yield savings account, CDs even, short-term treasuries like T-bills or an ETF called S-Gov. In general, these types of things are going to get you about a 3.5% to 4.5% interest or return. And that's usually beating inflation. And I know that's not exciting, but it is smart. When you invest money in the actual investment portfolio, what I'm hoping that you're learning from watching my channel and learning from people who've been doing it for longer than 10 years, the way that you make real money in the stock market is by letting it grow. It's by letting it actually sit in the market and not having to sell out of it every year because something comes up. So you want to make sure and have that money off to the side. I usually refer to this as an emergency savings, but I'm even talking about something even extra. Like if you know for a fact you're going to be buying a house in the next three years, or you know for a fact you have a really big payment coming up, like you need a new roof next year, that money shouldn't be in the market. That should be outside the market, ready to just use whenever you're ready for it. Protecting that short-term money is not glamorous and it kind of hurts. It does hurt me because I would rather it be in the market too. But to be a disciplined investor and just be smart with your money, you have to do this rule. Rule number three, understand the difference between assets and liabilities. This sounds basic, but most people get it wrong. A car is not an asset. It loses value the second you drive it off the lot. Your house? It depends. If it costs you more than it would cost to rent a similar place and you're not building equity fast enough to offset that, it might be closer to a liability than you think. Now in general, yes, a house is an asset by basic nature, but it's not necessarily an investment. A real asset puts money in your pocket. Something like stocks that pay dividends or even a rental property that's cash flowing over and above what your mortgage is and that money's coming into your pocket. Maybe even a business that runs without you. In my own portfolio, it would be SCHD and my rental property that are cash flowing assets. Those pay me no matter what. No matter if I show up to work or I don't, I'm getting paid from those sources. Average American has over $40,000 in credit card balances, auto loans, and personal loans combined. That's money flowing out every month. Every dollar going to debt payments is a dollar that could be compounding for your future. Something that I ask myself regularly is, if I buy this thing, is this going to be putting money in my pocket or is it going to be taking money out of my pocket? And it's okay to spend money on things that are going out of your pocket, but you just need to understand that that's not an asset, obviously. I will tell you that the way to build ultimate wealth is to buy more assets than liabilities. It's just like when you play the game Monopoly. Whoever has more properties and more hotels on those properties, it gets very hard when you're playing the game when you land on someone's stuff and you have to keep paying out every single time. The person with the more properties and the more assets in general is the person that usually wins the game. But at the beginning of the game and in the middle of the game, it looks like they're actually the one that's losing because they have the least amount of actual money in the bank, usually because they just bought a bunch of properties. We got to think long term when we're talking about this type of situation. Rule number four, this is a big one that people mess up as well. You want to diversify, but don't diversify too much. Everyone's heard don't put all of your eggs in one basket. Fine, that's good. But there is a way for you to diversify so much that it actually hurts you. I see my one on one clients all the time, and they have like 15 different ETFs that are all basically investing in the exact same thing. They own VU and VTI and SCHB and SPTM and IVV. All five of those are essentially the S&P 500 or the total U.S. market. They think they're diversified, but they're not. They just own the same basket five times with different labels. Real diversification means owning different things, owning different types of asset classes. So if you're in the equities market and we're talking about stocks and ETFs, it's good to own both growth and value. It's also probably a smart idea to have some U.S., but also some of the rest of the world as well. My favorite way to diversify is actual asset classes. So, yes, have some stocks and ETFs and things, but also maybe have some gold, also have some real estate, also have some Bitcoin, whatever it may be that you understand and that's an actual asset. Make sure to have multiple different types. We want to make sure that they're not all moving in the same direction and at the same time. So sometimes when stocks and ETFs are up, real estate might be down and vice versa, but it helps buoy the portfolio. Specifically, even in just the way that I teach to invest, the three ETF portfolio, you're going to have something high growth that goes up when the market goes up like crazy. But when the market goes down, those growth types of ETFs will drop like crazy. And so that's where the value ETF comes in. That's why I say have a value style ETF, a growth ETF, and then one right in the middle for the whole U.S. market. My personal portfolio has a core of growth ETFs and then also VU for the S&P 500 and SCHD for value with targeted positions around them. It's simple, it's clean and genuinely diversified because those three funds have very different compositions. I also own real estate, own businesses, and have Bitcoin to diversify as well. Now rule five is the one that I mentioned at the beginning, and this is one that many people are not doing. Time in the market beats timing the market every time. I know you've heard some version of this before, but when I show my students the actual data, this changes their entire financial life. A study by JP Morgan looked at the S&P 500 over a 20 year period from 2003 to 2023. If you stayed fully invested the entire time, your annualized return was 9.8%. If you missed just the 10 best days, your return dropped to 5.6%. Missed the best 20 days, 2.9%. Missed 30, you actually lost money. So let me put that into perspective. Of the entire 20 years, if you just missed 10 days within that entire 20 years, your return basically dropped in half. And if you missed just 30 of the best days in that entire 20 years, you actually lost money. But here's the part that matters the most. Seven of the best 10 days happened within two weeks of the worst days. So when people panic sell during a crash, they usually don't get in fast enough to then take advantage of that increase. That's how trying to time the market destroys your wealth. Because in theory, yes, you are gonna make the most money if you buy at the bottom and you sell at the top. The problem is that if you're in a real crash, think about it, a crash happens and we're down 20%. Now we're down 30%. You wanna get that money out of there quick because you feel emotional, you're scared it's gonna drop even more. But what if that 30% was the bottom? You're going to sell, get the money out, and then you're gonna be sitting there waiting for it to drop more before you put it back in. But the problem is, just like I said before, seven out of the best 10 days happened within two weeks of the worst days. Most people that I know and probably yourself, when you sell, you're not thinking, okay, within about two weeks, I'll get right back in. You're waiting for an extreme drop. You're waiting for months possibly for that thing to keep going down. And then at that point, that's when you'll put it in. Problem is that things probably back up. And so now you sold at the bottom. Now you're buying up here at the top. It just doesn't work. The emotional investors who sold during COVID, they missed one of the fastest recoveries in market history. The disciplined investors who held their portfolios recovered in months. Rule number six, this is huge and I can't tell you enough because I see this literally daily. I literally do financial consultations with people literally every single day. And people, your income is not your wealth. This is the rule that separates high earners from actually wealthy people. I've met doctors making $400,000 a year with a negative net worth. I have clients who are teachers making $55,000 a year who retired millionaires. The difference, the gap between what you earn and what you keep. It's not about what you earn. It's about what you can keep. According to the Federal Reserve Survey of Consumer Finances, the median net worth for Americans age 55 to 64 is about $364,000. That includes their home equity. If you strip that out, the median financial net worth is about $167,000 for people earning six figures. Your salary is a tool. It's not a scoreboard. The scoreboard is actually your net worth. And the way that you build, the way that you get points on that scoreboard is that gap between your income and how much you spend. Then it's about what you do with that gap. And I'm hoping that most of that is thrown into investments because that's how it's gonna grow. The best way to make your wealth compound and grow even faster is every single time that you get a raise or every time that you do some type of side hustle or something, all of that could be the gap. The problem is most people, when they make more money, they just increase their expenses along with how much money they just made. The secret to my wealth at this level would just be that since my income has grown, my expenses have stayed pretty close to the same. And so now I have more of a gap, more of that extra disposable income to just throw into investing, which grows even more over time. Now, next is the last rule. And after that, I'm gonna show you exactly how you can check yourself for these rules and what to invest in moving forward. Rule number seven is simple. At least it sounds simple, but it's not easy. Start now. The best time was yesterday. The second best time is today. I saved this one for last because the other six rules don't matter if you don't act on them. Here's the cost of waiting. If you start investing $300 a month at age 25, at 10% average returns, you'll have $1,057,000 by age 65. Start at 30, $802,000. Start at 35, $602,000. Start at 40, $443,000. Same amount invested every month. The only difference is when you started. Every year you wait costs you roughly $200,000 or more in your final portfolio. That's not an exaggeration. That's compound interest math. And I usually, when people see something like that, they look at it and they go, well, I'm not 25, I'm 45. And so from that example, it looks like I'm already at the end. I'm already not gonna have that much. Well, we have to keep in mind that that was just $300 a month. Hopefully at your age now, if you are a little bit older, you're in your highest earning time. And so now if you can just cut down on some expenses, you should have a lot more to be able to invest with. And at the end of the day, if you have at least five years, 10 years even to let that thing compound, that could really grow big if you can just get started right now. All right, so now you have all seven rules. So here's how you check yourself. Three questions and be honest. One, am I saving before I spend or am I saving whatever's left? If it's leftover money, set up automatic transfers this week. Two, do I have money in the stock market that I might need within three years? If yes, move it to the high yield savings or treasuries. Protect that money. Three, am I consistently investing or am I trying to pick the right moment? Set up dollar cost averaging and stop watching the daily moves. If you caught yourself on even one of these, you're not alone. Most people are not doing all three to be honest. The difference is what you do about it starting today. Now, if you're watching this and you want to follow a portfolio that actually does all of these rules, I made a video here on most simple ETF portfolio that I actually invest in month in and month out and it follows all of these rules. If you want my eyes on your specific portfolio or just to talk about strategy that's gonna work best for you, I do private financial coaching and the link is found down in the description. Make sure to subscribe if you found this video. And remember to keep investing simplified.