The most powerful way to think about money

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The most powerful way to think about money | 
Paula Pant 
Every choice that you make comes with a 
trade-off
. 
(cheerful music) 
Money is an 
invitation to critical thinking
. You can afford anything, but not 
everything. So if there's something that you value, whether it's travel, food, 
or a house, you can have that thing. You just can't have an endless series of 
ands. You might not be able to have that thing and something else and 
something else and something else. And that doesn't just apply to your 
money. That applies to your time, your focus, your energy, your attention - 
any 
limited resource
. And life is the ultimate limited resource. So when you 
practice being better at managing your money, you practice being better at 
managing your life. 
My name is Paula Pant. I am the host of the "Afford Anything Podcast." I 
want to help you reach financial independence by making smarter decisions 
with your money. 
(contemplative music) 
The mistake that I see a lot of people make when they start asking questions 
about how to manage their money is that oftentimes people will ask a 
question about a product or a tactic. So for example, they might say, 
"Should I use this app, or should I invest in cryptocurrency?" First-principles 
thinking is stripping away everything and really getting to the root of 
something. So if you think about a tree, the tactics and the products are like 
the leaves of a tree. That's the most visible surface so, of course, it's what 
people might ask about first.
But first, let's start with the roots of that tree. The roots of that tree are your 
values. It's that 
question of what matters most
. And then from those roots 
stem that trunk of the tree, which is your philosophy of life, the type of life 
that you want to lead. 
And from that philosophy, then your objective or your goals: How does that 
philosophy of living translate into specific goals? That's really that tree 
trunk. 

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From there, you go out into the branches of the tree, and they represent the 
strategy. Now that you know your philosophy of living, you know your goals, 
now you can come up with strategies for how to obtain those goals. And 
then once you have that strategy in place, then those leaves are the tactics 
and the products. So if you're starting with the question about tactic or 
product, you've got a leaf in your hand, but you don't have that root system 
built yet. 
When personal finance is framed in the context of 
delayed gratification 
so 
that you can have more money when you're 75 years old, it's really hard to 
get excited about that. But when we reframe that as financial independence 
and how taking better care of your money leads to this flourishing of 
freedom, of opportunity, of choice, that becomes much more enticing. FI is 
the point at which your potential passive income - money that comes to you 
when you're sleeping, typically through investments - is enough to cover 
your basic bills. And the reason that matters is because then 
endless options 
open up for you. You have the freedom to do whatever you want - whether 
that's to stay in your current profession, 
make a midlife career change
, 
become a full-time parent, or travel the world. Whatever choice you want to 
make, you're able to make that without having to sweat about how you're 
gonna keep the lights on, how you're gonna keep the fridge stocked. 
The pursuit of FI is for everyone, but the first steps that you are going to 
take will differ depending on where you are in your journey. There are really 
only three steps to achieving financial independence: 
Grow the gap, invest the gap, repeat. 
Grow the gap means to grow the gap between what you earn and what you 
spend. And there are only two ways to increase that gap: earn more or 
spend less or both. If you don't make very much, like me when I was in my 
first job out of college making $21,000 a year, at that stage of life, your goal 
is to increase your income. 
If you're already making big dollars but you have a 
spending problem
, the 
low-hanging fruit 
is 
to curb that spending problem 
and to address the root 
psychological issues that are leading to that spending problem. 
Step two is to then invest that gap. My personal feeling is that everyone 
should aim to save and invest at least 20% of their income. And when I say 

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save and invest, that includes making additional payments towards the debt 
above and beyond the minimum required, retirement savings, investments 
in an investment account. It includes building up your emergency fund. Start 
with the goal of saving 20%, and if you're nowhere close to that, increase 
your savings rate by 1% and do that every month or two. It will take a few 
years, but you will over time get to that 20% mark. And then step three is 
repeat. This is a lifetime practice. This is not 
a quick hit 
or something that's 
going to 
happen overnight
. Money management happens for life. 
(contemplative music) 
There has never been a point in history when the world has not been 
volatile
. A hundred years ago, there was also a pandemic going on, and 
there was a first World War. A decade later, the Great Depression. After that 
was World War II. After that, event after event after event that affected the 
entire globe. I came to FI because I was scared and anxious about the 
volatility in my life and the world. My response to that was 
to become 
obsessed with saving
as much as I could because it allowed me to not be so 
scared of the future. It felt psychologically comforting to have these savings. 
Change is the nature of the world, the nature of time. And so, if you're 
looking out at the big global factors that are happening in the world today 
and you're feeling fear, embrace it and use that fear as motivation
, as fuel to 
make wise decisions 
about how you spend your money, your time, your 
effort. That's how you build a life that's more intentional. And there's a lot 
of joy in that. 
(cheerful music)