This is a long one, because rather than notes, it’s based on kindle highlights direct from the book to PDF. Enjoy!
This book will teach you how to make wage income irrelevant to your financial picture in just a few years. In this book, you will learn how to redesign your lifestyle, restart your career, and rebuild your financial position. In this book, you will save your money, earn more money, and use the cash you accumulate to purchase freedom and the ability to design your daytoday life without the need for wagepaying work. This book is designed for someone with a specific set of circumstances. It is designed for the full time median (around $50,000 per year) wage earner who has little to no initial savings but wants early financial freedom.
This book offers a simple, three step approach to gaining early financial freedom.
financial runway—the number of years that one can maintain their lifestyle without the need for wagepaying work.
Part I teaches readers how to make the necessary changes to go from little to no savings to preserving over 50 percent of one’s middle class income. It teaches readers how to live well on less than $2000 per month and how to use the savings to pay down debt and extend their financial runway to a year or more. Executing
Part II of this book takes readers from $25,000 to $100,000 in personal wealth. It takes readers from one year of financial runway to a position in which they could survive for three to five years or more without earning a paycheck. While continuing to live efficient lifestyles, readers will further reduce their living expenses by purchasing a primary residence that allows them to live for free. They will also learn how to earn significantly more income by changing careers and how to develop habits tied to success.
Part III of this book takes readers from $100,000 to early financial freedom. It takes them from several years of financial runway to a lifetime of permanent financial abundance. Readers will continue to scale their income and live efficiently, but our focus shifts to the purchase and creation of income producing assets. Readers are exposed to an advanced discussion on the concept of financial freedom and taught investment philosophy. They learn what types of wealth count toward financial freedom, and what types don’t.
accumulating a lifetime of wealth in a short period of time involves making personal decisions in major areas of your life that are different from the norm.
it involves a change of perspective that may be sharply at odds from that of your family, friends, and colleagues. Examples of the perspective you’re about to discover include: You should start by saving the next $1000, not earning the next $1000. A new car is totally unnecessary. You should spend more, not less, on entertainment and fun. Student loan debt is rarely worth it. Buying a home (or worse, a condo) in the best part of town will slow you down on your path to early financial freedom. Stocks are less risky than bonds. You need to spend less money to earn more money. Developing a specialty is far more risky than being a jackofalltrades. A few good options are better than too many options. Contribute less, not more, to your retirement accounts—and be ready to withdraw from them early.
You may not be able to retire forever on one year of savings, but you can certainly introduce yourself to a wealth of choice—the ability to take advantage of opportunities unavailable to those with weaker financial positions.
Remember, the goal is to build out a yearlong financial runway. Retirement savings, home equity, cars, and other false assets aren’t useful to the individual who wishes to work toward early financial freedom. The fellow with $20,000 in retirement savings and $40,000 in home equity, but who spends $3000 per month and has just $7000 in the bank, has no financial runway. If he leaves his job, he runs out of cash in three months. Compare this to the guy with $25,000 in cold hard cash and a $2000 per month lifestyle. He can leave his job for a year or longer and be just fine.
The latter has no real wealth that he can deploy in the short term and is locked into working his current job or one very much like it to cover the mortgage.
must start designing a longterm lifestyle that costs as little as practical, given their priorities. For
The hard truth is that the first step in the process to escape the rat race is (and always has been) to begin preserving capital. Frugality. Savings. Penny pinching. Living on less.
the individual seeking early financial freedom must do three things to achieve their goal: They must accumulate real assets that produce income and increase in value. They must constantly seek to invest their capital efficiently. They must design a lifestyle that costs as little as practical, such that passively generated income can pay for it.
If you can easily get by on significantly less income than you currently earn, you open yourself up to an entire world of possibilities or opportunities. Some people call this luck—and only the financially prepared are in position to get lucky. Those possibilities absolutely include jobs and entrepreneurial pursuits that require short term sacrifice for the opportunity to pursue huge long term gains.
In Summary The preservation of capital should be the primary starting focus for financially ambitious nine to five employees for three main reasons: Frugality exposes the saver to opportunity. Frugality is noninvasive to one’s lifestyle relative to moonlighting or building businesses. A penny saved is better than a penny earned because it is after tax wealth. This is not to discredit the importance of scaling your income and increasing your investment returns. This is just to point out that it’s less effective to attempt to earn more money or invest efficiently when you can have far more impact by taking control of your spending.
The strategy outlined in this book relies heavily on your level of emotional motivation.
The strength of your desire to become financially free early in life is paramount to your success. But, you must also learn to control your emotions and moods in the short term. It’s called being disciplined. Do not allow shallow, short term emotions to prevent you from achieving your bigger goals.
ask yourself the following question: Is that event/trip/item so important that I’m willing to delay my financial freedom in order to purchase it? There’s nothing wrong with saying “yes!” occasionally to the above question; nothing wrong with having fun and buying things that are awesome with your hard earned money. But, always understand the implications of those purchases.
You should become very uncomfortable spending money unnecessarily, because wanton spending delays your freedom.
If you consistently prioritize your early financial freedom the way it deserves to be prioritized, then many spending decisions are easy. For instance, you won’t set aside any money for clothing, meals out, or gas. Instead, you will make decisions on a casebycase basis, erring toward the lowest cost option to fulfill your needs and desires wherever reasonable.
That desire will force you to make decisions logically based on an emotional desire, with or without a monthly budget.
Your long term motivation needs to be stronger than the vast majority of your short term urges.
Instead, attempt at first to do things yourself. Develop an understanding of the scope of work involved and the potential risks to look out for. Then, make a decision about hiring out the work. Do not hire out tasks unless one of the following is true: There are potentially catastrophic consequences of misdiagnosing the problem. Think of this like a broken bone, suspicious lump, or other chronic health issue that doesn’t go away after a few nights of sound sleep and a few intense exercise sessions. It is unlikely the job can be completed in less than one full business day, and the job needs to be done as soon as possible. There are issues with completing the work that might create unreasonable liability (for example, it may be unwise to do electrical work on a rental property, because insurance might not cover any problems associated with that work). You’ve previously performed similar work, can safely say that you
particularly detest the work, and can pay someone else to do the work for less than $25 per hour.
If you are reliant on people with titles, degrees, and certifications to handle the basic stuff ordinary people deal with all the time you’re helpless. You’re throwing away money on problems that can be researched in just a few hours of applied effort. Hire a specialist only in select and truly unique situations, or after you’ve done exhaustive research and know exactly what you need done, and how you want it done. Now the folks who play in the
If you take the position that you’re responsible for all of the outcomes in your life, you will find the cost savings to be in the tens of thousands or hundreds of thousands of dollars over the next decade or so. Yes, you will make mistakes, and yes, you should consult with these professionals from time to time. But, only after you have a reasonable understanding of what it is you are trying to do, and what success looks like.
This is not about being cheap. It is about wanting early financial freedom so badly that the choice not to spend is an easy one. Take pride in the fact that you live efficiently and don’t blow your money on outlandish toys that destroy wealth. Far from being something to aspire to, ostentatious displays of wealth should offend your sensibilities as they so obviously delay financial freedom for a shortlived material pleasure. The guy at the stoplight with the shiny new jackedup pickup truck should look like a fool to you, not as someone to be admired and emulated.
Remember that every dollar you spend is aftertax, and every dollar you earn is pretax.
This chapter clearly spells out the actions that a median wageearner can take to drive total spending down to below $2000 per month within a year. While at least some of these tactics will apply to virtually all Americans, others will not apply to folks in specific circumstances and in specific parts of the country.
The real issue is not your clothing budget. The problem is your rent or mortgage. The problem is your commute and driving costs. The problem is you are likely eating out too much and not eating reasonably healthy food from reasonable grocery stores. Those
The categories that typically include fixed costs from the pie chart shown earlier are housing, transportation, personal insurance and pensions, healthcare, and education. On the other hand, things like Joe’s dining out budget might be called a variable expense. Joe can decide to bring a sandwich to work tomorrow instead of buying fast food or going to a restaurant. The spending categories that frequently include variable costs include food, entertainment, apparel and services, cash contributions, and miscellaneous.
there’s no need to eradicate the small pleasures in life that you truly enjoy on a daytoday basis if you are willing to do the big things right instead. Don’t sacrifice the little things. Change the big things.
Find an apartment that can be affordably rented, make sure it’s as close to work as practical, and try to split the costs with a roommate or two. That’s it.
Single individuals pursuing early financial freedom should understand that living alone costs nearly double what it costs to split an apartment a few ways by sharing the space and cost with a roommate. Families pursuing early financial
freedom will, of course, make up for the inability to split housing costs by having two income earners.
Living in a cheap apartment convenient to the workplace is the single most important thing you can do to start saving money.
After housing, the largest fixed expense in Average Joe’s life is that of his commute. The American commute is an incredible expense that destroys billions of dollars in wealth, hurts the planet, and leaves good people with, literally, years of life spent risking their lives daily behind the wheel. In spite of his bitter resistance to this claim,
Average Joe commutes about twentysix minutes and sixteen miles to work, each way, each day.2 The government suggests that it costs $0.54 per mile to operate a vehicle. Average Joe earns $50,000 per year—or $25 per hour. Driving to work in this circumstance will cost Joe the following: $17.28 in driving costs per day and $21.67 in time lost per day.
Compounded over the course of a 260day work year, this leads to $4492.80 in costs directly associated with driving, and $5633.33 in lost time. That’s $10,126.13 per year! And that’s just in driving to work.
This isn’t to mention all of the other costs that go with a long commute. Folks with long commutes have higher blood pressure than folks without. They are less likely to be happy than folks without long commutes. They are less fit than their peers without long commutes.3 They have higher levels of stress and anxiety than their peers without commutes. Therefore, folks with a long commute tend to be poorer, fatter, more anxious, less happy, and let’s speculate—less productive.
moniker Mr. Money Mustache, or MMM. If you get a chance, read his article titled “The True Cost of Commuting”
If these numbers [the costs associated with commuting] sound ridiculous, it’s because they are. It is ridiculous to commute by car to work if you realize how expensive it is to drive, and if you value your time at anything close to what you get paid. I did these calculations long before getting my first job, and because of them, I have never been willing to live anywhere that required me to drive myself to work. It’s just too expensive, and there is always another option when choosing a job and a house if you make it a priority. And making that easy choice is probably the biggest single boost that will get the average person from poverty to financial independence over a reasonable period of time. I would say that biking more and driving less was the trigger in my own life that started a chain reaction of savings and happy lifestyle changes that led my wife and I to retirement in our early thirties.
Costs of debt. In 2013, Average Joe’s new car was $33,560.4 Joe typically gets a loan on his car purchase, and typically puts down an average of less than 5 percent.5 If it’s a $33,560 car, then Joe will put down $1678. This amount in many cases is not even enough to cover the taxes and fees associated with a car purchase. If that’s the case Joe will often end up with a loan balance that is more than the car’s value new. Assuming that Joe ends up with a loan of $33,560 financed at 4.5 percent interest for five years, he will pay about $1400 in interest alone in the first year. Over the life of the loan, he will pay almost $4000 in interest. Depreciation. According to Carfax, cars depreciate 10 percent the moment they’re driven off the lot, and then depreciate an additional 10 percent after the first year. After five years, a new car will have lost 60 percent of its value. Here’s the timeline of value for that new car: Lot price: $33,560 Value after driving away: $30,204 Value after year 1: $26,848 Value after year 5: $13,424 Total loss in value: $20,136
There is little excuse for the aspiring early retiree to buy anything other than a small economy car. Only a tiny fraction of the population truly needs the excess seating, power, offroad utility, or cargo space offered by other types of vehicles. And, on the rare occasions that additional power or seating is needed, it’s often possible to rent a car or borrow one to come out way ahead financially. Whatever car you purchase,
Every single person who has a long commute has made the combinatorial choice to live where they live and work where they work. It is a personal choice made at the individual level, and the decision to buy or rent a home and take a job in locations that are far apart from one another keeps middle class Americans middle class and Average Joe average.
They think their jobs or their homes are special. They are not. This applies to everyone. Too often, Average Joe dismisses his commute as a part of life, as a fixed expense that cannot be changed in his circumstance.
Amazingly, it’s well within Joe’s power to eliminate much of his eating out budget and instead feed himself delicious, selfprepared food for less than $300 per month per person.
The secret Joe missed is that he needs to prepare most of his food, most of the time, with healthy purchases from reasonable (that means: not Whole Foods) grocery stores.
Always have the ready option for a delicious and healthy meal Forgo truly unhealthy and horrible fast food entirely Enjoy meals out with friends and family when opportunity arises and makes sense Never go out to eat because he
doesn’t have anything prepared Always be prepared with healthy snacks like fruits, nuts, and vegetables
If you have a large box or bag of healthy nuts at your desk or in your lunch box at work, and the next best option is chips or candy from the vending machine, you are highly likely to snack on what’s within reach. If you don’t have snacks, then your dollars will flow into the vending machine, and fat will flow to your stomach.
The primary purpose of insurance should be to eliminate distractions from your other life and financial pursuits. Proper insurance should allow you to go about your day without making decisions based on fear. You shouldn’t be afraid to drive around and get in an accident, or have a sickness unduly devastate your life. You also shouldn’t fear for your family, heirs, or the affairs of others if you pass away.
Typically, the best way to reduce insurance premiums is to increase deductibles. Average Joe lives basically paycheck to paycheck, and even a $3000 expense is an emergency he can’t handle. Those aspiring to financial freedom will quickly save $5000, $10,000 or more, and manage their money and investments such that they have ready access to funds. Therefore, a $3000 deductible is no big deal. Make
If you have high deductible auto insurance you may save hundreds of dollars per year. But, when a hailstorm damages your car, you might have to shell out $3000 as part of a highdeductible plan. This is a longterm win for you however, as you are likely to more than recoup the expense in lower premiums over time.
For those who accumulate large war chests and are well on their way to financial freedom, highdeductible insurance makes more sense than its low deductible
counterpart. For Average Joe, a $5000 financial hit is a life changing amount of money he cannot withstand.
From this financial position, high deductible insurance policies can be a smart way to play the odds.
the simple practice of regular and intense exercise. Exercise adds years to one’s life. Those who exercise become more productive, think more clearly, and are better looking than when they fail to exercise consistently. These advantages directly tie to incomegeneration and the ability to live a healthier, happier, and wealthier life.
Pay TV is a waste of money, not to mention time. Cut the cord and do something better with your life.
Watch out for any subscription billing. In fact, go ahead and cancel any subscription that renews automatically on a monthly or annual basis as soon as you can.
Avoid unnecessary waste, and purchase clothing you like and that’s reasonably priced. If new clothes are your thing, and this category is still less than 5 percent of your budget, go for it.
Do not overestimate the value of an expensive degree, especially an advanced degree as it pertains to attaining early financial freedom. Do not underestimate the power of selfeducation and the knowledge that is readily available from books, seminars, and mentors.
Saving 15 percent of your income will not make you rich. It
You need to save 50 percent of your income. Or more. You need to cut out anything that does not bring you happiness from your spending—including much of what middle class America purchases. You need to take pride in living frugally, in handling your own problems, and in making choices that save you tens of thousands of dollars each year and result in a healthier, happier, wealthier, and more exciting life.
might retire at fiftyfive, instead of sixtyfive. You are only making real progress when you don’t buy the car at all. When you bike to work. When you take on no consumer debt. When you take pride in your ability to enjoy your favorite pastimes for free.
There are three initial steps that should be completed, in order, for the seeker of early financial freedom to build up that one year stockpile. These three steps are (1) to build up an emergency fund of $1000 to $2000; (2) to pay off all “bad debts” (we define this term below) and build strong credit; and then (3) to build up one year of financial runway in the form of cash or equivalents
Bad debts include debts financed at high (10 percent or more) interest rates, that incur late fees, or that impact your credit score.
Some examples of bad debts include: Credit card debt (often charge high interest) Fines and parking tickets (often incur late fees) Any delinquent or high interest consumer debts Payday loans (ugh)
If you have bad debt, don’t buy luxuries. Don’t go out for dinner. Instead, stop wasting money and pay off those debts as quickly as possible. It’s foolish and dangerous to pursue investments, consider buying property, or otherwise make large financial decisions with bad debts looming overhead.
Method 1: The Debt Snowball. Championed by personal finance and antidebt guru Dave Ramsey, this concept involves paying off the smallest debt first, then moving to the next smallest, and proceeding so on and so forth. The advantage to this method is it offers the debtor the chance to score some easy wins with smaller debts to get them in the mindset and habit of paying down their debt completely. The disadvantage is it’s not technically the most efficient way to pay down debt. It’s a more efficient utilization of your money to pay down debts via the second method. Method 2: Pay the highest interest rate debt first. This is a more efficient method than the Debt Snowball approach because it involves paying down the most expensive debt first, and will result in a more efficient deployment of savings. The downside is that those with large highinterest debt may find themselves paying their debt for months or years before eliminating any single debt from their records.
Two Quick Notes on Paying Down Debt Note 1: Try negotiation. Hospital debt, credit card debt, or other similar highinterest debt, can often be negotiated. This is especially true of delinquent debt that’s several years old. It’s amazing to watch folks with delinquent fivefigure hospital debt negotiate their way down to just a few thousand or even a few hundred dollars with a single phone call. If you decide to negotiate your debt down, here are some tips for when you call your creditor: Understand that many delinquent debts are never paid, so the collector wins when you agree to pay even a fraction of the total amount owed. Keep in mind that a long call might be necessary—but even two straight hours is worth it if you can negotiate the bill down by hundreds or thousands of dollars. Be polite, but make it clear you’re willing to take as long as it takes on the phone to bring down your debt amount. Your creditor has every right to refuse to reduce what you owe, so don’t count on getting it lowered.
In addition to bad debts, there are so called “good” debts. These debts can include things like: Home mortgages Student loans Car loans Personal loans Any other debt that is current and financed at low interest rates These debts are commonly referred to as “good” debts, but that’s a fallacy.
Improving one’s credit score is simple and straightforward. The first step is to go check your credit score by getting a free copy of your report from one of the three major credit bureaus or by accessing the information through a thirdparty website like Credit Karma.
simply get current on your debts and begin making your payments on time. Look at your debts and set up automatic payments for them. In some cases, you might have to call the person holding your debt to find out how to begin making payments on it. The third step is to begin aggressively paying down your debt. The less you owe, the more your score will improve.
To maintain good credit, pay your bills on time, and don’t take on more debt than you can easily repay. Ever.
Once you’ve accomplished these three milestones, you will have the opportunity to pursue a more scalable career, house hack, or even take a sixmonth to one year shot at starting a business fulltime. If you’re not interested in making those changes, then excess cash will be used to acquire incomeproducing assets until early financial freedom is achieved.
That $25,000 is what you will use to turn your home into an incomeproducing asset. That $25,000 is what you will use to buy your way into a scalable income.
Over thirty years, Joe’s model tells him that this decision’s financial impact is almost beyond belief. Living as a house hacker will result in about $1.5 million more wealth than renting, and about $850,000 more wealth than buying an equivalent single family home.
Yes, not losing wealth can be counted as building wealth in the case of housing, which for most people is one of those “fixed” expenses we discussed in chapter 2. Interestingly, Joe notes that becoming a homeowner is a losing investment. That’s contrary to what most Americans think. True, it’s less bad to own a home than to rent in scenarios like this one. But Joe will still lose close to $300,000 in wealth over thirty years just by living in his nice singlefamily residence. Plus, look at his cash outlays! His bank account will look way worse as a homeowner (less cash in the bank, more tied up in equity in his home) than if he were to just keep renting for the next twentyfive years! Even so, the results are clear: house hacking is so far and away the financial winner that it isn’t even a comparison.
In fact, as a finance nerd, Joe will probably end up spending less time managing his property than he does attempting to pick winning stocks. There is just so clearly nothing else he can do with his money that’s even remotely close to having as large a financial impact as house hacking
If we extrapolate that every available dollar over and above what the SFR homebuyer will have available, is invested immediately in the stock market at 10 percent longterm returns, the picture changes in an interesting way. The renter actually has a legup on the homeowner from a cash position and has more cash to invest in the stock market. This lessens the true wealth gap between the renter, the house hacker, and the homeowner, and suggests that given the transaction costs of homeownership, it may be better to rent than to buy in the shortmedium term. The homeowner has the least amount of cash available, since most of his wealth is tied up in equity in his property. This results in less opportunity to invest and makes owning a home even less favorable.
Only in rare circumstances will house hacking prove to be less financially beneficial than renting.
It’s an incredibly powerful way to eradicate one of the largest expenses in your life and replace wealth destruction with wealth creation.
freedom. Those who fail to house hack are missing out on perhaps the most powerful wealthbuilding tool available to ordinary Americans.
These folks are getting a little smarter and a little more creative with their housing purchases relative to ways one and two. In this type of purchase, the prospective purchasers put in time and research commensurate with the significance of a large financial decision. They are also thinking, “What’s next?” as a part of their decisionmaking process. While they intend to live in the area for at least a few more years, they understand preferences change.
The person buying solidly in this category will know their market, understand the math behind renting versus buying, intend to live in the property for several years, and have contingency plans for selling the property or renting it out in the event their life plans change down the line. This is a reasonably smart way to go about buying property. If you are buying property with this kind of thoughtprocess in mind, it’s likely that your home won’t cause you undue financial stress, and that you’ll be able to move on with your career and life on your terms.
A home is not an asset, unless it generates income or is expected to produce reliable appreciation.
Way #4: Buying a Livein Flip This way of purchase involves buying a property with a lot of “valueadd” opportunities (read this as “in need of fixing”). The buyer intends to go in and take the home from a state of disrepair to a property in excellent condition.
Every two to three years, they buy a rundown property in a good location, move in, and begin fixing it up on their nights and weekends. Over the course of the first year in each property they turn the somewhat dilapidated structures into a luxury home, and enjoy their handiwork for the next few years before selling it and moving on to another similar home.
Benefitting from improvements that have created hundreds of thousands of dollars in additional home value, Ashley and her husband then sell their homes largely taxfree. They put the profits from each sale partially toward another property, and partially toward the things they really want in life. It’s like having an extra salary, in exchange for some weekend and evening work on the property. After just two or three such transactions, they accumulate almost $500,000 in aftertax gains, solidly cementing their financial futures. This type of strategy is often called a “livein flip.” The obvious downside is that in order to be successful, the homebuyers will either have to fix the property up themselves, or manage contractors to do the same while living there. This means doing work, and sometimes a lot of work, to add value. The advantage, of course, is that the homebuyer is no longer dependent on the value of properties in the local area going up to make their profit. If they understand what the property will be worth after all the repairs are made, the homebuyer can, at reasonably low risk, go into the purchase with the expectation of a profitable exit down the line. They can also take as little or as much time as desired to fix the property up, and can do so at their convenience, so long as the property is habitable upon the purchase and can be lived in reasonable comfort during the improvement phase. Furthermore, when livein flippers go to sell their properties, they can often exclude most of the capital gains on their primary residence from taxation, a nifty loophole as part of the Taxpayer Relief Act of 1997 that makes this strategy extremely advantageous.
Way #5: Buying a House Hack House hacking is the most advantageous way to buy a first or next property. It involves purchasing an investment property that would make immediate sense as a rental, but living in one of the units or bedrooms. It allows the owner to live for free or at exceptionally low cost, while others pay rents covering her mortgage payment. This is the way to turn one’s housing expenses into a wealth creation tool.
House hacking is the optimal financial decision for most firsttime buyers. As Joe showed us in the last chapter, house hacking entails buying a piece of investment real estate with the intention of living in it, while renting portion(s) of the property to cover the mortgage payments.
a house hack should make sense as an investment property at the time of purchase. You put yourself in an advantageous position if you buy
Furthermore, house hacking can be combined with the liveinflip strategy discussed earlier. It’s quite feasible to buy an investment property that needs some work, fix it up, increasing both the value of the property and the rent that it can command. This offers the purchaser an advantageous situation! The house hacker even gets the added benefit of choosing his neighbors! In many cases, folks moving into new areas are cautious about the types of people in their neighborhoods. As long as you aren’t discriminating illegally, you can choose the kindest, quietest neighbors who apply and kick out (either by evicting or refusing to renew a lease) the ones you don’t like. It’s just like owning a townhome, except with the ability to pick your neighbors, and with the bonus of being able to use the rent you collect to cover the mortgage payment.
There are four questions that savvy firsttime house hackers should ask themselves prior to buying a home or house hack: Is the property affordable with conventional financing? Are you willing to live in the property? Will the property cash flow? Is there a reasonable chance at appreciation?
As a livein house hacker—because of a special tax law that benefits owner occupiers—appreciation can produce a more powerful financial impact for you than it can for a traditional investor. Assuming you live in the property for more than two years, when you sell the property, much of the capital gains are taxfree.
A job without opportunity for rapid salary advancement doesn’t offer the opportunity for the rapid attainment of financial freedom.
Instead, this chapter is written purposefully for the young, ambitious employee (or soon to be college graduate) who feels their talents may be underutilized and underpaid. This is written for the fellow who doesn’t find particular joy in his career or line of work.
Therefore, the wage earner who wishes to rapidly increase their income must carefully analyze how they make use of their time to ensure they are spending it as efficiently as possible in the pursuit of more income. If they are not spending their time improving their financial positions, then they had better be enjoying it or serving others. Otherwise, they are wasting time.
Wageearning employees learn, through years or decades of experience not to try too hard. They learn to do their jobs, not ask too many hard questions, put on a polite and pleasant appearance each day in the office, complete the tasks they’ve been assigned within the timelines provided, and go home.
Coupled with a personal finance outlook seeking to spend every penny they earn, a startling pattern emerges. A surprisingly large number of Americans become unmotivated, specialized, unhealthy, and dependent on their current jobs to make it through the shortterm future. They learn to passively accept the workday, and are too tired and unmotivated from their week to do anything other than watch a little bit of TV and go on the occasional weekend trip to visit the inlaws. What a terrible way to approach a career. But, does it sound familiar? This slow drain of enthusiasm and ambition confines your hunger for achievement to little wins one can earn from the cubicle. March Madness bracket becomes exceedingly important. Fantasy football becomes a central part of the workday banter. People jockey for the corporate tickets to the ball game. Wearing the stupidest tie in the office on Wednesdays is something of a weekly contest. Folks plan out ways to sneakily be the first one out of the parking lot at 4:00 p.m. on the dot on Friday. They apply their best creative efforts to these things—and it’s because creativity is slowly suffocated in a salaried job! Living out a professional life over decades in this manner is a terrible fate that those who achieve early financial freedom can avoid easily.
The guys who are starting businesses, building empires, growing portfolios, traveling the world, and succeeding by all conventional measures of success aren’t doing so by being smarter than the average person. They are winning because they are playing a game where the possibility of success actually exists! It’s a game where they have at least a little control over their workday and productivity! Play that game! Not the one where winning means making your boss laugh.
Those looking to earn more money, like those looking to save more money, are going to have to do some things that may be uncomfortable or new. They are going to have to make changes and perform actions that may not pay off for months or even years. They are going to have to make some big changes to their lifestyle and to their careers. Regular folks without the goal of early financial freedom will not understand these actions, or the reasons behind them. None of this should be a surprise, and the
If your industry or career does not offer you the ability to take control of your income, you need to find a way to change—that is, if you want to move from an average income to an extraordinary one.
The benefit to performancebased pay is that earnings can theoretically be unlimited. There are many downsides, however. One downside is that those who do not deliver against their metrics receive little or no pay. Another disadvantage is that many commissioned salespersons, contractors, or similarly paid workers do not receive the cushy benefits packages offered by large corporations to their employees that earn large salaries. Finally, salespersons and commissioned consultants or contractors typically will have to spend months or even years developing expertise and a sales pipeline to begin producing results that can out scale salaried income. So, if you make
If you want to have a shot at earning way more money or at achieving financial freedom early in life, you will likely have to give up a regular salary in a traditional career to attain it.
They include work that directly uses her professional skillset and that give her the chance to gain more experience while earning large amounts of money per hour. If you want to have a good shot at succeeding, choose to go down paths that are synergistic with your current life circumstances and career!
Pursue a career that is in more demand with your professional fulltime efforts. This decision is made in college for millions of Americans. Don’t go through a fouryear degree and spend tens of thousands of dollars to educate yourself on a subject with little commercial value. Why bother going to college at all when you can learn for fun and for free on your own time? Instead, pursue a degree that places you at some advantage in the marketplace. Understand that degrees that are unlikely to provide value in the marketplace are a sunk cost—you will have to start from scratch and learn something truly profitable if you desire to earn more income. Pursue your passion professionally if, and only if, it is marketable, or
It is the combination of high income and a strong savings rate that will truly expedite early financial freedom.
She realized that the reason other people don’t quit their jobs—even those with obviously lousy prospects—is the same reason they don’t take advantage of the free money in the Employee Stock Purchase Plan. They are either scared to try something new, unable to handle even a temporary reduction in cash flow, or too lazy to bother to educate themselves. These problems afflict millions of people in this country. Folks who would otherwise rationally pursue financial independence and greater income opportunities hold themselves back and instead follow the herd. The problem isn’t that people are stupid. Ellie’s coworkers were smart, hardworking people. The problem is that people who work really hard for money put almost no thought into managing it once they earn it. People don’t manage their money because their peers and associates don’t manage their money. It’s not “normal” to try to live life intentionally, doing what you want, when you want to do it. It’s some of the best analysts in the world fail to see the obvious problem preventing them from escaping the rat race and living the life they choose, instead of one chosen by a middle manager. Smart people utterly, bafflingly fail to see that their job/career is the reason they earn so little. And that it’s the most important thing to change
Benefits are amazingly effective at keeping great people in middling roles at companies for years and years. Many people don’t like their jobs. When asked why they stay, they say things like, “I’m waiting for my promotion in March,” or “In two more years I’ll be fullyvested!” These folks are literally working a job they despise, for years in exchange for petty amounts of unrealized benefits or promises.
Don’t be enslaved by benefits. Understand they pale in comparison to the ability to scale objectively against a metric, the ability to scale with the company’s production, and the ability to work or not work on your terms. Do not ignore their value entirely—obviously benefits do have value, but understand that benefits should be distant considerations compared to perceived opportunity.
It’s really quite simple, you only have a few choices if you want to increase your income, and have no capital with which to invest in incomeproducing assets: Go out and develop a new skill that’s worth hundreds of thousands of dollars per year. Get a job that rewards performance with unlimited upside. Start a business. Freelance or start a side hustle. Get creative and synergize your income producing pursuits.
Put yourself in financial position where you are unafraid to pursue opportunity. Put yourself in financial position where the cushy benefits of a dull job with little potential can’t hold you back. Don’t be one of the millions of smart, talented people who are too lazy, afraid, or financially incapable of challenging the status quo to pursue their dreams.
Five Tactics To Help You Earn More Money Put yourself in a high achieving environment. Read and selfeducate forever. Focus on continual improvement. Instantly make trivial decisions. Put yourself in position to get lucky.
surround yourself with the very best people possible. Potential is stifled when ambitious young stars go into a company where there is an entrenched hierarchy, and a set path for advancement.
Working in cramped conditions surrounded by folks who like to chitchat will not help you be productive. Instead, design a work environment that provides you the physical space and amenities that you need to be able to concentrate on important work for long periods of time. Furthermore, you should have access to the tools you need to get the job done right.
“One hour per day of study will put you at the top of your field within three years. Within five years you’ll be a national authority. In seven years, you can be one of the best people in the world at what you do.” A book a week roughly translates into about an hour of study a day. This is what it takes to attain an income in the top 1 percent of all Americans. (The threshold to be in the top 1 percent was $389,436 per year, according to an Economic Policy Institute Study in 2013.1) In other words, reading and taking to heart one book per week, fifty books per year, will make you one of the besteducated, smartest, mostcapable, and highest paid professionals in your field.
The vast majority of decisions that are made on a daytoday basis are fairly trivial. Yet, sometimes these small decisions can take up a tremendous amount of time. When it comes to trivial decisions, what matters isn’t necessarily making the best choice, but making one that’s good enough and putting that decision behind you.
more important in the workplace and in business. A trivial decision doesn’t have a lasting impact. A trivial decision will not significantly change your life for better or for worse. Do not waste time on trivial decisions.
you can improve your chances of getting lucky. You can do this in three ways: Learn to recognize luck. Put yourself in position to get lucky. Give others the chance to make you lucky.
If you don’t have a clear goal, then you will probably not be getting lucky,
If you don’t have any goals and aren’t sure what you want to do with your life, how on earth are you going to even know if you are getting lucky? You have no chance at good fortune because you don’t even know what good fortune looks like!
Jenna meets many key connections by spending time at networking events, meeting with local friends who share her goals and interests, and even spends her time online interacting with people in her industry on popular websites. On the other hand, Jenna makes fewer such connections at the bar at 1:00 a.m. or while watching Say Yes to the Dress. Shocking, right?
Jason tells everyone he knows he is looking to build his real estate portfolio and wants to learn as much as possible. He talks about it at real estate networking events, to friends, to family, and to random strangers he meets while out and about. He even discusses it with people who aren’t even remotely close to being in a position to buy real estate or help him with buying real estate. Is this annoying? Probably. But it also brings him opportunity. Jason has met multimillionaire real estate investors who are connected to him in unexpected ways because of his tendency to tell others about his goals early and often in conversation. One
Where income inequality becomes a real problem is when it’s combined with wealth inequality. Income is usually (but not always) based on merit and natural ability. Income can be taken away and can come and go. Wealth, on the other hand, is a function of knowledge and time. Wealth in the right hands is much harder to lose, and in many cases, increases forever.
Financial freedom is a state in which one has enough income from return on assets that they no longer need wage paying work to permanently sustain their lifestyle. There are an infinite number of ways to achieve financial freedom, but the principle always remains the same. The financial freedom equation is as follows: Assets x Return > Lifestyle Where “Assets x Return” is equal to the usable cash flow (in dollars per month) generated by your assets and “Lifestyle” is equal to your cost of living per month. Once assets generate returns in excess of the spending needed to fund your lifestyle, then the financial freedom equation is satisfied.
While it is safe to say that money isn’t necessarily a source of happiness, those who build wealth and attain financial freedom generally have more choices in life and more opportunities to seek that happiness than those who do not.
The Four Levels of Finance Level #1: Cash Flow Negative Level of Freedom: Lowest A cash flow negative life is one in which an individual or family spends more than they earn.
Level #2: Cash Flow Neutral Level of Freedom: Modest Long term, a cash flow neutral life is one that’s reliant on either a paycheck, or in the case of the self employed, a small set of customers. Large life decisions are heavily dependent on the whims of a boss or are based on the changes and limited opportunities in one’s chosen field.
The cash flow neutral category includes all lives that routinely save less than 15 percent of their total takehome pay. Mortgage payments and home equity do not count as savings, nor do retirement account contributions, since these assets are not usable in the shortterm and do not generate usable cash flow.
Level #3: Cash Flow Positive Level of Freedom: High Cash flow positive folks live well below their means and accumulate assets at a high rate relative to their earned income. These folks are able to work jobs of their choosing and are able to make major life decisions with thought given to their overall wellbeing first. They also have sufficient leeway in their lives to take risks with their careers and passions, should opportunity come aknocking. The difference between a cash flow neutral person and a cash flow positive person can be hard to spot.
Cash flow positive lives result in everdecreasing dependence on others and lower tolerance for boring/ineffective work. They desire and seek out rewarding and engaging challenges in life.
Level #4: Financially Free Level of Freedom: Highest Financial Freedom is achieved when cash flow that requires no work (or minimal active work) safely and consistently surpasses total lifestyle expenses. It seems like a lot of folks fantasize that financially free individuals lead a life of leisure. They’ll envision a nice beach, frequent traveling, massages, and other luxuries. While some folks do treat themselves to these types of lavish lifestyles, as a practical matter, the financially free folks are often some of the hardest workers and most frugal people around. The reason these people work so hard is because they no longer need to work for money. They work to solve a problem they are passionate about, master a hobby they enjoy, or to build a business empire that will last for multiple lifetimes. Because they have total control over how they spend their time, they only participate in projects that are truly interesting and engaging to them. This part of the book will move you toward early financial freedom.
What is an asset? In this book, an asset is something that produces income (or reduces expenses) or appreciates in value. An asset should ideally produce financial benefit for use in the near future to support one’s lifestyle prior to retirement age. Investment or business income produced by these assets should require far less effort to maintain than the fortyplus hours per week that most full time jobs demand. If it doesn’t produce income, doesn’t reduce your living expenses, or isn’t increasing in value faster than inflation, it’s not a real asset.
Bonus “False Asset:”: The Cashflow Negative Spouse You’ll know this one when you see it. This is the husband who is too lazy to get a job and hits up the bar every night, or the stayathome mom who spends thousands on designer clothes and jewelry and expects a fancy dinner out at a nice restaurant every week. It is imperative that both partners contribute to the family’s bottom line either by contributing income or enforcing a budget and financial discipline. A lack of alignment can result in devastating consequences that not only leave couples in dire financial straits, it can potentially ruin the relationship.
intentionally build wealth in a readily accessible form, and accumulate assets that are likely to produce excellent results that provide benefits immediately.
Do not save money for the sake of saving money. Save money to invest it, and generate cash flow and appreciation.
If Bryan has a stockpile of $1000, and doubles that money in the stock market, his life won’t change much. Sure, he has an extra thousand dollars, but he cannot quit his job, cannot move and sustain significantly higher rent or mortgage payments, and cannot change material aspects of his transportation or other daily activities over the long run. Same thing with $10,000. But, if Bryan can take $100,000 and invest it efficiently, earning steady 10 to 15 percent returns, all of a sudden he may experience a real impact on his life.
On the other hand, portfolios with a certain scale (often $100,000 or more) can often produce annual returns of $10,000, $20,000, or much more by creative and successful investors. All of a sudden, this becomes an effort that’s actually rewarding. Regardless of current portfolio size, it’s always valuable to self educate on the fundamentals of investing and wealth management.
Those just starting out with little to invest, however, would be well served to focus the bulk of their efforts on earning more money instead of attempting to eke out large percentage returns on fledgling portfolios.
The safe withdrawal rate (SWR), expressed as a percentage, determines what percent of usable net worth (“real” assets) that can be withdrawn each year, such that your assets are not depleted.
SWR is defined as the quantity of money, expressed as a percentage of the initial investment, which can be withdrawn per year for a given quantity of time, including adjustments for inflation, and not lead to portfolio failure. You can use the safe withdrawal rate to answer the question: “How much wealth do I need to accumulate to become financially free with little to no risk?”
A conservative person might assume a safe withdrawal rate of 1 to 2 percent. This means that if this person wants an annual income of $50,000, he should accumulate $2.5M to $5M in assets.
The more streamlined your personal spending and lifestyle, the less you spend keeping afloat month to month, the easier it will be to achieve early financial freedom. Think carefully about each part of your budget, and constantly prune unnecessary expenses. Your spending is likely to be the single greatest barrier between you and early financial freedom. And remember, once you achieve early financial
To achieve early financial freedom, you will need to transform your financial position from one with little to no real assets or one dominated by false assets to one in which you have a large amount of real wealth that generates income and appreciates in value forever. This all starts with lifestyle. Those living a lowcost lifestyle need fewer real assets and can earn lower returns on those assets to sustain early financial freedom. A lowcost lifestyle enables the saver to accumulate cash and income producing assets faster.
Do not begin making large investments if you have outstanding bad debts remaining.
Note that those who have completed parts I and II of this book may also find themselves in excellent position to take on entrepreneurial pursuits, including starting and buying small businesses.
You are enabled to pursue entrepreneurship in part due to your continually lengthening financial runway. The guy with over $100,000 in real net worth has a fouryear financial runway on a $25,000 per year lifestyle. That means he can work on a new business for years before running out of capital and needing to return to wagepaying work.
These are the seven core tenets of investing. Violate these tenets, and you risk slowing your journey to early financial freedom. After that, we will explore key investing concepts that will help you frame your investment ideology.
This index, called the Consumer Price Index, suggests that the inflation rate averages out to about 3.2 percent per year over the past several decades.
Because of inflation, the value of cash decreases over time, as it will purchase fewer and fewer goods and services.
The Seven Core Tenets of Investing To kick things off, here’s the list: Tenet #1: Never spend the principal Tenet #2: Reinvest most investment returns Tenet #3: To invest, one must have capital Tenet #4: Effort correlates with return only if you are in control of the investment Tenet #5: Investment returns are impacted by knowledge Tenet #6: Do not confuse volatility with risk Tenet #7: The best investments are specific to the investor’s personal situation
To sum up the key to wealth preservation in one phrase: Never, ever spend the principal. Abide by this rule and you, your children, and your children’s children will be taken care of financially until the end of time.
When you decide to invest a dollar, you need to think of that dollar as gone. Out of your life. Forever. You never get to spend that dollar. You never use it to buy coffee, purchase a primary residence, pay for Junior’s college, spend on retirement expenses, or anything else. Instead that dollar is to be put to work generating returns, forever.
It is acceptable to spend the returns generated by an investment though, whenever they materialize. But it’s not acceptable to spend the original dollar if your goal is to sustain a perpetual state of financial freedom.
The physical exertions and time spent actually working on the investment— individual efforts—can be almost entirely outsourced to property managers, handymen, and contractors, and as investors grow wealthy, this effort should be hired out. However, without knowledge so much can go wrong for those who seek to invest and build businesses. Knowledge decreases the risk of an investment in which an investor has control.
Now, stocks as a group are more volatile than bonds. However, it’s important to make the distinction between risk and volatility, a distinction many investors fail to adequately understand. While stocks are more volatile than bonds, they are not more risky. The most noticeable feature of this graph is that treasury bonds produced far less total return than stocks over the time period studied. This same scenario plays out across virtually every thirtyyear period in modern history.
Investors, attempting to permanently build sustainable sources of life changing passive income, understand the core concept of investing. The first and most important core tenet: Never, ever spend the principal.
They care only that an investment helps them build the most total wealth over time, relative to its alternatives. Stocks, over every long period of time, have historically produced more wealth than bonds, and with increasing statistical certainty the longer the time horizon! It is therefore quite costly to allow the secondary point—that stock values will fluctuate with more volatility than bonds, to supersede the most important point! In the short run, yes, investors will likely suffer some big drops in the market value of stock portfolios. But, since they are investing forever, and never spend the principal, they accept that volatility with the understanding that they are clearly likely to build more wealth over time investing in stocks versus bonds! Another way of putting this is to say that bonds are more risky than stocks, because investors are at a far higher risk of having less long term wealth by investing in bonds than in stocks. This is because investors in the game for the long term sensibly define “risk” as “the probability of having less wealth over time.” With this more appropriate definition, bonds are statistically more risky over the long run than stocks. Stocks may be more volatile in the shortrun—stocks may have more ups and downs—but over virtually every thirty year period in history, equity markets outperform debt markets!
Most people, especially amateur investors, fail to understand that great investment returns do not come from typical investments made in the stock market, bond markets, or even in real estate. Instead, the greatest investments are often in things that reduce monthly personal expenses. Yes, reducing monthly cash outflows counts as an increase in wealth and can be considered to be an investment return.
Too few people give investments that save money the respect they deserve. They become very excited about owning popular companies like Facebook or Amazon, but refuse to believe purchases that substantially reduce their monthly expenses are investments. In many cases, they can earn far greater returns
Five Concepts for the Savvy Investor If you follow the core tenets, you will be off to a good start in developing a strategic investment plan,
These five concepts are: Speculation versus Investment Opportunity Cost Diversification Passive Income Materiality vs. ROI
First, over the period from 1928 to 2015, the geometric mean return of the S&P 500 was 9.5 percent, which is very close to this 10 percent return rate.
In the language of finance, 10 percent per year is our cost of capital. If we assume that we could earn 10 percent returns on $10,000, then the cost of capital (the cost of failing to invest) is $1000 per year. Here are some takeaways from the discussion of opportunity cost: There is a very real cost to not taking action. There is a very real cost to not investing our available excess funds. The cost of an investment that loses money is greater than just the money lost, since all the returns that could have been achieved in another investment are lost as well!
risk isn’t defined as probability of a loss in value in the shortterm, but as the probability of an investment producing less longterm wealth than another investment or set of investments. Given the goal of early financial freedom, the concept of diversification, as many traditional financial advisors define it, doesn’t apply. Let’s illustrate an example of traditional diversification. Joe is worth exactly $1M dollars. His net worth is divided as follows: $250,000 is in real estate equity $250,000 is in stocks $250,000 is in bonds $250,000 is in cash In this example, Joe is diversified, with his wealth split evenly among four asset classes.
the ideal way to manage assets is to focus exclusively on that asset class he or she feels is likely to produce the largest and most accessible longterm returns, and to invest in that asset class consistently until the desired amount of wealth is accumulated. The goal in this book is to rapidly attain a state of financial freedom as early in life as possible, not to preserve a small amount of wealth.
First, diversification assumes that protection of principal is the most important goal. While protection of principal is important, remember that as investors, we abide first and foremost by Tenet #1: Investors never spend the principal. Protection of the principal isn’t the most important goal, especially for someone just getting started in a career or in building wealth. Rapid accumulation and expansion of capital, within reasonable limits, is far more important, given the goals of readers of this book. It is almost certainly much more efficient to build net worth, for example, by house hacking (discussed in chapter 4) for a few years than to try to build up an equivalent equity position in stocks.
Diversification is extremely important to certain investors: The very wealthy and those near retirement in particular.
Dollar cost averaging is the practice of consistently buying a fixed amount of an investment over time. For example, if you plan to purchase $1000 of an index fund each month for many years, you would be dollar cost averaging.
The objective is to sustain a system of wealth creation, not to time the markets perfectly. As long as you consistently purchase an asset class that’s capable of sustaining longterm returns and are comfortable with your choice, you are likely to build wealth regardless of market highs and lows.
There is plenty of time to diversify once you have a net worth exceeding $100,000, $200,000, $500,000, or even $1,000,000. But, if your goal is to give yourself the best odds at achieving financial freedom early in life, diversifying your first $25,000 in stocks, bonds, gold, and whatever else is unlikely get you there quickly.
If you are truly passionate or committed to attaining early financial freedom so quickly that real estate investing and index fund investing are simply too slow, then you will need to find means of investing that are more aggressive and more suited to your personal situation. Here are some examples of other ways that individuals have built wealth and achieved early financial freedom: Invest with options Create or buy a blog Buy a small business Write a book Lend with peer topeer lending Create YouTube videos Become an angel investor Rent out a home out through Airbnb Build an app Build an online course Gamble (no, this isn’t recommended) Become an Internet entrepreneur
Never spend the principal, reinvest the majority of your investment returns, and build wealth forever. The informed investor, who develops a sound philosophy, will reap the rewards of this study in increasing amounts throughout her life.
There are lots of choices; don’t be timid about exploring them. And be proactive in your quest for early financial freedom.
While average returns will not speed you on your way to early financial freedom, the fact that average returns can be achieved with essentially no effort will enable you to apply your efforts elsewhere in pursuit of earning more money or designing an ever more efficient lifestyle.
Read on below to understand the two major reasons why attempting to invest in individual stocks is likely to be a waste of time that produces no excess wealth for the average investor with little to no starting wealth.
Reason #1: The Competition Is Out of Your League One of the reasons that attempting to pick individual winning stocks is so difficult is many other investors are also trying to do exactly that.
They are often highly paid, have excellent access to information and company management, and have years of experience in their markets.
You aren’t competing with other people like you, who are investing in stocks part time while making a living from a day job. You are competing with Matt. Matt moves tens or hundreds of millions of dollars into and out of companies. Average investors move hundreds or thousands of dollars into and out of companies.
Reason #2: The Alpha Isn’t Worth It
really, hard. It’s probably all three. Let’s suppose things had gone differently. Let’s suppose he was a stockpicking prodigy like Matt or a legendary investor capable of sustaining longterm returns like Warren Buffet. Let’s suppose that instead of losing money, he earned a 25 percent return on his $5000 investment and brought home a cool $1250 in 2014. Let’s also suppose that he was able to produce this incredible result, beating fulltime investors like Matt and legendary greats like Buffet on just ten hours of research per week in his spare time. In this scenario, he would have beaten the market’s return of 11.4 percent by 13.6 percent. That additional 13.6 percent return (which again, is extraordinary as an investing achievement) is what investors like to call alpha—here defined as the return you generate in excess of the market average. On a $5000 investment, David’s alpha in this scenario equates to just $680. Over 500 hours (fifty weeks at ten hours per week in this example) of research went into that alpha. That’s roughly $1.36 per hour. Selling water bottles outside the stadium is starting to look a little better, huh?
$13.60 per hour! Realistically, the best of the best only dare to hope for 1 to 2 percent abovemarket returns over the long run. In order to earn a median salary of $50,000 per year, you’d need to have $2.5M to $5M in the bank to justify putting in a real fulltime effort to pick stocks. And if you are picking them in your free time? Well, best of luck.
The trouble with it all, however, is that as individuals have proven, picking winning stocks can be done. It’s just a game where the odds of winning are stacked against you, where more variables than you can count are in play, and where knowledge and hard work often has no bearing on one’s success. That’s a fool’s game.
If you invest in stocks, invest with index funds. One example of an index fund is the Vanguard 500 Index Fund (Ticker Symbol VOO). This fund buys a stock in each of the companies in the Standard & Poor’s (S&P) 500, and like most index funds, it’s a weighted fund. This means that if a company is growing fast, it’s larger market value is reflected by increasing weight in the investor’s portfolio, and companies that are declining become smaller and smaller pieces of the portfolio.
First, it ensures that the collapse of one company cannot wipe out an entire portfolio. Second, it exposes the investor to many different companies, enabling the fast growing ones to contribute to their portfolio with increasing weight. Third, and very important, the costs of running index funds are cheap, and as a result index funds have lower fees than actively managed mutual funds.
Five Reasons to Invest in Real Estate Reason #1: Rental Properties Build Wealth in Multiple Ways Rental properties help investors build wealth in three ways: Income Appreciation Loan Amortization
An investor can look for deals that are undervalued or in an up and coming area to get a shot at excellent appreciation. This kind of speculation may be a great idea for investors looking to take advantage of trends in their local market, so long as the property is an income appreciating asset regardless of whether the local market improves.
These advantages to rental property investing are further compounded by special tax advantages that real estate investors enjoy. For example, phantom expenses like depreciation can offset rental property income. This increases your aftertax cash flow relative to some other types of investments.
Reason #2: Rental Properties Allow the Investor Control Real estate investors have much more control over their investments than folks who invest in the stock market or with other publicly traded securities. They can find creative ways to reduce expenses, take over when things get out of hand, and mitigate problems.
Countless people have inherited rentals, kept former homes after they’ve moved out, bought real estate without any prior education, or otherwise gone into landlording without prior preparation. This offers opportunity to the investor looking to run their rental property business seriously—as opposed to someone who manages a former home they couldn’t sell or who inherited a rental. A savvy investor can build a system to deal with problems, fix up the property himself or hiring it out as makes sense in his personal situation. There is plenty of opportunity to compete effectively in the marketplace for the investor willing to commit to the business for the long term and put in effort upfront.
Reason #3: Rental Properties Allow the Investor to Benefit from Leverage Leveraging (buying real estate with a loan) allows the investor to control more property with less money and offers opportunities for smart investors to more rapidly build wealth and move toward financial freedom. With a 20 percent down payment, an investor can purchase a property roughly five times higher value than if they were to buy a property for cash. This has the effect of immediately compounding the rewards and risks of real estate fivefold.
unleveraged real estate (the diamond line) performs worse than the stock market (the square line) over time, on average. Leveraged real estate, on the other hand, typically produces larger returns for investors than the stock market over the first decade, and then produces lower than average returns after that as the portfolio deleverages and the debt is paid down.
Real estate investors that use leverage effectively are presented with a good problem after a few years. On the one hand, they are paying off their loans and getting some great passive cash flow from their investments. On the other hand, they’d actually be better off from a return perspective if they just sold their de leveraging properties and invested in the stock market, or better yet, releveraged by selling off their old properties and buying newer, bigger, and better ones!
The key points here are these: Leveraged real estate produces greater returns on average than unleveraged real estate. Leveraged real estate produces less initial cash flow than unleveraged real estate or even dividends from the stock market on average. Every year, as you pay down the loan, and as the property appreciates in value, your investments will on average deleverage, decreasing your return on equity, but likely increasing your cash flow.
Reason #4: Real Estate Investors Can Trade Up
Reason #5: Real Estate Is Manageable While Working a Fulltime Job Every real estate property purchase involves hard work, discipline, and tests a variety of traits, both in acquisition and management.
Real estate investors have but to sustain a few basic principles to give themselves a high probability of success: They run frugal lives and businesses, relative to generated income. They keep plenty of cash on hand to handle large unexpected repairs and maintenance. They buy reasonable properties that will obviously produce cash flow after financing and operational expenses. They buy in locations that are desirable or that a reasonable person would expect to become more desirable over time. They treat their tenants, and those they do business with, honestly and fairly. They act consistently, with a longterm outlook.
Real estate investing works best when investors purchase properties during times when they are well capitalized and in a stable life position. Investors with tens of thousands of dollars in the bank set aside for the next purchase, who are pre approved or extremely wellqualified for financing, or who have other sources of money ready to go are in excellent position to purchase real estate with good odds for success.
People tend to succeed in the long term only at those endeavors on which they focus, and inspect regularly. In order to become successful financially, and otherwise, it’s imperative you have an understanding of your results on an ongoing basis, and use that understanding to make changes where applicable. It’s important you track and measure your efforts when it comes to time and money. No one is perfect. Everyone
Two Internet products that have emerged as leaders in this industry at the time of this writing are Mint and Personal Capital.
The First Financial Metric: Net Worth One’s net worth is simply the number of assets one owns, minus the debts one owes.
Retirement accounts may only be considered part of this equation if they can be accessed far in advance of retirement age, or are a meaningful part of the current financial decisionmaking process. While it’s not bad to have the retirement account, it’s not useful to one whose goal is to secure early financial freedom.
Calculating Real Net Worth We’ve already demonstrated commonly calculated net worth for Sam. Here’s how Sam would calculate his real net worth: Sam has the following real assets to his name: $7000 in cash Total usable assets: $7000 Sam also has the following debts: A car loan of $17,000 on the Honda A mortgage for $240,000 on his home $4000 in credit card debts $30,000 in student loans Total liabilities: $291,000 Sam’s usable net worth is negative $284,000. How did this happen? Well, Sam made several key mistakes that far too many middleclass Americans make: He bought a financed car. He bought a luxury home with a huge mortgage. He got himself a financed degree. He failed to build any significant wealth outside of a retirement account. Folks, this is likely what most of America considers a strong financial position, and it’s absurd. A lifetime of “smart” decisions and Sam is in a $284,000 financial hole. Another
The Second Financial Metric: Spending
a budget (a detailed outline of what you plan to spend in the next week or month) isn’t necessary for those serious about pursuing early financial freedom. If you agree with the basic premise of this book, then it will be clear to you that every time you spend money, you are by definition prioritizing that purchase over the more rapid attainment of financial freedom. Spending decisions are made and avoided in the moment, and every purchase is a penalty that delays your freedom. While there are transactions that are worth delaying financial freedom, the pattern that works for you should become clear very quickly. If that’s your
The Third Financial Metric: Income
The Fourth Financial Metric: Time Most people have no idea how they spend their time.
Most people have no idea if their actions tend toward their goals (in fact, most people don’t have goals). Early financial freedom is your goal.
You should be able to go from a standing start with few assets to well over $100,000 in real net worth within three to five years. Your annual goals should be set up to accelerate through the stages of wealth creation outlined in parts I, II, and III. There is no reason you, as a median wage earner, cannot surpass the $100,000 mark in three years if you follow the advice in this book and act intelligently in pursuit of your goals.
Optimal daily planning and tracking comes down to being very intentional about the most important things in your day, and setting aside several hours of dedicated quiet time toward the completion of that task. However, you also cannot systematize your interaction with truly important people in your day, and will need to set aside not time blocks, but action blocks with regards to reaching out and meeting with other people and helping them. Make sure you are prioritizing
Many people understand what they need to do to become wealthy. It’s straightforward: save; earn; aggressively invest the difference. Repeat and scale until early financial freedom is achieved. All it takes is consistency, intelligent effort, and time. However, progress can be drastically slowed and financially freedom needlessly delayed due to small mistakes and bad habits that compound over time.
Cut These Ten Habits Out of Your Life Habit #1: TV/Netflix Netflix and 99.9 percent of television programming have absolutely nothing to offer in terms of steering you toward the things you really want in life. They are a distraction, a waste of time, and worst of all, an opportunity cost.
Habit #2: Sports Entertainment Professional, college, and amateur sports are a distraction. You could be doing something better with that time in almost every situation.
Habit #3: A Luxury Residence Far from Work
Luxury living is often expensive to maintain and furnish, and encourages other behaviors (such as TV, sports, eating out, nightlife, and shopping) that further detract from goals. Many folks who choose such living situations also purchase an expensive automobile to compensate for their long commute and match the high standard of living embodied by their personal home.
Habit #4: Eating Out There are occasions when meeting someone for lunch makes sense. Catching up with a friend, family member, potential business associate, or coworker over lunch or a beer can be a great use of time. Using reasonable restaurants this way isn’t a bad thing. If you meet potential connections, mentors, or other people who are likely to help you move toward your goals, then do that regularly, every single day, if you can. On the other hand, if going out to lunch, dinner, or worse, breakfast by yourself or with the same small group is your goto move, then it’s likely eating your dreams. Bring a lunch instead.
Eating out regularly has the following drawbacks: It’s expensive. It’s time consuming. It’s unhealthy.
Habit #5: Social Media Facebook, LinkedIn, Twitter, Instagram, Pinterest, and other major social media channels are now part of everyday business vernacular.
Habit #6: Music at Work Ah, I can hear the shouts of disapproval already. Music in and of itself is a wonderful thing and is a wonderful way to entertain yourself. If you need a few minutes of your favorite song in the morning or like classical music while you work or need a few ampedup songs to get pumped for your workout, obviously it would be a mistake to cut that out. But music is not helping you achieve your goals
Music doesn’t directly take away from your ability to do other things, but it could be replaced with something that will actually help move you toward your goals, and it’s a distraction. Over a long time period, such as a year, the person who forgoes music for selfeducation and development audio will have a massive advantage over the music listener. Typically popular music has no place
Habit #7: Nightlife Occasionally, you will meet someone so deluded that they argue that getting drunk and stumbling around bars is productive.
Habit #8: Shopping There are some items in your life that can make a serious difference in your productivity, and there are some items that will last much longer than others. For example, it’s quite reasonable to spend a large amount of time selecting a new mattress, investment property, computer, or insurance policy, as that might significantly improve the quality of your life, your ability to produce effectively on a day to day basis, your peace of mind, and your financial position.
Like many of the other habits on this list, shopping aimlessly is a waste of time and money,
Habit #9: The Snooze Button The snooze button is the ambitious person’s greatest ally. It keeps the competition in bed, where they can’t compete! Better yet, it makes them groggy, unproductive, and way worse off than if they had just gotten out of bed in the first place. When that snooze button
Habit #10: The “I Want to Try to Do Everything” Mentality Millennials, for their part, have been widely documented as valuing such experiences over other types of consumption. There’s nothing wrong with this mindset, and indeed, one of the benefits of early financial freedom comes in the ability to have significantly more unique experiences than peers that work forty hours per week with three weeks vacation. However, taken to the extreme, this mindset results in the following outcome: They have a ton of shallow experiences in a large number of areas, thus becoming fairly lousy at a lot of different things.
Too many people seem to prioritize having, as wide as possible, a breadth of life experiences, but fail to prioritize having a deep level of expertise or passion about hobbies in a more narrow range. This isn’t to say you shouldn’t
Replace the time eaten up by these habits with time spent doing things you truly love and things that will move you toward your goals.
The hardest part of the journey is going from a standing start (little to no net worth) to approximately $100,000. It takes sacrifice to accumulate the first $25,000, hustle to scale that income, and intelligence, knowledge, and creativity to turn accumulated capital into income producing investments that increase in value. Progress seems painfully slow at first, but once you get the ball rolling, it will never stop. Assets continue to grow and snowball, and more and more income is generated with less and less effort. The first step on the journey toward early
Focus on making financial progress such that you could survive for a year without employment. Then five years. Then forever. It doesn’t matter how early financial freedom
find a list of five strategies that can be used to transform retirement accounts from false assets to real ones.
Strategy #1: Use Your 401(k) Balance as a Hedge Against Your Current Savings Plan If you have a comfortable, high paying job, at or above that $100,000 per year mark, and plan to have multiple years of lower income after retirement, then maxing out your 401(k) contributions now, while earning income in a high marginal tax bracket, is a simple way to build net worth that you can use to provide a large cushion to secure your financial position in old age. While it will not help you achieve early financial freedom, it may be nice to know you have some steadily growing funds that will be available later in life. This is because the 401(k) will lower your tax payments today, and you can allow the gains to compound taxdeferred.
Strategy #2: Roth Conversion The Roth conversion strategy is a great option for those with money in a 401(k) or other pretax retirement account looking to access that money early. It works well in years after early financial freedom is achieved, where one earns very little income or is in a lower tax bracket. For example, suppose that an individual earned a high income of over $100,000, contributed money to a 401(k), and then left wage paying work.
advantageous to do this in a year where you are in a lower tax bracket, so those conversion taxes are minimized. At this
you can withdraw Roth IRA contributions immediately (but not gains). Please note, however, that if you take advantage of this Roth IRA “conversion” loophole, you generally need to wait five years to withdraw contributions penalty free.
Strategy #3: Maximize a Roth IRA Roth IRA’s are great for two primary reasons. First, the gains are taxfree. Second, you can withdraw contributions (but not gains) penalty free. It can be a great idea to make the maximum annual contribution to a Roth IRA if you are eligible—assuming you intend to withdraw your contributions to fund early financial freedom. The negligible downside to a Roth IRA is that you can’t withdraw investment gains tax and penalty free until you turn fiftynine and a half.
Strategy #4: Roll Over Your IRA into a Selfdirected Plan As an additional option, there are selfdirected IRA options that allow folks to invest in stocks, bonds, and mutual funds, but also things like real estate, private notes, private investments, and other types of alternative investments. The obvious advantage to this approach is you get to take much more control over your investments, and that you get to use your money to perhaps invest in things that you are little bit more familiar with or have more control over.
a selfdirected IRA isn’t a good bet for someone without a large 401(k) who just wants to invest in index funds, as you can probably invest in those index funds using a more traditional IRA company to do so at lower total cost. Using a self directed IRA may make sense if you want to invest in alternative investments using retirement funds,
Strategy #5: Substantially Equal Periodic Payments It’s possible to access the money in an IRA penaltyfree before retirement, if the money is taken in the form of a substantially equal periodic payment (SEPP).
If you have money in an IRA and want to access it before retirement age, you can take a portion out every year. Although the distributions are generally still taxable, the SEPP is designed to protect you from early distribution penalties.