Clay Finck (03:45):

It’s a lot easier to achieve financial freedom if you have your expenses under control and you’re living within your means. One good way to do that is simply to pay off all your high interest debt. You eliminate your car debt, your credit card debt, student debt, and so on. This is one of the easiest ways to lower your monthly expenses.

Clay Finck (04:05):

The next thing I would say to focus on is to just limit your big three expenses. Your food, your housing, your transportation. The majority of people’s spending falls into these three categories. So it’s really good to put focus there and see which ones you could potentially reduce.

Clay Finck (04:21):

I had read Robert Kiyosaki’s book Rich Dad Poor Dad when I was in college, and I think it’s just such a good book for understanding the mindset of how rich people think and operate. In his book, Kiyosaki says that an asset is anything that ends up putting money into your pocket while a liability is anything that takes money out of your pocket. And this is a concept I was actually thinking about as I was playing the game, I draw a card and see a real estate deal. And some deals would be a positive cash flow deal, where they put money into your pocket each month. And some of them were negative cash flow, where they take money out of your pocket. And you would have to have the down payment necessary to purchase a deal, or you could even take on a loan to do that. So it was really fun to kind of analyze the deals in the game because it’s really somewhat similar to real life.

Clay Finck (05:07):

In his book. Kiyosaki expands on this idea by saying that the rich focus on buying assets, while the rest of society focuses on buying liabilities that they oftentimes think are assets. So in Kiyosaki’s case, he’s probably buying dividend paying stocks, he’s buying real estate, he’s buying businesses and building businesses, all of which pay him cash flow each month, or have the potential to in the future. A lot of other people are working their job and buying a house with a very expensive mortgage or they’re buying the nice car that costs them over 500 a month in payments. And I’m not bringing this up to say that it’s bad to not buy assets or it’s bad to purchase a car that you really like. I just think it’s important to recognize the reality of the situation in that an asset is something that gives you cash flow and builds wealth, while a liability is something that requires your cash and extracts wealth from you.

Clay Finck (06:00):

What I love about Kiyosaki’s book, Rich Dad Poor Dad, is the focus he puts on the mindset around money. With really anything in life, it all starts with your mindset and how you look at a particular situation. For example, when you see an expensive item that you really want, do you say, “I just can’t afford that.” Or do you ask yourself, “How can I afford that?” Telling yourself you can’t afford something shuts off that creative part in your brain and just eliminates any chance of you getting that item. If I see a Tesla that I really want, and it would cost me $700 a month to finance it, I could tell myself, “I just can’t afford that.” And I could also just simply ask myself, “How could I afford that?” And that opens up your mind to search for, and potentially create ways to accomplish what you really want out of life. Whether it’s buy a Tesla, buy this really nice house you want to buy, or whatever it is.

Clay Finck (06:54):

I’ll tell you that there are a lot of people out there that drive Teslas. And for most of them, it probably didn’t happen by accident or just by coincidence. Turning to more of something that is an asset, I might come across a real estate investment that is a really good deal. I could look at the numbers and say, “Wow, the cash flow from this is really good, really amazing,” but I might not have enough money for the down payment. And there are two ways I could potentially look at this. I could say I just can’t afford the down payment and just walk away from the deal and say that I literally have no way of paying for that down payment. Or what if I just ask myself, how can I afford that down payment? Well, that opens up to mind to potentially think of ways to come up with the money for the down payment. Maybe there are people that are willing to lend me money for the down payment and finance it that way. Or maybe I could work part-time temporarily and just come up with the money some other way, or… There’s so many ways you could do it. It’s just having the right mindset to really get and chase what you really want out of life. So the shift in mindset around money is really everything and that’s what I love about Kiyosaki’s book.

Clay Finck (08:00):

Let’s take this idea of financial freedom a step further. What does it mean to have financial freedom? According to moneyfit.com, financial freedom usually means having enough savings, financial investments and cash on hand to afford the kind of life we desire for ourselves and our families. It means growing savings that enable us to retire or pursue the career we want without being driven by earning a set salary each year. Financial freedom means our money is working for us rather than the other way around.

Clay Finck (08:33):

Most of the people listening to this podcast probably know that you can’t save your way to wealth just by putting your cash in the bank. If someone earns about 75,000 throughout their career and saves 20% of their income for 40 years, that will leave them with $600,000 for retirement, which after considering how much the value of the dollar will be lost over that period is practically certain that it won’t be enough to live on for the rest of your life. So the question is, what in the world do you do with the money you save to achieve financial freedom? Because most of you probably don’t want to be forced to work a job for the rest of your life and you want the long term financial security.

Clay Finck (09:13):

The first question you should probably ask yourself is what do you really want out of your life? Do you want to work your current job until later on in your life, you’re 50 or 60 years old, or do you want to get out of your job and do something else in the near term? Also, how much work and time are you willing to put in to achieve financial freedom? And is financial freedom something you want to achieve in the near term, the midterm, the long term, like what’s your timeline on this? If you’re looking to achieve financial freedom later on in life, doing something along the lines of just simply investing in the stock market is probably one of your best bets. It’s totally hands off and traditionally has done very well over long time periods. The FIRE movement, which stands for Financial Independence, Retire Early, popularize this idea, and you can speed this up by minimizing your expenses and investing greater than 50% of your income each month. And that’s what this movement is really all about.

Clay Finck (10:11):

A rough way they estimate when you’re actually financially free with the stock portfolio is simply by using the 4% rule. This rule states that once your portfolio is 25 times your annual expenses, then you can withdraw 4% of your portfolio for the rest of your life. And you’ll likely never run out of money. For example, if you spend $50,000 per year, you can multiply that by 25 and you have 1.25 million as that’s a rough estimate for how much you will need to retire and become financially free based on the 4% rule. Put another way, a portfolio with $1.25 million will allow you to take out $50,000 per year and then adjust it for inflation each year after that. And essentially 1.25 million will be enough to live off of for the rest of your life assuming that your lifestyle isn’t going drastically higher in retirement.

Clay Finck (11:06):

To save over $1 million is definitely possible for people, but it is definitely going to take a good amount of time to do that, which is why some people like to take a more active approach to their investments to achieve financial freedom even faster. One way that is faster is to invest in real estate. I recently got an advanced copy of my co-host Robert Leonard’s book, The Everything Guide to House Hacking, and it really opened up my eyes to some of the opportunities in real estate. There are people in my area, in the Midwest that have purchased a house hack and gotten significantly higher returns than they would’ve gotten had they invested in stocks instead. For those not familiar, a house hack is simply buying a residential property, living in one bedroom and renting out the other bedrooms for other people to live in. So it potentially takes one of your largest expenses, which is oftentimes housing, and it turns it from a liability to potentially an asset if done right.

Clay Finck (12:06):

Say for example, somebody out of college purchases a four-bedroom house and the monthly payments on it are $2,000. If the person who bought this house gets three of their friends to live in the other three bedrooms and each of those friends pays $750 per month in rent, then the person who bought the house is now essentially living there for free. Now, obviously they need to do things like take care of the issues that are fixed throughout the house. They have to actually find the house to purchase it. They need to find the friends to rent it out. Make sure all of their appliances are running and deal with all these things related to the house, but still they took their largest expense, which was housing and converted it from a liability to an asset. And this isn’t even considering some of the other benefits. You have the appreciation of the home potentially, the tax benefits they’re going to receive from that. And then their equity on their home is getting paid down each month by the people that are renting it out. These paying the mortgage each month. And part of that payment is going to go down towards the equity towards the house.

Clay Finck (13:08):

There are so many benefits to real estate that I don’t think a lot of people really realize. It’s accessible to practically anyone. Anyone can learn about the market. They can save up money and find a deal that makes sense to them. And there are just so many different types of deals to do. You could invest just straight up in a rental. You could buy a house hack. You could do Airbnbs, you could do apartments. There’s so many ways to go about it. But on the flip side, since anyone can do it, that can bring a lot of competition as well, since it is accessible to anyone. And also, if you are in a metro city, you can find that a lot of these rental properties are really, really expensive because of just the cost of living increasing so much over time.

Clay Finck (13:49):

One big reason that house hacking is so attractive is because oftentimes people can qualify for a really low down payment. If you qualify for an FHA loan in the US, then you might only need to put down 3.5%. So just to throw out some numbers on this, if a duplex is worth $400,000 and you put down 3.5%, then you only have to put down 14,000 to purchase the property and the rest of the purchase is used with the bank’s money, which is pretty cool. Then you can rent out half the duplex to renters, say you rent it out for $2,000 per month, and then you can live on the other side and potentially even rent out a bedroom or two to friends if you want. Or you could just live on that other side on your own. I know of people that put down roughly $10,000 on a duplex to house hack, and now they’ve moved out and they’re receiving nearly $1,000 or more in cash flow after all of their expenses are paid.

Clay Finck (14:50):

So just doing the rough math, if you put down $10,000 and you achieve say $10,000 in cash flow per year, which is what people are doing out there, then they’re receiving 100% cash-on-cash return on their money. And that’s before considering all the other benefits on real estate I mentioned before. Taxes, appreciation, equity down payment. This isn’t tax advice, but oftentimes the profit you receive ends up being tax deductible because your depreciation expenses from a tax perspective are so high it offsets all or a lot of the income you earn off the property. So $1 earned from a rental property is not equal to $1 earned at a job because the income from a rental property is oftentimes tax deductible.

Clay Finck (15:36):

Another reason that real estate works so well is that you can get access to private deals. With stocks, everyone has access to the market and there are millions of people that have access to buy and sell at any time. In real estate, you might find someone in your market that is willing to sell you a good deal today. Say if someone inherited a property and they just want to get the property off their hands. They don’t really care about the price they get for it. They just want the headache out of their hands into someone else’s hands. Because they might be wanting to get it off their hands as soon as possible and you might be the only willing buyer they know of, it might be a win-win situation as they don’t want to go through the hassle of listing the property on the market and dealing with that whole process. So essentially you have access to a deal that no one else has access to.

Clay Finck (16:23):

You’d be surprised to hear the deals that people are willing to find off the market. The trick is actually finding them and knowing how to differentiate a good deal from a bad deal. I don’t want to dive too deep into the details of real estate, but I did want to shed some light on just how powerful it can be. There are a ton of books on the topic of real estate investing and so many ways to profit from real estate. My co-host Robert Leonard also has a great show that talks all about real estate investing on the Real Estate 101 show, which is released on Mondays on the Millennial Investing feed.

Clay Finck (16:56):

The next kind of level of achieving financial freedom a bit faster is to build a business. With the growth of the internet, there are just so many ways to build a business nowadays that everyone has access to sell to anyone else in the world. Just the billions of people out there on the internet. You might be a content creator within a specific niche you’re really interested in, or just know a lot about. There are people out there that make a solid income off things like YouTube. One reason that building a business is a fast track to wealth is because of your ability to sell the business.

Clay Finck (17:30):

Say, if you build a business that produces 100K per year in profit, and it doesn’t necessarily require your time and attention, a lot of that can be outsourced. Then you might be able to sell that business for some multiple of the cash flow. If it sells at 10 times the cash flow, then that would be a million dollars that you could sell it for. If you’re able to increase the cash flow to say 150K, then you’d be able to sell the business for 1.5 million, assuming that 10X multiple on the business.

Clay Finck (18:00):

So this is kind of the simple framework or level, so to speak, in achieving financial freedom. Level one would be to simply invest in the stock market. It’s simple. Anyone can do it. It’s 100% hands off and passive. Level two is getting into real estate. Again, anyone can do it, but it is much more involved and requires time, effort and sacrifice. Level three is building a business and not everyone can do that. And it does take a ton of time, a ton of effort and a ton of sacrifice, but it also has some risk. And with that risk, it has higher potential payouts in the end. Of course, there are other ways to go about making money and achieve financial freedom, but I think this is a good place to start and thinking about the overall concept and wanting to achieve it.

Clay Finck (18:47):

I hope this episode was inspiration for you to start or maybe continue to have your money working for you rather than you just constantly working for money. That’s all I had for today’s episode. If you guys have any questions related to anything I discussed during this episode, feel free to reach out to me. My email is clay@theinvestorspodcast.com. And be sure to give me a follow on Twitter. My username is @Clay_Finck. Thanks for tuning in.

Outro (19:13):

Thank you for listening TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.