How to Boost Your Income & Investments for a Faster Route to Financial Freedom

 Welcome to the BiggerPockets Money Podcast show number 31.

And then you discover the concept of financial independence and you make changes on one or more of these fronts, spending, earning more income, side hustles, entrepreneurship, those types of things, investing. That those changes produce results that speed you along to financial independence. That’s the story that we want to keep hearing and sharing all over again is how can we help more and more people empathize with someone’s situation on this show and then take the changes or understand what they did and apply it to their own situation to derive drastic and accelerated results toward financial independence.

It’s time for a new American dream. One that doesn’t involve working in a cubicle for 40 years, barely scraping by. Whether you’re looking to get your financial house in order, invest the money you already have or discover new paths for wealth creation. You’re in the right place. This show is for anyone who has money or wants more. This is the BiggerPockets Money Podcast.

Scott: How’s it going everybody, I’m Scott Trench. I’m here with my cohost Ms. Mindy Jensen. How are you doing today Mindy?

Mindy: Scott, I am doing fantastic. I am really looking forward to the prospect of speaking to you all by myself today while I really enjoy interviewing people on the show. I also really like talking to you.

Scott: Yes and I like talking to you and I like hearing both of us talk. I like hearing myself talk sometimes. I thought this was a lot of fun. I think it will be helpful. This is kind of a compilation of what we believe to be a roadmap to financial independence of the last week’s episode and this week’s episode. We kind of approach it in the order of saving and reducing your expenses, increasing your income, and then investing, which we talk about income and investing today.

Mindy: Yes, the increasing your income can happen through recognizing opportunities that are around you at work and side hustles. Introducing new opportunities or taking advantage of new opportunities that might not be currently in your life. We discuss stock market investing and real estate investing both are things that we find value in and we bring in more references to some of the shows that we’ve had in the past where our guests have really helped explain these concepts in great detail. All of this information can be found at the show notes for this show, which is show 31. You can find that at biggerpockets.com/moneyshow31.

Scott: Awesome and then one thing I want to add right before we get to today’s sponsor is we talked about saving last week and we talked about that for a reason first because that’s the one that’s approachable and effective for a lot of people to begin accumulating wealth from a median income with few little to no assets. It reduces the total amount of wealth you need to generate and income that you need to produce to sustain financial independence so lower-cost lifestyle is easier to support with passive income. There’s a third reason that we forgot to mention I think which is taxes. Right every dollar that you save you get to keep 100% of so if you just don’t spend a dollar you get a 100% of that dollar back in the bank account.

If you earn an extra dollar you might only get to keep two thirds of it or two fifth or three fifths of it, sorry three fifths, 60% of it depending on your tax bracket. I think there is also a tax advantage as well to focusing there. That said this is really exciting stuff to talk about increasing income and investing. There’s unlimited opportunity here and this is what really will pull you towards financial independence over time so very excited.

Mindy: Yes, well before we jump into today’s show let’s hear from today sponsor.

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Mindy: Okay huge thanks to our sponsor so Scott why is income increasing your income second on the list? Why isn’t that this first thing? We talked about last week we talked about spending is the top thing. Why is income second?

Scott: Well I think that for many of our listeners I know that this is true for me. Particularly at the beginning of my career that increasing much of what you might have done in your life and in your career, education, all that kind of stuff has probably been geared towards getting a job that you believe offers you the best combination of pay, benefits, career opportunity, and lifestyle design that you’re looking for. People go to college. They work hard.

They know their salary. Like there’s probably not for many folks a lot of immediate optimization to be done on the career front and it’s probably not at the same percentage level that it can be done on spending. Like there’s probably tens of thousands of dollars in spending change that you can enact over the next year or two, but maybe not the same level of change that you can make to your income if you’re working a full-time W-2 job and have kind of a traditional title in a corporate environment. That’s kind of I think why the second thing is. On the flip side however income is infinitely scalable. Unlike spending, you can only cut spending down to a certain point. You can only have so much impact whereas income is theoretically unlimited in your potential.

Mindy: That leads us to the first episode I want to talk about is David Greene’s episode number 12 of the BiggerPockets Money Podcast. This show blew my mind. David was a waiter, which is not typically a high income earning job. Nobody lays in bed at night wanting to be a waitress. I can’t wait until I can wait tables for a living.

Nobody ever says that. It’s either a high school job or like a fallback in college or you know there are people who make a career out of it, but that’s not what we’re talking about. We’re talking about just your plain old average career, average job of waiting tables and David took his college age career of waiting tables and really elevated that. He looked around and saw that the dayshift people wanted to get off early so instead of starting at four he would come in at 3:30 and he would pick up a few extra tables that the waitresses from the dayshift didn’t want to take.

They wanted to get out of there. They wanted to be done with their day. Oh I’ll take those tables. That’s an extra $10 or $15 in his pocket. At the end of the day even if he wasn’t scheduled to be a closer to close up the restaurant, he would offer to take that closing position from somebody who was, who would almost inevitably be done with work, not wanting to close anymore. They just want to go out so he would offer to them to finish off their shift and they would always allow him to.

He would make an extra $25 – $50 bucks while he is waiting for the restaurant to close down. He’s getting all of these extra tables in addition to his middle tables then he went a step further and he talked to the owner of the restaurant. What is it that bothers you? She said, “I don’t like when the glasses are dirty. I don’t like when there’s spots on the wineglasses.” He said, “Oh you know what I’m going to do? I’m going to clean these wineglasses. It’s going to make her feel better.”

He’s already there early waiting on a couple of tables, waiting for his big rush to come and make a lot of money. He is already there. He’s kind of doing nothing because it’s a slow period. “I can wash these glasses. I can shine up these glasses, make them look nice.” It’s not really any sweat off of his brow to do it and I don’t want to say currying favor with the boss, but let’s be honest when your boss likes you, your job is a whole lot better.

Scott: Yes, I think that you know that’s politics. He’s playing politics to a certain degree in the workplace right. Understanding who’s in power and what they want and I bet that with alongside doing that currying favor comes better shifts, more opportunities to make money. You know opportunities for promotions, not referrals, what am I talking, references that you can use in future jobs and that’s really important. I think that a failure to acknowledge that and a failure to understand the power dynamics in an office can really hold you back in some ways. He did that and did it intelligently.

Mindy: It absolutely can hold you back and there’s the 18-year-old me is sitting there saying well I’m not going to kiss up to anybody, but the not any longer 18-year-old me is saying you know what there is a lot of value in having your boss appreciate you. There is an enormous amount of value in showing your boss that you want to do a good job. Does David love shining wineglasses? Probably not, but is it a huge deal to do? No, it is not like he’s scrubbing toilets with a toothbrush.

Scott: No and that mentality by the way you know that seems like table stakes, maybe literally I don’t know if it’s a pun or not in a restaurant, but once you know that mentality that he demonstrated there obviously contributed to the stellar career that he had going forward. He just carried out that mentality at increasing scale throughout his career in the police force and as an agent and now as an investor and personality. He just continues to provide that extraordinary work ethic.

I mean David is one of our podcast hosts and he’s constantly asking you and me how he can help contribute and make the podcast a better experience for folks. I mean it’s the same mentality that he’s talked about in his through as a waiter that he’s carrying out to a side job for him, which is host of BiggerPockets podcast today. We see it working with him.

Mindy: Yes, yes. He has come in so I schedule the guest for that show and for this show if you’d like to be one, go to BiggerPockets.com/guests and apply. I scheduled a desk for this show and as soon as he started, as soon as he came in you know what this might be a little bit of eye-opening, get a glimpse into Mindy herself, but when he came in he is like, “Oh what if we did this?” That’s a great idea. Let’s do that. What if we did this and this? Those are great ideas. What if we did this, this, this, this, this, this, this, this, this—da, da, da. I’m like wait wait wait wait what are you doing? Are you trying to take my job? No. He doesn’t want my job. He wants to do his job as good as he can.

Scott: Yes and he executes on those things. He suggests and then he says, “Hey I’m going to go do this.” Our show I hope you’ve been listening to the BiggerPockets podcast as well, the real estate one. It’s great, he’s doing a great job. We’re finding great guests and we make continuously making solid improvements as a result of some of these suggestions on something that he’s doing as a side project.

Mindy: Yes, he loves what he does so when you love what you do it doesn’t seem like work. He’s a huge fan of the show so he’s making the show better because that’s what he wants to listen to. Who better to improve the show than the people that are listening to it actively and it’s not like he’s you know he’s not trying to kiss up to anybody, he genuinely wants to do the best that he could do.

Scott: The reason this mentality is important is because these things don’t seem to pay off right away. You know you are not going to like go the extra mile and then all of the sudden get a ton of extra pay right. They curry continuously goodwill and favor and increase your odds at producing results. With that seems to become this explosive amount of excess opportunity. You know I’m trying to kind of do this similar approach to my career that David Greene has had and I’m finding that the more favors I could do, the more I can just genuinely help the people, the more opportunities seem to come back even if it involves extra work or extra time commitment or whatever. That’s where that snowball for your career can really get going. I think where you stagnate in your career is when you show up. When you show up, work your eight hours and then do what you’re assigned and go home.

Mindy: Yes.

Scott: Not saying you have to work a ton more, but there’s something about showing up and even if you’re just there for eight hours the same amount of time figuring out at all times how can I go and help people do their jobs better. How can I as efficiently as possible get my work done and go on and help the next person and just do that ruthlessly and continuously. Ruthlessly in a good way.

Mindy: Yes.

Scott: How do I ruthlessly help as many people as I possibly can and consistently just like why am I wasting time here? It’s a ruthlessness with my own time schedule.

Mindy: Yes. Now another tip that he did, he was in a higher-level restaurant. There were specific people called busboys who come and clear your tables. He made sure that those busboys got a little bit extra from him every shift and I was a waitress. As a waitress you’re making all of this money and you know sometimes it is tough to part with some of that money.

You tip out your bartender for making your drinks. You tip out your busboy for making your drinks, but when you do tip out your busboys extra they come to your section first. They make sure your section is clean so if you’ve got a busy restaurant and every table is full and the busboy makes sure your table is clean before Bob is over there because Bob only tips the bare minimum and he never seems to appreciate me. I’m going to go make sure David’s tables are clean and then David gets the seat because his table is clean. He’s ready to go that’s more money in his pocket. Treat people with respect. Go a little bit further and you’re going to reap so many rewards.

Scott: Yes, another good example of fantastic career rises is Tony Gayden from episode 21. That’s BiggerPockets.com/moneyshow21. Tony went from working the overnight shift at Walmart to making over six figures a year. I mean.

Mindy: He did something else didn’t he?

Scott: Yes so well so Tony also lost 200 and what 75 pounds in that period.

Mindy: Has kept it off for five years. It’s one thing to lose it. That’s a big enough deal, but he’s kept it off for five years and he is happy. He is healthy. His career has skyrocketed because more opportunities have become available. During the show, he talks about how he had started to lose weight and then went and applied for like a cable installer position with a weight limit of 275 or 250.

Scott: Yes.

Mindy: He had just gotten down to 275. Getting his health in order increased his work chances and his employment opportunities simply because now he can climb a ladder.

Scott: Yes, absolutely and I think that is just such a literal example of how taking care of yourself can result you know your body, your health, your weight, can contribute to financial benefit. I mean that’s literally just him, he had to lose the weight in order to get the job. Once he got that job you know he was able to begin kind of entering that median income range. Then he went to work for the prison system.

Right and he became a security guard at a prison and he took every opportunity for overtime that he could. That is pure hustle that was helping him kind of earn that extra income and continue to move up and have opportunities there. I think there’s a good bit of that kind of parallel between David Greene and Tony Gayden, where they they really went the extra mile and hustled not just in that at work. I assume that Tony puts forth the best effort at work similar to David, but also with those extra hours in place too, which seems unfortunate, but it seems like that is a theme amongst a lot of people who experienced rapid or spectacular career advancement.

Mindy: Yes, if I’m your boss and I’ve got two people to choose from and one guy comes in and is putting forth the effort and really doing a good job and taking pride in his work and the other guy comes in, punches his clock, does the bare minimum. I’m not excited about giving him more opportunities. He doesn’t value the job that he has now. Maybe he’s getting it done and there’s no need to fire him, but there’s also certainly no need to promote him. I was going to draw that same parallel. David Greene walked in to you know waiting tables is like I said before. It’s not the lucrative career that dreams are made of, but it gets you, it pays the bills so walking into this job a lot of people have this mentality ugh well I’m going to do the bare minimum because I hate this job. It’s so awful. All of these people telling me what to do. Well you know what? Welcome to life.

Scott: Yes, I think doing the bare minimum is a recipe for mediocrity. I mean if you just do exactly what you’re told and what’s handed to you you’re not, like your career is just not going to advance quickly. You have to do something else and I think that themes among them are looking for those opportunities. Understanding the political dynamics in your organization like David did and then going the extra mile to help those people that are your boss with what they want and that kind of goes a long way.

Then hustling and understanding hey these servers are the ones who tip me well so I’m going to go and clear their tables first as the busboy and then as the waiter I’m going to tip the busboy a little extra because that’s going to get me more business. Right all of those things I think are key understandings. Then I think a second kind of component of career advancement and income generation is this concept of self education. Right so these guys are relentless readers. Right they’re constantly learning new books.

One of the things that I attribute to a lot of you know the things that I’ve been able to accomplish over the last couple of years is I read probably may be a book every week and a half. I used to read a book a week, but I maybe a little slowing down from that, but I’ve read maybe probably 50 books on personal finance, right. I’ve read 10 – 15 books on behavioral economics. I read books on psychology.

I read books on management, on leadership, on business in general. You know HR, all of these different topics that are related to running and growing a business and managing your career and I think that that gives me a huge huge advantage in decision-making quality over what I would have otherwise because all of these experiences that might be new or make challenges or you know you never heard of before are things like hey no the answer to this is very clear. I read this in the book and it made perfect sense and here’s the solution to this problem. I don’t have to come up with an original solution to tons of problems because they already exist and the best practices are clearly defined and already in my head if that makes any sense.

Mindy: Yes. Have you read Poor Charlie’s Almanac by Charlie Munger?

Scott: Yes, I have.

Mindy: Okay, he’s got a quote in there. Charlie Munger is Warren Buffett’s business partner for those of you who don’t know and every year I go to the Berkshire Hathaway annual meeting and Charlie and Warren sit up there on the stage and they just answer whatever question you have for them. At one recent meet up somebody asked do you have any tips or whatever and he said, “In my whole life I have known no wise people over a broad subject matter area who didn’t read all the time. None, zero. You’d be amazed at how much Warren reads and that how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.” These are some of the smartest guys ever and they just continually talk about how much they read. We come into the office and we read 97 magazines and 400 newspapers and we read books and we read and read and read and read and you’re absolutely right.

Scott: Well I mean at what point, how many hours of study did you put in to get a degree in college? You know for in a subject right?

Mindy: More than 10.

Scott: I mean how many degrees does Charlie Munger or Warren Buffett have in business and finance as a result of their study right?

Mindy: No, goodness.

Scott: There’s no college professor that’s read more on business than Warren Buffett. Like almost certainly not.

Mindy: Probably not.

Scott: Right I mean this guy is like he’s probably got dozens of PhD’s in related fields to business. The equivalent of education of that and there’s no reason why that’s not accessible to ordinary Americans. Right, you can get I have an audible subscription. I get a credit a month and I often use far more than that so I actually probably spend like $50 bucks a month on Audible. I could go to library.

I could cut that expense out, but Audible is convenient and I download book after book after book on related subjects. I listen to this on my commute. I listen to it at the gym while doing chores or even some sort of like basic rote tasks like tallying up my numbers at the end of the month for my personal finances or whatever. I’ll just listen to a book while doing that and then analyze it with the book auth. I mean this is an easy way to acquire tons of knowledge without actually impacting your life in a negative way and kind of really advance your chances at career success over time.

Mindy: Your library has audiobooks. Your library has Kindle sharing books so there’s a lot of ways free and inexpensive ways to consume this information. Okay.

Scott: Now another thing for income that I think is interesting is that when you save more. As you cut your lifestyle expenses back and accumulate a cash cushion you become more comfortable with taking risks right. Let’s say you make $80K a year and your family spends $75K a year and you have $5,000 in savings well you’re not going to be able to quit your job and go take a $50,000 a year job that may give you a huge bonus potential or equity at a startup or something like that. If you spend $40 or $35 and have $50,000 saved up well now you have a ton of opportunity to take a risk that you might not otherwise have been able to have.

I think that spending can paradoxically decrease your odds at career choices because you’re afraid of taking opportunities. In other sense you might be afraid of losing your job right so there’s a big difference between playing at you know approaching your career from a perspective of how do I play to win? How do I try to have the biggest possible impact that’s positive for the business and then playing not to lose? How do I not screw up?

Mindy: You know what that’s a really good way to put that out. Playing to win versus playing to not lose.

Scott: Yes, and I think that a lot of people play not to lose in their career. They don’t want to lose their job. They don’t want to rock the boat, but if you play to win that’s when opportunities can begin coming in right. That’s where that’s what like how like a salesperson or performance based person or an entrepreneur can kind of approach things.

Mindy: You’re so smart, Scott.

Scott: I love philosophizing about this. This is one of my favorite activities. What else do we want to cover on income generation before we move on or at your career before we move on to maybe side hustles.

Mindy: Oh I was going to segue to side hustles because basically David Greene’s episode 12 and Tony Gayden’s episode 21 kind of covered that you need to have the drive. You have to do this in order to succeed and succeed exponentially. You can succeed in a job like you said playing to not lose, but you want to play to win. If you want to play to win you have to look around and take your cues.

Scott: Both of those guys put in extra hours yes, but I think that more than extra hours, the extra hours of work and study is the intensity with which you approach that work. I think that’s the kind of key and then one last point before we move on to side hustles is that your career is probably going to be the major source of your income because that’s where you’re spending the bulk of your day. Right so if you have a certain number of waking hours in the day, the major portion of that at least during the week is going to be driving to and from and while you’re at work or commuting you know. If you’re trying to build a huge business or side hustle on the side after completing that time at work I think you’re at a huge disadvantage in terms of your potential to generate income.

I think that understanding what the levers are in your career and putting yourself over time in a position where there is a chance for scalability is important. Not that you shouldn’t do side hustles. We’re going to talk about that in a second, but that the career it would be inefficient, which is a sin in my world. Inefficient to spend the bulk of your day working on something that was not scalable or had the potential to have a reward for a very long period of time for most of your career and then spend a tiny fraction of it on the real opportunity. How do you kind of drive change that you can really work on big opportunities with your best efforts during the best part of your day, during the best weeks of the year so.

Mindy: Yes well and I like the side hustle because you have the opportunity to check out other things. Let me say I am a secretary. I am a low-level manager. I’m not making a lot of money. I’m not happy in my job, whatever the case may be, whatever is not you know floating my boat, I go and I look at other things. I’ve got a passion for making cupcakes or I’ve got a passion for just making money and I see these here’s a different way to generate some income.

Nick Loper came in on episode 28, a more recent episode and shared with us some of his favorite side hustles and they don’t take a lot of a huge infusion of cash to start them up and even Alan Donegan way back in episode 17, Alan Donegan came on and shared with us how to start up a lean business and these two episodes kind of go hand-in-hand. Nick talks about bringing in income from the side and Alan talks about starting a whole company without a huge infusion of cash.

Scott: Yes and the lines between those two things I think are very blurry.

Mindy: Yes.

Scott: There is no necessarily like a line that you cross between side hustle and entrepreneurship right. Nick did a great job I thought in his episode of breaking out side hustles into four tiers. Right so he had that tier one that’s kind of like that minimum wage, easy job that you can kind of do on your own time like babysitting, dog walking, Air BNB, Uber, Lyft, all that kind of stuff. Then tier two, working up a notch is like freelance consulting, Upwork, things that might be higher dollar per hour related to your skill set.

Tier three, I believe was buying things low and selling high, arbitrage so you would go to the yard sale, buy something that was clearly at a discount and then sell it on Craigslist or Amazon or a number of different ways. You could do that at shopping. You could arbitrage things on Craigslist, whatever. Then tier four is to become like an online authority.

This is kind of like I guess in some ways what maybe Josh Dorkin, the founder of BiggerPockets did where you start a website that becomes an authority on a subject in some areas. Like so BiggerPockets we like to think we’re the authority on real estate investing for median to upper-middle-class Americans across the United States. That was kind of like more and the like and that spectrum by the way goes from clearly like may be a low income, minimum wage job that’s moonlighting to pretty clearly entrepreneurship, but it’s all within the realm side hustles.

Mindy: Well and it also kind of scales up in levels of or in terms of dollars invested. To be a babysitter you literally just have to wear clothes and go to the person’s house or have the baby dropped off to you. The same with dog walking, you need to have clothes and comfortable shoes and some poop bags, but again you can get those at the grocery store at like—there’s not a huge infusion of cash. Air BNB and Lyft obviously are going to have you know slightly larger stakes in there, but you already have a house, you’re already in theory, you already have a car in theory.

Freelancing and coaching you know that’s another thing that’s kind of you already know how to do it. The third tier was buy low, sell high. That’s really kind of the biggest influx of cash or the biggest outlay of cash that’s going to happen. You have to buy the products first before you can sell them, but I know a lot of people who flip a lot of products on eBay or Amazon or you know wherever just because they know what’s in style or they know what’s hot right now.

Scott: Yes, I think in addition to cash there’s a time commitment that is involved with each of these as well. Like becoming an online authority right, making a website and ranking in Google and getting content and selling a product that’s going to take a long time to ramp up and you may see no results for months or years until you start and before you build up a steady income stream versus you can go make an extra $50 bucks dog walking this week. No question, you sign up for the app and do it, but there’s not going to be a scalable component to that. There’s trade-offs along this whole line of thinking and I think that the goal that you should have as a listener to this is understand what you need to do right now. Maybe you’re still saving up for your first house hack or your first $10,000 in savings or paying off debt. Go side hustle by driving Uber or walking dogs or freelancing or whatever.

Something that you can easily get into tomorrow. Save up that money, but have an exit plan I’d argue. Have an exit because the end goal I think should not be to drive Uber for a living. The end goal should be to use Uber or these other side hustles to generate an extra amount of cash so that you can invest and begin producing passive income, get to the next stage of your journey and then hopefully once you’ve kind of build that wealth and have a higher dollar per hour coming into your life that’s when you can move on to these more speculative, but potentially better long-term payoffs in that tier three and tier four area.

Mindy: Yes that show was so eye-opening and it just came out a couple of weeks before we recorded this episode and I got so many comments about that. This show opened my eyes. I can’t wait to go do this or that or I’ve got an idea for a side hustle here. Such a positive positive show and if you have not listened to episode 28 you need to go right now, put this one on pause and go listen to Nick. His show is so fantastic. It’s BiggerPockets.com/moneyshow28 or you can download it on any of the podcast apps.

Scott: Awesome, anything else you want to cover on side hustles here before we move on to investing?

Mindy: No, I think that pretty much covers it. You know change your attitude. Do you want to make more money? Start acting like you want to make more money. Look for opportunities to improve your standing at work. Look for opportunities to stand out at work and if there aren’t, you know some jobs are just dead end if that’s not an opportunity go look for work opportunities on the side. There is no shortage of side hustle opportunities. Even outside of the episode that we had with Nick Loper, budgets are sexy. Has a list of something like a 150 side hustles. Google side hustles and you will find list after list after list of all these things. You’re like people get paid for that? Yes, they get paid and sometimes they get paid really well.

Scott: Yes and I think a lot, for some of these you know if you’re trying to go a little bigger try to test these out viably in a faster and faster path. You know how do you have a real attempt at a side hustle that might generate passive income, every quarter, four times a year? Can you start site, a business, or a side to hustle or whatever that has potential to produce a thousand dollars a month at some point in the future. Can you try to start something like that every three months with your free time?

You know if you can get that to that failure rate nine out of ten businesses fail. I’m making that statistic up like 90% of statistics are made up on the spot. Fun fact. You know if nine out of ten businesses fail and you start one business every three months and give it a real sophisticated shot then you got a good shot at having a business succeed within the next year and a half. Right a 50-50 shot at having one of your ten business attempts work out within five quarters. That’s what 15 months so.

Mindy: That’s not bad.

Scott: There is a reasonable chance there and there’s no reason not to take it if you can follow Alan Donegan’s advice or Nick Loper’s advice and really start a side hustle with a minimal cash outlet.

Mindy: Yes and I want to quote a song that’s from way before you were even born it’s called Opportunities. It’s by the Pet Shop Boys. It says, “There’s a lot of opportunities, if there aren’t you can make them.”

Scott: I love that. That it’s a great quote.

Mindy: Yes.

Scott: I never heard of this band. They must be. I’m sure.

Mindy: The Pet Shop Boys.

Scott: Are they on the records?

Mindy: Yes. Shut up I actually had the Pet Shop Boys record.

Scott: Nice.

Mindy: Okay Scott as we sat down to kind of map about what we wanted to talk about in last week’s episode and this week’s episode we definitely wanted to cover investing, but we wanted to cover it third. Why is it that you wanted to put that at the bottom of the list?

Scott: I wanted to put it the bottomless because I feel that investing is obviously a critical component to producing passive income and achieving financial independence, but I think that or the median income earner starting out with little to no investable liquidity that investing is just not going to have a major impact on your journey to financial independence at this point in time. Right in the beginning of your journey and that’s for the simple reason that suppose that you know we talk about stock market investing if the stock market is producing around a 10% annual return every year and you invest $10,000 in the stock market which might be more than you have to invest right now. You’re going to get a return of $1,000 a year. You know earning or saving a thousand dollars a year you can do that much more efficiently by focusing your time on reducing your expenses or working on side hustles or career advancement. There is much more opportunity to efficiently generate wealth in those areas prior to investing. Once you start approaching that kind of six-figure mark and this is not to say you shouldn’t invest with low amounts of wealth.

Mindy: Good.

Scott: Not to say you shouldn’t invest, it’s just to simply say that the bulk of your efforts and attention should be focused more on I think income generation and expense reduction until you have maybe $50-$100,000 with which to invest. Now you can begin making really meaningful investments that can accelerate your results. If you can get a 10% or 20% return on a $100 grand now you’re producing $10,000 to $20,000 per year. That’s real money and that’s going to make a big difference. That might be even more meaningful than what you can save at your job eventually so.

Mindy: That is going to make a huge difference and you know I like the way you explained that because so much of what I hear in the personal-finance world is oh you have to invest. Well yes that’s great if you’ve just got piles of cash sitting around, but when you don’t have piles of cash sitting around like you said it just doesn’t really make the impact that you want it to have. For the purposes of this discussion I want to kind of focus on two different types of investing. There is the stock market investing and then there’s real estate investing. Obviously there’s a way larger number of investments you can make, but I am not an expert in anything outside of stocks or real estate. It’s certainly not going to do you any good for me to try and explain some other kind of investment that I’m not going to be good at.

Scott: Yes well I think that stocks and real estate are two investments that are capable of producing significant returns that are available to your ordinary American. Right there’s just there is a lot of other things you can invest in that are really creative, but from a broad strokes high-level real estate and stocks are two of the options out there that are accessible and offer a chance at greater than 10% annual returns. Very few other things offer that in a historical basis so.

Mindy: Yes.

Scott: What I think is interesting about the index fund investing in general though is that for me I was a stock picker right and we mentioned earlier how I was picking stocks and I wasn’t you know succeeding with this. I guess this was last week that we were talking about this.

Mindy: Yes and I thought you had actually lost every bit that you had put in there. I didn’t know you had only lost $500, but still.

Scott: No, I lost probably I net lost probably $2,300 because I could have gained $1,800 instead lost $500.

Mindy: Oh that’s a good way to look at it.

Scott: Yes.

Mindy: The net loss you could have gained $18, but instead he lost $500 so you actually lost $2,300.

Scott: Of course, that’s just my frame of reference, a singular point, not necessarily reflective of averages or anything like that, but I think it does and of course yes I could have just as easily picked a stock randomly that beat the market and thought I was a genius right. There’s no so the point though I think is that for repeatable perspective index fund investing seems to allow people the best odds at producing an average return. Attempting to spend lots of time studying investments or trying to pick winning fund managers and that kind of stuff seems to result in sub average performance for the majority of people who attempt it.

Mindy: Yes, over the long haul you’re not going to beat the market unless you’re invested in the whole market and one of the most common analogies that people use is a rising tide lifts all ships so as the index rises all the stocks rise. As the index falls, all the stocks fall, but it’s more of like a rising tide.

Scott: Now I’m a huge nerd so I think that like the financial independence community rightly so gives the advice of just invest in index funds right, but I think that it’s worthwhile exercise to study a bunch of books on stock picking and security analysis like Ben Graham’s Security Analysis, Beating the Street by Peter Lynch. Some of the things that Warren Buffett talks about with his and his annual share holder reports and learn about like what beating the stock market takes is like and then also listen to the arguments of Jim Collins, A Random Walk Down Wall Street by Burton Malkiel. I’m sorry I must’ve I’m sure I butchered his name, but great book and then see which argument is more compelling. Like read the best work on why you should index and then read the best work on how to beat the market and see what argument registers with you more so that’s the advice that I give listeners is to educate, but. Basically I’m saying go through the 30 to 50 hours of reading of all of these different books so you can arrive back at the conclusion to invest in index funds.

Mindy: In index funds and you know there are companies that I want to support. I will buy their stock and maybe you know I’m not investing you know $25 million in some company that I think is doing a good job, but like there are companies I want to support so I do. Just because you invest in index funds doesn’t mean you can’t pick individual stocks. It just you’re going to have a probably have a better return with your index funds.

Scott: Absolutely. Let’s also at this point take a moment to talk about diversification. What’s your what is your view on diversification when it comes to investing for financial independence?

Mindy: I am pro diversification when we, my husband and I, started investing it was just in individual stocks because we hadn’t heard of this concept of index funds and so we started, we picked, we had the kind of exact opposite experience that you did Scott. We picked some pretty good winners, but wholely admit that it was luck. It was sheer dumb luck. Pretty much based on our own experiences.

My husband chose to participate in the Google IPO. They IPO’d in a Dutch auction so everybody could buy their IPO price instead of just you know the friends and family of the guy that was releasing it through his investment banker or however that normally works so we haven’t been in any other IPOs except that one. That was really cool to see that and the reason that we did that is because he was having a problem at work and he’s like, “Ugh I do not want to read this book to find this answer.” The guy sitting next to him said, “Oh just Google it.” He’s like, “What?” This was before Google was a thing you know right around the time you were born Scott. This is like 1996-‘97.

Scott: I grew up with Google. I remember Dog Pile.

Mindy: I don’t know what Dog Pile is.

Scott: Oh that  was the search engine that we all used before Google.

Mindy: Oh.

Scott: It would compile all of the best answers from other search engines.

Mindy: Oh. I didn’t use that.

Scott: You type in a term and it would have like you know the I don’t know if Bing was a thing. It would have Yahoo. It would have Google. It would have Ask Jeeves. It would have all of these different things.

Mindy: Oh I remember.

Scott: It would give you the best result from all of this, yes.

Mindy: I remember Ask Jeeves. I never used those though and so his friend said, “Google it.” He’s like, “What do you mean?” He said, “Go to Google.com and type in your question.” He did and like milliseconds later there’s the answer that would have taken him reading through an entire computer programming book to discover.

He’s like, “Oh my goodness what is this?” The guy is like, “Oh it’s this really great thing. They like this site knows everything. You just ask it a question and it gives you the answer.”

You know kind of like today. Google knows everything. You don’t look it up in the encyclopedia, which is how I found information when I was your age Scott. Now you use an online encyclopedia called Google that knows everything so yes so our stock picking experience has been very different, but we fully realize that it’s just pure dumb luck so we are transitioning out of individual stocks into index fund investing and we are now 50-50 into real estate and index fund investing.

Real estate we consider it to be we extend some money from our 401(k) to people who are investing in real estate. That’s called a private loan. We invest in like a group loan where somebody will say, “Okay, I’m going to buy this apartment building who’s in with me?” We give them money and we pull all of our money together to buy this $28 million apartment building that needs some a $1 million of work and now it’s worth $35 million. That’s called a syndication. We invest in a syndication in syndication deals. We invest in private loans or we make private loans and we own a third of a mobile home park in Maine.

Scott: Yes, I think you guys have a great portfolio and by the way oh the stock picking thing, Peter Lynch if you’ve ever, if you ever want to read Beating the Street would argue very much in favor of the strategy that you guys employed in picking stocks. Companies that you use understand are like, “Wow this is the greatest experience.” That in a crowded field they’re going to win and he had a lot of success doing that over a period of time so it’s not to say it can’t be done or that it necessarily was pure dumb luck and there are arguments in favor of that so.

Mindy: Yes.

Scott: I think again it just comes down to understanding them all and deciding which one works best for yourself and I happen to have read all of these arguments and decided for myself that index fund investing is the more appropriate approach.

Mindy: Yes, but like you said invite, we invite you to read both all of those books. Both all of those books on both sides of the equation and see what one you like best. I really like Jim’s Simple Path to Wealth. It’s just, it’s simple. It’s a great read. He’s an excellent writer and it’s just, he makes a good argument for the index fund investing. Scott on the flipside what do you think about diversification?

Scott: Well so I think, I’m a big fan of diversification as well in stock investing for example. I have an interesting take on diversification. I am not a big fan of diversifying in a sense of having stocks and bonds in my portfolio, but I am a big favor of if I’m investing in the stock market, not investing all of my money into one company. Instead rather diversifying through an index fund, which buys the shares of all of the companies in the stock market.

Here’s why I don’t like stocks for like including bonds in my portfolio with stocks. If you map out the return of a bond portfolio for the last 30 years. It’s called treasury bonds or something like that. You’re going to see slow and steady growth. Right you’re going to see a couple of percentage points, nominal growth on your investment over the years without any huge fluctuations in price of your portfolio. If you invest in stocks over that same period you’re going to see much greater overall growth, but you’re going to see some big dips particularly in 2000 and 2007.

Mindy: Yes.

Scott: When people look at that, those two graphs, they say stocks are riskier because of those two big dips and dives, but I look at that graph and I think that those two big dips in the market, the two drops in 2007 and 2000 are the second most important point of the story that that graph is telling and the most important point is that stocks are going to give you much greater wealth over all. I’m much bigger overall portfolio over a 30 year period than bonds. I actually don’t diversify across stocks and bonds for example because I feel that over a long period of time I increase the odds of having lower wealth over all by including them in my portfolio.

Mindy: Yes so at the beginning we talked about we’re going to discuss stocks and real estate. I purposely didn’t bring up bonds. I don’t like bonds. They’re nice safe investment, but they’re also like almost no growth. They are what is it? What does their line look like, a one degree angle. It just doesn’t you know I like the up into the right graph that my stock portfolio gives me overall.

Scott: That risk and diversification can be appropriate in some situations so if you’re like oh I’m going to retire and I can’t run out of money then that volatility really is unacceptable from the stock market potentially if you’re going to need most of your portfolio. If you don’t need it then I believe that if I invest in stocks that I’m simply or I’m sorry if I include bonds in my portfolio then I simply with a high maybe close to statistical certainty guarantee myself at being poor in 30 years than I do by investing in stocks.

Mindy: Okay, I think we have thoroughly covered stocks.

Scott: Yes.

Mindy: We should move on to real estate, which is my favorite and your main form of investment right?

Scott: Yes so now I do diversify across stocks and real estate, but the reason why I favor real estate over stocks is because I believe that you can earn, you have a good shot at earning higher than that maybe 10% historical stock return in a self managed real estate investment using leverage.

Mindy: I agree so. Just do real estate. Okay next.

Scott: Well well should we explain why that is?

Mindy: No, we should explain why that is. We should talk about Chris and Debbie Emick from episode 25. They knew that they wanted to invest in real estate, but they didn’t feel like they could do it in their small town in like the plains of Colorado. They didn’t think there was an opportunity there. They bought a turnkey property out-of-state and then I don’t remember how they discovered they could do it in state and in their area.

I think they like happened upon somebody who was a landlord in their area and they’re like oh you could buy it locally. That’s awesome. Now they buy houses for ridiculously low prices. Like $30,000 – $40,000 – $50,000 that are renting out for $500 a month. In this there’s a concept in the real estate investing world called. It’s a rule of thumb called the 1% rule and basically your monthly rent should equal or be greater than 1% of the purchase price so when you buy a property for $40,000 you only have to rent it out for $400 a month in order to hit that 1%. They’re buying properties for $40,000 and they are renting it out to for $585 and those of you who are quicker at math than I am can figure out that money, but that’s way more than 1%. That’s like 1.35 or something.

Scott: If you buy a house for $50,000 and you rent it out for $500 a month in cash right and/or let’s say your cash flow is $500 and I’m renting it for $7-$800 bucks and have some expenses there. You know that is $6,000 a year in rental income or rental cash flow. Right that’s going to be what a 12% return on your money so you’re already just from a cash on a cash flow basis outperforming a stock market investment at least on a historical basis. The stock market might do better or worse than 10% you know 10% – 12% in a year, but you’re already doing better than that on that investment. If you can use leverage, you can pound those results. Say that you buy a $100,000 property with $20,000 down. Well if that property appreciates over a year like at 3% you know you have one fifth of that property in equity. That’s a 15%, five times three, 15% return on your investment in that first year just from appreciation. Plus you’re paying down a mortgage and generating cash flow.

Mindy: I was going to say you’re not paying down your mortgage. Your tenants are paying down your mortgage. Your tenants are literally buying you a house and when they move out you still own all of the house that they bought you and in many cases more because the property has appreciated, but as when you buy with leverage and that means you put down a small amount and you get somebody else to loan you the rest of it that’s initial outflow of cash from your pockets is very low. You’re paying down, your tenants are paying down the mortgage so you’re gaining equity and in many cases the property is growing in value.

Scott: Yes, absolutely and now there are transaction costs on both sides of the equation here and leverage works both ways. In a DOW market it can compound your losses, but if you kind of run you know assume average inflation, average you know 1% rule, 50% expenses, those kinds of things you know there’s a good shot that an ordinary average investment purchased consistently can produce a 20 plus percent return in the first year of ownership.

Mindy: Yes.

Scott: Now the way the math of real estate works is that as you pay down the mortgage and as your property appreciates your return on inequity, your return on the amount of money you have in the property actually declines over time. This is some tricky math that I am getting very excited about right now so let me know.

Mindy: This might be a little too high level for this episode, but if this is something that interests you you can email Scott, [email protected] and he would be delighted to talk to you about this in depth.

Scott: Let me go one more minute on this.

Mindy: Yes, I will let you go one more minute on this.

Scott: Suppose you buy you know a house for a $100,000 in cash right.

Mindy: Okay.

Scott: That property might produce five grand a year in rental income right so.

Mindy: Okay.

Scott: That’s your cash flow and net of expenses. That made a $1,000 a month in rent and maybe you know $650 bucks or $550 bucks in expenses, $5,000 a year in total cash. That’s a 5% return and it might appreciate 3.5%. That’s an average year right so that’s going to be an 8.5% return on your investment. That’s less on an average basis across the nation than the stock market returns at around a 10% historical average.

Mindy: Correct.

Scott: With that leverage however you’re getting that 20 plus percent return on average in that first year if you’re you know buying an investment that has 1% rule, those kinds of things. As you pay on the mortgage and pay off the property, you begin going from that 20% – 25% return to that eight and a half percent return. Do you see it do you understand what I’m saying?

Mindy: I understand what you’re saying.

Scott: Because you are beginning to pay down that mortgage and properties appreciating so there is this window of time in the first maybe 10 – 15 years where you’re really getting that outsized return on real estate investment. That’s why I invest in real estate is I believe that for the first seven to ten years while using leverage I can produce returns in real estate that satisfactorily outperform the stock market. On average and I will build more wealth over the course of the portfolio doing this. I have to keep re-leveraging. I have to sell off the properties after every you know on average 10 – 15 years. There will be ups and downs, but throughout a long term, I believe I’ll generate more wealth by investing in real estate and putting in the extra work that real estate has then I could produce with an index fund investment.

Mindy: Yes and I want Carl to listen to this too because I also believe that this is the case. Although you know we’ve done pretty well in the stock market so it’s a difficult argument that I have. It’s difficult debate that I face with him.

Scott: I think there’s acceptable room. Like both of those are good returns, 10% or you know maybe the 12% – 15% that you can kind of average on leverage real estate investments in the first five – ten years of ownership. Like those are both good returns so that kind of diversification seems to make sense. You can have both of those and still get some very strong portfolio returns versus like a bond or something.

Mindy: Yes. I don’t even want to discuss bonds.

Scott: That’s my opinion on diversification.

Mindy: I don’t want to even discuss bonds. Bonds are better than nothing.

Scott: The good news is that BiggerPockets, a lot of our guests are able to do way even better with those kinds of returns because they’re finding great deals. They’re managing the properties more effectively. They’re finding ways to add value to properties. They’re flipping them. They’re making returns in shorter periods. There is a BRRRR strategy, but those are some of the reasons why folks on BiggerPockets are able to get better returns I think than even what I discuss there, the average return.

Mindy: Okay so for anybody who is interested in that, but Scott may have lost you in his description. Scott is actually really really excited about this, but this is kind of a high-level concept so if you’re really interested in this take a minute and go back and rewind to that space when you have an opportunity to sit down and write down all of these numbers and it will make a lot more sense. You can also email Scott, [email protected] and he will be more than delighted to expound forever on this concept.

Scott: Yes, I wrote this in an article. I can’t remember what the title is right now, but we will link to it in the show notes and I go through the kind of graphical representation of just why I invest in real estate rather than stocks, which just boils down to I believe I can get a higher return on average over the course of a 30 year investing career in real estate than I can in stocks.

Mindy: Yes.

Scott: A very complicated way of saying that.

Mindy: Yes and I agree. I think I love real estate, but you know the stock market is a no-brainer so I can see why people would want to. I’m sorry not a no-brainer, well the index fund is a no-brainer. It’s kind of a said it and forget it. When you invest in index funds you put your money in and then you kind of don’t need to touch it ever again.

Scott: Yes and absolutely that’s part of also part of the reason why I invest in stocks is right now I don’t have the bandwidth in my personal life and with my job to go and really focus on buying another property. I can put in index funds right now and that’s a completely passive way to get a. I think it’s the best way to get to long-term highest possible totally passive returns. That’s why I think I have a big stock portfolio in addition to my real estate.

Mindy: Yes. Absolutely perfect. Okay.

Scott: To recap all of this you know that’s there’s an investing philosophy and then there’s earning extra income and a two-part segment. There is career and then there’s this side hustles and all of this stuff you’re doing on the side, which is a blend between maybe moonlighting or extra work that you take on after your job and then full on entrepreneurship and everything in between. The goal of which is always to generate extra income or passive or create passive income to sustain financial independence. You can either invest it or use it, create an asset that will generate those that income for you, but this you know I hope that these tips and these philosophies and the recap of the people that we’ve talked to on these shows has been helpful and kind of giving you maybe a step by step guide of how to approach financial independence from whatever position that you’re in right now.

Mindy: Yes and as we go forward we’re hoping to be able to continue to bring you these really great interviews with people who can give you these really great concepts and really dive deep into these singular topics and give you the information you need so you can make an informed decision because not every idea, not every concept, not every tactic is going to work for everybody.

Scott: Yes and there’s new ones all the time like we are not perfect at this. We’re still learning all of these different things. We make mistakes all the time and we have perspective changing events come in all the time. Like travel rewards is the latest one for me. That’s just the total, a brand-new concept. I’m like wow I really miss this and I need to go in and add that back into my overall financial strategy.

Mindy: Yes, coming up in the next couple of weeks we are going to speak with a fee only financial advisor, financial planner. Fee only CFP, certified financial planner and he’s going to tell us what’s the difference between a fee-only and a commission based. He’s going to tell us things like how to choose a financial advisor because you may feel that you’re not qualified to do this. I think you are, but you know if you don’t have the mental bandwidth to devote to this and it’s easier for you to hire it out. Personal finance is personal. It is your business and if you’re comfortable spending the money on a financial planner then do it. If it makes your returns grow because you dropped you know $300 on a consultation that’s good money spent.

Scott: If you do go to a personal to a CFP I would love some feedback on whether this show has helped you impress that CFP with your planning or not and get some feedback there so you know it would be great to to test the things that you’re learning here and maybe on other shows or other books that you’re reading from a professional who does this for living on a fee basis.

Mindy: Ooh that’s a good idea. Yes send us a note at [email protected]. We’re also continually looking for people who are moseying down the path to financial independence with or without kids. People who have already reached financial independence. I’d really like to get my husband on to talk about how he was able to get over the mental hurdle. We had reached the number, but then he wasn’t able to you know quit for a long time and then he finally decided okay I’m done and two weeks after he quit his whole project was canceled.

Scott: Oh wow.

Mindy: I think that if it had been canceled before he was ready to quit that would have really shaken him so he was able to quit on his own. On the other hand if he would’ve waited two weeks he could have got a nice severance package so thanks a lot sweetheart.

Scott: No, I think it’s interesting and one of the things that I love and encourage, the stories that I think are really helpful for the audience if you know somebody like this or maybe this is your own story is you know you have a set of circumstances that are relatable to a lot of people and then you discover the concept of financial independence and you make changes on one or more of these fronts, spending, earning more income, side hassles, entrepreneurship. Those types of things, investing, and that those changes produce results that speed you along to financial independence. That’s the story that we want to keep hearing and sharing all over again is how can we help more and more people empathize with someone’s situation on this show and then take the changes or understand what they did and apply it to their own situation to derive drastic and accelerated results toward financial independence.

Mindy: Yes that’s what we’re here to do so if this is you or you know someone who would be a really great guest please have them contact us, [email protected], [email protected], [email protected]. Mindy is the best @BiggerPockets. No, that’s not a real email address, but it should be. Okay, Scott I think that we have really given some great information here and have referenced a lot of really great shows. Do you have any?

Scott: Yes, I had a lot of fun. This is just us talking about finance for two hours.

Mindy: I love talking to you Scott.

Scott: Two and a half hours so.

Mindy: Yes, I think that sometimes maybe my joking around doesn’t come through easily, but I am the president of Scott’s fan club. I think the world of Scott and I love talking to him so I am really really excited to have two whole hours with just you.

Scott: Yes, I am the president of your fan club in due so.

Mindy: We need more members.

Scott: This was a lot of fun and yes I never got that impression at all so I think I appreciate the teasing.

Mindy: Okay good good because it’s not stopping. Alright for episode 31 of the BiggerPockets Money podcast this is Mindy Jensen over and out.