Part 3 – Investing

The magical third leg on your path to getting rich and saying F That Treadmill, forever!

But what the hell does investing even mean? OH NOOOOOO!! This is a huge black box to most people. You put money into the box and more money is supposed to come out. Except, it doesn’t always happen this way!

Why should I invest? What should I invest in? How do I quit my job when I need money to pay bills and buy food? It’s crazy overwhelming, and with that, very easy to see why most people are content to just go to their job everyday and continue “paying the bills”, while pretending to live like the rich, buying tons of stuff, and staying on the financial treadmill.

Touching on something I wrote in Why Can’t I Be Rich, Part 1, during my early financial education, I learned from Robert Kiyosaki that income sources for rich people was NOT from a JOB. Rather, income came from rental properties, businesses you owned, and/or stocks. Income from these was supposed to be on the “income” side of my balance sheet, not a job. Ah ha!

So while the exact answers to all of my investing questions weren’t immediately answered, I learned that the goal was for investments in rentals, businesses, and stocks to replace my job on the income side of my balance sheet. With that, I started looking at the options:

• Owning rental properties – ah, the holy grail in my early education. I could buy a rental property with relatively little down, use a bank or investor’s money to finance the majority, and get a tenant to pay the mortgage until I owned the property free and clear. I could also use the equity in properties, after I started paying down the mortgages, as leverage to borrow more money for more properties. While this seemed great on paper, the housing market crash of 2007/08 made financing much more difficult after thousands of investors that were upside-down on their mortgages defaulted and left banks holding the bag. Hard money lenders were a little easier to borrow from if you didn’t mind paying 20% or more interest, but for me, no thanks!
• Owning businesses – while this may be appealing to some, I learned that owning a business requires either starting from scratch, going the route of a franchise with big fees, or buying an established business, often one in distress and turning around their balance sheet. These can certainly work, but will require at least a few years to really learn the ins-and-outs of the business while taking out minimal income for yourself, making the business profitable, hiring trustworthy people to run it, and handing over the reigns while continuing to check in occasionally. Most people are never comfortable handing over the reigns, and for them, they end up owning that job until they eventually burn out and call it quits.
• Buying stocks – you hear anecdotal stories all the time about your second cousin’s uncle that bought a few hundred shares of Microsoft or bitcoin for pennies and is now a multi-millionaire, but for every one of those stories, there are thousands of people that lost a lot of money and bailed out of stock investing. Later I would learn the power of index funds, which are large collections of different stocks that allow for portfolio diversification while maintaining high returns. Unfortunately, I didn’t pursue this option first, but you can!

After initially evaluating these options and despite the housing market crash of 2007 / 08, we started down the path of owning rental properties and owned a nice income producing property for years while looking at countless others. Of course juggling this together with family responsibilities and a full-time consulting job cut way back on the time I had available to commit. When I was able to look at something, I’d often get hung up on details and miss out while over-evaluating, sometimes I’d have difficulty putting together the down payment, and other times the balance sheet wouldn’t make sense after researching and plugging in the projected numbers. There were so many details to look at too; fix-up repairs to make the property “nice” (I didn’t want to be a slum-lord!), mortgage, taxes, insurance, future repairs, etc. Looking ahead, after I hypothetically purchased a few properties, I would have to hire property managers, and would the investments and cash-flow still make sense?

After a few years of looking at rental properties while raising a young family and rehabbing our primary residence, we had started to get some headaches from our tenant at the time. It was around 2014 that our focus started shifting from rentals and toward owning a business, specifically, flipping houses. We had learned a lot about house construction and rehab, and the idea of getting into a project and cashing out seemed much more appealing than dealing with tenant and/or property manager headaches forever. In 2018, after successfully flipping two houses, we were able to pay off all our debt (including mortgages) and had some cash leftover to invest. I found that I really enjoyed the process of rehabbing, and we had made more money than we had from years owning a rental.

While we started looking for other houses to flip, I wasn’t going to leave a large chunk of cash in the bank, so courtesy of my financial education from Mr. Money Mustache (www.mrmoneymustache.com) and J.L. Collins (author of “The Simple Path to Wealth”), we moved it over to a Vanguard Index fund, VTI (investor fund that follows the total stock market), and the magic began! I’ll save the details for a future post in “My Journey”, but this was the point when all of our after tax dollars that we could afford went into VTI and all of the pre-tax dollars I was allowed to allocate to my 401k went into the lowest fee index fund that tracked the S&P 500. From this point on, our wealth increased faster than ever.

And we have a winner!

I cannot recommend reading J.L. Collins’ “The Simple Path to Wealth” enough. He greatly simplifies investing, literally paring down thousands and thousands of options to only a couple of index funds. He also explains how index funds allow very simple investing while keeping your portfolio diverse, and why hiring a financial adviser is tremendous gamble with a ridiculously low chance of winning. Of the three options to replace your income, rental properties, businesses, and stock market; I believe index funds that follow the broad stock market are the best option for most people. The education needed is very little (one book, Simple Path to Wealth, and done!), and anyone with a few dollars to invest can jump right in… no additional research, no visiting properties, no long days building a business, no evaluation of balance sheets other than your own; it really is the simple path!

How does index fund investing create income? At some point, you have to sell some of those funds, but you don’t run out of funds because over time, the value of stocks go up as the economy grows. With index funds that follow the total stock market, they’ve generally gone up about 7-8% per year (actually 10%, but adjusted for inflation), but for retirees, it’s expected that some funds are transferred out of the stock market and into bonds. With this, a rule called the 4% rule (https://www.annuity.org/retirement/four-percent-rule/) was created that suggests it should be safe to liquidate 4% of your total investments per year if your balance between stocks and bonds is 50/50. Although this stock and bond ratio of 50/50 is outdated (blame low interest rates of the past couple decades), the rule still works with a higher stock market allocation. I plan to dig into retirement math in a future blog post, but for now, if your goal is to replace your income with stock and bond index funds, you should have 25 times your annual money needs invested in all accounts combined so you can safely cash out 4% per year. If you need $40k per year, $1 million invested will do it. Drop that number to $30k, and you’re down to only $750k needed to retire. See why cutting expenses is so important?

Summary

In Part 1, I asked the question of why can’t I be rich and gave an overview on how my family reduced living expenses to improve cash flow and start on the path to wealth-building. I then pointed you toward Jacob’s excellent, albeit extreme, overview on how to REALLY tear into your expenses at www.earlyretirementextreme.com via his “21-day makeover”. While his commitment levels may not work for everyone, I suggested reading his plan and finding your happy medium, which is exactly what my wife and I did.

In Part 2, I showed you how to eliminate debt as quickly as possible with your newly found cash flow. The goal here was to focus 100% of available money on debts that charge higher interest rates than the long term index fund returns of 7-8%. Once you’ve eliminated those higher interest debts, maximize your 401k while continuing to pay down lower interest debt until it’s all gone. Once your debt is gone, then every penny you can spare after maxing out your 401k should go to investing.

Finally, in Part 3, I focus on options to invest your newly found cash flow with the goal of replacing your income from a job. While this could include owning rental properties, businesses, and/or stocks; I recommend investing in a broad stock market index fund because of the minimal education and investment required to get going.

What about the answer to the title, “Why Can’t I Be Rich”? Unless your name is Jeff Bezos, you won’t be rich to everybody, but does it matter? Once you’ve reached this point and you’re financially independent, you’ll have freedom to do what you want, including to say F That Treadmill!