BiggerPockets Money Podcast - 31: How to Boost Your Income & Investments for a Faster Route to Financial Freedom

Episode Date: July 30, 2018

Continuing where we left off from last week’s episode, this show discusses increasing your income by recognizing existing opportunities and making your own opportunities through side hustles. The show progresses through investing basics, both... Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the Bigger Pockets 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. And those changes produce results that speed you along to financial independence. That's the story that we want to keep peering 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 drive 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 Bigger Pockets Money podcast. How's it going, everybody? I'm Scott Trench. I'm here with my co-host, Miss Mindy Jensen. How are you doing today, Mindy? Scott, I'm doing fantastic. I'm 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. Yeah, and I like talking to you and I like hearing both of us talk. So I like hearing myself talk sometimes. So 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. last week's episode and this week's episode. And 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. Yeah, 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. So you can find that at biggerpockets.com slash money show 3.1. Awesome. And then one thing I want to add right before we get to today's sponsor is we talk 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 a little to no assets. And it reduces the total amount of wealth you need to generate an income that you need to produce to sustain financial independence. A lower cost lifestyle

is easier to support with passive income. But there's a third reason that we forgot to mention, I think, which is taxes. Every dollar that you save, you get to keep 100% of. So if you just don't spend a dollar, you get 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-fifths of it, or three-fifths of it, sorry, three-fiths, 60% of it, depending on your tax bracket. So I think there's also a tax advantage as well to be 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.

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well-being. What makes Audible so powerful is its breadth. audiobooks, you also get Audible Originals, podcasts, and a massive back catalog across business, health, parenting, and more, all accessible in one app. If you're looking to turn everyday moments into real progress, Audible has been indispensable for me over over 10 years. Kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at at audible.com slash BP money. Huge thanks to our sponsor. So Scott, why is income increasing your income second on the list. Why isn't that the first thing? We talked about last week, we talked about spending is the top thing. Why is income second? Well, I think that for many of our

listeners, I know that this was 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, a career opportunity, and lifestyle design that you're looking for. So 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 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. So 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.

And that leads us to the first episode I want to talk about is David Green's episode number 12 of the Bigger Pockets 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. Oh, I can't wait till 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 or average job of waiting tables. And David took his college-aged career of waiting tables and really elevated that. He looked around and saw that the day shift people wanted to get off early. So instead of starting at

four, he'd come in at 3.30 and he'd pick up a few extra tables that the waitresses from the day shift 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, 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. So he would make an extra $25,50 bucks while he's 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 wine glasses. So he said, oh, you know what I'm going to do? I'm going to clean these wine glasses. 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. So he's 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 necessarily say currying favor with the boss, but let's be honest. When your boss likes you,

your job's a whole lot better. Yeah, I think that, you know, that's politics. He's playing politics to a certain degree within the workplace, right? Understanding who's in power and what they want. And I bet that with alongside doing that curring favor comes better shifts, more opportunities to make money, you know, opportunities for promotions, refer, not referrals, 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. And he did that and did it intelligently. It absolutely can hold you back. And there's the 18 year old me is sitting there saying, well, I'm not going to keep.

kiss up to anybody. But the not any longer 18 year old me is saying, you know what, there's 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 wine glasses? Probably not. But is it a huge deal to do? No, it's not like he's scrubbed on toilets with a toothbrush. No. And that mentality, by the way, you know, that seems like table stakes, maybe literally. Is that, I don't know if it's a 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. And 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 can help contribute and make the podcast a better experience for folks. I mean, it's the same mentality that he's talked about as a waiter that he's carrying out to a side job for him, which is hosting Bigger Pockets podcast today. We see it working with him. Yes, he has come in. So I schedule the guests for that show and for the show.

If you'd like to be one, go to BiggerPockets.com slash guest and apply. But I scheduled the guest 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's 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. I'm like, wait, wait, 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. Yeah, and he executes on those things. He suggests, and then he says, hey, I'm going to go do this.

And our show, I hope you've been listening to the Bigger Pockets podcast as well, the real estate one. It's great. He's doing a great job. We're finding great guests and we're continuously making solid improvements as a result of some of the suggestions on something that he's doing as a side project. 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. And the reason this mentality is important is because these things don't seem to pay off right away. You know, you're not going to like go the extra mile and then all of a sudden get a ton of extra pay, right? But they curry continuously goodwill and favor and increase your odds of producing results. And 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 Green has had. And I'm finding that the more favors I could do, the more I can just genuinely help people, the more opportunities seem to come back, even if it involves extra work or extra time commitment or whatever. And that's where that snowball for your career can really get going. And I think where you stagnate in your career is when you show up. When you show up, work your eight hours, and then do it you're assigned and go home. And not saying you have to work a ton more, but there's something about showing up.

And even if it's 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. 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. 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 bus boys got a little bit extra from him every shift. And I was a waitress. As a waitress, you're making all 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 bus boy 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's full and the bus boy makes sure your table is cleaned before Bob's 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's clean. He's ready to go. That's more money in his pocket. So treat people with respect.

go a little bit further and you're going to reap so many rewards. Yeah. Another good example of a fantastic career rise is Tony Gaden from episode 21. That's biggerpockets.com slash money show 21. Tony went from working the overnight shift at Walmart to making over six figures a year. I mean... He did something else, didn't he? Yeah.

Yeah, so Tony also lost 275 pounds in that period. And 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's healthy. His career has skyrocketed because more opportunities to 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. He had just gotten down to 275. So getting his health in order, increased his work chances and his employment opportunities simply because now he can climb a ladder. Yep, 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 a financial benefit. I mean, that's literally just him. He had to lose the weight in order to get the job.

And 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. So that is pure hustle that was helping him kind of earn that extra income and continue to move up and have opportunities there. And I think there's a good bit of that kind of paralleling between David Greed and Tony Gaden where they really went that 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 experience rapid or spectacular career advancement. Yeah, if I'm your boss and I've got two people to choose from when 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. And I was going to draw that same parallel. David Green 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. Oh, well, I'm going to do the bare minimum because I hate this job. It's so awful.

All these people telling me what to do. Well, you know what? Welcome to life. Yeah, I think doing the bare minimum is a recipe for mediocrity. I mean, if you just do exactly what you're told or what's handed to you, 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, understand 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. And 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 bus boy a little extra because that's going to get me more business. All 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. So these guys are relentless readers. They're constantly learning new books. One of the things that I attribute to a lot of the things that I've been. been able to accomplish over the last couple of years is I read probably maybe a book every week and a half. I used to read a book a week, but I may be a little slowly 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 in psychology. I read books on management, on leadership, on a business in general, you know, HR, all 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 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 a 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 it makes any sense. Yes. Have you read Poor Charlie's Almanac by Charlie Munger? Yes, I have. 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. And at one recent meetup, 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 at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out.

And 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 read and read and read and read. And you're absolutely right. 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? More than 10. How many degrees does Charlie Munger or Warren Buffett have in business and finance as a result of their study, right? I mean, there's no college professor that's read more on business than Warren Buffett. Like almost certainly not, right? I mean, this guy is, like, he's probably got dozens of PhDs 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? For, 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 the library. I could cut the expense out. But audible is convenient. And I download book after book after book, after book on related subjects. And 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 off. I mean, this is an easy way to acquire tons of knowledge without actually impacting your life in any negative way and kind of really advanced your chances at career success over time. And your library has audio books. Your library has Kindle sharing books. So there's a lot of ways, free and inexpensive ways to consume this information. 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. So if you make, let's say you make 80K a year and your family spends 75K a year and you have 5,000.

$50,000 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. But 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. So 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, 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? You know what? And I think that's a really good way to put that out, playing to win versus playing to not lose. Yeah. 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 like how like a salesperson or performance-based person or an entrepreneur can kind of approach things. You're so smart, Scott. So I love philosophizing about this. This is one of my favorite activities. What else we want to cover our income generation before we move on or at your career before we move on to maybe side hustles? Oh, I was going to segue to side hustles because basically David Green's episode 12 and Tony Gaden's

episode 21 kind of cover 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. And both of those guys put in extra hours, yes, but I think that more than the 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. 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.

And so 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, out a huge disadvantage in terms of your potential to generate income. So 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, 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? Yeah. Well, and I like the side hustle because you have the opportunity to check out other things. Let me say I'm a secretary. I'm 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 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 Donagan way back in episode 17, Alan Donagan 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. Yeah, and the lines between those two things, I think, are very blurry. There's 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 we 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, Airbnb, Uber, Lyft, all that kind of stuff. And 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 Gardsdale, 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. And 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 Bigger Pockets did, where you start a website that becomes an authority on a subject in some areas. So Bigger Pockets, we like to think we're the authority on real estate investing for median to upper middle class Americans across the United States. And that is kind of like more than the line. And that spectrum, by the way, goes from clearly like maybe a low income minimum wage job that's moonlighting to pretty clearly entrepreneurship. but it's all within the realm of side hustles.

Well, and it also kind of scales up in levels of, 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 this at the grocery store. Like, whatever.

There's not a huge infusion of cash. Airbnb and Lyft obviously are going to have, you know, slightly larger stakes in there. You already have a house. You 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. And 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. Yeah, 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 result 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.

Sign up for the app and do it. But there's not going to be a scalable component to that. So there's tradeoffs 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 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 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. Yeah, 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. That's BiggerPockets.com slash Money Show 28.

or you can download it on any of the podcast apps. Awesome. Anything else we want to cover on side hustles here before we move on to investing? 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. And 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 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. Yeah, they get paid. And some of times they get paid really well. Yeah. And I think 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. 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 a site, a business, or a side hustle or whatever that has potential to produce $1,000 a month at some point in the future? Can you try to start something like that every three months with your free time? If you can get that to that failure rate, nine out of ten businesses fail and making that statistic up, like 90% of statistics are made up on the spot. Fun fact. But, you know, if 9 out of 10 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 10 business attempts work out within five quarters. That's what, 15 months? That's not bad. There's a reasonable chance there. And there's no reason not to take it if you can follow Alan Donagin's advice. or Nick Loper's advice, and really start a side hustle with a minimal cash outlay.

Yeah. 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. I love that. That's a great quote.

Yeah. Never heard of this band. They must be. The Pet Shop Boys? They were fantastic. Are they on records? Yes. Shut up.

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We are here to support your business through every stage of growth, from your first pitch to your first acquisition. Whether it's improving cash flow or exploring investment banking solutions, with Desjardin business, it's all under one roof. So join the more than 400,000 Canadian entrepreneurs who already count on us and contact Desjardin today. We'd love to talk. Business. Okay, Scott, as we sat down to kind of map out 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? I wanted to put the bottom list.

because I feel that investing is obviously a critical component to producing passive income and achieving financial independence. But I think that for the median income earner, starting out with little to know 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 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 $1,000 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's a much more opportunity to efficiently generate wealth in those areas prior to investing. But 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, not to say you shouldn't events. 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 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. That is going to make a huge difference. And, you know, I like the way you explain that because so much of what I hear in the personal finance world is, oh, you have to invest. Well, yeah, 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. So for the purposes of this discussion, I want to kind of focus on two different types of investing. There's 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. So 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. Yeah, 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's 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 on a historical basis. So 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. Yes.

And I thought you had actually lost every bit that you had put in there. I didn't know you'd only lost $500. But still. I lost, I lost probably, I net lost probably $2,300 because I could have gained $1,800 instead lost $500. Oh, that's a good way to look at it. The net loss, you could have gained $18, but instead you lost $500. So you actually lost 2300.

And of course, that's just my frame of reference, a single singular point, not necessarily reflective of averages or anything like that. But I think it does. And of course, I could have just as easily picked a stock randomly that beat the market and thought I was a genius, right? But there's not. So the point, though, I think is that for a repeatable perspective, index fund investing seems to allow people the best odds at producing an average return.

and 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. Yeah, 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.

Now I'm a huge nerd. So I think that like the financial independence community rightly so gives a the advice of just invested 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 security analysis, beating the street by Peter Lynch. Some of the things that Warren Buffett talks about with his and his, his annual shareholder reports and learn about 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 Merton

Balkiel. I'm sorry, 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'd give listeners is to educate both. And so basically I'm saying, go through the 30 to 50 hours of reading of all these different books so you can arrive back at the conclusion to invest in index funds. And, you know, there are companies that I want to support so I will buy their stock. And maybe 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. Absolutely. Let's also at this point take a moment to talk about diversification. What is your view on diversification when it comes to investing for financial independence? 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 wholly 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 IPOed 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. But 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, oh, I do not want to read this book to find this answer. And the guy sitting next to him said, oh, just Google it. He's like,

what? This was before Google it was a thing. You know, right? right around the time you were born, Scott. This was like 1996. I grew up with Google. I remember Dogpile. I don't know what dog pile is. Oh, that was the search engine that we all used before Google. It would compile all of the best answers from other search engines.

Oh, I didn't use that. So you type in a term and it would have like, you know, the, I don't know if Bing was the thing. It would have Yahoo. It would have Google. It would have all these different things. It would give me the best result from all of this. I remember Asked Jeeves. I never used those, though.

And so his friend said, Google it. It's like, what do you mean? He said, go to Google.com and type in your question. And he did. And like milliseconds later, there's the answer that would have taken him reading through an entire computer programming book to discover. And he's like, oh, my goodness, what is this? And the guy's 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. And, 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, yeah, 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 investment.

investing. And real estate, we consider to be, we extend some money from our 401k 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? And we give them money and we pool all of our money together to buy this $28 million apartment building that needs a million dollars of work and now it's worth 35 million. So that's called a syndication. We invest in a syndication deals. We invest in private loans or we make private loans. And we own a third of a mobile home park in Maine. Yeah, I think you guys have a great portfolio. And by the way, the stock picking thing, Peter Lynch, if you 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, and 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 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 these arguments and decided for myself that index fund investing is the more appropriate approach. Yes.

But like you said, we invite you to read both all those books, both, all those books on both sides of the equation. And see what when you like best. I really like Jim's simple path to wealth. It's just, it's a simple, it's a great read. He's an excellent, he's an excellent writer. And it's just, he makes a good argument for the index fund investing. So Scott, on the flip side, what do you think about diversification? Well, so I think I'm a big fan of diversification as well in stock investing, for example.

So I have an interesting take on diversification. So 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 the companies in the stock market. But here's why I don't like stocks, including bonds in my portfolio with stocks. If you map out the return of a bond portfolio for the last 30 years, let's call it 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 port period, you're going to see much greater overall growth.

growth, but you're going to see some big dips, particularly in 2000 and 2007. And so when people look at 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 overall, a much bigger overall portfolio over a 30-year period than bonds. So 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 overall by including them

in my portfolio. 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 a nice, safe investment, but they're also like almost no growth. What is it? What does their line look like a one degree angle?

It just doesn't, you know, I like the up and to the right graph that my stock portfolio gives me overall. And that risk diversification can be appropriate in some situation. 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 your portfolio. But 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 poorer in 30 years than I do by investing in

stocks. Okay. I think we have thoroughly covered stocks. We should move on to real estate, which is my favorite and your main form of investment, right? 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 may be 10% historical stock return in a self-managed real estate investment using leverage. I agree. So just do real estate.

Okay, next. Well, should we explain why that is? We should explain why that is. We should talk about Chris and Debbie, Emec from episode. 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. So 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've like happened upon somebody who was a landlord in their area. And they're like, oh, you could buy it locally. That's awesome. And now they buy houses for ridiculously low prices, like $30,000, $40,000, $50,000 that are renting out for $500 a month. And 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 one. 1%. And they're buying properties for $40,000 and they're renting it out 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 1.3 or something. So if you buy a house for $50,000 and you rent it out for $500 a month in cash, right? Let's say your cash flow is $500 a month. You're renting it for $700 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% any year, but you're already doing better than that on that investment. And if you can use leverage, you compound those results. So say that you buy a $100,000 property with $20,000 down. Well, if that property appreciates over a year at 3%, you know, you have one-fifth of that property in equity. So that's a 15% five times three, 15% return on your investment in that first year just from appreciation.

Plus you're paying down the mortgage and generating cash flow. 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're. 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 the, your

tenants are paying down the mortgage. So you're gaining equity. And in many cases, the property is growing in value. Yeah, 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. 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 equity, your return on the amount of money you have in the

property actually declines over time. This is some tricky math that I'm getting very excited about right now. This might be a little too high level for this episode. But if this is something that interests you, you can email Scott, Scott at BiggerPockets.com, and he would be delighted to talk to you about this in depth. Well, let me go one more minute on this. Yes. I will let you go one more minute on this. So suppose you buy, you know, a house for $100,000 in cash, right? Okay. That property might produce five grand a year in rental income, right? Okay. So that's your cash flow and net of expenses. So that may $1,000 a month in rent and maybe, you know, $650 or $550 in expenses, $5,000 a year in total cash. That's a 5% return. And I might appreciate three to half percent.

That's an average year, right? So that's going to be an eight, at eight point, 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. With that leverage, however, you're getting that 20 plus percent return on average in that first year if you're buying an investment that has 1% rule, those kinds of things. As you pay down the mortgage and pay off the property, you begin going from that 20, 25% return to that 8.5% return to that 8.5% return. percent return. Do you understand what I'm saying? Because you're beginning to pay down that mortgage and properties appreciating. So there's this window of time in the first maybe 10, 15 years where you're

really getting that outsized return on real estate investment. And that's why I invest in real estate is I believe that for the first seven to 10 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 releveraging. I have to sell up 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 than I could produce with an index fund investment. 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 a difficult debate that I face with him. But I think there's acceptable room, like both of those are good returns, 10% or, you know, maybe the 12, 15% you can kind of average on leverage real estate investments in the first five, 10 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 very strong portfolio returns versus like a bond or something. Yes, I don't even want to discuss bonds. I don't want to even discuss bonds. Bonds are better than nothing. The good news is that bigger pockets, a lot of our guests, are able to do way, even better than 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's a burr strategy. But those are some of the reasons why folks on Bicker Pockets are able to get better returns, I think, than even what I discussed there, the average return. 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 these numbers. And it'll make a lot more sense. You can also email Scott, Scott at biggerpockets.com, and he will be more than delighted

to expound forever on this concept. Yeah, 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 is boils down to, I believe I can get a higher return odd average over the course of a 30-year investing career in real estate than I can in stocks. Yes. Very complicated way of saying that. 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-braith. Well, the index fund is a no-brainer. It's kind of a set-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. Yeah, and absolutely. That's 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. So 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 the long term, highest possible, totally passive returns. And that's why I think I have a big stock portfolio in addition to my real estate. Yep. Absolutely perfect. Okay. So to recap all this, you know, there's an investment. investing philosophy, and then there's earning extra income and a two-part segment. There's career, and then there's this side hustles and all the 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 create passive income to sustain financial independence. You can either invest it or create an asset that will generate 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 in 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. Yeah. 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 diet. 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. Yeah, and there's new ones all the time. Like, we are not perfect at this. We're still learning all 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 a 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. Yep. 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. And 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 it would be great 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 a living on a fee basis. Oh, that's a good idea. Yes, send us a note at Money at BiggerPockets.com.

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. And 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 you would have waited two weeks, you could have got a nice severance package. So thanks a lot,

sweetheart. 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 sort 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 hustles, entrepreneurship, those types of things, investing. And those changes produce results that speed you along to financial independence.

That's the story that we want to keep peering 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 drive drastic and accelerate results toward financial independence. Yep, that's what we are here to do. So if this is you or you know someone who would be a really great guest, please have them contact us, Mindy at BiggerPockets.com, Money at BiggerPockets.com, Scott at BiggerPockets.com. Mindy is the best at 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. Yeah, I had a lot of fun. This was just us talking about finance for two hours, two and a half hours. Yeah, 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'm really, really excited to have two whole hours with just you. Yeah, I am the president of your fan club, Indy. We need more members. This was a lot of fun. And, yeah, I never get that impression at all. So I appreciate the teasing. Okay, good, good, because it's not stopping.

All right, for episode 31 of the Bigger Pockets Money podcast, this is Mindy Jensen over and out.