Rich Habits Podcast - 172: APPRECIATING vs. DEPRECIATING Assets

Starting point is 00:00:00 Hey everyone and welcome back to the rich habits podcast, a top 10 business podcast on Spotify brought to you by public.com. By the end of this episode, you're going to understand exactly what makes an asset appreciating versus depreciating, why most people get this wrong completely, and the one rule for using debt that separates people who build wealth from people who destroy it without even realizing. My name's Austin Hankwitz, and I'm joined by my co-host, Robert Croke, Robert is a seasoned entrepreneur with lifetime revenues of over 300 million, and I'm a multimillionaire in my 30s with a background in finance and economics. As the show name might suggest, every episode, we talk about rich habits as they relate to business, finance, and mindset.

Starting point is 00:00:46 So, Robert, what are we talking about in today's episode? In today's episode of the Rich Habits podcast, we're talking about something I wish someone had explained to me when I was 20 years old, because it would have saved me hundreds of thousands of dollars, and that is appreciating assets versus depreciating assets. The concept is simple. Some things you buy go up and value over time, and some things go down. But the way most people handle the financing of each one is completely backwards. I've watched so many people, smart, hardworking people financed depreciating assets with expensive debt while paying cash for things that actually appreciate. They'll take out a 72-month auto loan on a

Starting point is 00:01:27 $65,000 truck that's going to be worth $40,000 two years later and then say they can't afford to invest $500 a month into the stock market or even put a down payment on a rental property. The math is upside down and we're going to fix that today. Yeah, Robert, this episode is one of those that by the end of it, the way you think about every major purchase is actually going to change. We're going to walk through what appreciating and depreciating assets actually are. Give some real examples of each. talk about the gray areas, which I think are even more important, because that's where people get

Starting point is 00:02:02 confused, and then, of course, give you our framework for how we approach buying these assets with debt, or maybe not, when to use debt, when to avoid it, and why the answer depends entirely on which category the asset falls into. So let's start by defining the question, what is an appreciating asset? An appreciating asset is anything you buy that is expected to increase in value over time. The key word there is expected. Nothing is guaranteed, but historically and structurally, these assets trend upward over time. Austin, the big ones are obvious. Real estate, stocks, index funds, small businesses. If you bought an S&P 500 index fund 10 years ago, you've probably tripled your money. And if you bought a house in most American markets 10

Starting point is 00:02:52 years ago, it's worth significantly more today even after the most recent rate environment. And Robert, here's what makes appreciating assets so special. Many of them also produce income while they appreciate in value. So rental property goes up in value and it pays you rent every single month. A dividend stock goes up in value and it pays you cash every single quarter. A business you own likely becomes more valuable over time and it throws off those profits. So you're getting paid twice on the appreciation and on that cash flow. I want to linger on that because I think it is the most important point. When I've built businesses over the years, I wasn't just building something to sell, although several of them did sell for significant amounts. I was building

Starting point is 00:03:36 something that paid me profits every single month while simultaneously becoming more valuable. Get that two ways. You're making money both ways. That's the power of an appreciating asset that also produces income. You're building wealth. in two ways simultaneously. And from my perspective, Robert, the biggest appreciating asset in my life has been that stock portfolio that I've been building my $2 million dividend growth stock portfolio. I also have some business equity and some private investments I've made through venture, but that portfolio is now worth multiples of money than what I've actually put into it, right?

Starting point is 00:04:10 So appreciating assets are things that are expected to increase in value over time and also tend to pay you cash while you own them. So, Robert, why don't you now answer the question, what is a deep? depreciating asset. Yeah, this is the other side. This is the gray area, the one that so many people get wrong, and that is depreciating assets. A depreciating asset is anything you buy that loses value over time, usually starting the moment you purchase it. The classic example, everyone knows, is the car. You drive a new car off the lot and it loses 20% of its value in year one and roughly 60% of its value in the first five years. So a $60,000 vehicle is worth maybe 20 to 24,000.

Starting point is 00:04:51 thousand dollars five years later that's thirty six thousand dollars in value that just evaporated but cars are not the only one you've got phones and laptops and furniture and appliances and boats i like boats i have a boat i know boats depreciate that's for sure these are all depreciating assets robert i just bought a boat for roughly 90 000 100 000 last summer i haven't looked up what it's worth but i'm sure it's less than that right now well but we also ought to make sure that everyone understands we're not saying don't have fun i've owned many many experiences depreciating assets in my life. And I'll be honest, some of them were mistakes and some of them were worth it because they served a purpose. The key is understanding what you're buying and why.

Starting point is 00:05:31 A depreciating asset isn't necessarily a bad purchase. You need a car to go to work. You need a phone. You need furniture. The mistake is treating them like investments or financing them like they're going to go up in value. They're not. They're tools. You use them. They lose value and eventually you replace them. And that's assuming they actually are tools. A boat is not a tool. A boat is a toy. Don't go finance a boat, but we'll talk more about that for sure. I'm not sitting here saying never buy a car, like what you said, Robert. I never buy a boat. I bought a boat, right? I have a decent car. I got a nice five-year-old four-runner that I was able to buy new. But what I am saying is you have to understand the math behind it. When you buy a depreciating asset, you need to think of the true

Starting point is 00:06:10 cost of ownership. It's not just the sticker price. It's the sticker price plus the depreciation plus any interest you're paying if you actually financed it. That total number is usually way more painful than people originally realize. And as people go out and they buy these brand new to your point Robert's $60,000 cars, and then they depreciate by $36,000. That's, you know, $36,000 out the window, plus maybe they paid $7,000 of interest on the loan so far. I mean, it is disgusting.

Starting point is 00:06:42 Yeah, I remember we did an episode a while back maybe a couple of years ago about leasing versus buying in the car realm. And I got so much hate in DMs and on the post and the podcast and everything because I tell people my rule of thumb. If you want to buy a new car, you better be willing to keep it for 10 years and drive it to the wheels fall off. Otherwise, you lease and keep all that money in your pocket. So you're still investing and not putting all that money into a depreciating asset.

Starting point is 00:07:10 So let's get into the part where people get it confused. And I think this is really interesting because there's a bunch of things that. that people think are appreciating assets that actually aren't, and a few things people dismiss as depreciating that can actually appreciate. So let's go through the biggest misconceptions. We broke it down here. Number one, again, is that car.

Starting point is 00:07:30 A car is not an investment. It is just not, even if you buy a Toyota that holds its value very well, it's still worth less every single year. Now, the rare exception is a true collector car, a vintage Porsche, a limited edition Ferrari, But if that's you, you already know how to buy it and you understand what you're buying. For 99.9% of people, your cars are appreciating tool, full stop. There is no other way around it.

Starting point is 00:07:57 So don't let a salesman or your own ego convince you otherwise. Here's another misconception that we hear all the time is my house value always goes up. And this one is mostly true. Don't get me wrong. It is mostly true. But it's more nuanced than I think a lot of people think. And that's what I was talking about the total cost and true cost of ownership here. Yes, the land under your house in your home's market value will generally appreciate

Starting point is 00:08:22 over five, seven, ten years. But the physical structure, like the roof, the HVAC, the appliances, those things are all going down in value because after time they break and they need replacement. And that replacement costs money. So when you factor in those property taxes, insurance, maintenance, and the interest on your mortgage, the actual return on a primary residence is much often lower than people might think. Robert Schiller's data shows that U.S. home prices have appreciated at roughly 1% per year above inflation over the last 100 years when you strip everything out. So definitely a good asset to own. It goes up over a long period of time. We know that. I'm not arguing that. But it's not that wealth building machine most people believe it is unless you're

Starting point is 00:09:08 using it for some sort of rental income or something of that nature. Yeah, I think it's a great point. and it really comes down to something we talk about a lot, and that is understanding what you're buying. Is it a depreciating asset or an appreciating asset and understanding the total ownership cost? That's a huge factor when deciding if real estate is right for you. I own a lot of real estate. I know Austin, you own some real estate as well.

Starting point is 00:09:30 And so I want to add to this, though, because when real estate becomes a true appreciating asset is when you use it as an investment property and not just a place to live. Austin and you and I have talked about this for years, that we think most people should not start out in the dream home. Start out by house hacking and really get things moving because if you buy that duplex, triplex or quadplex first,

Starting point is 00:09:53 then move into maybe your first starter home or your dream home. It sets you up with so many different benefits through taxes and depreciation and all of this, and it becomes a real wealth builder. But your primary home is more of a forced savings account that roughly keeps up with inflation. it is not a great investment. So always consider that when you're thinking about how to build real estate for yourself.

Starting point is 00:10:19 And number three that I want to start off with, and this is the one we see the most on the internet, is watches, sneakers, handbags, and collectibles. This is where people really fool themselves. They see one story about a guy that bought a Rolex Daytona and it doubled in value, or they see the Travis Scott Jordans that just released on Stock X, and they went up suddenly to $5,000 for the pair of shoes. These are rare fringe cases. Now, for me, I have classic cars.

Starting point is 00:10:50 I have Porsches. I have vintage Rolex watches and all of this. I've done very well doing it, but that's on an individual basis. So so many people I think they get this wrong because they're hearing about that 1% of the items that went up and they make the headlines, but they don't realize that for every Rolex model that doubled,

Starting point is 00:11:09 there are thousands of watches that people have bought and paid at the top of the market that have depreciated over time. Like everything else, survivorship bias is real. And yes, do I think you can make money in classic cars and vintage Porsches and watches? Absolutely, as long as you know what you're doing, you know what you're buying, and you understand the market. Otherwise, you're probably going to lose money. Let's keep this confused, appreciating, depreciating, you know,

Starting point is 00:11:36 conversation going with these misconceptions. The next one I want to talk about Robert's education. It's a very great area. Education is such a great area because your degree itself is technically a depreciating asset. It's a piece of paper that's not going to gain value, right? But the earning power it gives you is absolutely an appreciating asset if you pick the right field and you leverage it correctly. A finance degree that leads to a career where you earn $2 million more over your lifetime and you paid $40, $60, $100,000 for that finance. degree and without it, you wouldn't have made those millions throughout your lifetime. That's an incredible return on investment. A $200,000 degree in some field that has limited job prospects,

Starting point is 00:12:18 that that might actually be a depreciating asset in the total picture of things. So to your point, Robert, it's not just the total cost to ownership now with education, but it's also the ROI on that actual spend. Yeah, I think this episode is really incredible for me as we film it and I sit here and think about it because I go back to my earlier years and I wasn't thinking about things like depreciating versus appreciating. I wasn't thinking about opportunity cost as much as I am now of what it looks like when you go out and buy that item that's a depreciating asset and what that money could have turned into two, three, five, ten years more down the road. So I think that's why this episode, I hope people like it because I think it's incredibly important for people to understand the

Starting point is 00:13:03 distinction. And I want to throw in one more that I think is definitely not a gray area, but one that has talked about a lot, and that is crypto and gold. These are speculating assets. They don't produce income. They don't have cash flows. They go up or down purely based on what someone else is willing to pay for them later. I'm not saying don't own them. I own both, but calling them appreciating assets implies certainty that doesn't exist. They're speculative stores of value and treat them accordingly within your own portfolios. So, Robert, we've defined what appreciating assets are, depreciating assets, and then sort of walk through the misconceptions and the gray area here. Let's now round off the episode with sort of the debt framework of how to purchase different

Starting point is 00:13:47 types of assets. It's very simple. Use debt to buy appreciating assets. Use cash to buy depreciating assets. That's it. That's the framework. Super simple. It's not that deep. And Robert, why don't you walk us through why this framework exists and how important it is for people who are trying to say, do I buy the used car? How do I think about the house? What do I think about the boat? How do I think about this new pair of shoes? Should I go into debt to go buy my Rolex, right? How do I think about this or that? Walk, what can I win through that? Yeah, I want to start by saying most people get all of this wrong. They think that the rich people pay cash for everything when in fact, the wealthiest people I've ever known and ever met, and you can

Starting point is 00:14:30 read their books, they carry debt because they want the positive arbitrage of their money working in their behalf. And so let me break this down mathematically a little bit, and I think it'll clear it up. When you borrow money to buy an appreciating asset, leverage is working in your favor, that positive arbitrage. So let's say you put $100,000 down on a $500,000 rental property with a mortgage. The property appreciates 5% in a year. That's $25,000 in appreciation. But you didn't put up 500,000, you put up $100,000. So your actual return on investment capital

Starting point is 00:15:05 is 25%, not 5%. And on top of that, a tenant is paying your mortgage so your cash on cash return is even higher. This debt is amplifying your upside when the asset goes up. And it's the exact same thing with a business.

Starting point is 00:15:21 If you take out an SBA loan to buy or build a business that generates profits greater than your loan payments, you're using other people's money to create wealth for yourself. So let's go back and flip this on its head. When you borrow the money to buy the depreciating asset, you're getting destroyed from both sides. Let's take the truck example, the $60,000 truck. You finance it for 72 months at 7% interest. Over the life of the loan, you pay roughly $73,000 total for a vehicle that's now worth $24,000 when it's paid off. You lost $36,000

Starting point is 00:15:55 in depreciation and paid $13,000 in interest. That's $49,000. in total value destruction on one single purchase. Think about that, Robert. I'm going to give you a truck that's worth $24,000 now, 72 months later, and you're going to give me $73,000, right? Like, that's what's happening here. And the faster people understand these things, and that goes for any depreciating asset.

Starting point is 00:16:20 That's the furniture. That might be that TV you wanted to go finance. That might be the boat you're trying to go finance for the summer. I paid cash. That might be the lawnmower, the pressure washer. or anything that you're saying like, hey, I'm going to go take on this high interest credit card debt or this, you know, installment loan with a 8, 10, 12% interest rate to go buy the $7,000, ultra luxury mower of some sort. That mower is going to be worth $3,000 in three years. And the total payment on that is going to be $9,500. So you lost $6,500 for this $3,000 moat. Like, that's the power of appreciating assets versus depreciating assets. assets and focusing on how to allocate your debt accordingly toward them. And here's why it's so important, Robert. It is a net worth equation, right? You might be telling to yourself, okay, I've got a

Starting point is 00:17:11 $60,000 truck that I owe $60,000 on. It nets out zero zero. I get it. That's fine. But as the years go on, right, as you pay off the truck, not only are you, yes, paying off the truck, but you're also accruing interest over here. And it's going down in value over here. That's, $49,000 of total value destruction is a $49,000 hit you just took to your net worth, right? That's how that is. And so when it comes to tying up your net worth in vehicles and motors and things that go down in value, we want to say, maybe don't do that, right? Maybe you want to go pay cash for that. That's how you should be thinking about it because if you don't, not only is your net worth going to go down by owning it and tying up so much cash in it, but if you did

Starting point is 00:17:59 didn't pay cash for it, it would still go down, but you're also now paying interest on top of that. And it's just a recipe for disaster. And I think this is a trap that lasts most people's lives throughout their entire lifetime. If you drive through most neighborhoods where people are living beyond their means, you see the one new Jeep in the driveway, you see the jet ski in the side yard, you see the two new mountain bikes, you see the BMW that maybe the husband or the wife drives. And they think because they can keep getting credit and keep getting these cool things that they should keep doing that, but they're not looking at the math of all of these depreciating assets. I said this to someone recently on a one-on-one call. I was like,

Starting point is 00:18:40 you have all of this stuff, and it may look good to your neighbors and in your driveway, but you don't own any of it because you have loans on all of it. And I think that's one of the things that most people just don't understand. Just because they'll let you borrow the money, doesn't mean you should because that is the trap that so many people fall into. And that's why the average 401k or net worth of people that are 55 years old right now is less than $150,000 because they live their entire adult lives in this debt trap with these depreciating assets. And here's where it gets really powerful. I want to run the math side by side.

Starting point is 00:19:15 Let's say person A and person B have the same income. Person A finances a $60,000 car at $900 a month for 72 months. And person B, they say, I'm not going to do that. I'm going to buy this $15,000 use car cash and invest the $900 a month into the S&P 500 index, averaging around 10% annual returns. So after six years, person A has a paid off car worth about $20,000. Person B has a car that's basically worthless, but has an investment portfolio worth $95,000. That's a $75,000 difference in wealth cap from that one decision.

Starting point is 00:19:55 And that gap only widens from there because person B's portfolio keeps compounding over time, why person's A's car keeps depreciating. What a perfect example. And that should be the motivation for anyone right now that needs to change how they think about financing depreciating purchases. And I want to add this. That doesn't mean you never buy a nice car or some sort of luxury item. I own nice things. Robert owns nice things. The difference is. We buy depreciating assets with cash or some sort of short-term financing from a position of strength. After our appreciating assets are already built off and throwing the income, that order matters. Because Robert, I remember when I bought the boat, you know, it's $90,000 boat. And I've got a investment portfolio worth seven figures.

Starting point is 00:20:45 What did I do? I said, okay, let me go get a four and a half percent, five and a half percent margin against my portfolio. take out the $90,000, use that to buy the boat, didn't have to sell my investments, I have to do anything. And over the coming two, three, four, five months, I put that money back into my portfolio. So I didn't have to come up with all this cash at once. I borrowed it from my investments. I never sold my investments. If you guys remember, summer of 2025, the market's ripped. All my investments continue to go up in value. I put the money back into my portfolio, so I'm not in margin anymore. And that's how I finance this boat while simultaneously paying cash.

Starting point is 00:21:22 It is incredible. It's like, and there's so many instances of that. And you're like, Austin, that's four and a half percent, five and, yeah, but I paid it off in a couple months. Right. It's like versus, you know, coming up and, you know, long-term capital gain tax or this, this, that, and the other. It's just, it's better. I can't even put it in a words, Robert, but it's like wealthier people that have access to liquidity and capital and margin and just they have a portfolio. They're able to do these things.

Starting point is 00:21:46 It truly is a game changer compared to those people that, one, don't know these techniques exist, but also, too, are literally person A who goes and buys this $60,000 car with a $900 payment. And at the end of it, they look over and they're like, I've got this crappy car and no investment portfolio. Yeah, this really goes back to one of the best things you say that means so much. And I think it's really smart to say it right now. And that is wealthy people forecast, broke people react. And I feel this is really important because so many people go, I want to get a boat and go to

Starting point is 00:22:21 my buddy's lake and go fishing and all that. Great. If you can afford the boat, go get the boat. But at the end of the day, you need to prepare and understand what you're buying. Is it an appreciating asset? Or is it an appreciating asset? And as long as you understand the buy box that you're in and what that means for your finances, I'm fine with it because we all like nice things, but you have to prepare for it accordingly. So let's break down the practical rules here. Let's give everyone the playbook here so they can apply it starting today. Rule number one, if it appreciates, consider using leverage. Real estate, business acquisitions, certain investment strategies.

Starting point is 00:23:00 These are situations where smart, affordable debt can amplify your returns and help you build wealth. The keyword is affordable. The debt payments need to be comfortably serviceable and the expected returns need to exceed the cost of borrowing. Rule number two, if it depreciates, use cash or minimize your financing term. If you absolutely must finance a car, keep the term as short as possible. 36 months max is great and put as much money down as you can. The goal is to minimize the time you're paying interest on something that's losing value. Better yet, buy used and pay cash.

Starting point is 00:23:38 Let someone else eat the first two years of depreciation. I've done that many times. I remember friends tease me when I bought a one-year-old Aston Martin DB9. It was my dream car. and I think I saved $105,000 by buying it used a year later. This was back in 2011, and it only had 1,800 miles on it. And it was just a smart way to do it. Dude, yeah, my boat.

Starting point is 00:24:03 Again, I keep coming back to this boat example. I bought it in 2025. It's a 2022. So it's a three-year-old boat when I bought it. And I think the MSRP was like 190, 200. And I bought it for 50% off that because I waited three years and I didn't want to buy a brand new boat. Like if it's going to be a depreciating asset, wait a year two or three and let the other person get that depreciation hit. Talking about rules here, Robert.

Starting point is 00:24:26 Rule three, never use high interest debt for any type of asset. Credit card debt here at 24% interest. Don't do it. Appreciating, depreciating. I don't care. It's wealth destruction. Pay off your high interest debt full stop before doing anything else. Rule four.

Starting point is 00:24:41 If you're not sure whether something appreciates or depreciates, it's probably going to depreciate. The test is simple. Will this be worth more or less in five years from now? If you cannot confidently say more, treat it like a depreciating asset and buy it with cash. And finally, Rule 5, rich people lease depreciating assets and own appreciating assets. There's a reason why you see wealthy people lease these luxury brand new cars instead of buying them to Robert's point. They understand that tying up $250,000 of capital to go buy a brand new Rolls-Royce or whatever it might be. into this depreciating asset that's going to fall off a cliff in value, that is opportunity cost.

Starting point is 00:25:24 That $250,000 sitting in some sort of Rolls-Royce could be earning 10% per year in the stock market if instead invested. So they lease it for, you know, $1,000, $2,000 a month, whatever it might be to keep their capital invested, swap it out after a couple years without having to deal with that depreciation. Yeah, I just talked about this with one of my dearest friends and I explained to him. He's like, why do you lease these new cars? and I explained to him, I want a new car every two to three years. It's a depreciating asset. I don't want to own it.

Starting point is 00:25:52 I want to use it. I want to borrow it. And then I want to give the keys back and pick up another one without any money out of pocket. So that's a great breakdown for rule number five. So Austin, let's recap what we covered today. Appreciating assets. Real estate, stocks, index funds, small businesses, certain private investments. These go up in value over time.

Starting point is 00:26:12 And many of them produce income along the way. Use strategic debt to buy these because leverage amplifies your upside and your wealth. Depreciating assets, cars, electronics, boats, furniture, most consumer goods, those lose value over time starting the day you buy them. Use cash for these and keep them modest until your appreciating assets are generating enough income to fund the lifestyle you desire. The gray areas, your primary home, education, collectibles, crypto, understand what you're actually buying and don't fool yourself into thinking a depreciating asset

Starting point is 00:26:50 is an investment just because you want it to be. So many people justify in this. And the framework here is borrow to buy things that go up, pay cash to buy things that go down. And if you follow this one rule consistently over the next 10, 20 or 30 years, you will build wealth, period. Inevitably, I promise you it'll all work out. Especially if you do that example that Robert shared earlier, the $60,000 $9,000. $900 car payment versus the $15,000 buy cash. And well, now the car is worth nothing six years later. But you took the same $900 month car payment that Person A was doing. Now you've got a $95,000 portfolio, right? It's not just about pay cash for depreciating, borrow for appreciating. It's if you are going to pay cash for depreciating, you're being thoughtful about that depreciating asset. You're buying an asset that's already taken a hit, right? Like my boat example or like Robert's example with the DB9, you're buying something. that's already taken the hit with cash and you're using that difference and investing it.

Starting point is 00:27:49 And you're likely not doing any of this stuff unless you've already built your base. You've got hundreds of thousands of dollars in the markets and everything is trending up and to the right. Every dollar you spend is a choice between funding your future wealth or funding your present comfort. I'm not saying never enjoy your money. I'm not saying that at all. But what I am saying is to be intentional about the order you spend it in.

Starting point is 00:28:09 Build the assets first. Then let those assets fund your lifestyle. by throwing off those profits, by the portfolio income. We'd had a great episode, Robert, talking about our personal seven streams of income. Please, if you're not yet listening to that one, it's a banger. Do not finance the lifestyle and hope the assets come later because they do not. You have to build the assets. Then you get the depreciating assets.

Starting point is 00:28:32 What a great episode. I know people are going to be mad at us. You guys don't want us to have fun. Man, I really want those new jet skis. We're not saying that. We're saying, set yourself up first. I actually look at it in kind of a bucket format. If I say I want that new boat, I figure out how to pay for it out of an asset, not out of my money or by putting more debt on myself.

Starting point is 00:28:54 So I hope you guys enjoyed this episode. I certainly did. Austin, I think this is going to be a very memorable one for so many people to have this clarity of understanding how it really works to use the right kind of debt and not be buying these depreciating assets over having assets first. Totally agree with you, Robert. Now, before we jump to our Q&A section of this episode, got to give a shout out to public.com, the investing platform for those who take it seriously. We've been talking about investing.

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Starting point is 00:30:23 Paid for by public investing. Full disclosure in the podcast description. Speaking of free money, Robert, we got this first question coming from Instagram, from our friend Blake, Blake on Instagram. We have a question for us. You can DM us on Instagram at Rich Habits Podcast or email us at richhabitspodcast at Gmail.com. Blake says, might be a silly question, but where does the compound interest come from when investing?

Starting point is 00:30:48 Specifically, in a set it and forget it mindset. The way I see it, I've got 10 shares of VO that grows at 10%. But I still only have 10 shares after 40 years. Does that make sense? What am I missing here? Robert, I love this question. And I think this is a really good opportunity for us to simply explain what compound growth is. So compound growth, compound interest. Think about it like this. Let's say

Starting point is 00:31:15 you have a share of stock and that stock goes up by 10% every year just like the S&P 500. And that share stock right now when you buy it is $100 a share. So you are earning 10% on your $100 per share every single year. So we're going to go to our calculators here. We're going to do this as a group. 100 times 1.1, right, that 10% growth, your $100 growing at 10% per year there is now worth, after the first year, $110, right? $10 on that $100, $110. Now, here's the compound growth. Your $100 investment is now worth $110, except you're now also earning that same 10% growth. So you now earn 10% growth, not on the original 100, but on what it's worth today, which is 110. So now we're going to take 110, multiply it by that 1.1% and it's now 121, which means in the first year, you earn $10.

Starting point is 00:32:23 But in the second year, you earned $11. And now that 121 in the second year is now 133.1, which means you earn $12.10.10. right so you see that that's the compound robert it goes from ten dollars to eleven to twelve dollars and ten cents to maybe you know thirteen dollars and forty cents like it just continues to go up so it's not a linear scale of ten dollars a year it's not linear what you're earning compounds your growth earns more growth earns more growth and that is what it comes down to it's not how many shares you own it's not anything like that what it comes down to is at the end of the what grows has grown in value from the previous year.

Starting point is 00:33:09 So if you earn 10% on something that's more than what it was last year, that growth is just more mathematically. And to talk about the share count you mentioned, let's say you started with that one share, if you're reinvesting those dividends every single year, over time you're buying more shares with the dividends and the profits you've made from the upside and the compound interest. That is why Warren Buffett said that compound interest.

Starting point is 00:33:35 interest is the eighth wonder of the world because if you do this long term and you let it build on itself, you're just buying more shares of the asset like VOO over time. So eventually you're going to own a lot more shares over that 10, 20 or 30 years. Robert, I love that call out because dividend reinvesting. Here's what truly important people understand. The S&P 500, which we all know, right? 69% of the S&P 500's total return since 1960 came from dividend reinvestment back into those stocks, right? So what does that mean? To Roberts point, 70% of the, oh, I made money in my portfolio since 1960 by investing in the S&P 500 came from people reinvesting those dividends back in and buying more shares. Like that's what dividend reinvestment

Starting point is 00:34:24 is. And that's why it's so important to have that turned on in your own portfolio. So Blake, great question. Compound growth is definitely the eighth wonder of the world and free money, if you ask me. Our next question comes from Alex on Instagram. Alex says, hi, Austin and Robert. I hope you both are doing fantastic. I love your podcast. I listen to all your episodes. I actually started investing. Thanks to you all. Let's go, Alex. That's awesome. I haven't seen much information regarding the 530A account, which is the Trump account. Do you all think that it's worth it for a 10-year-old? Can you talk about how it's going to work? Are there any reasons why I should not open this? Thank you so much, Alex. Robert, kick us off. Yeah, I think it's a great account because, the first thousand dollars is coming from the government as long as you're eligible for any children born between 2025 and 2028 and there are some pros to it because you've got this free money you've got no earned income requirement you can do other matches with it there's low fees so that's really cool about it and if you're looking for a long-term horizon in this case your child is 10 years old it's a pretty good situation but i want to talk about some of the cons there is a lockup period

Starting point is 00:35:32 where you can't get access to the money. So make sure you understand that if you're investing on top of the $1,000 into this account, it is locked up in most cases, even if there's hardship, up to the child's 18th birthday. So make sure you understand that. Number two, very restricted of what you can do with the money in the account. It's not like a traditional Roth or something where you have all these options to invest in whatever you want to invest in. And one of the other pros, though, that I did forget is there are some tax benefits here because it's tax deferred growth. But just make sure you understand if you're going to put a bunch of money in this.

Starting point is 00:36:10 I would rather you do it a different way, maybe a custodial Roth or something that you can control because there are penalties for early withdrawal on this. And there are a lot of restrictions. That's my take. Austin, did I miss anything here? No, I don't think so. I mean, so let's make sure we're clear. The $1,000 seed deposit is only for U.S. citizens. born between January 1st of 2025 and December 31st of 2028. So your 10-year-old is not going to be able to receive that since they were born somewhere in

Starting point is 00:36:41 2016, I'd imagine. You can still enroll your children born before 2025 up until they're aged 18, but those kids, again, do not get that $1,000 from the government. So now the question is, do I even want to open this up for my 10-year-old without the $1,000 seed money? So here's what you're actually getting. or getting a tax-deferred account that must be invested in funds tracking a U.S. stock index with no leverage and an expense ratio under 0.1%, which is just your VO's of the world.

Starting point is 00:37:13 So, yes, you can invest in VO and these other S&P 500 low-cost index ones. We love that. You can invest up to $5,000 a year in after-tax contributions to this account, indexed to inflation, starting in 2028. So employers can also chip in up to $2,500 of that without it counting as the kids' taxable income, which I think is pretty cool. There are no withdraws until January 1 of the year the child turns 18, to Robert's points, kind of restrictive on that, at which point, though, it can convert into a traditional IRA. You can also just convert it to a Roth IRA later if you'd want.

Starting point is 00:37:51 Now, this is a cool bonus. Up to 25 million kids between the ages of 10 and younger qualify. depending on the zip code you live in for a $250 charitable deposit from the Michael and Susan Dell Foundation. So definitely check out your zip code to see if you qualify for that extra $250 for your son. I think it's a good idea. I don't know why someone wouldn't want to do this. But it's also like you've got a bunch of different options, right? You can have this.

Starting point is 00:38:20 You can have a custodial Roth. But the only reason your kid would be able to contribute money to the Roth is if they actually had earned income. So if they don't have earned income, they're 10, they probably don't. This might be a better route. You also have the 529. 539 can convert to a Roth up the $35,000 at the age of 18 if they don't want to use it for education. Like there's a lot of ways to get this wealth building done. And the Trump account is one of the many different ways.

Starting point is 00:38:46 Yeah, great, Austin. I knew there'd be some more nuggets in there somewhere. It's just a lot to cover. But like Austin said, plenty of ways to set your kids up early on to get them on the right path. for when they turn 18, and we could talk about this. I think we did an episode a while back about that, and there's just a lot of really cool tools out there. So make sure you do the research.

Starting point is 00:39:05 Robert, before we answer a final question here from our audience, got to give a shout out to Nios investments because Nios offers ETFs that seek high levels of monthly income with a keen focus on tax efficiency while providing core portfolio exposure across equities, fixed income, real estate, cryptocurrency, and cash alternatives like T bills. Their ETFs may be especially,

Starting point is 00:39:26 interesting for investors looking to generate tax-efficient monthly income inside of their investment portfolios. Their funds may serve as a compelling income-focused alternative or complement to many of the investments already in many investor portfolios. So if you're looking to add passive income-focused ETFs to your portfolio, consider learning more about Nios-ETFs at NiosFunds.com. As with all investments, investors should carefully consider their investment objectives, risks, charges, and expenses of Nios Exchange traded funds before investing. To obtain a prospectus containing this and other important information, please visit Niosfunds.com.

Starting point is 00:40:05 Please read the prospectus carefully before you invest. An investment in Nios ETFs involves risk, including possible loss of principle, and there is no guarantee the Nios ETFs will make monthly distributions, and the amounts may fluctuate from month to month. Cryptocurrency is relatively new, and the market has its own specific risks. Nios ETFs are distributed by Foreside Fund Services LLC. Our final question comes from Luis on Instagram.

Starting point is 00:40:32 Luis says, hey, I got a question. I bought a house in 2017 for $390,000. And now in 2006, it's worth $680,000. I do not want to refinance to get the money out because my interest rate is very low. But would it be wise to take out a helock to pay? purchase a rental property. Robert, we just talked about this on the episode using leverage in a responsible manner to buy an appreciating asset. And we even called out rental investment properties as a true real estate appreciating asset. So the question here for you, Lewis, is that you need

Starting point is 00:41:11 to say, okay, what do all the numbers mean? Go talk to Claude, chat, GPT, Gemini, sit down and say, I want to buy this property. It's $410,000. I need to be. to put X amount of dollars down. This is the county it's in. These are my property taxes. This will be the HOA. Here's what my insurance is going to be. Here's what I think I can rent it for. Here's what the maintenance might look like. Get all of the numbers spelled out and then say, okay, now if I borrowed that down payment of $100,000 or $50,000 or whatever it is from equity in my existing home, what's the interest rate I'm going to have to pay? What's that debt reservice payment? And at the end of it all, when you include the mortgage, the he lock, the vacancy rates, the maintenance,

Starting point is 00:41:55 everything, total cost. When you include every part of this, does it actually make money? And if that answer is yes in a very definitive fashion, then sure, go for it. I generally lean toward no helock, no matter the circumstance, because the last thing I want to do is have my house get foreclosed upon somehow some way because of a tenant who lost their job for showing up to work late three days in a row and they can't get their rent or whatever's going on. So I generally don't like Helox. But Robert's used him in the past. He's been successful with them. And they certainly work if you set them up in a very specific manner for a very specific purpose. But Robert, what'd you take? What I miss? Oh, you didn't miss anything.

Starting point is 00:42:33 I think you nailed it. Understanding the numbers is key here. I personally don't like the idea, but I get where you're at. You have a lot of equity. It's tied up in this one property. So if you're going to do this and you're buying a property, this second property in a area that has a higher capital appreciation than average, I think right now the national average is like 3.7% a year. That's not enough because when you look at the total numbers, let's say you, the HELOC is 7% and your current interest rate on your mortgage is 3%. Let's say you said it's low. If you combine those and it's 10% and you look at this property and go, okay, it is increasing in value and this neighbor that I want to buy 8% a year.

Starting point is 00:43:16 So you have a 2% negative balance of appreciation based on the interest rate. But then you have to consider everything else. They can see rates, property taxes, all of these other things. You just need to make sure you understand the totality of the numbers because you are going to have appreciation. You're going to have some tax benefits, all of the above. But you need to make sure that the numbers work long term because like Austin said, you don't want to go into a hole to get the.

Starting point is 00:43:43 the second property and then have negative cash flow month after month and sometimes year after year. Everybody, thanks so much for tuning into this week's episode of The Rich Habits Podcast. We are so grateful to have all of you come back every single week. Do us a favor. Check out the new Wall Street Favorites.com. Brand new, completely redid the landing page. A lot more information over there. If you're not yet checked out Wall Street Favorites.com, go do it because it's going to tell you

Starting point is 00:44:10 what Wall Street thinks about your portfolio. And if you've not yet checked out the Rich Habits Network, this is our community for our biggest fans. We're hosting Tuesday night, two hour long Zoom call live streams over there. We've got eight hours of video coursework now. We're answering your questions every single day in the DMs and in the posts. And we're investing in the companies like SpaceX, which Robert, raise your hand if you're excited for that IPO. We have four different SPVs, I think, that we've done that have access to SpaceX. So we're so, so grateful, so excited for that.

Starting point is 00:44:41 And if you want to get into the next cool big pre-IPO name, be sure to check out the Rich Habits Network. It'll be a link in the show notes below. I couldn't have said it any better myself. I am so proud of what we've built with the Rich Habits podcast and Rich Habits Network over the past few years. And if you're in that phase where you're trying to level up your knowledge, your income, your mindset, all of these things,

Starting point is 00:45:02 definitely check out the Rich Habits Network seven-day free trial. You can come in, join us on a call, kick the tires, check out all of the cool stuff going on inside the network. work and you can do it for free for seven days so check it out thanks everyone and we'll see you on thursday

Rich Habits Podcast - 172: APPRECIATING vs. DEPRECIATING Assets

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