Rich Habits Podcast - 187: What Makes Someone Financially Free?

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Starting point is 00:00:56 Discover coffee plus on nispresso.com. 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'll know exactly how to calculate your personal number for financial freedom, how to build a portfolio that actually pays you that number every single month in retirement, and how to make sure that taxes and other bad decisions don't mess everything up once you get there. My name's Austin Hankwitz. I'm joined by my co-host, Robert Croke. Robert is a seasoned entrepreneur with lifetime revenues of over 300 million. I'm a multimillionaire in my early 30s with a background in finance and economics.

Starting point is 00:01:38 And as the show name might suggest, every single episode we talk about rich habits as they relate to business, finance and mindset. So, Robert, what are we going to be talking about in today's episode? Today we're breaking down financial freedom in four parts. First, we're calculating your actual freedom number. and I'll tell you right now it might not mean fully retiring. Second, we're building the nest egg that pays you that number every single month using a rule that's been around for decades, plus a couple newer tools that make it easier to live off of.

Starting point is 00:02:10 And third, we're attacking the other half of the equation that people completely ignore, lowering what you actually need every month so the number actually gets easier to hit. And fourth, we're talking about the tax bomb that's sitting inside almost everyone's, a retirement account that nobody plans for until it's too late. Austin, I'm so excited about this episode, long overdue, and I think this is really going to help a ton of people to be able to look forward 10, 20, 30 years and figure out how to do all this the right way. So let's get started. Let's do it. Let's start with that first part that you're alluding to, which is the freedom number. We've talked about this freedom number in the past, but it's a good opportunity to remind everyone what's

Starting point is 00:02:53 going on here. So your freedom number isn't about how much money you're earning right now. It's actually about what it costs you to live your life. Two people can earn the exact same salary, let's call it $120, $150,000 a year, but have completely different freedom numbers in retirement because one of them expects to spend maybe $4,000, while the other expects to spend $12,000. Now here's how you actually calculate the freedom number. You need to add up together what it cost you to live your desired lifestyle every month. Not your current lifestyle, but your desired lifestyle. Think housing, food, insurance, travel, whatever you actually want to live your life like in retirement, adjusted for inflation depending on your age today. So a quick rule of thumb as you

Starting point is 00:03:38 think about adjusting for inflation. Think about how much it would cost in today's dollars, then double the amount you need for every 30 years into the future that you're planning. So if you're like my dream like monthly expenses at 30 years old would be $10,000 a month. Then you're going to need to generate $20,000 a month in 30 years from now when you're 60 to have the same $10,000 a month buying power. So if you're 45 years old, that turns into 15,000 a month at 60. If you're 53 years old right now, that turns into about 12,500 a month at 60. It's a bit confusing. Tap into AI, as chat, GBT, GBT, exactly what you're looking like there. But that's a general rule of them to use. Austin, I want to keep going on this point because let's say that comes out to $10,000 a month in retirement after inflation and after taxes.

Starting point is 00:04:28 Multiply that by 12 and your freedom number is $120,000 a year of sustainable, reliable income. And we'll get back to this, but reliable is important. That's the target. That's the number. Every single thing we talk about the rest of this episode is in service of. So here's the part that trips people up along the way. Financial freedom does not automatically mean you stop working completely. That's a really common misconception.

Starting point is 00:04:55 If you love what you do and a lot of our listeners genuinely do, your freedom number can and honestly should factor in some level of earned income you expect to keep making by choice and not necessity. So let's say your $120,000 freedom number assumes you keep doing some consulting work and that brings in an additional $40,000 a year. That means your portfolio doesn't need to generate the full $120,000. It needs to cover the remaining $80,000. That's the gap your assets actually have to close. Now, this matters because it changes the math we're going to be talking about

Starting point is 00:05:31 downstream, which means essentially how big your nest egg needs to be, how aggressively you need to be saving and investing to achieve that nest egg, how soon you can realistically get there. If you assume zero earned income forever, you've got this larger nest egg you need. If you assume maybe a little bit of part-time work, which, like, honestly, like, that's what I plan to do, right? I mean, retirement for a lot of people isn't just sitting on the beach all day, doing absolutely nothing, right? We all have passions. We have ideas. We have side hustles. We have things that get us excited. So make sure when you're thinking, yeah, Robert's a great example here, right? In the 60s, as you think about your freedom number in retirement, also don't forget about including and sprinkling on some of that earned income if it's $20, $40,000 a year. So, Robert, step one here concretely is you got to write down. the realistic monthly lifestyle cost.

Starting point is 00:06:21 You're going to multiply that monthly cost by 12 to get the annual cost. You then will subtract any income you genuinely expect to be earning by choice from that annual number. So that 120 minus 40 gets you that $80,000 a year. And whatever is left, right, that $80,000 in this example, is the number your portfolio needs to produce on an annual basis to be financially free. That is the freedom number. And that number is personal to you.

Starting point is 00:06:50 It's different for me. It's different for Robert. Like personal finance has never been more personal than this freedom number. So now we got the target. Robert, let's walk through how we build something that's going to pay us that number over and throughout our retirement years. Definitely. Segment number two is you have to build that nest egg to draw the portfolio income off of. So now we've got our number.

Starting point is 00:07:12 Let's use the $80,000 gap from our example. How big does our portfolio actually need? need to be to reliably produce $80,000 a year without us ever running out of money. This is where the 4% rule comes in. The 4% rule is one of the oldest and most tested frameworks in personal finance. It says that if you withdraw 4% of your portfolio's value in year one of retirement and then adjust that dollar amount for inflation every year after, historically your money has a high probability of lasting 30 plus years without running out, even accounting for market

Starting point is 00:07:47 down turns along the way. So let's give some real math numbers here because this is where it is very important to understand how all of it comes to be. We have that $80,000 example. Robert mentioned the 4% rule. So what we're going to do is we're going to take that $80,000 number, divide it by 4%. So 8-0-000, divided on my calculator by 0.04. Enter. That gets you a $2 million number. That. That That's the nest egg. That's the number that you're actually building toward. Not some like, oh yeah, I can't retire to them a millionaire number. Like whatever. It's like, no, we have a real number now. It's $2 million. That's the specific calculated target that ties directly back to the lifestyle that you want to live in retirement. So now, remember, 4%. It's a guideline. It's not gospel. It assumes a diversified portfolio can vary depending on market environments.

Starting point is 00:08:43 when you start withdrawing, how longer money needs to last for, specific asset allocation. But it's a good place to start. It's a good framework to use. But again, like, it's so you aren't just guessing and throwing things at the wall. It helps you make sure you have something to work toward and some clarity in the future. But, you know, it's the stock market. No one can completely predict the future here and we're not claiming to. But the traditional way people think about hitting that number is you sell shares of stock that you own. in that nest egg. So you have $2 million worth of bonds and equities and whatever it might be. Okay, great. I'm going to sell shares of ETFs that are in this portfolio. Convert those shares

Starting point is 00:09:24 into cash. That works, but it means you're now constantly deciding what to sell, when to sell, selling during a down market, which could be a mistake for the future and damage your portfolio. It gives a lot of stress to you. So Robert, let's talk about some other strategies that people could begin to implement instead. Definitely, but I want to linger for a minute. at about 4% being a guideline because some people in our peer group say, hey, the 4% rules great, but it's okay if you spend 6%, 8% or whatever. No, it's not. We are living longer as human beings and it's going to continue to get better for all of us because of AI and technology and modern medicines. So I think it is very important to understand that yes, if you had a

Starting point is 00:10:07 down year or you had something come up and you needed to spend 5 or 6%, you could probably recover from it but do not look at it as just this basic rule that is not important so you don't run out of money. So I just wanted to linger on that for a minute. I think it's important for everyone. So this is where income focus strategies come in as an actual solution to the problem. Not a replacement for the 4% rule, but a tool that changes how you can remain true to it and execute upon it. Funds like the ones Nios runs are built specifically to generate monthly income directly from your portfolio, through these option-based strategies instead of forcing you to sell your underlying shares to create cash flow.

Starting point is 00:10:50 For example, for anyone listening, you know we love Neos funds. So you could check out SPYI, you could do QQQI, you could do IYRI. All of those are great examples of funds that we currently hold that are great for this strategy. And there's also a fund called HEDG. That's the equitable shares hedged equity ETF, which takes a different but related approach. It holds S&P 500 stocks and rights covered calls against those same holdings to hedge your overall market exposure, layering in some downside protection. So you're not just collecting income. You're also cushioning against the volatility that could otherwise force you to be selling at the wrong time.

Starting point is 00:11:35 HEDG. We love that one as well. So, however you build it, the goal is the same. You want your $2 million nest egg actively generating cash flow for you every month instead of sitting there as a number you're afraid to touch. And even with a great income strategy, you still need to have another layer of protection in retirement. That's called the liquidity buffer. This is separate money, call it maybe 12 or 18 months of expenses sitting in a short term treasury apart from your invested capital because if the market, it downturns 15, 20, 25, 38% like it did in 2022. And that tends to happen the exact same month something happens to your car or the water heater does something bad and you now have to come up with thousands of dollars. You don't want to be forcing yourself to pull extra money out of a depressed portfolio to cover whatever these expenses are.

Starting point is 00:12:29 And again, I want to remind people, the NASDAQ was down 38% in 2022. Like this stuff happens all the time. The buffer exists so that a bad month, a bad quarter, a bad year in your life never turns into a bad decision with your investments. So let's recap this, Robert. The freedom number tells you how much you actually need for that income gap, that $80,000. The 4% rule tells you the nest egg size you need to generate the $80,000. And then we've told, of course, you can sell shares of the $2 million or you can have some NEO's funds, you can have HDG, whatever strategy you want. to help you draw that income in without always liquidating those shares if you don't have to.

Starting point is 00:13:11 And then having that liquidity buffer to protect everything from being disrupted by real life because when it rains, it fricking pours, Robert. Well, let's get into our next section, but I do want to say that I love the part you covered about liquidity buffer because I feel like that's one that nobody talks about and prepares for. And it's just so important in retirement because you can't just in retirement just all of a sudden go produce money at your job or you know, sell an asset from your job, you don't have that anymore and you need to be really prepared. So I love the liquidity buffer part. But let's get into segment three and that is lowering your expenses heading into retirement, those monthly expenses. And here's something people miss and it's not

Starting point is 00:13:52 as exciting as picking the right investment is every single dollar you don't need to spend every month. Is a dollar your portfolio doesn't need to produce. I know that's a lot, but follow along. And because of the math, we just walk through, that has a massive. multiplying effect. Remember, we divided our income gap by 4% to get our nest egg target. That means every thousand dollars a month you cut from your expenses is $12,000 a year you don't need your portfolio to generate. And here's the kicker, which means $300,000 less you need saved using that same 4% math. So let's say that again. Every thousand dollars you can cut from your monthly budget is 300,000 less that you need in your nest egg. So lowering your expenses isn't just

Starting point is 00:14:39 saving money. It's directly shrinking the size of the mountain you have to climb heading into retirement. So as you think about this, right? I love it. Making sure that when you do retire, you are being very meticulous about those monthly expenses because I want to just for a third time, a thousand dollars, a month of expenses that you do not have to rely on. That might be a car payment. that might be subscriptions, that might be food eating out, whatever, $1,000 a month that you don't have to rely on of expenses, is $300,000 that you do not need in a portfolio to generate that monthly income for you. So, like, really take that to heart as you think about, do I need $10,000 or can I get away with $9,000?

Starting point is 00:15:21 Is that, you know, $300,000 here? Heading into retirement specifically, the highest leverage move as it relates to getting rid of that $1,000, or whatever the number is, is getting rid of that bad debt. Bad debt, we talk about it all the time. High interest debt, not attached to an appreciating or income producing asset like real estate, credit card balances, think personal loans, something else that's sitting at that 10, 12, 15% interest rate. If your portfolio is doing 6, 7, 8, 9, 10%, and you're paying 12, 15, 18% on a credit card, you are going backwards. Get rid of the bad debt before you enter retirement. Debt has to go. Can't do it. There's also the mortgage, which is another tricky one because it is debt and it's not an income

Starting point is 00:16:04 producing asset, assuming it's your primary residence. It's a debate. We've had a whole episode actually talking about this, our episode debating with Dave Ramsey's like baby steps. Robert and I kind of walked down back and forth what we believe, what we don't believe and kind of, you know, we talked about the mortgage. Walking into retirement without a mortgage means you have a dramatically lower monthly overhead.

Starting point is 00:16:26 And that freedom number, that how much. you need in retirement drops dramatically, right? Think about it, Robert. You have a $3,000 a month mortgage. That's $900,000 that you do not need now in a nest egg to live in retirement. But it also means you're paying off a mortgage. Walk us through, Robert, what that could mean for someone's, you know, interest rates. Yeah, I think, and we've talked about this many times, this is where the real debate comes in. Because if you locked in a mortgage at three or four percent and your portfolio is earning meaningfully more than that, that's where the real argument for keeping the cheap debt, and letting your money keep compounding elsewhere instead of rushing to pay it off.

Starting point is 00:17:03 That's where it all comes in. And there's no universally right answer here. It depends on your risk tolerance. And honestly, your peace of mind. Some people sleep better with zero mortgage payment regardless of the math. And some people would rather arbitrage that money and keep the low interest mortgage and make more with their money in the stock market. That is why personal finance is personal. But I also want to cover car payments because.

Starting point is 00:17:29 in this category, it could be subscriptions you forgot you're paying for, memberships you don't use, whatever reoccurring expenses have crept into your life over the years. These are smaller individually, but they do add up, and they're the easiest to cut because there generally is no real trade-off. Yeah, totally. Get rid of that high car payment. Get rid of that subscription you don't care about anymore. Whatever it might be, get rid of it, because every $1,000 that you get rid of is $300,000

Starting point is 00:17:58 less that you need. The overarching point of this entire section is that people spend years optimizing what stocks to buy, what ETFs to own, and they don't spend enough time trying to optimize what they're actually going to spend every month in retirement, even though that second lever is more important, it has a bigger effect on how soon someone can hit that number. So, Robert, let's now wrap this up with the big tax bomb that we alluded to that people might be forgetting about. This one is, I think, probably the most important because it's impacting people that have done everything, right?

Starting point is 00:18:33 They know the number. They built the nest egg. You've got the income coming in. Your expenses might be trimmed down now. But what is the IRS going to show up for here? Yeah, I agree, Austin. The IRS shows up with a bill you didn't plan for. And this is where required minimum distributions come into play.

Starting point is 00:18:49 So here's what they are. If you have money sitting in a traditional 401k or a traditional IRA, meaning you got a a tax deduction when you put the money in and it's grown tax deferred ever since. The government actually forces you to start pulling money out and paying taxes on it, whether you actually need the money or not. In this section to me, God, it's really hitting me hard right now is most people just have no idea about this and they don't prepare enough for this portion of it. And I think it really gets them off track.

Starting point is 00:19:19 So right now as it stands, the age is 73 and it's already actually scheduled to move to 75 years old by 2033 under the current law. But as of today, if you have pre-tax retirement accounts, 73 is the important number you need to know. So here's why this catches so many people off guard. Let's say you've done a great job saving. You've got $1.5 million sitting in a traditional IRA by the time you hit 73 years old. The IRS has a formula based on your age and account balance that forces you to withdraw a specific amount every year. And that withdrawal counts as ordinary income stacked right on top of Social Security and anything else you're bringing in. And if you didn't actually need that money this year, you're now paying taxes on income you didn't ask for and it can

Starting point is 00:20:05 bump you into a higher tax bracket than you expected in retirement. So let's kind of rewind on that. I think it's important. At the age of 73 years old, you will have to start taking money out of your traditional IRA and traditional 401k accounts. That money you take out will be taxes or ordinary income. That amount of money you take out is a number that the IRS has already predetermined by your age and how much money you have in these accounts. So what could happen is, to Roberts point, you might not need that money that year because maybe your earned income is doing fine. You have a pension or maybe Social Security. Something's happening here. But you still have to withdraw this money from these accounts. Now get bumped up to maybe a higher tax bracket than you were expecting. And now your tax bill

Starting point is 00:20:50 is materially eating into your ability to be financially free in retirement. So like, this is a really important section that you need to do more research on, talk about this with your CPA and your financial planner to better understand exactly how, especially if right now you are in your 50s or 60s and you're getting ready to retire pretty early or whatever's going on, how required minimum distributions are going to impact you. Now, the solution is this. Roth conversion window. The Roth conversion window becomes one of the most underused strategies. in retirement planning. And here's the idea as to why. The years between when you actually retire, call it 65, and when the required minimum distributions kick in at 73, that eight-year period of time,

Starting point is 00:21:32 are often the lowest income years of your entire life. You're not earning that 120, 150, 180,000 salary anymore. You're not yet forced into the required minimum distributions. That could be maybe even six figures a year. It's the cheapest window you'll ever have. to convert money from that traditional IRA into a Roth IRA or whatever the Roth equivalent account is that you're working with. Meaning you pay taxes on it now, but you're paying taxes on it as someone whose tax bracket might be, I don't know, sub 20%, sub 15%, whatever it might be for you versus in the future with those required minimum distributions on top of a Social Security on top of something else. Now you're bumped up to 22, 24, 26, 28%. And you're now paying

Starting point is 00:22:19 taxes to the government because you did poor planning earlier in your mid to late 60s. And remember, when you convert this to that Roth account, it now grows completely tax-free with zero required minimum distributions required on the Roth money for the rest of your life. So getting as much money converted out of that traditional IRA into a Roth account, while you have no required minimum distributions, is definitely a pro tip. This is called bracket management. Instead of getting hit with a massive unplanned tax bill starting at 73 years old, you're strategically converting small chunks every year during low income years, filling up your current tax bracket without spilling over into the next one and diffusing this bomb that is slowly ticking against you,

Starting point is 00:23:06 and now you're doing it in such a way that allows you to save money on taxes. I am blown away by this episode, just thinking about bracket management. You never hear anyone talk about this. You You never hear anyone in our peer groups breaking this down so people don't get these surprises. I like that you use the word bomb, this tax bomb, because it is something people are not really expecting and are not prepared for. So please make sure if you see this episode, take some notes, get it to your tax people, maybe use chat GPT or whatever your AI is that you can really understand your own situation to make sure you prepare for this because I think it is really, really important. So the broader lesson here that's tying this whole episode together, hitting your freedom number isn't just about the accumulation phase. It's about structuring things to the government or bad debt or an unplanned expense. Don't quietly take a bite out of the freedom you've spent years building.

Starting point is 00:24:05 So Austin, let's go into the action steps. Here's your checklist from today's episode and ask yourself these four questions. Number one, do you actually know your freedom number, factoring in any income you plan? and to keep earning by choice an actual dollar figure, not a woo-woo number that's out there that you're not sure of. Two, have you calculated the nest egg required to close the gap using the 4% rule, and do you have a plan for generating that income monthly without just liquidating shares whenever you need cash?

Starting point is 00:24:37 And number three, have you attacked your monthly expenses as hard as you've researched your investments, starting with any bad debts sitting above that 10 or 15%. Mark and number four, do you have a plan for the years between retirement age and 73? And this is very important for those of you that might want to retire early. You need to make sure that in those lean years, you're prepared specifically around Roth conversions. So those RMDs don't blindside you with a tax bracket jump you didn't see coming. So if you can't check off all four of these, that's exactly where you need to focus next. Totally agree, Robert.

Starting point is 00:25:14 And I think a misconception to round off the episode is people think a four. Freedom number is a net worth number. Oh, my net worth is $2 million, $3 million, $4 million, whatever. I've got this much of my home and my business is worth this and whatever it might be. Freedom is cash flow. Cash flow, cash flow, cash flow. And that cash flow has to offset your expenses in retirement. If you can offset your monthly expenses with that cash flow, if it's coming from your portfolio,

Starting point is 00:25:40 if it's coming from a rental, if it's coming from whatever in the future, if you can offset your monthly expenses, you are financially free. figure out how to ensure you can keep that cash flow, and it's going to continue to trend up into the right for you while also optimizing for taxes as we get older. Yeah, and I think it's important. Like even in the Rich Habits Network the other day, we talked about the broke millionaire thing, and it's just really important for people to understand. You need to have that cash flow to be able to make it through anything. And that's why this episode is so important to prepare all of you for the pitfalls and things

Starting point is 00:26:12 you need to understand so you can prepare and not just rely on someone from a brokerage to tell you what to do without knowing exactly everything going on in your life and in your lifestyle and situation. Completely agree. Now, Robert, before we jump to our Q&A section of this episode, got to give a shout out to public.com, a great platform to use to start building your nest egg. The investing platform for those who take investing as seriously as we do here on the Rich Habits podcast. On public, you can build a multi-asset portfolio of stocks, bonds, options, cryptocurrency, and now they have generated assets, which allow you to turn any idea into an investable index using AI.

Starting point is 00:26:51 And it all starts with your prompt. From renewable energy companies with high free cash flow to semiconductor suppliers growing revenue over 20% year over year, you can literally type any prompt and put the AI to work. It screens thousands of stocks, builds a one-of-a-kind index, and even let you back-tested against the S&P 500, all with just a few clicks. Generated assets are like ETFs with infinite possibilities. they are completely customizable based on your thesis, not someone else's.

Starting point is 00:27:19 So go to public.com slash rich habits and transfer your portfolio today. That's public.com slash rich habits. Paid for by public investing, full disclosure in the podcast description. So our first question comes from Ryan on Instagram. If you got a question to ask us, DM us on Instagram at Rich Habits Podcast. Email us at Rich Habits Podcast at gmail.com or join the Rich Habits Network. Turn on your camera during our weekly Zoom call and ask us a question. question face to face. Our first question comes from Ryan on Instagram. Ryan says, Austin and Robert,

Starting point is 00:27:50 I really appreciate the podcast. I'm 33 and I've been investing for about eight years. When I got married, I realized I needed to get much more intentional with my money and that really kicked off the process. Early on, I got hooked with rich dad, poor dad and even some Dave Ramsey and I took pieces from both that worked for me at the time. I've always been a little contrarian and didn't follow much of the traditional financial advisor advice because I've learned that to your point, personal finance really is personal. My progression has been to budget hard by cash flowing rentals using the Burr-style approach, build cash-flowing stock and ETF income, flip cars and furniture and clothes for extra cash, and invest as much as I can into index funds. My goal has always been

Starting point is 00:28:30 in early retirement. I'm now worth around $1.86 million and recently got to the point where investment cash flow could cover my expenses until I realized that I had completely overlooked health insurance. As I'm continuing to build my nest egg, are there any other cash flowing assets you think I should consider? Robert, I feel like you've been doing cash flow your whole life here. What are some of your favorite cash flowing assets that you would recommend people learn about as they're thinking of building up passive income in their own lives? Yeah, I mean, I like where Ryan's at here, and I think he's off to a good start. He's tried a lot of different things with cash flowing in the per method, stocks and incomes, flipping cars, furniture, all of these different things.

Starting point is 00:29:15 But I don't see anything about owning like gold, silver, copper. I don't see anything about dollar cost averaging the Bitcoin. I don't see anything about owning some small business equity in some small businesses, maybe since, you know, if Ryan here knows how to work on cars and flip them and he has the understanding of cash flowing rentals and stuff like that, he's probably going to be really good at owning parts of businesses or maybe buying already established businesses and owning them all himself. So I would get a little more diversified away from these kind of hustle culture products and get into some more cash flowing items so he can scale even larger to be able to,

Starting point is 00:29:59 you know, retire early. So I would start with dollar cost averaging into Bitcoin, look at buying into businesses or maybe owning just equity in some businesses, maybe do some of this pre-IPO venture investing that we do into companies that are already growing but haven't IPO yet. So I think there's a lot of options here for Ryan and anyone else listening that's got a really good base understanding and has a bunch of stuff happening but wants to accelerate their growth but also have more diversity. I think to answer your question plainly, what other cash flowing assets you should consider. I'm a big fan of covered call ETFs, specifically Neos funds, because I think they make the best ones, but like you can go find whichever ones you want. I'd learn how to write covered calls on

Starting point is 00:30:44 your own. You talked about how much you have invested into index funds. Like maybe there's a world where you can learn how to write a covered call that's, you know, a month away, extremely out of the money that's going to help you generate another four, six, eight percent, you know, yield, cash on cash yield on your portfolio. Neos funds generate 12, 15, 28 percent, depending on which one you own there, or the boosted funds do really well. I mean, I know people that have so much money in NEOs funds that they're making $30, 40, $50,000 a month from NEO's funds. So, like, that's the definition of cash flow when you don't have to do a single thing

Starting point is 00:31:19 and the money just gets deposited to your brokerage account. So you mentioned index funds. I would encourage you to look more into Nios funds, which are SPI, QQQQI, IYRI, M-L-P-I, B-T-C-I. they're boosted series funds, go learn about those. But like, if you're looking for like true passive income cash flowing assets, I think NEO's funds or any other covered call, you know, ETF out there that you decide on, I just think Nios funds are the best to do it when it comes to taxes and like, you know, writing it out of the money and all that stuff. But I think learning more about covered calls and how you could begin to generate more income of your existing portfolio

Starting point is 00:31:58 of index funds, I'd start there. Yeah, I love that. That is a great ad on top of small businesses and the other thing that I mentioned. So our next question comes from Colby. Colby says, hey Austin and Robert, I want to start by thanking you. The Rich Abbott's podcast has been a daily listen on my commute for the last couple years and it's genuinely been a catalyst for changing my life financially. Let's go, dude. Colby says, whenever someone asked me a financial advice or resources, I always suggest your podcast. I'm 33 years old and had a negative net worth just three years ago. Around that time, I decided I was going to learn how to make money and invest. I left hospitality the operations and I got into sales. My income has increased every year and this year I'm on track to

Starting point is 00:32:38 make $300,000. Dude, awesome. Let's go. You can't, I love this, Robert. And I know I'm going on a little squirrel tangent here, but people forget how powerful it is. You know, you can only save so much money by cutting your expenses. You got to jack up that income eventually. And Colby's done that here. Colby says I kept my expenses low to around $4,500 a month. I invested consistently. And now I have have 46,000 in my 401k, 27,000 in my Roth IRA, 102,000 in my taxable brokerage account, and 35,000 in cash in a money market. I owe a truck loan of 42,000. Now, my goal is to build a simple buy-and-hold strategy that allows me to put the majority of my energy into continuing to build my skills and career in sales. I invest aggressively and I become work-optional at 40 years old.

Starting point is 00:33:27 At that point, I'd love the freedom to transition into remote sales contract rules so I can travel or possibly build a coaching business around helping young men achieve their sales goals. Now, my question is around real estate or the markets. I work in residential real estate sales for a home builder. So I understand buying and selling homes pretty well and I constantly feel the itch to buy my first rental property, either as a single family home or a duplex to house hack like you all talk about. Currently, I'm renting. How do I know when I've built a strong enough financial base to buy my first property? And more importantly, knowing my long term strategy, do you think adding real estate is a smart diversification strategy or my potentially creating a second job for myself or my time and mental energy might produce a better return by staying focused on my sales career and continuing to invest aggressively in the markets?

Starting point is 00:34:17 Ooh, I love this question because I'm a big believer in these like the idea Robert of like brain calories. I think a lot of people make the mistake of having 92 different things they're working on where if they just focused on one thing got exceptionally well and. really, really good and strong at that one thing, it would more than pay for all of the other things they're working on. I think it was Sawhill Bloom. I forget the quote he shared, but it was an awesome quote. It was like people go further in life by consistently showing up doing that one thing than being like mediocre at like a hundred things or whatever it might be. But like I love how Colby here is saying, hey, I can go do this. I can go do this. I can figure this out. Or is that just brain calories that I don't need to spend. I go all in on being the best salesperson I can be

Starting point is 00:35:07 and I'm going to make more money by spending time and focus on doing that. That's my answer, Robert. Colby's proven that he's able to go from whatever he was doing with hospitality operations. So now making 300,000 a year. Colby, go make a million. Go make two. Go figure out that coaching business. You don't need to be retired at 40 to have a coaching business and teach other people's sales. Go do that. That to me is the highest upside risk to reward. ratio, in my humble opinion. Now, I'm not saying that to diversifying to real estate. Real estate's great. Go have some real estate in your own portfolio like I do. But if you're saying it's going to take, you know, 10 hours a week distraction over here to have real estate or I have

Starting point is 00:35:45 that same 10 hours to week to focus on sales and go from 300 to a million over the next three years, I would do that instead. I agree with your take, Austin, 100%. And that's why I probably have a higher net worth right now. If I could follow your advice, you just laid out. for Colby here. I personally like distractions because I'm not good at doing one thing and one thing only. That's just how I'm built. That's why I've always been a tinkerer and someone that's got to own businesses and this and this and that. But I do enjoy buying real estate, developing real estate, buying small businesses and all that. So I think in Colby situation here, I would look at it this way. You're in sales in the housing world. So you know construction. You know what works.

Starting point is 00:36:31 you know contractors and subs and all those people. So I don't think it hurts to ever be diversified in the real estate world, especially because right now you're renting. You could go buy, I wouldn't buy a single family home. Don't get that itch. Go get a duplex, triplex or a quadplex, use the Fannie Mae 5% down mortgage. Buy that first property, live in one unit for two, three, four years, build up a bunch of equity.

Starting point is 00:36:57 Then reevaluate. If you love real estate and you can do it a couple hours of week. Like me in Ohio, I have a lot of real estate. I have one guy right now that works for me 25 hours a week. He keeps up with all the properties. He mows the lawn. He makes sure everything's great. You can get to that point pretty easily. So I agree with you, Austin. I think your take is fantastic. Brain calories are important. And many times when I buy a property, I bought one a month ago. A single family home is a great rental. I said to myself, man, do I really want to tie up this hundred thousand dollars when I can just go put it into you know these stocks or

Starting point is 00:37:32 ETFs we talk about probably make more but I like the diversification of having real estate so I think you can do both as long as it doesn't distract you with those brain calories so you don't keep earning more money so our final question comes from Michelle Michelle says hey guys love the podcast I've got money in a 529 account for my kids and now the plan is that my mother will be paying for their education so that's cool and I'm aware that I can transfer 35 thousand into a Roth for them over several years. But my question is, can I do this now while my kids are in high school and do not have an earned income? Or do I need to wait until they haven't earned

Starting point is 00:38:08 income of at least the amount being transferred? As this is a non-traditional way to contribute to a Roth, I'm unsure if the traditional roles apply. It would be nice to get them more time compounding in the markets in a Roth if possible. Great question. Let's break this down. Yes, the normal earned income requirements still apply, even though the money is coming from a five 209 rather than like the actual bank account. The 529 to Roth provision waives the normal Roth income phase out, but it does not waive the requirement that the beneficiary has to have that earned income for that year. So in plain English, it means that if your child earned $0 of taxable income that year in high school, you cannot roll anything over to that Roth IRA yet. If they earn

Starting point is 00:38:51 $3,000 from a summer job, you can roll up to that $3,000 from the $529 into the Roth IRA. If they've earned $7,500 or more, you can roll over that full limit of $7,500 to the Roth IRA. That's the breakdown. I think it's an awesome thing to do and really cool to hear that someone is paying for their college. What a great episode, Austin. I think this is going to really ruffle some feathers, but also wake people up to having a real plan. And I don't care if you're 25, 35, 45, 55 years old watching this episode. this is important for all of you because in my opinion and I see it every single day in the

Starting point is 00:39:31 Rich Habits Network in my DMs, I feel like people don't even think about their financial futures till they're like 40 or 45 years old. That's a huge mistake. So everyone listening of all ages, make sure you take notes on this episode because I think it's really important so you can retire comfortably, but also without the anxiety and the fatigue around worrying that you're going to run out of money. And please, join. us inside the rich habits network. Robert, you know, we've got the rich habits newsletter. And inside the rich habits newsletter, we do a monthly breakdown of the rich habits network. And I just want to shout out kind of the August in review. So in the month of August, Katie Stockton joined us for an

Starting point is 00:40:14 exclusive webinar inside the rich habits network. We offered four private investments, ranging from series seed all the way to pre-IPO. 161 questions from people that our members were asked inside the Rich Habits Network, and we answered all 161 of them. We posted 66 market research updates ourselves and our analysts. We shared 48 wins and enjoyed 12 hours of direct access to Robert and myself. So, like, all of that happened just in the month of August inside the Rich Habits Network. I am so pumped about what we're building.

Starting point is 00:40:50 We've got a great breakdown about it on our About page. So please just click the link below or go Google Rich Habits Network. It's going to pop right back up. And you too can join the 200 plus people that joined us. 203, Robert. 203 people joined us inside the Rich Habits Network during the month of August. It's unbelievable. Yeah, I think it's really a testament to what we've built.

Starting point is 00:41:13 And the retention rate is so incredibly high. And Elizabeth and I, we've been talking about. about it earlier today, how there's over a thousand members now, a thousand people that have found the Rich Habits Network and feel so passionate about it that it's helping them with their business, their mindset, their personal finances, and they're investing. So I'm really proud of it. I know you are as well. And it's just really incredible to see in the last two and a half years what we've built and how many people have stuck around. Could not agree more. Everyone, thanks much for tuning into this week's episode of the Rich Habits podcast. And we'll see you on Thursday

Starting point is 00:41:47 for a Q&A episode.

Rich Habits Podcast - 187: What Makes Someone Financially Free?

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