Rich Habits Podcast - 24: Top 3 Reasons People Don't Become Rich Pt. 2

Episode Date: August 7, 2023

In this episode of the Rich Habits Podcast, Robert Croak and Austin Hankwitz revisit Episode 6: the Top 3 Reasons Why People Don't Become Rich. However, in this episode they introduce three new ideas and concepts that truly put the "velocity of money" in perspective. If you have a question for next week's episode, be sure to ask it through Instagram DMs! @richhabitspodcast---Be sure to check out Public's new ⁠⁠High Yield Cash Account paying 5.1% APY.⁠⁠ This is higher than anything else on the market and is FDIC insured up to $5M. ---Earn 5.1% APY using a Public HYCA, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Opt-in and share your email, ⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠Learn more about our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠4-module video course!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Download our FREE Budget Template, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠To learn more about Robert: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://stan.store/RobertJCroak⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠To learn more about Austin: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://stan.store/austinhankwitz⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Contact: [e-mail] ---Hankwitz Group LLC has an existing business relationship with NEOS Investment Management LLC. The opinions expressed are those of the author, and the author owns several NEOS ETFs.

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I just love my job. Get tickets now, the Devil Wears Prada 2 in theaters, May 1st, directed by David Frankel. Hey, everyone, and welcome back. to the Rich Habits podcast, a top 10 business podcast on Spotify. My name is Austin Hank Witts, and I'm joined by my co-host Robert Croke. Robert is a seasoned entrepreneur in his 50s with more than 200 million in company exits under his belt, and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business and actively advise some of the most well-known

fintechs around the world. As the show name might suggest, every episode. we talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives along the way. One from an industry veteran, which is Robert and the other myself, someone who's still in the process of building wealth and figuring it all out. Robert, what are we going to be talking about in today's episode? In this episode of the Rich Habits podcast, we will be revisiting episode six. You guys all love that episode, so we're going to put a little twist on it.

However, in this episode, we'll be introducing three new concepts. that will truly put the velocity of money in perspective. I think this is a very critical part of the podcast today, and I want everyone to really pay attention because what I see is the wealthy people and people that I engage with in business really tend to have their mindset skewed to when they get money, what can I do with this money? How can I invest this money and how can I get velocity with my money? And with the lack mindset, kind of that consumer-based mindset,

I just really see that a lot of them, the money burns a hole in their pocket if they don't have a play sport. So it's really important to understand this mindset shift of thinking like an investor and not a consumer. So important. I'm really excited about this episode. I don't think I've been this excited about an episode in a couple weeks. So let's jump into it with point number one. Let's compare sunk cost versus opportunity cost, right? So this is unfortunately a mistake I see people make all of the time.

If it's with their stock portfolio, maybe a real estate deal, or even a new business they're trying to start. The sunk cost fallacy goes like this. You invest your time, energy, and money into achieving something. For this example, let's say it's an investment into a stock. Then out of nowhere, the stock price goes down because the company announced that they're being sued by the FTC for fraud, and they notify their investors of a challenging year ahead. Well, you're already down 50% on your investment, but instead of cutting it, your losses and investing that money elsewhere, you say to yourself, well, I'm already in this

deep, I might as well stick it out until the end. By keeping your money invested into this losing stock, you're incurring something called opportunity cost, which means you're losing out on the next best investment, which in this case is the S&P 500. Now, the S&P 500 goes up on average about 10% per year, which means by staying invested in the other idea, you're not just losing 50% of your money, you're theoretically losing 60% of your money because that 10% the S&P 500 would have returned. I personally fell victim to this sunk cost fallacy all the time, especially with cryptocurrency, but at the end of the day, the smart investor knows that you can always earn a little bit more somewhere else. And it's incredibly important for people to understand that they need to take

into account the opportunity cost of staying with one investment, one idea, or anything that's taking your money out of the next best investment. You took the words out of my mouth, and that is a great explanation to this thesis because so many people they do their trading and they're investing based on emotion like a dog with a bone. And at the end of the day, take the emotion out. This is all about math and understanding the markets and the market cycles and understanding when it's best to cut your losses. So with that being said, Robert, walk us through the next key theme for this episode.

Yes, we're going to talk about early payoff. versus positive arbitrage of your money. So everyone listening, please take notes because this is so important for you to understand what positive arbitrage means to you. We hear from Dave Ramsey all the time how you should make double payments on your house, get it paid off as soon as possible. He says the same thing about your car and any other debts. The math just doesn't add up and I don't think Dave Ramsey could be more incorrect here.

Now, don't get us wrong. Bad debt is worth paying off. specifically high interest consumer debt. But if you have low interest debt on your car or your home or investment properties, you should leave that alone as long as possible. If I could get a 50-year mortgage at 3% interest, I would take it and never pay an extra payment. You just really have to understand the positive arbitrage model and how it works for you. If I can go get a mortgage for 3% and I can make 10% in the market and I have that 7% positive arbitrage. I will let the payments go forever. So I'm sorry, Dave, the math just doesn't add up on this one. It's just not in the favor of the

investor. I think a lot of people listening right now, especially if they're existing homeowners and they were able to refinance their mortgage during the pandemic when mortgage rates were 2.5, 3%. I mean, my mortgage is 3.3%, I think, and I'm never going to pay that off because why would it? the stock market is up 20% year to date, the NASDAQ is up 30% and the NASDAQ 100% is up 40%. Right? So at the end of the day, if I took, call it, this $500,000 of debt that I have on a mortgage that was at 3.3% and I used that money to pay it off, that was $500,000 that could have earned 10, 20, 30% in the markets, right? We're talking about the opportunity cost of $150,000 of gains because you decided to pay off your mortgage with 3% interest rate. So I totally agree with you here, Robert. It's something that I try and

practice myself as much as I possibly can, and it's unfortunately something I see a lot of people who are younger fall victim to. Yeah, I'll tell you a story that just happened a couple weeks ago, and it's not just for our youth. I had a call, a one-on-one call with a retired doctor, who I believe was 64, 65 years old, and he was asking me my thoughts of what he should do based around that he was selling one house and he was going to have all of this capital. and that him and his wife thought they should pay off their other house. And it was crazy to me because I explained it all to him. I explained opportunity cost, positive arbitrage.

And the house that he wanted to pay off, I think they had a balance of like $390,000 at 2.75% interest. I said, please, please, please do not do that. Take that money, put it into the market, bolster your funds where you have VOO and QQQ and your index funds and your stock. make the 10% there and leave the 2.75% alone. Two weeks later, he reaches out to me and says, yeah, well, I lost the battle with my wife,

so we went ahead and used all that money and paid off the property. And it was just really sad because by doing that, they left hundreds of thousands of dollars on the table over the next few years that they could have made in the markets with positive arbitrage. So it's really important for everyone to understand that and really research what positive arbitrage means and how it affects their finances. Now, what's the third theme for this episode?

Third theme is my favorite, timing the market versus time in the market. People just don't understand this strategy and I really want to dig in because so many people and we know a lot of them, Austin, feel that they can time the market. I was victim to it years ago. I was like, I'm smart. I understand stocks. I understand market swings. I can time the market and guess what? I couldn't do it just like most people cannot. That is why time

in the market is so much more important. By missing just a handful of the best days in the market, it can drastically reduce an investor's average rate of return. That's why time in the market is so important. And what that means is by having the time in the market, the longest that you can, and you're staying in the market, you're not jumping in and out, you're letting compounding do its job, And compound interest are the two greatest words to any financial person and anyone trying to build wealth. So it's just really all about understanding time in the market is so important to let your money compound. So Austin, take us away on this and break down the math a little bit for us. Yeah, I'd be happy to. So according to a recent study by Putnam Investments, a $10,000 investment

made into the S&P 500 in 2008 would be worth roughly 35,000. by the end of 2022. However, if that same investor was trying to time the market by treating their investment and somehow missed only the top 10 best days in the market over that 14 year period, right? Think about how easy it would be to miss those top 10 days. Their investment of 35,000 would shrink to be only 16,000. Now let's pretend they missed the 20 best days in the market. They would have actually lost money on their investment and it would be worth roughly $9,700. And if finally they missed the 30 best days in the market over this 14 year period, something that would be super easy to do if you're trying to time the market, they would only have

$6,000. Yeah, this is great. I love that you break these things down mathematically to show people what really happens when you try to do things that even the best in the business shouldn't do and that is trying to time the market. I don't know of anyone that can successfully do it, even the biggest hedge funds and some of the brightest minds in the world. And that is why we believe the best investing strategy is time in the market and dollar cost averaging, period, full stop. It's just the most important strategy for your success. Yeah, I mean, this is why Warren Buffett

says, you know, you should take your money and invest it on to the S&P 500 and forget about it versus trying to get it with a hedge fund and do the ins and the outs and this and that. I mean, we talk about time in the market versus timing the market all the time on our live streams on Thursdays on TikTok. So if you have not joined those, you definitely should. But we've never broken it down like this with the math. So I'm really glad we had the opportunity to do this. Yeah, that was amazing. I love it.

And I'm so glad we did this episode. With that being said, Robert, let's introduce the episode sponsor. This episode of the Rich Habits podcast is brought to you by Nios Investments. Nios offers ETFs that aim to offer monthly income while providing core portfolio exposure across equities, fixed income, and cash alternatives like T-bills. Their ATFs may be particularly interesting for folks looking to generate passive income inside of their investment portfolio. They even offer an ETF that provides exposure to the S&P 500 Index while aiming to offer

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securities will decline in value because of an increase in interest rates. We really appreciate you all, always hanging out with us during that very scripted advertisement. But with that being said, we cannot be more happy that Nios is a sponsor of the podcast. Both Robert and myself are invested into their SPYI fund. It is an awesome way to generate up to 12% distribution yield on your money. There's also CSHI, a cash alternative ETF that yields about 6.5% compared that to the 5.5 with T-bills, right? Their products are incredible. Cannot be happier

that they are a part of our rich habits journey. So with that being said, Robert, let's jump in to the most fun part of every episode, our question and answer segment. Our first question comes from Alexa N. Alexa asks, not sure if this is a topic you'd typically answer on the show, but what is your advice for startups looking to raise capital? My company is currently entering a pre-seed funding round, and I need all the advice I can get. Robert, this is something I would say you're probably more well-versed to answer, just considering all the different brands and companies that you've started. How have you raised capital and really bootstrapped companies perhaps in the past? Thanks for that, Austin. Alexa, I love the question. And there's just a few things I would ask you. Number one, do you need to do a raise? I personally love to bootstrap companies and get them to post revenue or at least get them launched because you're going to have a much higher valuation and then raise money. But you can look at it in many different ways. If you truly need the funds right out of the gate, you could do a friends and family raise. You could do a safe note. There's a lot of different ways you might be able to find an SBA loan or even go and

just get a credit line through the business at one of your local banks. I like Chase Bank. But there's a lot of ways to do this. You just really want to look at it from this perspective. Don't give away too much of the company too early on because if it really truly becomes very successful, you'll regret it later by basing your raise on evaluation before you've done anything. Whereas once the company's up and running, you've got a viable product. That it's a lot easier to get a valuation that suits both you and the investors so you're operating from a position of strike. Yeah, I just want to double click on that Safe note acronym that you mentioned. So Safe stands for simple agreement for future equity. Essentially what it means is you are perhaps pre-revenue

or, you know, a very new company. No one really knows what the fair valuation of your company is. So what these early investors, whenever they sign up for a safe, what they're doing is they're agreeing to, I don't know what you're worth. I admit that. And I don't think you know what you're worth either. So next time you do raise money, let's say add a specific valuation that is priced, I want a 20%, 30%, 40% discount to whatever that valuation is. 20% is normally the standard. So that safe is essentially a agreement between you and your investors, both kind of admitting, listen, we don't really know what we're valued at right now. But by taking in your money and signing this agreement, I will give you a discount on future equity because you believed in me so early.

Yeah, safe notes are great. I deal with them all the time. And what it really is. prevents and so many founders get this wrong is they come up with this pie in the sky, blue sky valuation. I dealt with it the other day where there was a pitch sent to me, great product, all, everything really, really lined up, but they had a pre-money, pre-product valuation of $40 million. And I was just like, you're never going to get anywhere when you put the valuation so high. So that's what's beautiful about a safe note is it takes the valuation out of the mix in the beginning. And if they believe in the product and the founders,

then you can derive what the valuation, the fair valuation is for everyone down the road. It's a great kick-the-can strategy that works for people that have a great product and people want to invest in, but they're not sure about the valuation and how to determine the valuation. Our next question comes from Dallas B. Dallas asks,

Love in the podcast thus far. However, you all mentioned a few episodes ago that inventing something is a great, way to build wealth. I have an idea for a product and I feel like it would be very successful. Do you have any tips on my next steps, specifically on how to get a prototype, maybe some manufacturing support, or even marketing? Robert, I am so unqualified to answer this question. You have done this time and time again. I'm going to let you take this one away. Dallas, this is a great question and so many people get it wrong. They either have analysis,

paralysis and they don't do anything with their idea or worse, they start moving ahead with their idea, but they don't protect themselves. So let's go into it. I like to look at it in kind of this napkin process where I'll take a piece of paper, a napkin when I get an idea and immediately start writing down the thoughts. And this happens frequently. So I start with the ideation process. What does this look like? What would it be? Is it worth developing? Is there enough people out there that would love the product as much as I think they would love the product? So ideation is important. Second is research. Does the product exist in the market already? if it does is your iteration better than theirs?

What can you do different because you're going to make the product better than what already exists? Because remember, you can make millions and millions of dollars in product development and bringing an invention or product to market just by iterating something that already exists. It does not even need to be a brand new idea. So keep that in mind. So then we're going to go to numbers three, the third point. Really start thinking about name you are.

and social media handles, because these are going to be really important. If you found that the product is viable, you've done your research and you're ready to go and you're like, yes, this is going to work. I'm going to move forward. Then you want to make sure that you can get a really good name for social media and also for SEO because search engine optimization is still very important for Google searches, Bing searches or any search like TikTok search. So that's important as well.

Next up, you're going to want to start getting your documentation in order. Because what I don't want you to do when you start sourcing is just go on Alibaba, find a factory, tell them your idea and say, what's it going to cost me? A lot of people do that. And then guess what? They have no control over the product. So the next step I want you to do before factory selection, get your drawings done. Whether they're simple drawings, CAD drawings, whatever you need for the various product. Get those drawings done.

Make sure that they're documented. So you have proof that you created these drawings and the IPs. is yours. Then what you're going to want to do is put together a manufacturer's agreement. Just Google Manufacturers Agreement, simple manufacturers agreement. You're going to get that put together. Then you're going to have an NDA as well. So then if you go on Alibaba, you start researching factories. You're going to go on to Alibaba, see who can make a product similar to yours. You'll have to do some searching to find out what product is similar. And then what you're going to do before you tell them anything about the product, you're going to make sure

that they're a verified vendor. You're going to make sure that they're not a trading company. And just so everyone understands it's listening, if you're thinking about using Alibaba, you want to make sure that they're not a trading company because all that means is they're a broker that's marketing on Alibaba to get people's business, then they're just going to go find a factory just like you would. So we want to make sure to follow that step. You're going to want to find two or three factories that you feel comfortable with. Then before you share the product, you're going to get that manufacturer's agreement. and the NDA in place to protect yourself.

So those are the steps I would do moving forward. And then also make sure that you're understanding the overall cost to launch this product because you don't want to get in a situation where you pay for your tooling. The manufacturer makes your sample run. You've got your 100 samples or whatever you feel you're going to order. Don't order too much in the beginning until you prove the concept. Then you're going to get that in and run out of money. So we want to make sure you have proper funding for your website, for your business structure, for the manufacturing of the product, and most importantly, the marketing.

Because if you have the best product in the world, but you can't get eyeballs, you're going to fail. So follow those steps. You'll be in really good shape and you will be set up for success. And most importantly, you'll have your idea protected so you don't have knockoffs show up in the market right away. There's something else here now. Something new. exclusively on Paramount Plus. It's the series Stephen King calls Scary as Hell. Everything here is impossible, but it's also real.

Sci-fi vision calls it the best show streaming right now. We're running out of time and we still don't know the rules. Don't miss what the movie blog calls something you need to watch. Saving those children is how we all go home. From Binge All Episodes exclusively on Paramount Plus. I didn't know that you could use Ali Baba as sort of a search engine tool to find manufacturers. I thought Alibaba was just like an Amazon marketplace.

That's so cool. I didn't know that. No, you're thinking about Alibaba Express, where a lot of people just go buy smaller quantities so they can drop ship or white label. Alibaba is fantastic. If you were to think about it, like Google, but make sure you protect yourself.

Let's say you're going to develop a new phone stand like this one. You've got your drawings and you're ready to go. I would go in and type into Alibaba's search bar, just like I would Google, aluminum portable phone stands. Boom, you get a list of all the factories that make an aluminum portable phone stand. You start to search them out. How long have they been in business? What are their reviews like, et cetera, et cetera? Then you message them with as much detail without telling them what the product is.

Hi, I'm looking for a manufacturer to develop a new OEM product that I have designed. Put all of that in that beginning email so you're protected. And then once you get that feedback and you get the customer service, you make sure that they're legit, all of that, then you start the contract phase to protect yourself. Really great question, Dallas. Our final question comes from Tyler W. Tyler asks, you all say parked money is dead money. I have a $10,000 emergency fund right now.

I'm considering taking a chunk out of it and investing it into the S&P 500 to make some more money with it. Should I keep it in the emergency fund or should I invest it? Should I put it into T bills maybe? Now, this is a huge, huge, huge, huge, huge important lesson for people to understand. A emergency fund is for emergencies. It's insurance. It's ensuring that you don't have to take money out of retirement and pay a 40% penalty. It's ensuring that you don't have to go into 28% interest rate credit card debt, right? It's ensuring you don't have to sell your house overnight because you need liquidity. It is an emergency fund. insuring you against tragic catastrophes.

For example, my dishwasher broke last month. I had to pay like $1,000 to get it fixed and a new one in this whole thing, a new motor, it was crazy. If I didn't have that money in my emergency fund, that would be a really big credit card bill, right? I'd have to pay $280 on interest on that credit card. So essentially what I'm saying here, what I'm trying to get at is it's a really, really good idea to keep all that money in that emergency fund to protect yourself against catastrophe

later. Now, you should want to earn money on your money, especially if it's an emergency fund. There are a couple ways to do that. The first one is T-bills, aka Treasury Bills. There's going to be a link below in the description to go sign up for public.com so you two can buy these T-bills on their platform and earn 5.5%. And if you use the rich habits promo code, you'll get $10, $15, $20 and free money to your T-bills account. But long story short here, by parking that $10,000 or a chunk of that money into the T-bills,

you can earn now 5.5% a.k.a. parked money is now parked in something that is creating velocity, right? You're earning money on your money. It's not dead at that point. Also, you can use a high-yield savings account. We recommend wealthfront. I use wealth front a lot for my taxes that I have to set aside throughout the year for my business. Really great platform, 4.8% I think yield right now on their high-yield savings accounts. But at the end of the day here, it's really, really important to classify your emergency fund money as an emergency fund and also have money set aside for investing and not really commingle the two of them because if an emergency does come up, you want to have that liquidity and you want to have that money set aside to make sure that you're not going to be hit with a 40% penalty if you take money out of your retirement or a 28% interest rate on a credit card.

The only thing I would add to this, Tyler W, is a lot of people keep way too much money in an emergency fund. And so you have to look at what are your monthly bills. If your total monthly bills are $3,000 a month, $2,000 a month, I would say keep three months of those bills, the total amount of bills, in a fund where you can get to it and get access quickly that has liquidity. But the rest of your money should be actively being invested in those treasury bills in the index funds, in the stock market, because you definitely don't want to have your money parked. So like Austin said, you want to keep the emergency funds separate and everything else needs to be. active earning you money because you have to at least, at the very least, try to keep up with inflation or better make 10, 12 percent on your money. Really good answer there, Robert. With that being said, everyone, thank you so much for listening to this week's episode of the Rich Habits

podcast. We have cracked the top five and we cannot be more thankful about that. We had it for, I think, two days. I think we're back now to number six, but that's okay. One week at a time, we have the most incredible community behind us. And quick announcement, we're building a Discord community so everyone will be able to join. Hopefully we'll have hundreds, if not thousands of people in there, asking questions, making friends, networking, meeting other like-minded individuals. It's going to be an incredible community. We're so, so excited about it.

So stay tuned on that. And as always, if you enjoyed this episode, share it with somebody. Share it with your barber. Share it with your next door neighbor. Next time you're at the grocery store and the checkout cashier is scanning something for it. Say, hey, have you heard about the Rich Habits podcast? Yes, I love it. thank you all from the bottom of our hearts for all of the support you've shown over the past

few months. It's been quite a ride for us. And we really appreciate all of you that listen to our podcast, the Rich Habits podcast on a daily basis. So thank you very much. And don't forget, if you love the podcast as much as we hope you do, please leave a five-star review. It helps us a lot and means a ton. Thanks, everyone. Have a great start to your week. And we will see you soon.