The Personal Finance Podcast - The Wealth Flywheel: How to Systematically Grow Your Income (Fast!)

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Starting point is 00:01:00 how to systematically grow your income fast. What's up, everybody, and welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of MasterMoney.com. And today on the Personal Finance Podcast, we're going to be talking about wealth flywheels. If you guys have any questions, make sure you join the Master Money newsletter by going to mastermoney.com slash newsletter. And don't forget to follow us on Apple Podcast, Spotify, YouTube, or whatever podcast player, you love listening to this podcast on it. If you want to help out the show, consider leaving a five-star rating and review on Apple Podcasts, Spotify, or your favorite podcast player.

Starting point is 00:01:56 I'm going to thank you guys enough for leaving those five-star ratings and reviews. Now, today, we're going to be diving into Wealth Fly Wheels, which is how to systematically grow your income fast. Now, if you want the free guide to Wealth Fly Wheels, we will link that up down below in the show notes so that you can access that free guide as we go through. this episode. Now here's what I want you to understand is that building wealth is like a flywheel. So at first, it's going to start slow and you're going to have to rely on your savings rate to do all the work because early on you don't have enough cash producing enough income for you. And so you're going to have to rely on your savings rate, meaning you're going to have to do a lot of hard work early on. And this is why the first 100K is so difficult because the majority of the work that has to be done has to come from you. But as time goes on and as your wealth begins to grow, all of a sudden, the amount of money that you have invested is going to be producing

Starting point is 00:02:49 enough cash flow for you to be able to live on. And then soon, you'll say, ooh, it produced enough cash flow to pay my electric bill. Ooh, this produced enough cash flow to pay my mortgage. And, oh, wow, I can actually stop working now because I have enough cash flow every single month to actually fund my lifestyle. And so this is where wealth flywheels are going to come into play. Because at some point in time, you're going to see the light of day. And it is absolutely amazing once that light bulb goes off. So today, I want to introduce a concept to you that I call wealth flywheels. Now, these are investments that over time are going to begin to grow larger and larger. And if you reinvest the profits, these can become massive wealth building machines.

Starting point is 00:03:31 Now, the goal here is to master one flywheel and then you can move on to the next. Or you can grow your current flywheel so large that it replaces your income. Now, here's the core analogy, because a flywheel is something that is hard to get moving. It is something that is hard to get started. You're going to have to work to get it going. But once in motion, it gains momentum, spins faster, and eventually sustains itself with little effort. Now, wealth works in the exact same way.

Starting point is 00:03:59 You have slow, heavy effort up front, saving, learning, discipline, and then exponential momentum, which is cash flow, reinvestment, and compounding over time. And so this is how well flywheels are going to, to work and I'm going to show you how to utilize them to increase your income. But first, let's define what wealth flywheels are because we need to understand what we are even talking about here so we can understand how to produce and create our own wealth flywheel. And so a wealth flywheel is any investment or asset that number one produces cash flow. So we want this to be able

Starting point is 00:04:33 to produce cash flow so that we can reinvest it in our flywheel and grow it larger and larger over time. Number two, it can be held and built over decades. So, many long-time listeners know what we talk about here is investing for the long term. And we want you to be investing for long periods of time. If you are someone who gets in and out of stocks or you're someone who buys a piece of property and flips it, that's not what a well flywheel is. Instead, what we are looking for is something that is going to produce enough cash that we can then reinvest over time. Number three, is it can compound over time when reinvested. And so you're going to see this in a lot of different areas from businesses to real estate.

Starting point is 00:05:10 You're going to see this from stocks. And there's a lot of different ways that you can compound your money over time when you reinvest those dollars. Number four, it needs to scale with momentum, meaning it gets better, easier, faster over time. What you're going to see is that once people start to get wealthy, earning money becomes a lot easier. It becomes a lot faster, and momentum begins to propel them forward. And we've talked about this a number of different ways. We have an episode talking about why it is so difficult to get to your first million dollars. And we have another episode talking about what your first 100 can. is by far the hardest. So Charlie Munger mentions this when he says, your first 100K is the hardest

Starting point is 00:05:49 by far. So do whatever you can to get to your first 100K. Then life gets a little bit easier over time. And again, the reason for that is because you have to save enough to get to your first 100K. But then your money starts to take over. It starts to compound. It begins to spin off cash flow. And then all of a sudden, everything changes. Now, number five, the fifth component of a wealth flywheel is it needs to spin without your direct effort at some point in time. So eventually your goal is to make sure that this wealth flywheel can work without you. It needs to spin without your direct effort. And because of this, this is where financial freedom comes into play.

Starting point is 00:06:25 And so really, really important things that we need to talk through as we talk through the phases of each flywheel. Okay. Now, the wealth flywheel is going to have five different phases because we have these components that it needs to have, meaning, again, the components are, number one is it needs to produce cash flow. Number two is it can be built over decades. Number three is it can compound overtime when invested. Number four is it scales with momentum. And number five, it eventually spends without your direct effort. But there's also five phases to the well flywheel that I think we need to understand

Starting point is 00:06:54 as we begin to talk about some of these areas that you can turn into a well flywheel. Number one is the ignition, which this is the area that is high effort and high return. So during this time, you're going to be saving aggressively, meaning the majority of the work is going to come from your savings rate. you're going to be working really hard. And a lot of times people at the very beginning, they don't make much money. And so your goal is to find a way to grow the gap, meaning the difference between your income and your expenses, that is the gap. And the bigger that gap is the more money that you can put towards financial independence. Also, during this time, you need to be learning the basics. So when you are thinking through this and you are earning an

Starting point is 00:07:31 income, you need to decide, I am going to stay disciplined and learn the basics so I know what to do with this extra income. And during this time, you can be building up capital once you identify what you actually want to do because you really don't have momentum yet. It all comes from you. It all comes from your power. But then what's going to happen is phase two, which is stability. So you've decided to start investing in a flywheel and you start to see the fruits of your labor,

Starting point is 00:07:59 meaning that the flywheel is going to slowly begin to start turning. Maybe it's rental income. Maybe it's dividends. Maybe it's business revenue. and it all begins to trickle in. And so what you do is now you're going to reinvest those profits, which takes you to phase three. Once you begin to reinvest profits within your wealth flywheel,

Starting point is 00:08:16 that means cash flow is reinvested, and you're in the acceleration phase. Now, the acceleration phase means that the flywheel is going to begin to grow larger because when you reinvest capital into this flywheel, the ROI is going to increase because you have more money invested. And so now we start to see momentum happening, which is phase four. This is where we start to see exponential competition. And so we've talked about this a number of times, getting two different metrics so that you can see

Starting point is 00:08:41 this exponential compounding. An example of this. If you have $10,000 invested and you get a 10% rate of return, that means for that year, you have $1,000 return to you within that year. If you have a million dollars invested and you get a 10% rate of return, that means you get $100,000 for that year. Now, this is just easy math. Don't get into the nuances of compound interest here. But what I'm saying is once you get started and once this really starts to grow and these, numbers start to get bigger and bigger, the amount of money that you're going to make every single year is truly infinite if you understand how well fly a wheels actually work. If you actually understand this concept and you understand that reinvesting your dollars over time and getting as much

Starting point is 00:09:21 money as possible into these flywheels is absolutely going to change your life where you can achieve financial freedom, you're going to understand how fast this momentum can grow. And I've seen this a number of different times in various different asset classes. This is what we're going to be talking about next, but I've seen it happen in real estate. I've seen it happen in the stock market. I've seen it happen with businesses. I've seen it happen with a bunch of other different asset classes where you can turn anything into a wealth flywheel as long as you have the know-how. Now, the fifth phase is freedom, meaning it's self-sustaining wealth. So at that point in time, the flywheel is working on its own. You're reinvesting those profits and it is just continuing to

Starting point is 00:09:59 grow more and more and more. And you can pass these flywheels down to future generations. They can produce income for those future generations. It is absolutely amazing what you can do over time. And so again, to qualify as a wealth flywheel, it must produce consistent cash flow. It must be scalable and reinvestable. It must be long-term focused, require upfront effort or capital, and rewards, time, and patience. And so that is the description of how a flywheel is going to work. Now what we're going to do is we're going to dive into the various types of flywheels next. All right, so flywheel type one, and this is the one that for most people is going to be the easiest to understand, is real estate. Now, real estate is an absolutely incredible asset class that people have had a harder time finding deals as of late.

Starting point is 00:10:46 Now, when it comes to real estate, understanding how to run the numbers is the name of the game. You make all of your money in real estate when you buy the asset, meaning that you have to have an understanding of real estate before you even get into it. Now, what a lot of people do when it comes to real estate, like me, when I first started, was I got into analysis paralysis. I read for five straight years about real estate before it actually did my own first deal. And honestly, if I would have read for about a year and did my first deal, I would have been way farther ahead than waiting that long. And so when it comes to real estate, this is something where I think you need to take six to 12 months to learn and understand real estate by reading books, listening to podcasts, just like this, and going through the motions and talking to us.

Starting point is 00:11:29 other people who are real estate investors and maybe even asking if you can shadow them and have conversations with them when they analyze deals so that you have a good understanding and then you need to get some real world experience. So the first asset class within the real estate sector is single family rentals. So I have bought a ton of single family rentals in the past. And so this is something I understand very clearly. Now, they are much harder to find at this current time that I am recording right now. But that does not mean that this will not be a great asset class in the future. And there's a number of reasons why I like single family rentals. Now, here's how this flywheel works. And you can think of this as a circle. Cash flow is reinvested into saving for a down payment,

Starting point is 00:12:09 which is reinvested to buy another and then repeat it over and over and over again. So here's how cash flow works. Okay. It's usually your rent minus your mortgage payment plus interest, plus taxes, plus maintenance, plus capital expenditures. That's what's going to equal your monthly cash flow. Now, we have a real estate calculator. I will link it up down below in the show notes. I think it's 19 bucks that we created that you can check out if you want that teaches you how to run the numbers on a rental property. We also have an entire episode talking about that. And so if you want to check that out, we will link that up down below in the show notes. Now, typically, let's say, for example, that you set a parameter and you say to yourself, okay, when I buy a house,

Starting point is 00:12:48 I want to have two to $500 per month in cash flow or I'm not even going to consider buying that house. Well, that's going to give you some great parameters to figure out, okay, how much I'm going to make every single year? So for easy math, let's say you're going to make $500, per month that in some areas is very difficult to do in some areas that might be possible. And so if you're making $500 in cash flow every single month off a specific single family rental, well, now you know, I'm going to have $6,000 per year that I can reinvest into real estate. So let's do some easy numbers, okay? So if a house costs $100,000 in your area, sure, I know that sounds low.

Starting point is 00:13:20 We're doing this for easy math. Your boy doesn't do public math, okay? And so we're doing that and we're looking, okay, well, every three years, I'm going to have $24,000 in free cash flow that has been produced by these rental properties. Well, that's enough for a 25% down payment, meaning that when I have this first rental property, I'm going to be able in three years to have enough for a down payment for a second rental property. Okay? And so you're looking and searching, you find a second rental property that also produces $500 per month in cash flow. Okay? So watch how this flywheel starts to grow because you took the initial flywheel. You waited three years for your second

Starting point is 00:13:57 property, but now you have two of them producing $500 per month. Okay. So over the course of 24 months, which reduces it down to two years instead of three, now you can buy your third rental property. Okay. So now you have three rental properties within the first five years because you reinvested all the cash flow. You didn't take it and spend it on the Lamborghini. You didn't take it and upgrade your car from the Toyota to the Mercedes. Instead, you decided to reinvest it into assets that are going to produce more cash flow. This is how a flywheel begins to compound. And so in year five, you now have three rental properties that you can go out and purchase. Well, now they're making $1,500 every single month. And so it's going to compound over time where you can then buy more

Starting point is 00:14:43 properties, produce more cash flow, and have faster accumulation. And so this is what a lot of real estate investors do. So I have talked to a number of different real estate investors in the single family home realm who own thousands of homes now, because they started this way and all of a sudden the cash flow starts to produce and they understood how to run the numbers. They were very cautious in the homes that they bought and made sure that they made all of their money on the buy. And so when they started to do that, then you can start to upgrade to apartments if you wanted to go that route or you can just buy more single family houses or you can do developments. There are so many different cool things that you can do once your flywheel starts

Starting point is 00:15:17 to work. And so if you focus on properties that are in appreciating markets with strong rent to value ratios, that is going to be a great place to be. And then you can use. property management to remove yourself from the situation at some point in time. You're still going to have to manage the property manager, but you can get somebody in place who at least is managing the day-to-day operations. And so because of that, single-family real estate is something I absolutely love. Why? Another reason is because there's a lot of exit strategies with single-family real estate. You can flip the property if you want to get the tenant out of there. And typically, single-family rentals are always in high demand. And so it's

Starting point is 00:15:51 harder to get that higher cash flow number, but there are a lot of exit strategies and a lot flexibility with single-family rentals that you may not have with some of the other options. Number two is small multifamily, so duplexes, triplexes, and four-plexes. And so the way that this works is at the same thing. Now, typically, the cash flow is going to be higher with some of these multifamily units, only because there's multiple tenants there. And so usually you can run the numbers and find different cash flow numbers. I have had duplexes in the past.

Starting point is 00:16:17 I've had triplexes in the past. I've had fourplexes in the past. They do produce higher cash flow. They do have more headaches. And so because of that, there is a mass. massive trade-off because typically it is a different tenant in those types of properties than would be in a single-family house. And a single-family house, a lot of times they want to maintain the yard and mow the lawn and keep the house looking nice. And typically they stay three to five years. Whereas

Starting point is 00:16:39 in a duplex, triplex, quadplex, they will typically stay about one to two years, depending on what's going on. And so because of this, it has higher cash flow, but a higher trade-off of time. What is your return on your time? And that is something you have to weigh out. But here's how you can scale this model because this is a great way to have a really high cash flow and get their way faster. Number one is you can house hack your first unit. So if you don't know what house hacking is, that means you live in one unit and then you rent out the other unit. And so what happens here is either you're living for free or you're living at a deeply discounted rate because the other person in the other unit is able to pay for your rent or your mortgage,

Starting point is 00:17:20 allowing you to reduce your living costs. Well, this allows you to save more money to buy the next rent. rental property. And if you house hack, maybe you live there for two years and then you go to the next property, well, guess what? Now, you can do it again. Meaning you can get favorable terms because if you live in the unit, you're going to get more favorable terms than if you did not live in the unit. And so you can put less down. And there is a lot more cool options that you have by doing that. And so let's say you do this over and over and over again every two years. Well, all of a sudden, you can go from a duplex. Maybe you get a triplex next. And then you get a four

Starting point is 00:17:54 plex after that and you start to upgrade you bigger and bigger units, well, all of a sudden, you can see how this is going to scale in cash flow over time. You take the excess cash flow, you reinvest it to buy more properties, and you can have 100 units pretty quickly just by doing something like this. Now, a lot of people, when you talk about this on social media, I've seen a lot of people just be like, oh, you've got to have 30 houses before you're 30. No, that's not what I'm talking about here. I'm talking about systematically thinking through this and looking at the cash flow numbers and saying to yourself, can I actually scale this if I reinvest the cash flow over time.

Starting point is 00:18:25 It all comes down to how you run the numbers, though. So you have to be very conservative before you go and buy a property because if you're not and you're wrong, you're going to have zero cash flow. And so you've got to make sure that you understand how to run the numbers and understand how that works. And so if you don't, again, if you don't understand how to run the numbers, check out our episode where we talk about how to do it. It is really, really helpful.

Starting point is 00:18:46 A third way when it comes to real estate is short-term rentals. So you can look at Airbnb's or vacation homes. So I know a lot of people doing this now where they are buying Airbnbs or vacation homes and they are doing it in different areas and they are able to scale this much quicker. So if you're in a popular area, you can make anywhere from $2 to $5 to $7,000 to $10,000 per month depending on where your Airbnb is. And so because of this, you are able to reinvest that cash flow into another property. Now, typically Airbnb properties when you're making them specifically for Airbnb, you need to make sure that you are buying the property right. and so they're usually more expensive than would be a rental property. And so because of that, you're probably going to scale about the same pace as some other people would. But I know people

Starting point is 00:19:30 who have become financially independent by owning five, six, seven Airbnbs. And they literally don't have to work anymore because they have those Airbnb's available. And so this allows you to have that nightly rental income that is usually two to three times the amount of long-term tenants. It is variable, but it is higher margin. And the thing about Airbnb's is you have dynamic pricing and you have occupancy. So you're going to have to do a lot more work in terms of how many people are checking in and checking you out. And so what I would do is I would make sure from day one that I price in property management into an Airbnb property. Otherwise, you're going to be doing a lot of work. And that is just the way that it goes. So if you start with one well positioned

Starting point is 00:20:09 short-term rental and that thing starts to cash flow, you reinvest those cash flows into marketing and automation tools to increase your booking rates. Okay. And so once you start to increase those booking rates, now you can start to grow and expand to other properties. And you can do this across the country. If you wanted to say travel to different areas across the country and you wanted to have all these different houses, you can do it that way. I personally would prefer to have them all in specific areas so that I can then have one property manager managing them all within that area, one handy person, one cleaning crew, all that kind of stuff. And so that for me is something I would look at. Now, I would make it vacation friendly, but not overly seasonal. That is another big,

Starting point is 00:20:49 big caveat that I want to make sure that most people think through and use things like smart locks and cleaners and VAs to automate the management. So you can utilize a VA to help you with this process. I think that's a great way to do this. And we'll talk more about those in the coming months. Another one is self-storage units. The prices are coming down on self-storage units at the time I'm recording this. They were way overvalued as a short term. But I've seen Nick Huber, who has been on this podcast twice now. He owns over $100 million of self-storage units. And I've seen him as of late, stating that there are coming down and the prices are getting closer to areas where he would want to buy. And so because of this, this is something where you can rent to dozens or hundreds of small units

Starting point is 00:21:28 and you have no tenants or toilets or trash. It's low maintenance. And you have operating margins typically right around 40 to 60 percent is typically where you can land. But the key here is buying underperforming storage units, adding some rent occupancy by increasing technology, maybe making self-opening gates instead of having someone at the front desk, all these different things that you can start to automate now. And then you can add new units or climate control units if you have enough land there and adding value to the property. Adding value to properties is really, really important when it comes to these types of units, when it comes to commercial and or self-storage, because once you add value, you can pull more cash out. Now, what do I mean by that? Let's say, for example,

Starting point is 00:22:10 you find a really run-down storage unit. And you say to yourself, okay, here's what I'm going to do. I'm going to take this storage unit. It doesn't have a ton of units. but it is something that I could definitely make a turnaround with. I could reface the entire thing. I could restore the interior of these units and I could add a ton of value to these units. Then what I'm going to do is I'm going to get new customers to start renting these storage units and all of a sudden I have increased the value of this unit. So now if you renovated it, got new tenants in there and you can see real cash flow has increased

Starting point is 00:22:43 in these storage units, all of a sudden you have increased the value dramatically. Well, you can go back to the bank and you can say to the bank, and you can say to the bank, hey, Mr. Bank, I just increased the value of this storage unit. Here's how much I'm making every single month. And let's say you took it from $5,000 every single month to $15,000 every single month. Well, now that storage unit is worth much more and you can pull the equity out of the unit. And so this is something where a lot of folks within the self-storage unit community and within the commercial community all do things like this to extract value out of some of these properties.

Starting point is 00:23:13 And I think it's really, really important to note that you can do that. You can do this with mobile home parks as well. thing. So you can go to mobile home parks, reinvest the cash flow. Mobile home parks have very high cash flow typically because you can rent the land and the unit. And so these are another different way that you can reinvest some of that cash flow into flywheels. Another different way, again, is commercial. So you can look at commercial warehouses or commercial buildings, find some underperforming commercial units, renovate those units, get tenants in at higher rates, and pull the equity and the cash back out and then do it again. And you can do this over and over and over. And this

Starting point is 00:23:47 a really, really powerful way to develop your own flywheel where it's producing cash flow for you. You're building equity over time. You are getting tax breaks. There are so many huge benefits to real estate as a flywheel as a whole. It's just finding the right deal. And it's making sure that you know how to run the numbers and find the right deal. Maybe in your area, you live in New York or you live in California and you can't find a deal that is worth dittily. Well, if that's the case, then you need impossibly look in other areas across the country and become a long distance investor. that is something where a lot of people don't think that they'll be able to do that, but you were absolutely able to do that. And so many real estate investors do it. Now, what about land?

Starting point is 00:24:26 Can you turn land into a flywheel? There are a few ways that you can turn land into a flywheel. So one is, and we've had an episode on this in the past, but you can do something like buy pieces of land, sell it to someone else on notes. And so the way that this works is that you can find land that maybe is backed on taxes or land that someone just really doesn't want to own anymore. Maybe they inherited it. So you go to that owner and you send them letters or you can write them, you know, try to get on the phone with them, whatever else. And you say to them, hey, you've got this piece of land here. I'll buy it from you if you don't want it anymore. And so you try to buy it at a discounted rate. And then you go and flip the land. Now, when you flip the land, you're trying to

Starting point is 00:25:02 sell it to a buyer who is interested. And you can sell it one of two ways. You can sell it for cash and or you can sell it on a note with an interest rate. And so typically people will come in, they'll buy the land from you. You are now the bank, meaning you are holding the note on that land. And and they're paying you an 8% interest rate for owning that land. Then you take those profits, reinvest them, do it again. And so all of a sudden, you can have 10 different parcels over time when you're reinvesting these profits that are all paying you on a monthly basis at an 8% rate of return. And so this is a way that you could over time turn land into a flywheel.

Starting point is 00:25:38 Another way is to lease out to like solar or cell towers or parking. Parking is a huge way to turn land into a flywheel. the problem is you got to find the right spots or an RV park or hunting land. All those different things are ways to do it. And so even land can be turned into a flywheel. So that is real estate. That is the first step in looking into a flywheel is that you can reinvest the cash flow from your real estate to buy more real estate. It is a very powerful, time tested.

Starting point is 00:26:06 Millions of people have done it. It has produced so many millionaires. It is absolutely incredible. So that is the first flywheel I want to talk through. Next, we're going to get into different businesses. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible. And if you've ever been there, you know how stressful this can be. That's where Indeed comes in.

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Starting point is 00:29:19 Find your advisor at IDPrivatewealth.com. All right. So flywheel two is we're going to look at businesses because businesses can be a really rapidly growing flywheel if you do it the right way. And so let's look at this for a second when we talk about buying businesses. So buying businesses is one of the biggest opportunities out there.

Starting point is 00:29:39 Any long-term listener knows that I absolutely love the concept of buying businesses. It is what I currently am doing right now. I have bought businesses. I have sold businesses. And it is something I am really, really bullish on. Why? Because there is a huge, massive population of business owners called the Baby Boomer Generation who owns over 50% of the businesses who are now looking to retire. And so there isn't going to be a huge influx of small business that you can go out and buy. And so here's how this works. Let's say, for example, you want to go out and you want to buy your first business. And maybe it is a plumbing company, okay and you're looking for a plumbing company that is just a small one that you can choose to

Starting point is 00:30:17 operate and you find one you find a plumbing company it has three different plumbers on payroll and you buy it for a million dollars okay now you may be saying to yourself a million dollars that's absolutely crazy well the cool thing about in the business world is that you can get something called an sba loan now this is issued by the small business administration which will loan you 90% of the value of a business so if you have a hundred thousand dollars in cash you can buy a one million business with an SBA loan. This is a government-backed loan. Okay? And so this is something where you need to understand how business works first. You need to understand everything about that business before you go and buy it. But here's a cool thing. Let's say, for example, so you go out and you have $100,000 in cash and you go and buy a

Starting point is 00:30:59 business. And you go buy this small plumbing business that's out there. Plumbing is just an example. There's a bunch of different things that you can go look for. And you buy this plumbing business. It has three employees and it has a net profit every single year of $200,000. So it's, you're a, you know, It does a million dollars in revenue. After all the expenses, paying the plumbers, playing the vehicle fees, all the other insurances, all the other extra expenses, the advertising, you know, it's going to net all the way down to $200,000. You have 20% margins on this business, okay?

Starting point is 00:31:28 If that's the case, you have $200,000 per year, and you can do one of two things. You can fund your lifestyle and or you can take that and turn it into a flywheel, okay? So let's say, okay, the first year you produced $200,000. And maybe you still have your day job, but you're operating this business day to day and you have flexibility. Okay. Well, after your one, you have $200,000. Now you have two options. You can go out and look for another plumbing business and try to work a deal or you can wait until you have more cash to buy an even bigger one. And let's say, for example, you go out and buy another plumbing business for a million dollars and you sell or finance this one. So you say, okay, I'm going to give you $200,000 in cash and you're

Starting point is 00:32:06 going to hold a note for me for the other $800,000. So now you have two plumbing businesses. You You can rebrand them into the same name or you can hold them under a holding company. And so you have both of these and now you're producing $400,000 per year. Well, this is a really fast way, as you can see, to all of a sudden begin to start reinvesting in another plumbing company. And so now you're rolling up into three of them and four of them. And all of a sudden you have these plumbing companies put together. Now you may be saying to yourself, this is ridiculous. Like how would that even happen?

Starting point is 00:32:32 If you run the numbers, it can happen. And so this is how a lot of people who start to buy small businesses get very wealthy very quickly. is because they understand these metrics, but you have to be a good operator. You have to understand that running a business when you buy a business is way harder than anybody ever thinks. It is very, very difficult.

Starting point is 00:32:51 I'm not going to deny that whatsoever. It takes a lot of time, energy, effort, sleepless nights, a lot of thoughts about how am I going to fund this or how am I going to do that? Owning a business is not for everyone, but it is for some of you. So overall, this is going to be something

Starting point is 00:33:05 that you can absolutely systematize and run. If you stabilize businesses and if you can systematize and increase those margins and then reinvest those margins into more businesses, it can really scale up the amount of money that you have. Now, the second way is maybe you're like, I don't want to try to figure out these systems of these small businesses. That sounds risky. Why are they even selling these small businesses in the first place? There's got to be some other reason. And all of that sounds crazy to you. Well, number two, your second option is franchise ownership. So franchise ownership is, and we're going to have some franchise owners on the podcast. coming up and we're going to bring them into Master Money Academy as well because I want to talk through this a little more with people. Like when I was a teenager, I always wanted to own franchises because I thought it was such a cool concept that you could buy into an already existing business that had a brand name and then you can start to profit off it. Now the problem with franchises is the margins are much lower than some of these small businesses once you start to figure it out because you have to follow their model, you have to pay them a certain amount and they also have the franchising fee. And so because of this, you can work backwards with your numbers. And typically with franchises, you want to have a

Starting point is 00:34:08 couple of them at least in order to become profitable. Let's use Crumble Cookie as an example, okay? Crumble cookie is a very hot franchise right now that a lot of people have opened and people think they're really easy to open or not. But for what I've read as of recent, you can open a crumble cookie and the franchise fee is something like $70,000. But then in addition, you have to fund all the buildout. And so you find a location, you fund all the build out. Now you have personal guarantees on that lease. There's a lot of risk involved with this franchise. So then what you're doing is you have all this buildout done for $500,000. thousand dollars or something like that you're going to have to allow a lot more cash when you're going

Starting point is 00:34:41 to a franchise route or you get a loan and so because of this you have the build out done for this crumbull cookie now it's in place okay and so what you can expect to produce is about a hundred thousand dollars per year in net profit and so you have this successful location you get a hundred thousand dollars per year then a couple years down the line you save up the cash and you do it again now you have two crumble locations okay a couple years down the line you save up the cash you do it again now you have three now you have three now you have four you have five. Now you have seven. And so over time, you can get to a point where it's spitting off enough cash where you don't have to work anymore, depending on where you want to go. And so this is a very

Starting point is 00:35:19 powerful way to work backwards and figure out, okay, I only need three of these locations in order to be financially independent. Or I need five of these locations to be financially independent because I want to have an operations manager running them for me. And so I need those two extra locations to pay for the operations manager. All of these are different scenarios that you can run in your head and figure out how to get to the point in time where you are financially independent. Another way to do this is with a holding company. So let's say, for example, you're like, yeah, that sounds awesome. Maybe I want to do a little bit of both.

Starting point is 00:35:47 I want to own some plumbing companies. I want to own some franchises. I want to own some laundromats. I want to own some car washers. I want to get all different types of things to see what I like. Well, you can open a holdco. And so the way that works is that you can have multiple different businesses under one umbrella. And within that holdco, you can do a lot of cool things.

Starting point is 00:36:05 There's some really big ones out there. I like to look at Holdco sometimes in the home services industry because you'll see them owning things like garbage companies and pest control companies and window washing companies and all these different companies that are growing at rapid rates and they will buy out different brands. And these companies are huge and they just fly under the radar. Nobody even knows about them. But they own all these different brands in one place. That's what a Holdco is. So an example of this would be Procter & Gamble. So Procter and Gamble, if you don't know, owns an insane amount of different companies. And so if you look at you look at you look at you. And so if you look at you look at you. at Procter and Gamble, they own Loves and Pampers and Bounce and Downey and Gain and Tide and Bounty and Charmin and Puffs and Always and Tampax and Braun and Gillette and Venus

Starting point is 00:36:49 and head and shoulders and Aussie and Panteen and Old Spice and Cascade and Mr. Clean and Swiffer. And so they own all these different brands and the list goes on and on and on and on. I'm, you know, Olae and Secret and Safeguard and there's just, it goes on and on and they keep buying

Starting point is 00:37:06 more and more company. Well, this is a huge umbrella of holding companies, but you can do the same thing as a small scale. So like, let's say, for example, you want to be in home services. And so first, you buy a sprinkler repair company, then you buy a plumbing company, then you buy a electric company. And all of a sudden, you can do all these different things for a homeowner anytime they want a specific service. And so you can build a brand around that as well. And this is another flywheel that you can just think through, well, you can do this on small scale or a larger scale. And so business is a great way to build a flywheel.

Starting point is 00:37:35 it is a very hard and difficult way, but it is a simple concept that you can do. It's simple, but it's not easy. It's not for everyone, but for some of you, it could be. And I think it's a flywheel that some people should consider once they understand this. Now, if you want to learn more about buying businesses, there's two books I would recommend. One is Buy Then Build by Walker Diable. We had an entire episode with him on this podcast. And the second one is Main Street Millionaire by Cody Sanchez. She has also been on this podcast. Both of those are fantastic for looking into how to buy businesses. And we'll talk a little more about that here on this podcast as well because it is something I am very passionate about as well. So that is the second option is buying a business.

Starting point is 00:38:11 But let's talk more next about financial assets. So let's look at index funds, dividend investing, those types of things. All right, the last one is going to be talking about financial assets. Now, index funds and ETFs are what we talk about a ton here. If you think about this, index funds and ETFs don't produce a ton of cash flow up front, meaning what you have to do is those stocks or those assets have to appreciate over time, and once they start to appreciate, then you're going to see large gains and large swings. So you can see people who have multi-million dollar portfolios and index funds and ETFs, and they're making hundreds of thousands of dollars a quarter because those assets are growing so quickly over time. But in the early stages, index funds and ETFs,

Starting point is 00:38:51 they do produce a dividend, but it's usually not a very large dividend. It's usually somewhere around 2%. Like, what is the S&P 500 right now? Let's look at the dividend right now for the S&P 500. So if we look up V-O-O and we look up the dividend of V-O-O, it is going to be low. So currently, if you go on the Vanguard website and you look at the 30-day SEC yield, it is 1.17% for V-O-O-O. And so because of this, it's not like we can take dividends and reinvest them really quickly, but instead, what we want to do is the appreciation when it comes to index funds and ETFs.

Starting point is 00:39:24 Now, there are some with higher dividend rates, obviously like SCHD, which is a dividend an ETF or something that has a higher yield. But typically, when you're looking at index funds and ETFs, you want to take the dividend, you want to just automatically reinvest it. We teach this in Index Fund Pro. And then once you automatically reinvest those dividends, just turn that on, you just kind of let it run and let it run wild as time goes on. But your goal in Index funds and ETFs is try to get as much cash in them as early as possible so that you can reap the benefits of those index funds and ETFs growing over time. But let's look at another option. Okay. Number two is dividend growth stocks. So we have an entire episode also on dividend growth investing and how it works. And if you have

Starting point is 00:40:02 never looked further into dividend growth investing, the best book on this is called the single best investment. And in that book, it kind of goes through dividend investing, how it works, and why people may want to consider it. Now, if you look at the historic data of dividend investing in comparison to things like index funds and ETFs, the S&P 500 has historically outperformed the majority of dividend portfolios but dividend portfolios are typically something where you're buying big blue chip companies that have been around for a long time that have produced a dividend for a very long period of time. And what you're trying to do is get three to four percent every single year from that dividend portfolio that you can live on. So you're trying to get it to reduce enough cash flow so that you

Starting point is 00:40:45 can live on that dividend portfolio because each of these companies is going to spit off dividends. And so you want to make sure that you can live on that portfolio. So let's say, for example, you have a million dollar portfolio, and it spits off 3% every single year. That means you'd have $30,000 per year in dividends. These are really round numbers. We're just doing this for easy math. If you have a 2 million portfolio, 60,000, 3 million portfolio, 90,000. And there's obviously a ton of things involved here.

Starting point is 00:41:10 But that shows you this is a real true compounding flywheel. Because when it comes to dividends, what most people will start doing is they start to reinvest their dividends. And it's really cool to see the bloggers who talk about their dividend investments in their portfolios. One is dividend diplomats, for example, because when you see these people early on and they start these dividend portfolios, you know, they got five bucks or ten bucks or fifteen bucks that they're reinvesting in their portfolio. But then you check in with them a couple of years later and all a sudden, wow, they're reinvesting a couple hundred dollars. And then you check in with them a couple

Starting point is 00:41:40 years later and every single month they're reinvesting thousands of dollars. And it's because this flywheel is starting to compound. It's starting to grow faster and faster over time. Jason Fiber is another great example. So this is a guy who started really, really, really poor. He lived in Detroit. I need to get him on the show. And he started really poor and started to live really frugally. And over time, was able, over the course of a decade, to be able to retire with a dividend portfolio because he kept his lifestyle expenses low and was able to take those extra dollars and put them towards dividends. I mean, he was a mechanic. He was riding the bus to work every single day just so he could save enough money to fulfill his dividend portfolio. And he actually got to a small

Starting point is 00:42:19 enough dividend portfolio where he can live off that portfolio. He moved to Thailand to to reduce his expenses and now he's financially independent over there in Thailand and is happy as a clam last time I checked. So this is something where you can definitely do it, work the numbers backwards and see a really, really powerful result because of that. Another one is notes. So real estate notes are not something I am super interested in pursuing. I think there's a lot of risks there, but you can also turn those into a flywheel, meaning people are paying you every single month for you lending the money. So let's say, for example, someone wants to flip a house and your friend wants to flip a house and you decide to give them money

Starting point is 00:42:53 and they have to pay you like a hard money loan. So they have to pay you 12, 13, 14% on that money, but they're going to pay you back in six months once they sell the house. That is an example of something that you turn into a flywheel, but also there's just higher risk involved in that. I would rather own the asset or I would rather own an index fund or ETF than doing something like that. And that's just me personally. But some people are very good at investing in notes and they have figured out the formula. And if that's you, great, more power to you. Another one is reits. So reeds produce a higher dividend rate than would, you know, an index fund or an ETF. And so because of that, you can really grow a portfolio faster with cash flow because of reits. Now, REITs stand for real estate

Starting point is 00:43:30 investment trust. They trade like a stock. They are on the stock market. And you can go out and buy them. And really what you're trying to buy is more dividend growth because they spit out a dividend. They're actually required to send you 90% of their taxable income to shareholders. And so because of that, they have to send you a dividend. Now, there are some REITs that will actually give you a monthly dividend like oh for example which is net reality income which at the time recording this they send 22 cents per share out every single month so it's a $200 reet at the time i'm recording this so if you buy it every $200 you invest you get 22 cents back every month and so that is something where you can see an interesting breakdown over time and you can actually see it as a it's actually a dividend

Starting point is 00:44:09 aristocrat which that is something we talk about in the episode what is a dividend aristocrat and all that kind of stuff and so that is another option is to look into reits or real estate investment trusts and going that round. Now, before we wrap this episode up, I want to talk about stacking flywheels because this is something I think that over time, people who understand this concept can do this in a bunch of various ways. I have personally stacked flywheels. I have done all of these different things. So I have had flywheels in real estate. I have them in businesses, and I have them in financial assets. And those three areas, if you can stack those three areas, it is so powerful what you can do over time. And so I hope this episode is inspirational to you.

Starting point is 00:44:47 hope you work this framework backwards. And don't forget to go ahead and get the guide down below so that you can see some of these examples that we give inside of the well fly wheel. Because I think this is a very, very powerful concept that most people need to understand. Because if you reverse engineer your very own well flywheel, you can devise a plan for you to be able to retire at a faster pace. And so I want you to look at this as a way to systematically grow your income fast. And I want you to think about this in a way that makes sense for you. And so next, I'm going to give you the tactical steps before we wrap this episode up. All right. So lastly, I'm going to show you tactically step by step how to build your own flywheel. And again, the free guide

Starting point is 00:45:27 down below is going to show you exactly how to do this as well. But number one is to define your finish line. How much do you need every single month? If you need $10,000 per month, well, that means we need to produce enough cash flow to cover that $10,000 per month. And so we're going to work backwards towards that number. And so let's say we utilize that example that you need $10,000 per month. And we use our real estate example where every single house we buy is $500 per month. Well, that means you need 20 properties in order to produce $10,000 per month in cash flow. And so this is going to be one of those things where you can work backwards and estimate those passive income needs. Then I want you to decide what your investment vehicle is going to be. Start with index funds or ETFs or you can look at real

Starting point is 00:46:05 estate to start with, or you can look at business ownership to start with, but choose one of those paths that makes the most sense to you. And then decide how much you can actually save towards that target, because this is going to tell you how fast you can do it. For some of you with really high incomes, if you do this, you could be financially independent in 10 years or less. For some of you who may not have as high of an income, but want to do this over time, you can do this over the course of 25 years and have some real assets that are producing a massive amount of cash flow for you. So determining your annual target is going to be really, really important. And then you look at your gap. So look at the gap between your income and expenses, and you could say to yourself,

Starting point is 00:46:38 okay, I have an extra $1,000 per month. I can put towards wealth flywheels, and that's going to make a ton of sense. And then start to automate the system. So start to automatically save for some of these flywheels if you're going to invest in real estate or start to automatically invest if you're looking at dividend stocks or index funds and ETFs so that this becomes so much easier and then continue to reinvest over time. And so we laid out all the steps here in the free guide. So make sure you check that down below. And if you have any questions on these, please let me know. Listen, thank you guys so much for being here today. I truly appreciate each and every single one of you investing in yourself, because that's exactly what you're doing when you listen to this podcast, is you are investing

Starting point is 00:47:18 your time and your energy in yourself. And I truly appreciate every single one of you being here. I hope you have a wonderful rest of your week, and we'll see you on the next episode. Frozen lasagna, medium power, 15 minutes. Sounds like, Ojo time. Let's play. Feel the Fun with Play-Ojo, the online casino with all the latest slot and live casino games. What you win is yours to keep with no wagering requirements, instant payouts, and no minimum withdraws. Hey, I just won. Woo-hoo! Feel the fun! Play-Ojo!

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The Personal Finance Podcast - The Wealth Flywheel: How to Systematically Grow Your Income (Fast!)

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