Set for Life
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Set for Life

Dominate Life, Money, and the American Dream

Scott Trench

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eBook - ePub

Set for Life

Dominate Life, Money, and the American Dream

Scott Trench

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About This Book

Learn to build a stable financial foundation that will carry you through times of economic uncertainty. Fans of Rich Dad, Poor Dad and Total Money Makeover will love the actionable advice in this personal finance bestseller!

Set yourself up for life as early as possible, and enjoy life on your terms!

Are you tied to a nine-to-five workweek? Would you like to "retire" from wage-paying work within ten years? Are you in your 20s or 30s and would like to be financially free?the sort of free that ensures you spend the best part of your day and week, and the best years of your life, doing what you want? By layering philosophy with practical knowledge, Set for Life gives young professionals the confidence they need to conquer their financial goals early in life.

Building wealth is always possible, even while working full-time, earning a median income, and making up for a negative net worth. Accumulating a lifetime of wealth in a short period of time involves working harder and smarter than the average person, and Scott Trench—investor, entrepreneur, and CEO of BiggerPockets.com—demonstrates how to do just that. Even starting with zero savings, he demonstrates how to work your way to a five-figure income, then to six figures, and finally to the ultimate goal of financial freedom.

Readers will learn how to:

  • Save more income (50+ percent of it) while still having fun
  • Double or triple your income in three to five years
  • Track your financial progress in order to achieve the greatest results
  • Build frugal and efficient habits to make the most of your lifestyle
  • Secure "real" assets and avoid "false" ones that destroy wealth
  • And much more!

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Information

Publisher
BiggerPockets
Year
2017
ISBN
9780997584721

Part I

The First $25,000 Is the Hardest
This section shows you how to put yourself in a position where you have over a year of financial runway. It teaches you how to accumulate your first meaningful amount of capital. You will do this by focusing heavily on the preservation of your median income, and by cutting out spending where it will make the most impact. To achieve the goal of this section, you need to accumulate at least one year of spending in readily accessible cash or cash equivalents.
Why should you do this? Because this runway buys you flexibility, freedom, and the ability to make your first big investment. This kind of wealth-building makes the next stage of wealth creation easy and automatic—and it will force you to think about building readily accessible wealth, not just maxing out a 401(k) or making a mortgage payment. You may not be able to retire forever on one year of savings, but you can certainly introduce yourself to a wealth of choice—the ability to take advantage of opportunities unavailable to those with weaker financial positions.
Remember, the goal is to build out a yearlong financial runway. Retirement savings, home equity, cars, and other false assets aren’t useful to the individual who wishes to work toward early financial freedom. The fellow with $20,000 in retirement savings and $40,000 in home equity, but who spends $3000 per month and has just $7000 in the bank, has no financial runway. If he leaves his job, he runs out of cash in three months. Compare this to the guy with $25,000 in cold hard cash and a $2000 per month lifestyle. He can leave his job for a year or longer and be just fine. He can take advantage of opportunities unavailable to the first fellow. Why? Because the $25,000 is real. It is after-tax, and in the bank, and the guy who accumulated it is ready and willing to spend it to advance his position.
Be the guy with $25,000 in the bank and real options. Don’t be the guy with just the mortgage and the 401(k) and no after-tax accessible wealth to show for it. The former can pursue his dreams and land on his feet if something goes wrong. The latter has no real wealth that he can deploy in the short term and is locked into working his current job or one very much like it to cover the mortgage.
For some folks, a year’s worth of expenses will be $50,000 or more. That will change. After reading this section, you will know exactly what you need to do to put yourself in a position where your annual spending is well under $25,000 per year. You’ll learn how to do this by cutting back on some big, unnecessary expenses in your budget that will free up both time and money.
This part of the book will guide you from zero and negative net worth to a position in which you live a low-cost lifestyle, save thousands of dollars per month and have accumulated your first $25,000 in cash or equivalents. It will also teach you how to live a happy, healthy, and fulfilling life on $2000 per month or less.

Chapter 1

Building The First $25,000 through Frugality
How does a full-time employee go from a standing start with few assets to five figures in wealth? By saving their pennies. They must start designing a long-term lifestyle that costs as little as practical, given their priorities. For most folks with nine-to-five jobs that pay median wages, the pursuit of early financial freedom depends on the ability to preserve earned income. The hard truth is that the first step in the process to escape the rat race is (and always has been) to begin preserving capital. Frugality. Savings. Penny pinching. Living on less.
Obviously, it’s inefficient to exclusively save one’s way to hundreds of thousands of dollars in net worth and true financial freedom. That can take decades, if not a lifetime to accomplish, and it isn’t what’s suggested here. Clearly, the individual seeking early financial freedom must do three things to achieve their goal:
  • They must accumulate real assets that produce income and increase in value.
  • They must constantly seek to invest their capital efficiently.
  • They must design a lifestyle that costs as little as practical, such that passively generated income can pay for it.
Almost anyone thinking about building wealth understands these three basic premises. But, while many people are excited about making more money and learning to invest, few are willing to make the changes necessary to begin saving significantly more by cutting back on their current lifestyles. They focus instead on attempting to invest paltry sums or build assets in the little free time they have. This is a mistake, because the wealth-building process begins with accumulation of capital for the full-time employee. Let’s explore why you must begin this journey with frugality.
Why Wealth Creation Begins with Frugality
Reason #1: Frugality Enables You to Seek Opportunity
Many finance experts and motivational speakers say things like, “Don’t limit yourself to a scarcity mindset,” and “Don’t sacrifice! Build your income!” They tell their audience things like “Expand your mind—money is unlimited.” They’ve, in effect, convinced their followers that they need to focus on income, not savings.
These big shot experts aren’t wrong! Income (and chasing higher and higher investment returns) is a necessary path forward, and two-thirds of this book is dedicated to these topics. Those seeking early financial freedom should build more and more income streams, and intend to scale them increasingly over time.
However, the intimidating big shot expert is forgetting something that is obvious to the wage earner who’s currently working a full-time job. The guru isn’t working a full-time salaried job at or near the median income level, and didn’t get wealthy while working a full-time job for someone else. She is likely an entrepreneur or executive at a large company, and plays by a different set of rules than regular employed folk.
How on god’s green earth are you going to build a business on the side when you have to be up at seven o’clock in the morning, out the door at eight, at work at nine, and don’t get home until 6:00 p.m.? You’re going to build a business from 6:00 to 10:00 in the evening, after a full day of work and any evening obligations? Yeah right. How could you possibly compete with all the people out there who are equally gifted, but with all day to build a business? Unless you are superman or superwoman, it is a tall order to outcompete other competent entrepreneurs, who can devote the best part of their energies toward building businesses.
Of course, those with an extremely long-term focus or who passionately pursue their side business as a hobby may find success or fulfillment with this approach. But, if you are a regular full-time employee working a typical job, the following statement might be painfully obvious to you. You can’t seek greater income opportunity right now because if you lose your nine to five, you’re screwed. In fact, because you aren’t frugal, you can’t even take a job that pays slightly less than the one you have now! Think about that.
Liz earns $50,000 per year. Assume someone offers her a job that paid 15 percent less than that—$42,500 per year—but that gives her a 50 percent shot at earning $100,000+ per year in two years. This job has the potential to drastically increase her income, allowing her to accumulate income-producing assets in pursuit of early financial freedom far earlier than her current job. However, Liz is unable to take that opportunity due to her spending constraints. She has bills to pay. She has a car payment, a hefty rent bill, the Internet and cable bill, bar tabs, and many other expenses she needs to cover with her salary. She can’t afford to risk earning less than $50,000 per year.
Suppose instead that Liz was very frugal. Suppose that she spent only $2000 per month and was able to save $1500 per month. All of a sudden, this job opportunity is something she can seriously consider. She probably has thousands or tens of thousands of dollars in the bank, and the new job’s base salary is still far higher than her spending. She can afford to take a chance on a new opportunity and pursue her dreams.
Most Americans probably can’t do this. They probably have no money saved up, and set aside just a fractional amount of their income in the form of savings per month. If that’s the case for you, you’re missing out on opportunities with every passing day. In fact, you can’t even see the opportunities you’re missing because it hasn’t even crossed your mind to look for lower paying work that offers commissions, equity, or other scalable financial rewards.
If you can easily get by on significantly less income than you currently earn, you open yourself up to an entire world of possibilities or opportunities. Some people call this luck—and only the financially prepared are in position to get lucky. Those possibilities absolutely include jobs and entrepreneurial pursuits that require short-term sacrifice for the opportunity to pursue huge long-term gains.
Reason #2: Frugality Opens Up Opportunities
It’s always fun when folks use those words discussed earlier—words like “sacrifice” and “money is unlimited.” One of the most absurd comments is, “Yeah, I wish I could save, but I’ve got a family and cutting back will prevent us from doing the things we love to do together. I need to focus on earning more money instead!”
This argument makes almost no sense. This person is claiming that both financial security and family/recreational time are priorities, yet somehow believes that being frugal will negatively impact their lifestyle more than attempting to earn more money. Imagine this scenario: Adam currently works a forty to fifty hour per week job, and though it pays at or near the median US income of about $50,000 per year, he spends almost everything he earns and lives paycheck to paycheck. Adam’s employer doesn’t permit him to work on outside businesses or freelance work while he sits at his cubicle. So, Adam and the millions of Americans like him are forced to work on building outside income streams during other parts of the day. For example, Adam might pursue a side business in the early morning, or he might decide to moonlight and work a second job after regular business hours. Theoretically, he could also cut back on the time he spends sleeping, and work through the night. But, no matter how you slice it, pursuing additional income streams with no starting capital will involve a significant investment of time. That time investment will come at the cost of spending that time with Adam’s loved ones. Here are some examples of ways that Adam might earn some extra cash outside of work:
  • Drive for Uber
  • Take on after-work jobs like babysitting or tutoring
  • Sell clothing or services to friends, family, and coworkers
  • Start a business online
  • Start a blog
The problem with these projects is that they are either unlikely to produce rapid benefits or they pay near the minimum wage. Adam will lose many nights and weekends to efforts like these and may have little to show for it. He will realize a far greater financial result with far less lifestyle impact by making some changes to the larger parts of his budget. For example, he might be able to live in a cheaper place that’s close to his work. This might allow him to save money on rent and time and money during his commute. Adam can now spend more time with his family and will have drastically increased his savings rate. As we will discuss in chapter 2, this simple decision can result in five-figure annual savings opportunities for millions of Americans.
This kind of thinking can free up time and money in Adam’s life. Think about how incredibly impactful this can be for most Americans. An hour per day of time regained and money back their pockets. We’ll go into the math behind other specific strategies to reduce expenses and increase time in a bit, but just contrast the effort and total lifestyle impact of moving to a cheaper place closer to work with that of starting a business. Or driving Uber after work. Or taking a second job on weekends.
Lifestyle design (frugality) can have a large impact for many full-time employed individuals seeking early financial freedom. It can be painlessly implemented, increase free time, and will definitely result in a large increase in monthly savings. And, while no one got rich through savings alone, efficient lifestyle design also enables the saver to start those other business and side-hustle ventures if that is how they choose to apply the savings and extra time they generate.
Reason #3: Our Tax System Favors the Saver, Not the Earner
Surprise! Income is taxed in the United States of America (and many other countries). That’s income, not wealth.
Those in the demographic most likely to benefit from reading this book are probably paying a marginal tax of 30 to 35 percent on any income earned, including both state and federal taxes. And more earnings mean more taxes. A single person earning $50,000 per year who gets a 10 percent raise (a really large raise!) might think they are $5000 per year richer. But they are wrong. This person is really only making about $3300 per year more, after taxes take their bite out of the new income.
Instead, if this person just moved closer to work and into a slightly less expensive apartment, he or she might spend $5000 less per year between the commute and the rent. That’s money they get to keep—they truly are $5000 per year richer. Furthermore, the move does not preclude this person from earning a raise—obviously it’s great to get a raise. Understand, however, the absurdity of attempting to move toward financial freedom by working fifty to sixty-hour weeks for small percentage increases in taxable income when thousands of dollars in after-tax wealth can be easily saved!
Another way of stating this concept is to say that it’s 33 percent more effective for someone in this tax bracket to save money than to attempt to earn it. A penny saved is 1.33 pennies earned!
In Summary
The preservation of capital should be the primary starting focus for financially ambitious nine-to-five employees for three main reasons:
  • Frugality exposes the saver to opportunity.
  • Frugality is noninvasive to one’s lifestyle relative to moonlighting or building businesses.
  • A penny saved is better than a penny earned because it is after-tax wealth.
This is not to discredit the importance of scaling your income and increasing your investment returns. This is just to point out that it’s less effective to attempt to earn more money or invest efficiently when you can have far more impact by taking control of your spending. This does not mean that you should stop trying for that promotion at work! But it does mean that your focus starting out should be on saving more of your income, wherever and whenever practical.
Finance is more often than not a game of multiplication and exponential synergies. Folks that spend less can earn more. Investments that produce more cash flow can appreciate...

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