Today’s guest post is from Scott Trench. I first met Scott a couple of years ago at a business conference and was immediately impressed. Despite his young age (mid 20s), he had already attained a leadership position at BiggerPockets, a crazy successful real estate investing site.
At that first meeting, Scott and I talked about what books we were reading. Thinking back, every time I see Scott, the conversation eventually turns to books. Any friend of books is a friend of mine.
And the love of books is a reflection of one’s personality. Scott likes books because he has a passion for learning and knowledge. Scott is going places.
Enough yapping from me. Take it away Scott!
How to Accumulate your First $100,000 in Investable Assets
If you are reading 1500 days, you’ve been provided with a fine example of how a family can move from several hundred thousand dollars to early financial freedom over a moderate number of years. Mr. and Mrs. 1500 are legends, who exemplify hard work, a DIY mentality, an approach to investing that is fundamentally sound, and are just nice, wonderful people. Thank you so much for the honor and privilege to guest post on 1500 Days!
I hope to continue learning from Mr. and Mrs. 1500 as I continue to grow and build out my net worth to the targets I’ve set.
The focus of this article is to address the early stage of wealth creation. Specifically, I want to talk about how to as efficiently as possible go from a standing start with little or no assets to $100,000 or more in investable net worth. This article is written for the person earning a solid living that is at least that of a median earner, and who is willing to make some major life changes to hasten early financial freedom.
And, I’ll tell you something, “investing,” as most people define it, isn’t very important in this stage of wealth building. If you earn $50,000 per year, and have $10,000 to invest, earning a 12% ($1,200) return isn’t much different from earning an 8% return ($800). You would be unwise to spend dozens of hours learning how to pick stocks, master Lending Club’s nuances, or otherwise attempt to eke out a few hundred dollars more per year in return on publicly available investments.
Instead, this stage of wealth accumulation involves a heavy focus in three areas:
- Housing + Transportation
- Income Production
Let’s Start with Frugality
Frugality is the starting point in wealth accumulation for the median earner with little to no wealth. There are three main reasons this is the case.
First, frugality enables one to build out financial runway far faster. Financial runway is the amount of time that one could survive without wage paying work by spending their accumulated investable capital. So, if you spend $50,000 per year on your lifestyle, you’d need $50,000 in cash or equivalents in order to survive for one year without a paycheck. Halve your spending and two things happen. One, you keep more of your paycheck, enabling you to build more savings more quickly. Two, you reduce the amount of money you spend per year, lengthening your current financial runway immediately. If you spend $25,000 per year, then your $50,000 in cash has just doubled to two years of financial runway.
Second, and tied to our first point, frugality enables opportunity. As one’s financial runway lengthens, financial risk diminishes. You might be able to throw $10,000 at an investment, no problem, after a year or two of saving. That same $10,000 might be all, or more of your investable wealth today, and you can’t even imagine “risking it” in an investment. You might be able to quit your job and pursue one that pays less money in salary but offers the chance at bonuses, commission, or equity. You might be comfortable in starting a side business or launching full-time into entrepreneurship. Frugal living exponentially lessens financial risk and allows the saver to exploit opportunities unavailable to the spender.
Third, frugality is tax efficient. Ever heard the saying, “A penny saved is a penny earned” –not true, at least in America. A penny saved is better than a penny earned. If you are earning $50,000 per year as a single person, it’s possible that your marginal tax bracket is 33% between federal and state taxes. That means that when you earn a $5,000 raise, you only keep $3,350. On the other hand, if you can find a way to spend $5,000 less per year, you actually are $5,000 richer. It’s far more efficient, dollar for dollar, to save money than to earn more.
Housing + Transportation
As your two largest expenses, Housing and Transportation should be the areas that you spend the most time optimizing in the early stages of wealth building. Combined, these two expenses make up over 50% of the typical American’s household spending.
I’ve largely eliminated both of these expenses from my life, and the decision to do so was a primary factor that helped me to accumulate over $100,000 in investable assets in less than three years out of college, and go on to accumulate much more in the few years since.
I solved this problem by house-hacking close to my workplace. I bought a duplex that was less than five miles from my work, rented out the other unit and part of my unit to a roommate, used that money to cover the mortgage, and lived rent free. In addition, this duplex was an easy bike ride from work, so I bought a $250 bicycle, and used that as my primary commuting vehicle. Between these two decisions, I easily saved $1,000 or more over my peers living in the same city at similarly paying jobs.
I was able to buy this duplex because I had saved up $20,000 in the prior year on my $48,000 per year salary. I took lunch to work, behaved responsibly, and enjoyed cost-effective fun like skiing (I bought a season pass and live in Denver), rugby, and time in parks and outdoors. I used that $20,000 to purchase a the duplex by putting 5% down with an FHA loan. Between principal, interest, taxes, insurance and MIP (a special type of mortgage insurance on loans with low down payments), my payment came to $1,550. Rent from the other side was $1150 and rent from my roommate was $550, for a total of $1,700 in rent. This allowed me to effectively live for free.
Biking to work is one of the best parts of my day now. I did, however, recently decide to move a little farther from work (about a 6.5 mile ride). To solve that I built myself the very eBike that Mr. 1500 describes at length in this blog post on Mr. Money Mustache. I have to tell you that this is the most fun object I have ever owned, and it does not get old riding to work on this thing. Think about always getting wherever you want to go at full speed, and never having trouble finding a parking spot.
Living in a house-hack close to work, and behaving otherwise responsibly and frugally do not preclude one from earning a high income. In fact, I’d argue that they assist in that department. As I intentionally designed a highly efficient, convenient, healthy lifestyle, I found that my mental capacity increased and my ability to focus continued to develop.
Unlike frugality, there are no guarantees in the income department. While not spending $10 guarantees that you will be $10 richer, income production is all about playing the odds.
Now, one thing to clear up is the situation with your current job. If you are earning $50,000 per year as a “marketing specialist 1” then you know that the best case scenario at your current career is that you will be promoted to “marketing specialist 2” at $55,000 – $57,000 over the next 12-18 months. Again, that’s if things go well.
That is too slow if you aspire to early financial freedom and want to make good time. Luckily, because you’ve adopted the frugal lifestyle we discussed earlier, and pay little to nothing for your home and commute, you have accumulated at least 1-2 years of financial runway, and are able to afford your happy lifestyle on less than 50% of your current take home pay.
This enables you to take risks and increase your odds of earning a truly meaningful salary. This enables you to take a chance on a sales job where top performers earn $100,000, $250,000, or more per year. This enables you to join a startup with just a few employees at $35,000 per year, but with some equity that could be worth six or seven figures in a few years. This enables you to get paid for performance.
When you are paid for performance, one of two things will happen—you’ll either perform, or you won’t. If you can cut it, you’ll make far more than you would at a salaried gig. If you can’t, you’ll make less. Guess who can’t afford to make less? That’s right, the guy who isn’t frugal. Guess who can afford that worst case scenario and go back to salaried work if things really don’t work out? That’s right, you.
Now, if you decide to go down the income producing route, you’ll need to work harder and smarter than you might be currently. You’ll need to begin self-educating as much as possible. That means reading books, blogs, and listening to podcasts related to your field with regularity. It means meeting with star performers and building out your network, regardless of whether you are an introvert or extrovert. It means planning out, setting, and reviewing written goals, and tracking your progress painstakingly.
While none of this will ensure success, it will definitely increase your odds over time, and that’s all this income game is—repeated intelligent action that is intelligently taken so as increase the odds of a positive outcome as much as possible.
If you can live on less than $25,000 per year (a TON of money if you don’t pay for your housing or commute), house-hack, and are able to become even modestly successful ($80,000+ per year) with performance based work, you will have a good shot at accumulating over $100,000 in liquidity in less than three years. No, it isn’t guaranteed, but it’s an effective approach that will give you a great shot at making a dent in your goal toward early financial freedom.
And, once you have that first $100,000, opportunities begin to multiply in front of you exponentially. Investments, jobs, business opportunities, partnerships, and more will all begin to materialize before you as you continue to save, work hard, live intentionally, network, and self-educate.
Just ask Mr. and Mrs. 1500.
If you want to learn how to go from a standing start with little to no assets to several hundred thousand dollars in net worth and several thousand dollars per month in passive income, check out my book, Set for Life. This is a straight up guide that includes both a thorough financial philosophy and concrete, actionable steps for median, full-time employees looking to rapidly move toward early financial freedom!
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