This blog is essentially regular people repellant. The average person takes one look at the name of the website and eyes begin to roll. Instead of reading through and finding out we’ve already met several people in real life and this is not run by a bunch of broke people, the average person moves along quickly. In essence, this website encapsulates what we call “rapport breaking”. Everything about it is set up to push away and detract regulars (also known as mosquitoes).

Now unfortunately… you’re going to have to interact with regulars on a daily basis and no one should take on the tone that we use in this blog (although it’s what we actually think!). We’ll go ahead and summarize the best way to go about your day to decrease your interactions with these value leeches …. Deflect or Agree.

Two Key Principles

Principle #1 – The Blame or Praise Game: The average person believes in superstitions. Make no mistake about it. The typical person has lucky socks or lucky shirts or some insane item categorically unrelated to success or failure. This is an absolute necessity to understand. People will attribute “value” to obscure objects that are unrelated to success or failure.

If you said hi to someone in the hallway and they got fired 20 seconds later… There is a chance they will blame you for the event! In addition, if you said hi to that same person 20 seconds before getting a promotion, they might view you as “lucky”.

There is a reason why weather women routinely get hate email in volatile climate areas and it has nothing to do with logic or reason. They are just looking for someone to blame.

This strange phenomenon is also known as “Shooting the Messenger” or blaming the person who delivers bad news. Unfortunately, the phrase is not entirely correct. The correct way to understand this phenomenon is “Shoot or Praise the Messenger”. If you need an example of praising an unrelated messenger… just look at Television Game shows where people hug and kiss the host of the show even though he had nothing to do with them winning the prize. All of the people who win the prize will say “the host was amazing!”.

Hopefully, with the short paragraphs above, you’ve already identified a few people who view you favorably or unfavorably for unrelated reasons.

Principle #2 – Forced Connections Cause More Hate: This is the second most important item to understand. Due to some sort of “sixth sense” people do not like it when others attempt to become the messenger (or avoid being the messenger). If a good event happens and an individual comes out of the woodwork to praise them… a baseline value of contempt is built. In the reverse scenario, if you witness a negative event and run away suddenly, the person will then believe you had something to do with it and… a baseline value of contempt is built.

Now we see the clear conundrum. Fortunately, there is an answer which is the *Deflect or Agree* framework.

Deflect or Agree

Deflection Points:

Avoiding the Blame or Praise in the First Place: Once we all agree that there is an implicit blame or praise dynamic at play the first step is to play offense. Like practically everything else in life, playing offense sure beats playing defense because you can continue to put the pressure on the opposing team to recover. Playing offense in this case requires you to *deflect* situations where Blame or Praise will take place. The last thing you want to do is have a group of regular people blaming you for their problems (regular people have a TON of problems with nothing to lose). In addition, you don’t want them asking you for help either (time suck).

#1 Steer the Conversation: Since you’ll develop a solid baseline set of sales skills, you will have solid conversational abilities to help steer any and all conversations. You’ll naturally find yourself mirroring the body language of everyone you speak with, helping you establish a baseline level of rapport and nothing more. Now your goal is to avoid being associated with anything positive or negative. *Deflect* the conversation to irrelevant pop culture or headline items.

For one reason or another, this seems to work and there is always some meaningless article on Yahoo, Twitter moments or otherwise to pull from. The most consistent item to use is a “widget description” conversation. During the rare times where you’re forced to interact with regulars you will ask them about the latest “widget” that came out. New iPhone, New Oculus Rift, New Restaurant… so on and so forth. Now you’ll see what we’ve done with this set up!

After steering the conversation to something “new” that came out you get to ask questions about it since 90% of people will know about it. Pretend you don’t know much about it and have them *explain* the widget or what food the restaurant serves, so on and so forth. This is key as you become the “student” in this situation and the person will feel like they added value by giving you information. Importantly, do not ask them for any actual advice. All you are doing is asking for *descriptions*. This will make it extremely difficult for them to claim that they added any value to your life since all they did was regurgitate something you could have learned with a five second google search.

In short, ask for descriptions of innocuous items and be happy/jovial about the response so you can be the “normal” guy in their eyes.

#2 Deflect All Advice Related Topics: Unless you’re asked for it, never give any advice. People don’t want advice they just want to hear what they already believe. Since you’ll rarely be asked for any advice (a good thing), don’t dig your own grave by giving out advice on any topic. Never have an opinion on sports games, politics, making money or otherwise. In fact, if at all possible, your default deflection response is “I don’t know anything about XXXX to be honest, I really wish I knew but I’ve never learned about XXXXX”.

There is a strange part of human nature where it is difficult to watch someone do something incorrectly (your instinct is to help)… Don’t do it! They won’t want the help and even if you’re right they typically won’t listen. Again, don’t give any advice and deflect all advice related topics.

You know you’re moving in the *wrong* direction when regular people are asking you questions all the time in your day to day life. Deflect *all* topics away from anything opinionated.

#3 Physical Deflection: You know who regular people don’t trust? They don’t trust clumsy people (psychology). So you’ve guessed it! Appear a bit clumsy. If you know you’ll be forced into a regular person interaction mess things up a bit. Make your collar unaligned, carry a glass of water far too full of liquid so you’re walking around carefully and spilling a tad and of course carelessly drop irrelevant items here and there.

People will not ask for advice from someone they view as clumsy so physically acting the part can certainly help deter any questions. To add to the clumsy-ness you can ramble when asked basic questions so people become a bit frustrated that it takes you five sentences to say something that could have been communicated in 10 words.

Final Note on Deflection: While we’ve kept it short, these three items alone will make it excruciatingly difficult to be involved in any blame or praise situation. We’d wager you’re safe 90% of the time if you follow those cardinal rules: 1) steer to description related conversations – them talking not you, 2) avoid opinions by pointing to a certain aspect where you know “nothing about it” and 3) physically act a bit off or clumsy to avoid direct questions (bonus: they will talk secretly about how they can’t believe you’re so clumsy!)

Agreement Points:

De-coupling the Connection: Life isn’t fair. No matter what you do you’re going to have “regular” people ask for your opinion at some point. There is no escaping this situation. Sure we would all rather physically peel back each and every nail from our fingernails to our toenails than be in this situation… but… like paying your taxes, you’re going to be forced into this situation from time to time. We’re now in agreement mode to avoid the contempt framework where you’re associated with some sort of an event where you want no responsibility.

#1 Guess Their Opinion: This requires a lot of quick thinking but you may be able to knock it out quickly. Anyone who asks for advice just wants to hear their own opinion as stated above (reason for avoiding advice). Your goal is to guess their opinion… the one that they have *already* formulated. Typically the structure is *start small and agree*.

If someone is asking about making money, start with some outrageously small way to earn money off their current skill set (time for money exchange for the win!). If it is about physical change add some meaningless item that adds a couple minutes to their exercise routine (add a few sprints!). So on and so forth.

Notice… the framework is exactly the same as advertising directed towards regular people. It involves some small “trick” that will “transform or shock” the person. What this really means is that people are looking for small changes. No one wants real advice that requires work, they just want some tiny change that will “change things”. The enormous benefit of this line of thinking is that your small edit or suggestion won’t hurt or help them. It will be neutral. This helps you avoid future requests and helps you avoid contempt (their feelings towards you).

#2 Suggest a Third Party: Have a quick list of large popular websites and forums to refer the person to. This is a great way to avoid repeat advice. You’re going to bank on herd mentality. By recommending a large popular website or forum for the answer you can guarantee at least one person on the website/forum knows what they are talking about and you avoid burning one of your actual contacts who knows the answer inside and out.

#3 Keep the Smile and Nod Consistent: Keeping everything together, once you find that you’re in “agreement” with some innocuous change lock into the smile and nod set up. “Hmm yeah that makes a lot of sense” should be your gut reaction and make it seem like they got something out of the conversation.

Final Note on Agreement: You’re going to find yourself in this situation a few times and you’ll be forced to provide an opinion. If you can zero in and agree on some small meaningless change you’ll reap the following benefits: 1) no impact in being blamed or praised and 2) correct deflection to a “good source” saving you time

Concluding Remarks

– This set up is specifically for dealing with regular people since they will not change

– Regular people are extremely emotional and irrational and will blame or praise you for association

– Don’t try to be involved positively or negatively *stay neutral*. If you try to swing it to be a positive you could build contempt and on the flip side they may ask you for more advice (time suck!). No winning in swinging the pendulum.

– Play offense by deflecting all conversations to description based items when possible. If you’re forced into those boring topics like sports then go ahead and play “neutral” which is something regional based (home team fan for example).

– If forced into advice situations, start SMALL. No regular person actually wants to improve their life they want some small trick that could change everything for them. By making small irrelevant changes the impact is neutral and you can refer them to a larger resource beyond yourself.

Good luck in dealing with regulars, it isn’t easy! It took many years to avoid arguing with idiots on the internet and giving advice to people who desperately need it. Remember these rules and you’ll save hours of your life (more likely months or years).

As usual NO questions. A new Q&A will be sent to email subscribers shortly (this week). 

With our book well under way, we’re going to take a turn to personal finance for a bit to give our view on the current state of the economy. Specifically, we think 1) tax reform will take place, 2) we are waiting for interest rates to go up like a dehydrated man in the Mojave Desert and 3) risk tolerance appears to be reaching herd level mentality. With that we’ll start with the positive side of the coin first… Tax reform.

Trump Tax Reform

Within the next month or so there is a high likelihood that the Trump administration will adjust the overall tax plan for both individuals and corporations. Before any changes take place we’ll outline a few things to look for once the adjustments are announced. 

Individual Taxes

Investing in Munis: The primary benefit of munis is the tax free nature of the security. Assuming you buy munis that are linked to the state you live in, the returns are 100% tax free. Therefore a reduction in taxes would cause the value to come down. Munis become less valuable when tax rates are reduced because the returns on a Corporate bond likely yields a higher return on a post tax basis. As a reminder the basic calculation to find comparable yields is below:

Taxable Equivalent Yield = Tax-Exempt Yield/ (1-Marginal Tax Rate)

The interesting item here is which tax bracket you will fall into. Assuming Trump’s tax rates adjust downward across the board (all incomes) then we should see a near-term pull back in munis. This could create a nice buying opportunity.

*Treasuries are not federally tax exempt like muni’s. Treasuries are only exempt of state income tax, but subject to federal taxes.*

Deferred Tax Assets: Deferred tax assets also become less valuable in a lower tax rate environment. The best example of this is any 401K plan as the main benefit is tax deferral. While we think there is a high likelihood of a repeat Trump presidency, the chances that low tax rates sustain over a 20-year period are unlikely. Therefore, if taxes are adjusted downward in a meaningful way (especially if you’re in the top bracket), you should absolutely look into rolling over your 401K plans into Roth IRAs. Sure you take the tax hit now… but… chances are that rate is going to be higher in the future if tax reform actually occurs.

Real Estate Investment Trusts: This investment vehicle should benefit from tax reform as dividends from REITs are taxed at the individual income level. With tax brackets potentially falling across the board this would lead to high post tax payouts. Negatively, if interest rates do continue to go up we could see a shift to bonds if the returns become more meaningful (we’ll see). 

Quick Tax Conclusions: The quick answer here is we’re ready to buy a ton of Municipal bonds on the day of the dip. Why? We really doubt that a low tax environment will sustain for a 20-year time period. Typically when a new president is elected, there is an emotional over-reaction to this being the “new normal”. How many people actually thought he would win? (besides us and a few others) Very few. Similarly, now that he has won people believe we may have some long-term Republican administration for the next 20 years (also significantly unlikely due to the psychology of people in general). When the tax changes occur look at Munis, your deferred tax assets and REITs.

Interest Rates Are Going Up

Make no mistake, this low rate environment is going to change. The messaging from the Fed is clear. We’re likely going to see interest rates go up and… we might even see MULTIPLE raises! This means it may be time to make a big shift towards bonds. We’re separating this from the tax items due to the stock market returns.

S&P Returns Have Been Enormous: On January 2, 2009 the S&P 500 was at 931.80 as of January 3, 2017 we’re at 2,257.83 (and today we are even higher!!!). Lets look at what that means… it means the stock market has seen a 142.3% return over the last 8 years… or a compound annual growth rate of 11.7%. From a long-term perspective the stock market should see a return profile of around 7-10%!

It does not take a genius to figure out where we are going with this. If you’ve been smart (investing aggressively into the S&P 500 with a dollar cost average strategy) you’re sitting on a lot of money. If you can get a yield of around 5-6% without worrying about fluctuations in the stock market… You should jump ship into bonds with every single cent up to your *cost of living*. 

Lets crystalize this point. Since we know the last 8 years have generally been *above* historical averages… this means you’ve gotten a return in excess of the average S&P500 return. It is time to cash those chips in (up to your cost of living).

Quick math says… If you’ve got $1 million invested in the S&P 500 but have a cost of living of lets say $50K a year… Then you’re going to look to liquidate that and shove it all into bonds if you can get yields around 5-6%. Essentially, you’ll now have complete peace of mind that your cost of living is protected by ONLY your bond portfolio! Up until now it was incredibly silly to do this. Over the last 8 years interest rates were far too low making it idiotic to have any exposure to the bond market. Now? The tides are finally turning!

While we’ll still throw some excess cash into the S&P 500 (tickers: VOO or SPY) the bond market will likely become attractive. If you’ve got minimal bond exposure (you should at this point) then its time to dust off the old portfolio management strategies.

 Herd Level Risk Tolerance

We’re not quite there but we’re getting close. The move to passive and the overall sentiment “everything is great!” is becoming a bit redundant. We’re sitting in an echo chamber where the only thing heard is “stock prices must go higher!” which is pushing multiple valuations well beyond their intrinsic value.

Snap Chat IPO: While we don’t care much for individual stock investing within the technology sector, the recent IPO is making us realize that risk tolerance is becoming unreasonably high. Again. We’re not saying SNAP is a good or bad investment. We don’t know the stock closely enough. What we do know is the implied valuation.

Snapchat generated $404M in revenue and a net loss of $515M, this means the Company loses more money than it makes in total top-line revenue. This is 100% normal for a technology company (losing money pre-IPO). What is a bit abnormal is what the market is willing to pay for it! With a market cap of around $35B post IPO we’re looking at a valuation of 86x Sales. If we assume that revenue is going to triple this would imply valuation of 29x sales.

Sure the Company has $3.4B in cash and won’t be going bankrupt any time soon (yes we realize the enterprise value should be adjusted slightly lower) the point is that investors are willing to say “this Company will generate more than $35B in today’s dollars”. When you look at “market caps” the best way to think about it is a “back door” to present value. If you believe SNAP will generate more than $35B in today’s dollars (cash generation) then you buy it, and if you don’t then you’re on the sidelines.

To reiterate, SNAP is known to be a best of breed Company. As we understand it, the Company is the primary competitor for Facebook at this time given Twitter’s downfall (Instagram and WhatApp all belong to Facebook now). Maybe this means the stock is the next Facebook. Maybe not. All we know is investors are willing to risk (today) $35 billion dollars on a Company with less than a billion dollars in sales.

Price to Sales Ratios: The second metric to look at for overall euphoria is price to sales. As of today the Price to Sales ratio on the S&P 500 is around 2x… in the 2000-2001 time frame it was around 1.5-1.7x! Again we’re not saying things can’t go higher. If fundamentals continue to improve the market could continue to rock and roll to higher valuations (or sales numbers increase making the multiple reasonable again).

It seems that we’ve seen an aggressive move to equities over the past 8 years. This has been the right move no doubt as we’ve recommended and done the same thing ever since we started this blog and talked briefly about the market. That said, 2x price to sales is starting to look high IF we can get 5% returns on bonds in the near future.

Concluding Remarks and Summary

While we will still be investing small amounts of money into the S&P 500 in case numbers continue to move up we think there are a few things our readers should now look for:

1) We recommend watching the bond market aggressively. This means we’re now opening up the door for potential investments here if tax rates decline.

2) We’re going to watch personal tax rates and see if old 401K accounts should be rolled over during a tax cut period (we think it would be temporary)

3) We are also recommending looking at the REIT market to see if there is a buying opportunity post tax cuts and interest rate increases

4) If the bond market begins to yield a return of around 5%, we think it is now time to take a serious look

5) Continue to dollar cost average into the S&P… But. As rates go up we should shift more into bonds.

As usual no questions but we will respond to interesting comments.

As our readers know, we don’t tailor our writing to regular people and instead focus on ambitious individuals interested in living an exciting life. Everyone has a different lifestyle they are looking to maintain and we’ll go ahead and provide a framework for how we think each year should stack up at minimum.  We give up at 35 years old since no one should be giving life advice to someone in that age bracket (they’ve already made their decisions).

Assumptions

1) The first assumption we make is that you’re going to generate at least $100K a year out of the gate. If you’re working on Wall Street, within Enterprise Sales or in Silicon Valley, this is absolutely attainable. This is what we have recommended for a long-time in terms of a starting career.

2) Next, we assume that your net worth is calculated on POST tax money. We think it is a fraud to include $1 million in a 401K as $1 million to your net worth (it’s likely closer to $700K if we assume a 30% tax rate). To keep this estimate conservative, we assume all money in your 401K is worth 60% of the face value (40% tax rate).

2) We also assume that you will get a 5% 401K match. This is a rough estimate and we assume you’re not going to invest in excess of the match because you have better things to do with the money (primarily starting a business)

3) We use basic tax brackets since we don’t know where you live. Specifically we’ll assume everything up to $200,000 is taxed at 28%, everything between $200,001-$400,000 is taxed at 33% and everything above $400K is taxed at 40%. As an example if you made $400K exactly, we assume your tax bill is $122K (this is $200K times 28% and the other $200K times 33%). Again, this does not perfectly match the tax brackets to avoid perfect calculation and keep it simple.

4) We assume that your living costs increase at a rate of 5% per year and you’re going to live with roommates when you graduate in the first place. There is no reason to be a big spender when you’re young since we live by the saying “learn in your 20s, earn in your 30s, burn in your 40s”.

5) We assume your after tax investment returns will be 5%. This means the money you have on the sidelines will create 5% in annualized returns every single year. If you’re dollar cost averaging into the S&P 500 you should be able to generate around 7-10% over the long-run so our 5% assumption is quite conservative.

Example 1: Mixed Income Stream (Most Common)

From what we’ve seen, the most common path is this one. You start a high paying career, get burned one year on compensation, start a side hustle and… voila! Well over $2 million dollars by 35. Below is how it typically works out.

Age 21: To keep the math simple we’re going to assume you begin working at 21 years old. This means you’re likely graduating from college (despite costs rocketing higher!). In addition, we’re going to assume you have $0 in total net worth. If you’re reading this and are on track to rack up $100-200K in student loan debt, we suggest quitting entirely and reassessing why you’re going down the path of shackles. Since you’re going down an ambitious path we assume you’ll start with a Base Salary of at least $100K. This is going to be conservative given the compensation numbers for high earning careers on Wall Street, Silicon Valley and Enterprise Sales.

This is going to be a terrible year. You’ll realize that the cost of living alone is likely around $54,000 at minimum even when you live cheaply. Your after tax savings will likely be a smidge higher than 20%.

Age 22: To keep you motivated most companies offer a pretty nice income hike from year 1 to year 2. This is not because the company likes you. This is because they likely lost money on your participation in the labor force (training costs etc.) and if you leave after year one, they have to write it off as a loss or a bad hire! Ever wonder why employers care so much about time at a firm? Well now you know. They really earn money off of you once you’re up and running, not when you’re green.

We assume you get a 20% hike and because of this you’re still motivated to work. You put away just over 25% of your gross income a big step up when you look at the year-over-year change in total after tax savings (59% increase!).

Age 23: At this point most companies give a similar pay raise on a dollar basis. This is enough to keep employees motivated and they are now in the green on their investment in human capital (you!). Since you’re still seeing some career progression and you’ve got another wage hike you’re feeling pretty safe in your position making it easy to continue slogging along. The one thing you do notice is that the people who have been there for about 5 years seem to be more bitter than the younger employees.

Since the dollar amount increase was the same, your total compensation is up 16.67%. You end up putting away ~31% of your total gross income and your net worth should clear $100K. Unfortunately, around this time year 3 to year 5 time frame, you’re going to get hit by “the system”.

Age 24: You get one of the following excuses: 1) we had a bad year as a firm or group, 2) you’ve been getting solid raises so you should take one for the team or 3) we don’t know if you’re ready for the next change in role. It does not matter what the excuse is. Your compensation is going to be flat. It could be up (barely) but the point is the same, you realize that you’re a COG in a system that doesn’t care about you at all.

Hopefully this terrible conversation happens earlier rather than later in your career. This is because you’ll have the energy and motivation to do something on your own. You’ll strike out and do something small (typically free lance consulting) and make a few bucks with minimal effort. Total savings is still in the low 30% range.

Age 25: You get a small hike, but the move is not great, you’re realizing that you’re solidly in the center of the “triangle” within the firm where it is hardest to move up. Everyone wants you to quit or fail because it will lead to less competition for them over the long-term. You stick it out anyway and realize that it will be a while before your next “step function” upward in compensation. The silver lining is you can continue to freelance.

Your time is spent either freelance consulting or you’ve figured out that you can start a full business selling products! The result is largely the same, you focus more on your business and generate well over $1,000 a month. Not bad! Total net worth goes to $200K!

Age 26: You’re solidly stuck in the middle of the Company/organization. You look around and everyone in this bracket between 26 and 32 or so years old makes the same. It’s depressing to see and you realize if you jump firms… well it’s going to be the same story! May as well remain in the same Company if you’re plugged in from a political perspective. Besides, working on your business makes the most sense given the returns you’ve seen over the last two years.

You begin shirking a tad at work, cutting corners when needed and grow your small side business to $25K in total profit. It’s now generating a *near* living wage! You don’t have time to burn your cash since you had to work hard to get here. Net worth $300K

Age 27-31: This is probably the most painful bracket. You’re going to be doing the same mundane work for the vast majority of the time. The guys you want to replace won’t quit and there is no slot for you to fill. Your only upside is from your company. It’s tough to stay focused because the business you’re running cannot be scaled easily due to your current necessary career schedule! You’re going to feel like you’re chewing through a concrete wall.

The good news is that you’ll be able to chew through the walls without killing yourself. You’ll grow the business to an official near living cost profit pool of $50K by the time you’re 31. Lucky for you, since you have a career still it’s pure profit! Net worth $850K+

Age 32: For some reason this happens. When you’re about to quit because you see the light at the end of the tunnel you’re given some change in role. Think about it like this… If you were smart enough to realize you’re being underpaid… and were smart enough to start something… you’re probably a better worker than those guys slogging in long hours with nothing else going on! You’re hard working or you’re smart. You can’t be both.

For fun, we’ll assume you get promoted to a new role and your business takes off at the same time. This creates a tough situation for you because you’re not about to walk away from that high income boost and you can cover your living costs off of your business! You typically stick around “just one more year… just one more year…”.

Age 33-35: Your business cannot move anymore. It’s growing at a minimal rate of just 10%. Your income from your career is still the majority of your earnings. The problem is that working for someone else is becoming a hassle. You can’t stand taking any orders. Everything at work makes you annoyed and you’re going to take your foot off the gas more and more. They typically try to motivate you with more money but at the end of the day, you get blown out once they realize you’re not tied to them.

Reminder. Under no circumstances does anyone know what you’re doing. You simply get blown out around 34. The best part? Your business ends up benefitting because you never really focused on it. Typical net worth? Multi-millionaire at $2M bucks

Example 2: The Career Man

Some people just never see a reason to start their own Company. The reason why? Their careers never see a bump or hiccup. Specifically, a lot of luck goes their way and they have the skills to fill in each leg up of responsibility. We’ll use our Investment Banker as the best example since we know a few people who have pulled this off.

Age 21: Top –tier investment banking analyst. You’re the best in the class in the right  group/sector and you’re going to get paid at the top. Roughly speaking this is around $150K for a first year and you’re going to have the same living costs as everyone else ($54,000 out the gate). You are able to save your entire bonus so your savings rate is pretty solid at $57,600 in post-tax money in year-one.

Your savings rate is already over 33% when compared to your gross income and you had to work hard to get the top-bucket. No vacation for you, just deal related activity and a smile on your face even when getting crushed.

Age 22: It is rare to fall from top-tier in year-one to year-two. You end up being in the right “circle” from a political perspective and people in Wall Street rarely change their minds. You continue to get all of the right deal related projects and since you’re still focused, it is easy to get into the top-bucket again. Overall, you clear $175K in your second year without skipping a beat

It has only been 2 years and you’ve cleared $133K in net worth! Pretty impressive. While everyone else is wasting money getting drunk at the club you’ve built a strong baseline for a career that could lead to an associate promotion!

Age 23: After a somewhat easier year 2 you decide to begin training all the first year analysts. You also attempt to participate in more drafting sessions (proactively) dropping hints to the higher ups that you do have what it takes to be in an associate role. You’re able to manage the younger analysts and you have ideas for updating slide decks and S-1’s without any push to do so.

It has now been three years and you get the head nod for the promotion. Your net worth is nearly $250K (not quite) and it has only been three short years..

Age 24: We are throwing in a low number as a transition year. Why? Typically, you’ll either get a meaningless stub bonus or you will not get paid the exact top tier bonus from Analyst 1 through Analyst 3. This is a precautionary measure to make sure the math still adds up. In addition, many analysts typically upgrade their housing when they are moved to an associate role.

Overall, we take a small step back to keep all estimates conservative.

Age 25: Your first year as an associate requires more proactive work from you, you’re updating projects before you’re being told to do so. This means you know what your MDs and Directors want to see and simply save everyone time by putting all the items in there before it is requested. In addition, you’re consistently training the junior staff. Nothing special in this year but you’re clearing $230K (at least!).

Age 26-27: These two years are quite similar to age 25, the difference is that you’re continuing to show leadership in the form of training and initiative with pitch books and live deals. In addition, you spend some time at industry conferences to build a small set rolodex of contacts in your industry. More importantly, they give you the role of “staffer” right at the end of your third year as an Associate. This is typically given to VPs (most firms) so the writing is clear. If you can manage the team well, you are in-line for a VP promotion.

Age 28-29: Around this frame they give you a promotion to Vice President. You did the necessary work and luckily you built a small contact list within your sector. You get a material “step-function” up in your total compensation to $400K with a green light to $500K the next year. By the time you’re solidly in a VP role you’re also solidly in the 7 figure net worth range.

Age 30-34: It gets extremely difficult to predict in this range. However the general set-up is as follows: 1) you execute several deals – didn’t source them, 2) you sign up a few small mandates, 3) you eventually win a couple of extra small M&A deals or lead an IPO sourced by an MD, 4) you sign up more retainers for other ideas such as registered direct transactions, poison pills etc (small stuff), 5) you eventually close a couple of nice M&A deals or get lucky and are the banker for a specific IPO. The long-story short is you generate enough revenue to warrant a director promotion but not quite good enough to get to MD! You clear $500-600K each year. By the time you’re all set and ready to quit, you’ve got $3M in the bank and you start a hobby to make some side income.

Finally, most people don’t quit. If you were this good you’re likely a career banker.

*Note: for the 401K contributions below, we assume you are never able to contribute more than $18K which is the current max, hence the $36K cap at age 28 and beyond*

Example 3: The Entrepreneur

This is where the real money is, we’ve seen several people quit their careers rapidly once their companies begin to gain traction. It is tough to work for someone else when your business is making more money than your career!

Age 21: You start your career and begin acting like an entrepreneur out the gate. Instead of wasting time with politics (big career mistake!) you simply get your work done and go home immediately. This does not look good to the higher ups but you don’t care as you’re already working on something on the side. You save a decent chunk (just over$25K).

Age 22: You get an “okay” pay raise that is in-line with everyone else at about 5%. You realize pretty quickly that there is more than performance that matters at work. There is something called political capital where you have to be liked by the “right” people in order to get the better payouts. Fortunately, for you you’re still seeing 200% growth from your business so it remains as a focus point for you and you triple it to $15K net of tax.

Age 23: You’re solidly a “median” employee. There is no hiding from this fact. You can’t really get laid off or fired because your work is solid and good, you just don’t play any of the political games within the firm. Luckily your business doubles again, because this is why you don’t have time to play the politics in the first place!

Age 24: The step function occurs! No not for the career you hate but for your business. You clear $75K in post tax money which is roughly equivalent to what you made at your career. You’re thinking about quitting immediately but the firm has no reason to cut you. You’re a top tier performer from a work perspective but you take no initiative because there is no reason to anymore and on top of that there is no incentive either! Funny situation around this age as you’re not willing to give up all that money and you’re not willing to go all in on your business either.

Age 25: Your business now starts making more money than your career and you hear of a Reduction in Force (RIF) that is occurring over the next year or so. You raise your hand for the RIF since you don’t care about the career anymore. Once you raise your hand, they add your name to the chopping block (so you think!) and your business is doing great almost at $100K!

Age 26: They don’t let you go! Unfortunately, when it comes to cutting people its actually harder to get rid of the top-work performers even if they are not motivated! You end up getting a long-winded pep talk about working harder and are handed a ton of work that will double your hours at the firm. You quit. Forget about it you say and you walk away. Your business ends up generating $135K that year.

Age 27-35: For those skilled enough to build a 6 figure income while at a career, they usually end up scaling to around $1M in net profit. For some reason this is around where it all shakes out. You can certainly exceed this number or watch the number flat line. Overall, getting to a million dollar business is possible and this is where we assume it all shakes out. You’re growing your business in non-linear fashion and end up getting to a $5M net worth at age 35!

Concluding Remarks

We’d like to take the time to highlight a few key psychological factors for people looking to become multi-millionaires.

First, you will get screwed at least one or two times. There is no escaping it unless you’ve go the luck of the Irish. You’re going to get burned pay wise or work wise somewhere (typically 1-2x) over a decade time frame.

Second, once your business income exceeds your work income your motivation falls off a cliff. You don’t care about doing anything beyond the minimum and quickly fall out of the “circle” politically.

Third, If you’re spending your time building income streams you can get to multiple millions of dollars by age 35 and the numbers clearly prove this out (even with 5% cost of living increases!)

Fourth, if you don’t focus in on building yourself up early, there is practically no way to catch up.

Fifth, we don’t have much time. There is a 20 year time frame at maximum to really make money. No one wants to be killing themselves working around the clock at age 40+

No Questions Will Be Answered as Usual (Readers Can Respond to Them in the Comments), Interesting Comments Are Welcome and We Will Respond. 

We get a lot of questions about how to make a comeback if they’re age XX or if they should quit their jobs today. Unfortunately, they never address the core issue of *risk*. Risk is all about foregone opportunities. If the foregone opportunity was nothing to begin with, it’s time to jump ship. If your foregone opportunity is a million dollars, it’s time to review the risk profile.

Life Risk – Unacceptable

The first type of risk is the most important: risk of losing your entire life. We’re not talking about getting hit by a car or a bus which could happen as a freak event. We’re talking about making decisions that practically guarantee you’re going to be stuck relying on other people (borderline welfare). Or worse, making other people reliant (unable to support a family).

The Dead-End: If you’re making $60K a year in salary (total compensation), you’re solidly in dead-end risk territory. You have to get out. It doesn’t matter if you’re worried about paying the bills. Your unemployment checks would practically offset your cost of living anyway.

You’re not allowed to have any fun if the current future says “dead-end”. This means no partying at the club. No drinking with friends after work and absolutely no right to live alone. You’re in hell and the only way out is to switch into a career (at minimum) or start scaling a business *starting yesterday*

In general, most individuals are risk averse, constantly worried about being able to find the next position. It doesn’t add up. If you’re making $5K a month (pre-tax!), there is just no wiggle room for error anymore, your entire life is at risk.

“Most people die at 25 and aren’t buried until they’re 75” – Benjamin Franklin

Shackles: This is also known as “painting yourself into a corner”. We talk a lot about uncomfortable topics such as family members holding you down and this is no different. People shouldn’t be having families if they can’t afford them. This is just another anchor in life that can cause a material amount of stress over the next several years. No different than getting legally married followed by a divorce (1/2 of your income for life is certainly a shackle)

A similar less emotional example is debt load. Levering up a balance sheet (your net worth) is a dangerous activity. If total debt payments are not covered by investment income the downside is far too large. This is a severely conservative approach since you don’t want to make a life changing mistake into the red. Total recurring income “passive income” needs to be higher than the total debt payments.

“There are two ways to conquer and enslave a country. One is by the sword the other is by debt.” – John Adams

Paying the Life Toll: While we focus on efficiency, there is no way to avoid paying the toll. The Toll is 3-5 years of working 60-80 hours per week. That is not a typo. Everyone in their 20s must pay this toll if they want to become financially successful and the longer they wait the more it becomes a real life risk.

Why is it a life risk? Well, there is an interest rate on that 60-80 hour a week payment owed to the Money Gods. The longer someone waits the more hours they must pay back. If someone pays the life toll of 60-80 hours per week for 3 years in the age range of 20-22, that toll now becomes 5 years if someone starts at age 30. It continues to increase until the toll is paid.

“Quality is never an accident. It is always the result of intelligent effort.” – John Ruskin

Summary of Life Risks: Under no circumstances do you take a life risk. What does this mean?

Dead-End Issues:

– If you’re working a salary (job) then you’re going to work 40 hours per week after work  AND you are going to attempt to work while at your job to generate money from a side business. There is *no excuse* here and no exceptions. If an incorrect career choice was made then you’re 100% forced to start a business while simultaneously transitioning your skills toward a career (a dual process)

– If you’re older then your choice is limited to just one: start a business with recurring revenue. There is no other choice. There is no lower risk choice because the price was never paid and going down the wrong path means you’re running back to the starting line to take it into a different direction! It is the only way to reverse the course.

Shackles:

– This is boiled down to emotional control. Ask if the decision makes financial sense and if it doesn’t then there is no reason to do it. We don’t care if everyone else is doing it (buying a home, signing governmental marriage contracts). That’s not a valid reason because the vast majority of people never become financially independent in the first place. Make no mistake, your life is a business until you’re financially independent.

Paying the Toll:

– Well if you’re doing the first two, killing all dead-end items and avoiding catastrophic financial mistakes you’re not going to have very much free time. Why? You’re extremely busy paying the toll. Your life consists of eating, drinking, working out and sleeping. Can’t go broke if all your time is spent producing something to make you more money.

Opportunity Risk – Acceptable

Everyone is different. We’ve found that somewhere around a million dollars in liquid net worth makes you value your time significantly more. If you’re part of the growing online frugality group it’s less and if you’re in the group that realizes life without work is boring… it’s much higher than a million bucks (yes we’re in group 2!).

Loss of One Time Investments: If you’re making money with a business outside of a steady paycheck, we can practically guarantee money will be lost at some point. Either due to traffic that isn’t converting, a product that is mis-priced or both. The key is to make sure you’re making the right risk to reward decisions. Was the opportunity cost superior? If not it was still the right decision even if money was lost.

As an example, if you have located a specific niche for a diet related product that could generate $100K in income per year… It is absolutely worth the $50K start up cost. If the idea would require an unchanging website (not a content website like a blog) then your upside is already 100% in year one ($50K in to get $100K back). More importantly, if the product and targeted ad campaign works out, this is going to be forever. You’re going to clean up by making $100K per year for an initial $50K outlay. Overall, all you need is a 3-5% success rate (probably less) for you to go ahead and invest the $50K today.

The key is this: will the upfront costs lead to long-term revenue generation versus straight time for money exchanges (hourly income). If so it is worth the risk.

Losing Your Best Years: This was partially covered in the greatest book ever written “How to Get Rich” by Felix Dennis. Eventually you’ll reach a point where making additional money is eating up too much of your time. When you’re 20 there is no reason to do anything besides make money (assuming you want to be successful) so grinding away for 80 hours a week makes a lot of sense. When you start creeping up in age to 30, 35, 40 and beyond… it becomes significantly less clear if the effort is worth it.

We only get one shot at life (for now!) so we should live appropriately. If you’re never touching the principal (cost of living income) then it may not make sense to continue putting in those long hours. Don’t get us wrong. The game never really ends. If your personality type allowed you to crank out 80 hours per week in your 20s, you’re not going to sit around the house watching sports all day. Chasing an extra line of income when you could be traveling the world and avoiding regret is significantly more valuable.

Declining Income Risks: There are several industries with material declining income profiles. Look no further than our post on the future of Wall Street where we predict declines in Equities related positions. The interesting point here is the value in a declining business. This is no different than buying a company in a dying industry. There is still a ton of value in riding the declines to zero!

Specifically, if you find an opportunity to invest money into a declining business, it may be worth it. The trick is making sure that the business will generate enough cash flow to offset the inevitable declines. Calculate all of the future income and see if you can net a material positive return. It sounds risky at first glance… But… No one wants to deal with a declining business which creates an opportunity for a major bargain.

Summary of Acceptable Risks: We’ve lost tons of money in the past off of ideas that never worked. We don’t think this will be any different for other people going down the exact same route. You’ll lose money (you’ll get it back), You’ll value your time more and of course, you’ll find ways to bargain hunt for terribly run businesses that no one wants to deal with. Importantly, these *acceptable* risks should never create a life risk. You’re not going to throw down money in excess of your cost of living income into any venture since it’ll break the bank if mis-execution occurs.

What isn’t a Risk?

We’ve heard of several that don’t make any logical sense. Risk has nothing to do with feelings and is 100% related to an impact to your standard of living. If it does not impact your standard of living it’s not a risk.

Fear of Social Loss: This blog is a good example. We receive comments that state they are not willing to participate in our Facebook Q&A (March 16, 8PM EST) since they don’t want to “like the page”. All of these people will fail (so yes feel free to like the page to improve your chances of succeeding!). There is no doubt in our mind that they will fail because following a blog is not going to impact your future at all (it is not a risk). In addition, we’ve got enough traffic here that it’s becoming normal to visit the page.

Secondly, we learned that many people spend 1-2 hours per day on Facebook! Think about that. They don’t have any money but are willing to spend more time on Facebook to improve their “social status ranking”. If impressing peers is the strategy to get rich, we have several luxury handbags and cars to sell them into slavery.

Serviceable Debt: This is also not a risk. If you’re taking income in the form of dividends to offset the payments of a mortgage, it is not a risk at all. Debt for home equity is typically not enough to be considered a risk unless you’re relying on active income to make the payments. This means mortgages (for our smart readers) will not be considered a risk. Inflation will cause the asset to appreciate over the long-term making the minimal amount of debt a lever for you over the long-term.

Getting Laid Off: This also isn’t a real risk. If you’ve built skills that are transferable a layoff (which occurs to practically everyone at least once) is not a risk. Transferable skills allow you to find work elsewhere and *ideally* allows you to have more free time (temporary) to work on your business venture. Saying that working on a side business will hurt work performance leading to a layoff… well… it doesn’t matter. If you’re committed the results will absolutely come through over time.

Concluding Remarks

Under no circumstances do you ever take a life risk. Ever. By avoiding *life risks* you can sleep soundly knowing that you’ll eventually get there (financially independent). Once you’ve reached that saturation point it’s time to move toward multiple acceptable risks.

In terms of incorrect choices, we’ve found that the most common one is avoiding the toll. Paying the toll is equivalent to saving up for a plane ticket across the country. If you save up early (20s) you get to board the plane. If someone avoids paying the toll until they are older, they are now physically biking across the country. Sure, it is possible to hit the ball out of the park your first attempt at a later age, however, the biking example vs. boarding a flight is a representation of how painful it will be (mentally and physically).

As a note we’ll likely be producing more here as we work on releasing our product (Efficiency), the Death Knell to the Men’s Self Improvement Industry

As you know we’re positive on long-term dollar cost averaging in general since you’ll essentially mirror market returns of 7-10% over a lifetime. The problem? The next downturn will be severe because people are emotional. The one item that practically nobody talks about is the lack of emotional stability during the next decline.

Understanding Passive and Active

Move To Passive: The move to passive has been enormous, approximately $200 billion has moved into passive ETFs while actively managed funds lost $150B in net fund flows (just last year!). What does this mean? It means that there are now billions upon billions of dollars sitting in accounts where money can be pulled out with a few short clicks.

We anticipate the next decline to be an absolute bloodbath. This won’t change the long-term horizon of 7-10% returns in indexes, but it will likely lead to many people losing millions of dollars due to lack of emotional control.

Review of the Warren Buffet Bet: In 2009, Warren Buffet made a $500,000 wager that no investment professional could select a set of five hedge funds to match the performance of an un-managed S&P 500 index. It seems simple enough until we look at what happened.

“For Protégé Partners’ side of our ten-year bet, Ted picked five funds-of-funds whose results were to be averaged and compared against my Vanguard S&P index fund. The five he selected had invested their money in more than 100 hedge funds, which meant that the overall performance of the funds-of-funds would not be distorted by the good or poor results of a single manager.”

We cannot emphasize the bold and italics enough because it will prove our point even more.

Fund of Funds are Scams: We have absolutely no defense for “fund of fund” hedge funds. They are essentially scams. You’re paying fees upon other management fees just to underperform over the long-term. As an example: If you buy a “fund of fund” (double fees), you’re paying the manager of the fund picking a fee of about 1% and you still have to pay another 1-2% fee levied by each hedge fund so your total cost is about 2-3% out the gate! In short, point one is that fund of funds are not intelligent investment vehicles. Period.

Blanket Hedge Funds Can’t Be Compared to the S&P 500: We have no idea why people compare the performance of a hedge fund to an S&P 500 index. They are not related at all. In fact, many hedge funds are set up to underperform the S&P otherwise the fund is not doing its job. We don’t think this is well understood so we’ll provide an example.

A large percentage of hedge fund money is run in what is called “market neutral” books. This means your dollars short are equal to your dollars long. To make that comment even simpler, it means that if you invest $100 into stock X you must short sell $100 in stock Y in the same sector.

We have simplified this concept to make it easier to understand but the point is clear. A market neutral book is set up to provide stock price appreciation with no exposure to the S&P 500. If you’re doing 5% returns on an annual basis you’re running a pretty solid book because you should in theory not have any exposure to the S&P 500 (which is appreciating by 7-10%).

If you don’t believe this then take a look at the same chart provided in Warren Buffet’s letter to investors (page 22).

Look carefully. Notice that every single fund outperformed the S&P 500 during the last recession (2008)?

Despite having excessive fees (again Fund of Funds are poor investment vehicles), every single one of the fund of funds declined less than the S&P even with a negative 3% headwind. Why is that the case? Well now you know. Large sums of hedge fund money are not set up to beat the market. The only way to make this bet fair? Compare the returns of the S&P 500 to hedge funds with a Beta of 1.

The point of this section is three fold. 1) we think the next decline will be severe. When more money is in passive it means individual investors are able to click sell (emotional) allowing for a flooding of the gates creating a massive buying opportunity on the dip, 2) comparing the S&P 500 to a basket of hedge funds is beyond foolish as it does not take into account the beta exposure of the fund and 3) we do agree that dollar cost averaging over the long-term will yield a ~7-10% return, however, if you’re already worth a lot of money we’re getting closer and closer to suggesting a basket of bonds!

Valuation Has Surpassed the Average

If you’re in it for the long-haul (40+ years) you can certainly ignore this section. Most are not at this point given our demographics have continued to change (most readers are in their 30s). If we look at all of the valuation metrics there is practically no item where we can cleanly say we’re below average

S&P 500 – Price to Sales (Last Twelve Months): Price to sales ratios are typically attractive somewhere below 1.5x. At this point were at approximately 2x and moving upward as the S&P continues to appreciate. While the companies are certainly more profitable, the sales multiples are not very attractive anymore. While we don’t think we’re at the top yet, there isn’t much room to run and if it ever hits a 2.3x it’s probably best to exit all together.

S&P 500 – Price to Sales (Next Twelve Months): Largely speaking you’re looking for a similar entry point at around 1.5x or lower on an NTM basis. If you’re extremely bullish then investing at 1.5-1.7x is also fine because it implies that numbers should be higher than current forecasts. That said, we’re creeping up towards that same 2x marker making it tougher to justify throwing in large sums of money.

S&P 500 – Price to Earnings (Last Twelve Months): A sign of life. Companies today are significantly more profitable due to advancements in technology (internet, software, automation). This means that the P/E is actually relatively reasonable in the low 20s on an LTM basis. That said, this is still above the average where you want to be seeing numbers closer to 19x.

Price to Earnings (Next Twelve Months): Finally, we come to our last metric, the forward P/E. This is the last reason why we’re still okay dollar cost averaging some money for now. Despite the run-up and despite the valuation on a price to sales basis, the earnings per share on a forward looking basis remains reasonable in the high teens. It is certainly above average but we’re not in excess of 20x and we do believe that there is more room to cut costs and achieve the earnings numbers.

What Does This All Mean? The stock market is above average on every single metric including the forward FTM multiple. It does not mean there will be a decline near-term (in fact we think nothing will happen this year and it will be fine). The problem is that bonds will become significantly more attractive once rates go up a couple of more times and there will be a better *risk to reward* buying opportunity. This is good news for everyone who has built up their financial independence fund.

What to Do

Now that it is becoming clear that we’re at least beyond *average* valuation, what we’re saying is that we should all look to new investment vehicles beyond just S&P dollar cost averaging. We are not saying that you should throw your money into a hedge fund (many require millions just to get in by the way!), instead we think you should operate like a hedge fund at this point.

This means, if you are over the age of 30 and you are financially independent, it is time to brush up on your risk profile. If you’ve been averaging into the S&P for the last decade you’ve made a ton of money and there is no reason to risk your principal.

– We recommend starting a business ASAP. Make no mistake, if you’ve had a good run career wise and things start to get softer, that stream of cash flow is going to be under pressure. Start learning online sales or at least consulting on the side. Getting comfortable now is what everyone else is doing and that is exactly what you *shouldn’t* be doing.

– Take your market exposure from 1 to sub 1 by year end 2017. If nothing is learned from this post we suggest explicitly reducing your market exposure to under 1. For newbies this means if your entire portfolio was just the S&P 500 (that would be market exposure of 1), then we would reduce that to at least 0.7 or so (70% stocks, 30% bonds) somewhere around the end of the year when rates have gone up a couple of times.

– Do Not Risk Principal. Under no circumstances do you risk your actual principal wealth. This is the money that is stashed away to cover your cost of living forever. It is not worth it to have high exposure to the stock market with above average valuations across every single metric. If you’re already rich lets keep it that way.

– Watch Tax Rates and the Muni Market: If rates do increase and the tax rate declines there will be an enormous buying opportunity for tax free returns! Everyone has been praying for “5% risk free” for a long-time and we may get *close* to there if rates do go up quite a bit and the tax rate comes down! We can always pray! But at minimum, it should be tracked diligently for the remainder of 2017.

– Don’t Be Fooled by Indexes: Yes it works. As we stated in the past if you dollar cost over 50+ years it’s going to work. The problem is listening to the media and allowing them to drive people into indexes (notice everyone talks about indexes now). Don’t be fooled means… Don’t expect this upward trend to go forever. When the declines come there will be a stampede out (people have no emotional control and never will) so expect a bigger buying opportunity. If your plan is to stomach the downturn just remember this post and it will likely be uglier than most people think!

Finally, for fun, notice that even Warren Buffet is willing to pay high fees for solid Investment Bankers (M&A), not related to equities.

“And, finally, let me offer an olive branch to Wall Streeters, many of them good friends of mine. Berkshire loves to pay fees – even outrageous fees – to investment bankers who bring us acquisitions. Moreover, we have paid substantial sums for over-performance to our two in-house investment managers – and we hope to make even larger payments to them in the future.”

Good luck!

To start, *pure* passive income simply means “you are rich”. The only way to earn income without doing a thing (ever) is by having a large sum of money. The good news? There are hundreds of other ways to earn income in both a semi-passive or passive way. Specifically, you can create semi-passive streams that tail off, you can invest in higher risk passive income that *may* generate a return well in excess of inflation and you can always work part time to generate “semi passive” income. Below is an outline of streams of income (what we view as best to worst).

Semi-Passive Income

A Landing Page with No Updates: This is the best form of semi-passive income. It means you have a website that *does not need to be updated*! Now we have to repeat that phrase. You create and set up a website that sells a product and *does not need to be updated*. If it needs to be updated then it’s not longer in the tier one semi-passive income segment.

Any website that sells a product that does not require updating could include anything from: vapes, electronic cigarettes, retail clothing, protein powder, cosmetics, jewelry etc. Quite literally anything where you go to a website and the same products are being sold day in and day out. Importantly, the reason why this is the best form of passive income is because of the return profile.

Roughly speaking say it takes about a year to get enough traffic to earn $2,000 a month. This may not seem like much, however, if it only took a year to get done correctly you’re now getting $24,000 a year or the same value as having $600,000 (in a single year!). If you create two of these you can now focus on bigger ventures. This is the primary reason why we recommend online sales as a starting point. If you can just create two of them you’re now free to build something more meaningful and have the money to both live on your own or reinvest the money into paid traffic to a more important venture (important ventures are not semi-passive income as you’ll be grinding away to get past plateaus). In short, a landing page that converts is your best form of semi-passive income.

Management Income: While we prefer having other people manage rental properties for us, there is money in this game as well. If you want to become a landlord you’re going to be forced to commit time (interviewing new tenants, repairs etc.). This means it’s not quite passive income but the time spent can be *leveraged*. This is a key part of this semi-passive income stream. If you own properties with a high cap rate (meaning annual rental income over value of asset) then you can obtain some leverage to boost the returns. This is secondary to landing pages for a key reason… If you go down this route use the static income to cover the cost of the mortgage payments by 2x.

Lets assume you have $4,000 a month in semi-passive/passive income. This means you can take on a mortgage payment of around $2,000 a month (we take a conservative stance and assume your $2,000 payment includes everything). To keep everything simple, this means you can put $80,000 down to obtain $400,000 in real estate value. Assuming your interest rate on the debt is around 4%, your payment is going to hit right around $2,000 a month (we include home owners insurance, taxes and some wiggle room for repairs in this $2,000 estimate). Now you can sleep well knowing your payments are protected and can look for the best possible tenant giving up a few bucks (slightly lower rental income) for a stable semi-passive stream of income.

Updated Information Websites: Yes you can make some money from blogs, but the real money is in paid traffic product websites. We are including this as a form of semi-passive income because we’re sure everyone visits at least one website with updated information not classified as a blog. Let use Coupons.com as an example. Now certainly, no one here is wasting their time clipping coupons. But. Remember that there is a LOT OF MONEY in selling to the masses (hence why motivational seminars always work! Never ending supply of always broke dudes looking to get “amped up!” or “fired up!” or “Hyped!!”). The masses are always looking for ways to cut costs, so you can offer a website that does just that (like the coupons website).

Another good example of information based websites is credit card offerings or something like million mile secrets. No one wants to actually do the work and they correctly advertise with the slogan “Big miles. Small Money”. This barely makes our semi-passive stream since there is a lot of updating here. It is possible to run a smaller scale website like this without working a full time 40 hours per week. (not easy but doable).

Return Based Passive Income

Now we’re moving onto pure passive income. All of these forms of passive income will not require you to do anything. We’ll ignore you being forced to set it up (less than 4 hours) and assume that you do absolutely nothing going forward. There are many many ways to make money if you have money and that’s a good thing. The reason why this segment is separated out is you should be willing to lose some money if things go south. This is called “higher risk return” passive income versus “risk free” passive income. There is an important distinction because the return profile is higher and you shouldn’t bank on 100% of it being stable every single year.

Owning Properties, REITs and Private Equity Real Estate: Now the difference here is you’re handing over the keys. Unlike the management income where you do it yourself you’re going to outsource everything. You throw money at the property and hand the keys over to someone else to deal with it. This is not a risk-free situation given 1) potential debt load, 2) trust in property manager, 3) interest rate environment and 4) any one time hazard/maintenance issue that kills your yield for the year. We peg a solid return at somewhere around 6-9%. This includes a management company eating into your yield and of course the natural reserve fund for any maintenance issues.

The second option is a REIT which certainly has risk associated to it. While they do offer high yields (distributing 90% of earnings to shareholders), the REIT is exposed to 1) tax rate changes – you’re taxed based on your personal income bracket vs. dividend distribution rate, 2) reliance on debt, meaning more leverage is needed to boost returns, 3) real estate can be extremely location dependent and is prone to cycles just like we saw in 2008 and 4) since it’s an equity product and as a shareholder, we have to realize they can only re-invest 10% of net income since the rest is being distributed. Take a look at REITs and you’ll see they move around in ways un-related to the stock market.

The third option is working through a private equity firm such as a Blackstone, Lone Star or Brookfield. You’re locking up your money for a longer period of time (typically) but the returns should be notably higher as well (double digits). Now there is certainly a wide range of private equity transactions from low to extremely high risk… But. Locking the money up for longer periods of time is generally the theme here. Unless you’re in the Ultra Rich group, it’s one of your best bets to get exposure to commercial real estate (apartment buildings, offices etc.).

Overall, we’d say if you looked at this group in aggregate shooting for high single digit to low double digit returns is doable with the right background research. Many people make a handsome living in the real estate industry (there are even executives who read this blog and have emailed us!) and there is a clear reason for it.

High Yield Bonds: If you know your industry extremely well, you can start dabbling into higher risk bonds. We wouldn’t recommend going into the low end of junk bond territory unless you’re extremely savvy but you can begin looking at items with a yield closer to the BB range. We’d emphasize that high yield bonds are for a special type of person 1) a person who is looking for additional yield given that they are already financially independent or 2) a person with significant domain expertise that knows the industry’s cash flow dynamics like the back of his hand. If you’re in one of these two positions you can find yields that are around 6-8% or so (sometimes even 10% if you’re extremely savvy and know the space well!). Importantly, our view is to wait on this one since rates are likely going up a few more times, but it is good to get your hands into the mix now to figure out which corporate bonds are good investment vehicles

Crowd Sourcing and Peer to Peer Lending: This is another interesting one since the risk profile is not well understood today. You’re essentially lending to other consumers or you’re piling in your money with other smaller scale investors into specific projects. This is a hot topic today given the advancements in social networks and trust amongst strangers online. The key to this investment vehicle is you’re making a call on the risk profile of the investment vehicle versus the printed sticker return. If the return is the same as a high quality corporate bond the only thing setting your idea apart is the assumed risk (a clear example would be Lending Club).

The basic items include: car loans, mortgages and credit card debt. You’re essentially acting as the bank and again, we think the real differentiator is the spread on the assumed risk you’re taking on. The yields are somewhere in the mid-high single digits.

Dividend Paying Stocks and the S&P 500: The last bucket is another one for long-term investors that we have already spoken about in the past. Buying index funds that mirror the S&P 500 (ticker: VOO) or dividend yielding stocks (ticker VYM). You’re taking a long-term view and are willing to take the sharp downturns during an equity market pull back. The main risk here isn’t that the stock market will stop going up over the long-term… the real risk is emotional distortion when the selling begins. The vast majority do not understand what it means to invest in an index fund as you’re assigning equal weight to the same old set of 500 companies. To explain this in extremely basic terms “If everyone decides to buy the same 500 companies every month is that an efficient market?”. The answer is of course not. Sure companies move in and out of the S&P 500 but everyone should see the point, with more money in this strategy the downturns will be more severe.

Protection Based Passive Income

Government Bonds: This is the most basic form of protection based Passive income. Specifically, protection based passive income means you’re only protecting the principal values (more or less). If you generate a low single digit yield of 3-4% or so, you’re essentially getting nothing back once the year is done. You’re taxed at your normal tax rate and on top of that you have to strip out inflation of somewhere around 2% per year or so. We don’t think inflation is that low (1-2%) so we’ll go ahead and say all 3-4% of it just goes to stave off inflation. Boring stuff guys. This is to be used for asset protection. Instead of putting money into a savings or checking account where the value is being eaten up by inflation every year, you can throw that safety net amount into government bonds instead. No we don’t own these today.

Treasury Inflation Protected Securities (TIPs): Now in theory, many of you read the prior paragraph and said “well buying TIPs will protect me the best from inflation” this is certainly fair in practice. The problem is the long-term view on allowing an instrument to be pegged to what the government says inflation will be! Since we don’t even believe the current inflation estimates we wonder if the future adjustments to inflation numbers every single year will really make any sense. If you’re interested in protecting assets and have a more positive view on the assumed rates of inflation on a year to year basis then these instruments may be useful for you (ticker: TIP). No we don’t own these today.

Certificate of Deposit: A whopping 2% return! Honestly that is where the higher end CD rates are and if you want to track them yourself then you can check out bankrate.com they have a solid overview of the interest rates. Notably, the one benefit of CDs is your ability to stagger. This means you set aside one chunk of money, lets say one 5-year CD at 2% and then every year you buy the same one. This way once you’ve done this four times, you’re constantly getting back the investment and the return as a safety precaution. We do stagger CDs at a rate of 4 months of annual income expenses. This means once you have a healthy financial portfolio you have about 2 years worth of income earning a small return but peace of mind that every single year you can take a 6-month living expense hit and not worry about it. We think this is an extreme safety precaution and it can be done with much less in a money market account.

Money Market Accounts: If you’re not ready to set aside 2-years worth of income like a pack rat then you can also go down the money market angle. Nerdwallet.com gives a solid overview of the money market options and also provides basic overviews of credit cards, mortgages, loans and insurance. We don’t operate with a money market account but we’d use this as a “worst case scenario” area for safety. If you’re in this camp, 3-months of savings is likely good enough because you should be reinvesting thousands upon thousands of dollars into your real business.

Concluding Remarks

Your entire net worth and income stream is no different than a sales funnel or building a pyramid. We’ll say it once and we’ll say it again. You’re either building someone else’s dreams or you’re building your own. With that you should be looking at the framework as follows:

1) You build a business and put every cent into making it grow whenever you see a risk reward opportunity that favors you

2) During your free time you build a few landing pages to sell products that are known to be high quality and get them to generate a few thousand dollars a month

3) If you struggle to do step 2, move to a managerial or information based product where you’re constantly updating, it’s a grind but all the money is being invested in item 1 where you’re looking to buy traffic

4) With excess money flowing in, start building out a recurring income portfolio of “return based” passive income. We have no major preference at this time (we used to prefer dollar cost averaging) between the four items but we do recommend a mix of at least two of the ideas

5) Depending on your risk profile look at protecting a couple of years of income by investing into low risk passive income items.

There you have it every important as it relates to passive income into a single post. We will answer questions about passive income for the first 3 days this post is up.

There was an advanced discussions in our highly popular post on passive income. We’ve taken it and organized the content into a readable blog post (thank you to all the commenters “ownmyhood”, “Nixon”, “RE Guy”, “YM” for creating this idea). In addition to adding highly valued comments, we have vetted a few of the named individuals to confirm they are millionaires from the real estate game (ambiguity for double protection of their identities!). As many are aware we prefer the online route, but lets get started on this path.

Step by Step to Making Big Money in Real Estate

There are a lot of books on real estate investing out there, problem is most are terrible (and written by get rich quick gurus rather than people who have been there). If anyone’s actually interested here is an 8 step process to get started in real estate that actually works:

Step One – No Need for College: Skip college and go to a technology school for a building trade, preferably the one that pays the most in your area (plumber, electrician etc).

Step Two – Become a Contractor: Get a job with a reputable contractor in your field, preferably someone who offers overtime opportunities. Work as many hours as possible, learn all you can and get licensed as quickly as possible. Make friends with other tradespeople on job sites, preferably the more intelligent, young, hungry ones (these can be tough to find). Save every penny you can.

Step Three – Location, Location, Location: Locate an area that is run down, but shows some signs of turning around. Meaning multifamily buildings for sale that bring in double digit cap rates are common enough to where as there might be a few listed on the MLS and the population of the immediate area (or least the surrounding area) is not decreasing and preferably growing. Also, being within commuting distance to a desirable downtown area helps a lot.

There is quite a bit more than this when locating a suitable area, but there are some things that must be left out for others to figure out (notice no one gives away their business, otherwise they would be out of it!). If this area is local, good for you, if not, time to pack up and move. There are a lot of places where you can buy double digit caps all day that aren’t total war-zones. You don’t want rodeo drive (entry cost too high/tough to make money) but make sure it isn’t a demilitarized zone either.

– Investor Note – RE Guy: You can call these run down areas with signs of turning around “the borderlands” because they normally are on the border between a garbage area and a nice area. You shouldn’t count on anyone giving away all their trade secrets, especially not for free, especially not on a public blog, the same way this blog won’t give you specific stock picks or exactly the products they market online. However, all these resources combined make a great starting point for anyone looking to get into real estate, so if it is something you’d like to do, after us giving all this information in one place, you have no excuse not to start!

Step Four – “Campaigning” (no different than affiliate marketing): After locating the right area, use the MLS, targeted mailings, call campaign (anything else!) to locate a building with potential for a double digit cap and an owner willing to sell. Bonus points if they are willing to hold paper. Remember these properties are rarely pretty, be prepared to deal with some rough tenants and buildings. If either of these scare you, stop reading now.

– Investor Note – RE Guy: He’s currently setting up a deal with a single digit cap on a multi that will convert into a double digit cap, based on the purchase price and what he put into it for the renovation and subsequent higher rental income. Not based off it’s “true” cap, it’s new after rehabbed value which he believes will remain single cap. Cap is more tied to the general area than the building, it’s more “how risky is it to rent properties in this neighborhood” or “what quality or income level of tenant will possibly be attracted here” and cap will generally decrease as the quality of tenant increases (it’s less risky to rent to a doctor than a bus driver, and the market recognizes this and makes doctor friendly buildings more expensive than bus driver friendly buildings, relative to cash flow). Currently the owner is warming up to the idea of holding paper.

Step Five – Cash Flow Positive:  Buy the building using a method that allows for at least some cash flow after all expenses (lenders don’t like negative cash flow). Meet the tenants, keep the decent ones, immediately evict the bad ones, raise all rents to market rates if they are not already (if you lose sleep over raising ol’ miss McGillicudy’s rent $50 per month or start shaking in your shoes when you realize you have to hand Chopper the Hells Angel an eviction notice, this ain’t your gig). Renovate the lousy units into nice apartments using low cost but durable materials. You’re not going for a luxury penthouse, just a nice clean apartment. Now is the time to call your buddies you met on the job to help you or at least learn enough to be proficient at a few other activities. Hanging drywall, painting, basic carpentry can be learned by anyone who’s willing to put in a little time.

Investor Note – RE Guy: Decide ahead of time what the rules are and enforce them. Make them firm and strongly in YOUR favor. Add to that a moderate dose of pragmatic compassion; evictions are an expensive proposition and you may need to decide between a small and large loss. Make the decision to evict more on something like the person not answering phone calls than on them not being able to pay for a week or two IF there is an agreed upon payment plan that you believe they will stick to. If you conduct yourself ethically, you will have no problems with evictions.

Step Six – Learn from Competitors: Learn how local apartments are advertised, list your vacancies, learn how to take nice pictures and write coherent, appealing descriptions. Price them right, don’t overprice or they will sit vacant and carrying costs will eat up any profit. And most importantly SCREEN YOUR TENANTS THOROUGHLY. Nice people will rarely tolerate living next door to dirtbags for any length of time.

Investor Note – RE Guy: If you get too few phone calls you know it’s priced too high, too many and it’s priced too low (art that turns into a science over time). Know your market, know the seasonal variance, know what to expect as reasonable so you can adjust accordingly. Sometimes trying to squeeze every dollar out of a place leads to having to compromise on the quality of the tenant… and that knowing this is also knowing what is a good tenant for that particular neighborhood.

Step Seven – To be the Best, Never Settle Like the Rest: Alright, you’ve got one building cash-flowing, good work. Time to sit back and let the rent checks fill up your bank account right? Wrong. Visit the property often, pick up litter, respond to maintenance calls promptly, evict non-payers and troublemakers and ALWAYS PAY ALL OF YOUR BILLS ON TIME. Credit will *make or break you* in this game.

Step – Eight Wash Rinse and Repeat:  Now just repeat steps 4 through 7 over and over and over…

Key Notes

–When you are starting out, nothing is beneath you: Unclog toilets, keep your own books, do apartment showings, represent yourself in court. Learn these things now so you can teach and competently evaluate others to do them for you later.

–Don’t let emotions get the best of you. From buying a property to resolving tenant disputes emotions run high in the real estate world. Dealing with a stubborn moron who you want to purchase a building from? Be nice. Handing a tenant an eviction notice? Be nice. Nothing to be gained from losing your cool.

–Keep in touch with people that matter. RE agent points you toward a good deal? Keep in touch. A seller holds paper for you? Keep his contact info and reach out to him later if you need a reference. A bank loan officer mentions they have some foreclosures in the works? Call him in a few weeks and see how their coming along. All pretty obvious stuff if you read this blog. The moneys out there, if you want it, it’s yours.

–  Income Property Debate:  Opinion one: Don’t be the guy who buys a duplex in order to “live in one unit and let the other unit pay my mortgage” as a side hustle. If you’re going to get into this game plan on going big or not wasting your time (scale remember). Real estate is a complex endeavor that involves quite a few areas of expertise (sales, advertising, legal, building trades, tax accounting etc). You don’t have to be a master of all of them, but must be at least competent enough to judge whether someone else who you’re paying is doing a good job. Learning all this takes a lot of time and doing so just to “pay your mortgage” is foolish. Opinion two: If you buy it well enough to much more than cover the mortgage (which is a standard you should absolutely set for yourself) it is possible. In addition, you can go up to 4 units of pure residential while still qualifying for residential mortgages.

The main point of ownmyhood that I agree with 100% is not just buying a property to pay your mortgage, but buying a place to live in it and have it as an investment can be done all sorts of ways (including renting rooms, always legal if you live there to my knowledge a.k.a. Airbnb before there was an Airbnb), and for those who are really strapped for cash, that means you can even get a single FHA loan for a few % down.

How To Manage Once You Get the Hang of It

Once you’ve got the hang of it there is potential to see cash on cash returns of *at least* 10-20%, with minimal work (relatively speaking). If you don’t want to manage tenants you don’t want success bad enough (Real estate being your chosen path to riches). If this is the mindset someone has to be successful… well it is the most common red flag example. The second most common red flag? Are you willing to spend your Saturday checking out and analyzing deals rather than watching sports from 12pm to 12am? No? You don’t want it bad enough.

Back to dealing with tenants…hire a property manager. Yes you will pay money for the service and it will hurt your returns, but if you buy a property correctly you will be able to afford it and still make plenty of money. Average rent per month on units can come in around $800 and managers typically charge between 5-10% depending on your scale. If you’re just starting out and paying $80 ($800/rent x 10% mgmt. fee), that’s the best $80 you’ll ever spend because you don’t have to deal with tenants, contractors, or accounting. As a note, don’t choose a property manager solely based on the management fee. You can find a manager for 6% ($48/month in my example vs $80) and save a few bucks, but the wrong property manager can cost you *much more* than that in excess repairs or lost income. Find a manager who is going to look out for your best interests as an investor, not just someone looking to increase their revenue.

Deal Example – Nixon: Here’s the deal he’s working on today. 16 units priced around a 10% cap rate for $500K (that means around $50K of cash flow a year *after* paying a manager, but before debt service). The lending terms he went with on the last deal was 75% LTV at 4.5% using 25 year. That would cost about $25K of debt service a year on this deal, leaving $25K of the original $50K cash flow. He’d put up $125K of equity and end up with a 20% cash on cash return on a semi-passive basis.

Investor Note – ownmyhood: In most cases would recommend training and hiring your own property manager over a paying a management company. While the short term costs in time and money may be greater (training, setting them up with office, tools etc), in the long term you’re not going to pay for someone else’s overhead and the needs of your tenants/buildings will always take preference.

Basic Real Estate

You throw money at the property and hand the keys over to someone else to deal with it. This is not a risk-free situation given 1) potential debt load, 2) trust in property manager, 3) interest rate environment and 4) any one time hazard/maintenance issue that kills your yield for the year. We peg a solid return at somewhere around 6-9%. This includes a management company eating into your yield and of course the natural reserve fund for any maintenance issues.

Another option is working through a private equity firm such as a Blackstone, Lone Star or Brookfield. You’re locking up your money for a longer period of time (typically) but the returns should be notably higher as well (double digits). Now there is certainly a wide range of private equity transactions from low to extremely high risk… But. Locking the money up for longer periods of time is generally the theme here. Unless you’re in the Ultra Rich group, it’s one of your best bets to get exposure to commercial real estate (apartment buildings, offices etc.).

Bigger Pockets: Biggerpockets can be a good resource for beginners, and possibly if you have some good knowledge already a resource for looking deeper into specific topics. For example there is a thread there on construction of a full home from a lot. The issue with it is that it’s got a whole host of contributors of various levels of competency, different backgrounds, goals etc. It is easy to get confused or get misinformation in the form of biases you may not recognize as a beginner from there.

That said it is a a good beginner’s guide to real estate, because the person who wrote it called the system of “buy, renovate, rent, refinance”, he says “BRRR”, which he correctly stated was something many investors have been doing for a while and he was just creating an acronym for easy understanding. In other words, if you treat it as a summary of various concepts and a jumping off point for either further study or just to give you a basic framework to use while you go out and start taking action then it is good.

Of course, your best education is your first deal. A single deal is worth an additional 10k-20k because you’ll be getting your education out of it. Like as if you were paying a college for a semester of classes on real estate.

Example of Bias: There is a segment example where it discusses using someone to do certain repairs and spoke against it, while another contributor (who had many more units) said “I could see if you already have your portfolio and are just trying to maintain cash flow, then it is good, but if you want to keep building it, you’re better off paying someone to do it and looking for your next property.” Also, if you are just starting out and don’t have a background in the trades, it could also possibly be useful (this is another point of dispute among some people).

Basic REITs Exposure

A Real Estate Investment Trust is a company that owns and operates income producing real estate (yes there are other types like healthcare but we’ll keep it simple).  While they do offer high yields (distributing 90% of earnings to shareholders), the REIT is exposed to 1) tax rate changes – you’re taxed based on your personal income bracket vs. dividend distribution rate, 2) reliance on debt, meaning more leverage is needed to boost returns, 3) real estate can be extremely location dependent and is prone to cycles just like we saw in 2008 and 4) since it’s an equity product and as a shareholder, we have to realize they can only re-invest 10% of net income since the rest is being distributed. Take a look at REITs and you’ll see they move around in ways un-related to the stock market.

Your best bet is to DCA into VNQ for REIT exposure (0.12% expense ratio as of this writing), although be mindful at the moment as REITs tend to underperform in a rising interest rate environment thanks to the bond-like income. Dividends will be taxed at your ordinary rate vs. qualified rate, but netting 66% of VNQ at 4.7% is higher than 85% of VYM at 2.8%. Check out PFF as well for another high yielding (5.7%) ETF that isn’t related to real estate

As you start to make more and more money, something typically happens… You spend a grip more. Practically everyone will make mistakes once they start to feel rich (including every single one of us as well!). It typically doesn’t feel like you’re increasing your lifestyle by a large margin until you look at the year-over-year change in net worth and are unpleasantly surprised!

Not Financially Independent

If someone is not financially independent: negative lifestyle inflation is when your savings rate declines. Without financial independence, every single year needs to see an increase in your overall savings rate. You’ll establish a lifestyle that you enjoy and once that is set you’re going to throw every single cent into new businesses, investments and basic savings as well.

The Most Important – Generate More Income Every Year: This is and always will be the focus of the blog. While many continue to say that “you’re still saving XX% so its all about cutting costs!!!” they don’t understand that a high income is *needed* to generate a savings rate in excess of 50% or so. Trying to save 50% of income on a $50K pre-tax salary is absolutely not going to work. Your standard of living would be so low that your retirement would not be very fun at all! Can you imagine retiring in 17-20 years and living off of $20-25K a year? We can’t either. Step one is always going to be “generate more income each year” this will help you avoid negative life style inflation.

Every Single Pay Raise is Reinvested: If you’re not independent, then you’re still in hell. Knowing you are relying on someone else to help pay your bills is not a comfortable place to be psychologically. Again, you’re in hell. This means every single pay-raise must increase your savings rate. If you’re stuck in a position where you have an “ok” salary and a “mediocre bonus” you have to first work on moving into high paying careers and second save every cent you can in the meantime (potential to leverage into business/investment opportunity). If your investing rate is below 50% in your 20s, something is going terribly wrong. You have to put away 50%+ as soon as possible if you want to invest in a new business, get into real estate or otherwise.

90 Day Psychology: Any time you get a new windfall (bonus check hits, you have a great month of sales or another one time windfall), then you’re going to put that money into a 3 month CD. This is boring. The reason why you’re doing this is to allow your dopamine levels to settle at its normal baseline (you’ll have a temporary spike after receiving the windfall). We’ve found that 90 days is enough time to allow your body to reset (get used to the money). If you spend a single cent of the windfall within the first 90 days it usually leads to “buyers remorse” which is just another way of saying regretful purchases. We’ve deployed this tactic many times and continue to do so despite being financially independent (no one likes regretting purchases).

3 Months of Cash Flow: The second rule of thumb is to invest 100% of new cash flow for the first 3 months. This is specific to online properties. If you have a passive business that is generating $1,000-2,000 a month, then you’re not going to spend a cent of the first $6,000. Go back to point 2 and remember to throw it into CDs. This forces you to have a savings rate of 3/12 or 25% at minimum for year 1. It’s hard to predict variable revenue like an online property, so in a worst case scenario it goes to zero and you made a few bucks off of it. For people who are not yet financially independent, trying to operate at a loss for long periods of time just doesn’t work unless you’re planning on building a major technology company that operates at a loss (if so you’re probably not reading a finance focused blog!).

Avoid Brand Name Items: If you’re 25 and walking around with a Patek watch or $800 loafers, you’re only hurting yourself. There is no reason to try and impress anyone if you haven’t made it to financial independence yet. Think about the cost of a single luxury item and you’ll see that the return profile doesn’t work for a 20-something year old. Most will view a 20-year old with money as a trust fund baby who never had to work for anything in his life (don’t be that guy). Instead, keep all of your items as basic as possible, only buy more expensive material items if the return is higher than the additional cost (quality shoes without the brand name are good examples of this). Buying a Patek Watch when your iPhone tells the time perfectly well is beyond crazy. You can buy those items when you don’t need the money.

Spend to Free Up Time for Work: This is a critical part of success. You can absolutely spend for services (laundry, apartment cleaning, food delivery, etc.) if and only if you’re going to use the free time to generate more income. If you don’t have time to do laundry and it’ll cost you $50-100… But… You’re going to spend that hour or so generating more than $100, make the trade all day! If you’re idea was to spend $100 in order to free up time for catching the latest football game, you just don’t want it badly enough. Now we’ll give another basic hint. Re-read the underlined portion of the sentence.  This doesn’t mean you *have* to earn $100 in that specific hour! If you spend an hour to improve a business that will lead to $1,000 once the change is made (over the course of a year) it is clear you should make that trade!

Completely Financially Independent

The second group of people are the financially independent. Our definition of independent is a bit more difficult, you must be *rich*. This means your passive income will allow you to live a life you enjoy into perpetuity. If this is the case then the outline changes a lot. In fact you can ignore our entire outline if you’re not eating into the principal but we’ll go ahead and give our view anyway.

Continue to Do Something: Anyone who paid the life toll required to take the fast lane to financial independence is a hard working individual. If you started from *zero* and somehow made it to financial independence in your 30s (or earlier!) you’ve done an absolutely incredible job. The problem? You’ll be bored quite easily. As we stated you’re only rich if you’re happy with your life and we can all but guarantee you won’t enjoy living in Thailand collecting checks and spending them on beer. Watching the numbers go up in your bank account, trading account or other accounts is a fun dopamine rush.

Increase the Distance Adjusted for Inflation: Lets say you have $10K a month in monthly recurring passive income (your number needed may be higher or lower, this is simply an example). Then your goal is to create a spread between your ideal income adjusted for the rate of inflation every single year. 1) Calculate the inflation rate, 2) multiply it by at least 2x and 3) increase your monthly passive income needs by that much. Using the same example, if inflation is at 2.5%: it would be $10K x (1 + (2.5%*2) = $10.500.

An extra $500 a month is certainly not much *if* you were able to get to the $10K number in the first place. In addition, your goal is to actually increase the distance so you want to have $10,500+ in recurring passive income when the year is all said and done. This makes it impossible to lose your livelihood due to “inflation” as you’re doubling the level and beating it every single year. We use this as the minimum framework so you’re always improving in terms of cash flow.

Find a New Source of Cash Flow: Lets say you’re a real estate expert and made your riches through that route. It makes sense to develop a few other ways to earn passive/semi-passive income. Make no mistake, you’ll have a bread and butter skill-set driving your net worth, the goal is to simply learn a new form with a few hours a week invested into the activity. This will help diversify skill sets and add some entertainment as well (boredom is a common issue when it comes to work when you don’t need the money).

Spend More Time on Your Health/Hobbies: After paying your dues, it’s probably best to spend more time on your health. This can be in many forms: meditation, sleep, hours of exercise, flexibility, etc. You can also start checking off items on your “life to do list”. We don’t like bucket lists, but it serves as a good example. No reason to miss out on things you always wanted to do because we’ll never get our time back and health issues can rise out of nowhere. The extra money you’re making (you’ll never “retire” since you’ll have too much energy) can fund your to do list with no worries.

Avoid New Recurring Costs: This only applies to year one when you’re seeing if you can live off of your passive income. Try to avoid adding new recurring cost items (we don’t use Netflix but something like that won’t move the needle). Recurring costs would include a new major debt payment, a new luxury car or a life style upgrade that rips out 10%+ of your monthly income. If you can avoid the new costs you’ll be able to answer the passive income question pretty easily.

Concluding Remarks

Not Financially Independent

– If you’re not financially independent your savings rate (percent of net income made) must go up every year

– You will focus the vast majority of energy on creating more income

– Only spend money that saves time *if* you’ll expend that saved time on generating more income (not to go get wasted in the club with no one you’d spend your free time with)

– If you get a new windfall, spend none of it for 90 days

– If you create a new income stream you save every cent for the first 3 months (not enough experience to know if it will last)

Financially Independent

– No point in going from 70 hours a week of effort to 0. You’ll get bored so find a way to work less but still be actively earning a income

– Passive income needs to outgrow inflation

– Find new sources of cash flow outside of the primary skill-set to avoid a repetitive life

– Spend significantly more time on health and even traveling since we don’t get our time back

– In year 1, avoid recurring costs since it’ll make the math difficult to calculate

This post is directed 95% towards product sales online (not content based). You can earn an income with content based websites (blogs etc.) and we only touch on it for a second to make sure we hit all the forms of income. To emphasize these laws primarily refer to product websites.

Law #1 – There Are Two Markets: There are two distinct markets. The masses and the rich. If you’re looking to make money you have to make a decision on which market you will cater to. The masses will focus on anything that does not require them to do any work and the rich will look for status symbols. This is overly simplistic but it’s a good starting point. Trying to target both markets is extremely difficult as they have business models that are largely unrelated (an exception may be the shiny new iPhone). Products that sell to the masses typically have *lower* margins with high volumes while products that sell to the rich have *high* margins with lower volumes.

Law #2 – Sell the Dream to the Masses: If you go down the masses route you’re going to sell them with the following tactics: 1) external motivation like Tony Robbins – “Unleash Your Inner Beast with This Product” or “Fire your Boss!”, 2) magic pills that will fix their life – “This solution has doctors hoping it will be banned!” (modafinil/provigil is one of the latest fads), 3) minimal work for sudden riches – “work from home and earn $100K tomorrow with no work!” and 4) celebrity endorsements – “XYZ celeb uses it!”. The theme here is that they are not responsible for their own actions and there is always some “hack” to getting what they want (without building any skills). When you’re selling to the masses do not put anything logical in the sales pitch. Keep it emotional and make sure your product works. Sure you can get away with bad products but that just leads to non-recurring income.

Law #3 – Sell the Prestige to the Rich: Get rich by selling them on the status of the item. The product can be largely the same but it needs to be *exclusive*. The best example is black and white balls and other such “filters” for rich people to go and meet. The cost is practically the same just sell those tickets for hundreds of dollars a piece! Another great example is the classic “bottle service” experience. No doubt about it that pricing alcohol 300% above its market value is going to be profitable. Notice, these can be done online, offer exclusive “packages” to people.

Law #4 – Three Ways to Earn: There are three primary ways to earn money: Paid Traffic, Niche and Content. Paid traffic requires you to purchase traffic from Facebook/google and more importantly other sources (we can’t give you more than that). Niche websites rely on a specific product that has enough “keywords” to generate ~30K views a month (you’re selling a product). Content websites have an enormous number of ways to make money (selling books, ads, affiliate partnerships, consulting etc.).

Law #5 – Paid Traffic is a Faucet: It’s either on or it is off. There is no “time for money exchange” this is because you’re either paying to target a specific group and sending them to a website.. or you’re not. This is why you can go from $0 to suddenly making $10,000 in a day (or losing money!). Think of it as a faucet, you turn on the traffic and it converts or it doesn’t. Assuming it is converting you must keep the faucet on until it loses money. No customer left behind.

Law #6 – ~30K Monthly Views is a Living Wage: If you’re selling a product (niche, not a content website) then you should be able to generate a living wage off of 30K organic visits a month. Assuming you convert at 2% that would be 600 sales. If you’re doing 600 sales at just $5 in net income that is $3,000 a month. Sure it is debatable if this is a living wage in a place like New York but you can certainly live in many parts of the world off of a niche site doing $3,000 in net income a month. The key here is a 2% conversion rate.

Law #7 – If You Do Content Build a Brand: We don’t do content websites (this blog is a hobby) however if you want to do it you must build a full platform. You must build a massive following and never lose their trust. You can then expand your website into multiple directions (consulting, products, affiliate sales, etc.). The only problem with this (and why we avoid it) is you must constantly be “on”. Letting a website die will kill the returning visitors. If you go this route it is essentially for life since they are hoping to increase their interactions with you over the long-term. (others can chime in on the long-term strategies here since we don’t focus on it).

Law #8 – You Don’t Need to Be New: There are millions of products out there that are largely the same. There is no reason to create a product that is vastly different. Take an existing product make a couple of tweaks to the product and kaboom you have a new item to sell. This eliminates the need for a “light bulb” moment. 100% unnecessary for generating income online today. Coke and Pepsi are not that different and the gym equipment you see (45lb plates) are not different (slight change in shape).

Law #9 – Execution is Everything: If you have a solid product there is no need to make it perfect. We’d take a product that is the 3rd best on the market with the best possible sales and marketing over the #1 product in the market with terrible sales techniques. Logic never sells. Stick with having a clear execution (sales) strategy. Once your product is good you’re going to live and die from execution. The worst feeling is when you create the product and someone does it better than you later (after you give up). This has happened before and is a life lesson.

Law #10 – No Partnerships: Pretty simple for online sales. There is no reason to have a partner. You can pay someone (a major company) to help you with practically anything you need. You can make hundreds of thousands of dollars (even a million) without having a partner (ever). Partnerships are only good when you’re not making any money and are awful when you start making money “Who’s pulling the most weight?”. This is human nature, so there is no point in doing partnerships for a basic online venture.

Law #11 – Singular Focus: If you’re serious about earning a living online, you cannot have multiple projects running at the same time. It is comparable to pouring water. If you pour water into 100 different swimming pools none of them will be full. The water will evaporate and you’ll be stuck with nothing. If you constantly fill one (maybe 2) pools with all the water you have (every single day), you’ll see progress and eventually it will be functional. Spreading yourself thin is death in online sales because someone else is going to be 100% focused on that market.

Law #12 – Debt Needs a Return: Debatable we know… But… We view debt as an immediate return profile. If you are going to take on debt for any venture you should see a positive return in the first month (immediate cash flow). If you borrow at 5% for a venture and don’t see a positive return every single month you’ve made a big, big big mistake. You’re going to be eating into your cash flow which will kill your long-term opportunities.

Law #13 – You Need Liquidity: The last thing you want is to be cash strapped. If you find out that market XYZ is giving you the best return… you want to buy as much traffic from that demographic (buy every single one of those users!). There is no exception to this rule (none). You must have cash on hand to throw at the right demographic otherwise you’re going to miss out on an opportunity someone else will jump on. For the Real Estate guys, this is like not having money for a deal that you absolutely would love to have. Someone else will find it and buy the asset before you get the chance.

Law #14 – Always Available: You need to have a system that tells you if something is going wrong. Lets say you’re set up to constantly run traffic while you’re sleeping because it is profitable. This is great… Until it goes negative. You do not want to be asleep for 8-10 hours while the traffic is giving you a negative return. Have an alert set up so you’ll be immediately woken up if the returns are largely negative for an extended period of time (lets call it 2-4 hours).

Law #15 – A Fool is Born Every *Second*: There is a never ending supply of fools in the world. The saying is a fool is born every minute but after years of seeing terrible (shady) campaigns work… We’re increasing that to every second. Those emails that say a “nigerian prince” is ready to send you money… They work! Yes people are still fooled by spam even in 2017. It’s amazing but true and we should never underestimate the number of fools in the world.

Law #16 – Always Build Contacts: Keep a soft touch relationship with anyone who can help you. While we recommend going solo, you’ll have questions and if you pay someone for the answer (and it works) you should keep that person in your phone forever. Continue to do this for years upon years. Never under any circumstances do you waste their time. A simple hey how is it going 1x a month is more than enough.

Law #17 – You Don’t Need to Be “Smart”: The vast majority of people are risk averse. As an example, people are “scared” to like our current Facebook page even though we get 2 million visitors a year. That is quite a lot for a hobby blog and we have no doubt every single reader is less than 2 handshakes away from someone else who has read or seen this blog. What does this mean? It means if people have a risk tolerance that is extremely low, the number of people willing to become Entrepreneurs is extremely low as well! If someone is risk averse but has a bunch of skills you need, you just pay for his skills… There are many people who get rich that are not bright, they just hire people smarter than them to do what they cannot do.

Law #18 – You Will Hate Loss of Freedom: The one thing that we’ve seen in common with people who earn a living online? They hate losing their freedom. Many people who make money online will say they would rather earn $40K alone online than earn $200K in a corporate job. They are not lying. This may be some sort of personality disorder but it is a personality trait we have noticed. People will walk away from a career that pays more in exchange for their freedom.

Law #19 – The $50K Rule: It costs about $50K to start your own item. That’s our own rule for keeping cash in a checking account at all times. We’re not sure what industry you’re looking to crack into, but… We’ve found around $50K is enough to go into a new direction. Under no circumstances do you put yourself into a position where $50K is not readily available in liquid cold hard cash (no revolver no nothing).

Law #20 – Everyone Will Hate You: No one will be happy for you. If you make $200K a year in a corporate position people will be jealous. If you make $200K a year working off your laptop? They will hate you. In the first position they can laugh behind your back and say “you’re still being told what to do”. In the second position… They will loathe you and hope you will fail. Live off that energy!

Concluding Remarks

If we were to outline the most important items here it would be as follows: 1) if you are earning money you buy all of the traffic from the demographic until you have tapped it out, no sleep for you if it’s pouring in, 2) choose your demographic be it the masses or the rich, 3) niche sites are ideal for people looking to learn the basics, 4) do not work with anyone, partnerships end in tears, 5) you don’t need to be smart and 6) always have $50K in cold hard cash to go into a new venture.

Note: Our Facebook Q&A is on April 2 at 3PM EST. 

Thanks to the Wall Street Playboys for allowing to shed a little more light on the real estate game. I’ve gained quite a bit from their articles and am grateful for the chance to give a little back. Before we begin, I want to clarify that this is written from the perspective of an individual who started out in real estate the “old fashioned” way: working a job and saving up their first down payment. Some of these rules won’t apply to institutional investors and those with billion dollar trust funds. If anyone reading is involved in RE investing on an institutional level I’d love to hear their perspective as well.

I’ve decided to put together a list of rules that you should follow when contemplating getting into RE to begin with and then a few guidelines for looking at your first investment. I don’t delve much into actually doing deals and building an RE Investment biz in this post because it would take up too much room. If the WSPs ask me, I could potentially do a second post covering this.

Should You Invest In Real Estate?

1) You Must be a Jack of All Trades

Real estate investing requires a broad base of knowledge, so plan on spending quite a bit of time learning the following skill-sets: 1) Managerial: You should be able to manage tenants, contractors, employees and create effective business systems. 2) Legal: Most areas of RE investment require a good understanding of the following: property law, landlord-tenant law, contract law, tax law, zoning, codes compliance Etc. 3) Technical: Real estate investment generally involves purchasing and maintaining some sort of structure, you should be able to understand, evaluate and to at least some extent repair the different components and systems that compromise a building. 4) Sales/Marketing: As the WSPs say, *you don’t want to sell? Too bad*. RE investment involves quite a bit of selling, from convincing people to lend you money or sell their property, to knowing how to effectively market properties for sale or rent.

A lot of the bad advice you’ll read online says something to the effect of “If you don’t like something, you can just hire somebody to do it!”… Yeah, ok Skippy… In addition to this being wrong in many cases, the people who say this are missing the point. You don’t learn how to fix a leaky faucet, write an effective ad or draft an eviction notice so that you’re stuck doing it the rest of your life. You learn it so when you do reach the point that you can afford to hire someone, you can train them to do it or at least evaluate their work. If you think you can make real money in this business without having to acquire any skills you might as well stop reading now because clearly you’ve already got it all figured out.

2) Choose Areas of Real Estate That Cater to Your Strengths

Though real estate requires a broad base of knowledge, we all have a *certain type of intelligence*. To increase your odds of succeeding, figure out which areas of the RE game best utilize yours. Are you “the guy” people call when their popcorn popper stops working? There’s plenty of opportunity in fixer-uppers. Do you always read the “terms and conditions” in their entirety when purchasing a new product or service? After getting your head checked, you should consider some of the more legal oriented opportunities like judgement investing or buying properties with title issues.

3) Go Big or Go Home

Learning the skills listed above takes time. A lot of time. It also takes experience and while some skills are transferable from other professions, you inevitably have to learn many things by actually doing them over and over again. With that in mind, though certain areas of real estate can be tackled as a side hustle (some of the more legal oriented strategies come to mind), the more commonly known strategies like flipping, managing income property or RE development are generally full time gigs.

This isn’t to say you can’t do them part time to start as you certainly can maintain a couple of small income properties while working a full-time job. It’s just that there is so much learning and network building required to become a legit RE investor that it doesn’t really make sense to put in all that effort just to cap your progress at a few apartment buildings or the occasional flip. Do people go to school for 8 years to become part-time doctors? If you want to get into one of the more time consuming aspects of the RE game, plan on dedicating a lot of time and scaling up to a point where you become financially independent from it.

4) Everybody Has Advice When it Comes to Real Estate. Ignore it.

I have worked in a few fields, but none compare to real estate when it comes to regular people telling you how it’s done. Every knucklehead either knows someone that has “made bank” in real estate, or has done so themselves. These stories take on a few variations from “this house was the best investment I’ve ever made” (Oh yeah? So you’ve compared your home’s % increase in value to investments in other asset classes during the time you’ve owned it, making sure to subtract expenses…) to “I just bought a duplex and the rent pays my mortgage” (Don’t Get Me Started). The truth is, the vast majority of the money made in real estate isn’t due to shrewd investing, it’s from boring old market appreciation. The buy high, sell higher crowd that make their money in these situations are the same sheep who get slaughtered as soon as the market turns south. Intelligent investors can hold their own in almost any market.

In short, the only people you should take advice from on RE investing should meet the following criteria: 1) They are financially independent from investing in real estate; 2) They did not inherit it; If you question the second point: There’s a guy in my area who inherited hundreds of residential and commercial units from his father. The last time one of my friends saw him he was wearing a backwards, flat brimmed “Monster Energy” hat. Need I say more?..

When You’re Ready to Buy

5) Cash is King

The get rich quick gurus that dominate the RE advice biz love to talk about “nothing down” deals. You know why? They know there are a lot of broke clowns out there who are willing to swipe their credit card because they think they can get something for nothing. In the real world, nothing down deals do exist, but they are rare and often aren’t a bargain to begin with. Which gets me to my next point: Cash is king.

Though different investment techniques require differing amounts of cash, the general rule is: the more cash you have on hand, the easier your life will be. If you have a significant down payment, it will not only be easier to get a loan (lower LTV), the seller will take you more seriously. I know this first hand as I’ve lost a deal where a cash buyer paid significantly less than what I was offering with bank financing. Also, bargain purchases often require quick closings. Applying for a loan, waiting for an appraisal etc is rarely a speedy process… And don’t forget to have some of those greenbacks left over after the closing as well, because bills need to be paid and stuff breaks.

6) Cut Out the Middle Man

I’d be lying if I said real estate agents haven’t brought some good deals to my attention. They have. Also, since I’m on good terms with a couple of them (IE: referred them clients that made them $$$) if they are selling a property that they think I’ll be interested in, they’ll reach out to me before listing it publicly, which is nice (this benefits them as well, since if I buy they can now work both sides of the deal).

Those benefits aside, I think it’s usually a good idea for buyers and sellers to deal with each other directly. This is due to: 1) Better communication between parties; 2) Lower transaction costs (don’t have to pay agent commission); I can’t stress enough how important #1 is. As I’ve mentioned in my comments on prior posts, real estate can be a very emotional arena and the less direct communication the two parties have the more potential there is for misunderstanding, which can kill deals. Having agents involved turns a real estate sale into a game of telephone which benefits no one (well no one except the agents!)

My actionable advice is: 1) Learn to sell: This will help you convince the other party to like you and ideally swing the deal more in your favor (“Aww shucks, he’s a nice guy, I guess I can hold a $500k note for him”). 2) Direct Contact: Regardless of whether there’s an agent involved in the deal, get in direct contact with the other party and get on good terms with them. 3) Be Nice to Agents:  Don’t totally ignore or piss off RE agents as they can be useful, especially in the beginning when you’re still learning how RE transactions work.

7) The Real Money Often Lies in “The Borderlands”

Yeah, you might impress your date if you’re walking down 5th Avenue, point out a building and say “Check dat out girl. Alllll mine.” But the fact of the matter is, prime properties rarely offer the best returns and though many owners wouldn’t admit it, are often bought for status rather than pure profit. Ego is a powerful thing… The inverse is true as well. You could buy some beat-to-hell 20 cap on the corner of Skid Row and Mug Street, but then not only are you going to have to earn every cent of that rent money (and then some) managing your property, your prospects for adding value are limited as regardless of how nice you make your building you won’t be able to increase rents or attract decent tenants.

So with that in mind, often the easiest places to realize a decent return (Double digit cap or close to it) without dodging bullets are The Borderlands. I’d describe these as areas that are generally run down, but show some signs of turnaround. They are usually located near the real bad neighborhoods, but within a reasonable commute to the more desirable areas of town.

Credit to commenter RE Guy for “The Borderlands” term, it articulates perfectly the type of area I’m trying to describe. See his excellent discussion of this concept in the previous real estate post for more details.

8) Real Bargains Are Tough to Find and Are Rarely Pretty

When you hear words like “foreclosure,” “OREO” or “short sale” do you automatically think “bargain?” If you answered “yes” then get your credit card out, because I have a bridge to sell you… What I’m getting at is: properties priced significantly below market value are rare. Just because a property for sale is owned by a bank doesn’t mean it’s a good deal. Oftentimes it just means it’s a POS and this is already reflected in its price being lower than nicer properties for sale in the same area.

For a deal to truly be a bargain it usually has to meet one of the following criteria: 1) Nobody knows about it; 2) There is no market for it (in its current form) 3) There is something about it that scares most buyers away, which can be corrected for a significant amount less than the discount that it’s currently selling at… Where do you find these types of properties? All I’ll say is: don’t bother asking me in the comments section. (Why give away a business, no one would!)

9) The Numbers Don’t Lie

In the RE game it’s easy to get irrational, you may have just walked through a beautiful property that you would love to own or you could have heard a trendy new bar or coffee shop is opening up in a particular neighborhood. Maybe you just met a seller and he’s willing to give you some sweet financing terms… Regardless of any of this, it’s imperative that you run the numbers on a deal. And I don’t mean “what the rents might look like once all the nanobrew swilling hipsters with their trust funds move in to live near that bar with the chalkboard drink list that may or may not open up down the street.”

I mean what you can rent the place for currently. This doesn’t mean you can’t factor in increased return (along with the associated costs) due to improvements you plan to make in your hypothetical numbers, you certainly can and should. It’s just that you need to stick with known variables, not bank on an uncertain future event to increase your property’s value to a point where the numbers make sense. If you do that you’re just a speculator, not an investor.

You may ask “how do I know what a property will rent for or what the utilities cost?”… Well, if you’re a fool you could take the seller’s word for it. But I’d recommend doing the research and learning independently (finding out what utilities cost in your area, how much energy it takes to heat/cool a given amount of sq ft, Etc). Again, these are hypothetical numbers, so you’re just trying to get in the ballpark. This becomes far easier once you’ve done a few deals as you will have access to data from your existing properties.

10) What’s the Best Way to Learn RE? Doing Your First Deal.

Commenter Nixon brought this up when discussing Real Estate in a previous post and it couldn’t be more true: The best education you can get is doing your first deal.

I’ve noticed that there is a loose pattern that most first time investors follow when searching for their first property:

-They figure out the geographic area they want to work with
-They establish their ideal criteria for what they want to purchase
-They look at a bunch of properties, making a few offers, none of which are accepted
-They get frustrated “Why aren’t any of these jokers signing on the dotted line?..”
-The become fired up and look at a few more properties and make some more aggressive offers, oftentimes bending their initial criteria a bit
-Someone finally bites and the have a property under contract
-They haggle about small stuff “I need $1000 cash back to fix this AC condenser because the building inspector that I just paid $500 said so.”
-They may or may not have trouble getting financing “Whaddya mean I can’t only put 5% down?”
-They close.

Welcome to the Jungle.

Anyway, there is quite a bit to be learned during all of the above steps. So if you’re interested in getting started this is generally what I would recommend: 1) Work at your current job until you have enough for a decent down payment all the while studying different RE related topics in your downtime (Law, finance, building trades Etc); 2) Figure out where you want to invest and the logistics surrounding it (if you have to move or not); 3) Do your first deal

Good luck, you’ll need it.

-OwnMyHood

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Note: The outline above has had formatting edits made by us (Wall Street Playboys) with 99.99% of the content unchanged. We have confirmed OwnMyHood’s background and he is financially independent off of real estate investments (well over the multi-millionaire level). We thank him for his contributions and hope to grow a community full of people similar to his caliber.

We’ve started interacting here and there with “J. Money” from Budgets are Sexy. Now the most interesting thing is he found our blog (so we think?) right around when he got a one-time *event* of $75,000 in a single day! (December 2016). Coincidence? We think not. Now that said, we’ll put a spin on two of his latest posts to see if we can get more people on board the money making *bullet* train versus the cutting costs normal train. If we can convince just 1% of the individuals to make the jump we’ll call it a success (yes double meaning on 1% intended).

Disclaimer: we are not backing away from our belief that a time for money exchange is bad, instead the post is set up to prove that everyone, including hourly income individuals, generate incomes well below what they can get as a solo shop. We believe no one is maximizing their income, it just isn’t possible due to market inefficiencies.

Quick Overview of J’s Blog: From what we can tell he is passionate about the blog (you can see it in the writing). He seems to be a workaholic doing tons of personal finance type projects and that’s usually a good sign of someone who is interested in the topic. As Naval Ravikant would say, you’re moving in the right direction when… “It won’t feel like hard work to you but will look like work to everyone else”.  We have nothing against cutting costs (you can’t get rich if you spend 100% of what you make) but we do think it is more efficient to focus on making more money (hence our blog is about ways to make $$$!). With that out of the way, he has two posts one on him giving away $100 a month and the second on what to do if you have a $2,000 emergency (we’ll address both here).

What to do With $100 a Month (Anyone)

We’ll start with the latest, if someone gives you $100 today and you have a handful of skills the answer is to launch a small website immediately. We’ve focused primarily on product sales (most are not ready for this it seems) but we’ll give yet another idea… Start a basic consulting/services practice. If you have niche knowledge in any topic, you’re underpaid. Take a look at this chart.

Now we’ve certainly made this chart extremely simple. It looks exactly like your typical “supply and demand” chart. Essentially the first customer plot 1, is willing to give you $6 worth of profit. The second customer needs you less and would be willing to give you about $5 worth of profit. So on and so forth. This occurs until customer 6 where they are no longer worth your time. Importantly, this can be either your time (services) or a product sale (price point)

Now here comes the depressing part, how does this work if you actually work for someone else? Well take a look at one small edit… Now you’ll see what is going on. Absolutely no Company is going to give you more money than you are worth (assuming you’re an actual good employee – many companies have “inefficiencies” as well). If profits were to go negative for an extended period of time the Company would be in quite a big heap of trouble! So there you have it, two extremely simply charts to prove you’re underpaid!

Now back to the original question on what to do. We would go and open up a basic website (cost around $200 for the domain/hosting/decent template design), saving the first Benjamin (writing your sales page in the meantime) then getting to work in month two. Now you go and start a small website and link everyone on your social media accounts to that website (most have social media even with a few hundred “friends”). Then… kaboom you start your basic practice with either 1) what you already do or 2) with something *else* you are an expert in. Everyone has talent in something, so we would wager that every single person reading this is in the top 20% in at least two items. That is all it takes (two items) if you don’t want to have a conflicting businesses with your current job/career. You can then immediately acquire a handful of customers and make back the $200 (assumes a 3% conversion rate on 200 customers = 6 customers at $50 each… or a $100 profit in your first day “in business”). This is not unreasonable at all.

Now once that’s done you keep the first $100 you made and when the second $100 comes in you use it to outsource your customer reviews (if you have a ton of time do it yourself). Your customer reviews will be organized by someone else dealing with the back and forth emails and paid on a quick contact (easy to do on fiverr). Your second page on your site is going to be customer reviews of your service/product because you better *over deliver in a big way* to your first set of customers. This leads to several positive reviews and will then make it easier to keep your conversion rate at ~3%. You’re already rolling. Top cap it off, the most clear example we see every single day is in the gym. Several in shape guys (who need extra money) spend their time with headsets on ignoring everyone. Since “material” on working out is practically all a scam on the same old basic concepts (compound lifting) the special sauce is in the sale/services. They are typically standing right next to out of shape people with tons of money and can’t get the lightbulb to go on!

To put the nail in the coffin… if you end up getting more customers than you can handle you will now have the option to 1) raise prices or 2) hire others to do the work! In short? You’ve Set up a Potential *Event*. We have talked about *events* many times. But. This is important to understanding when you’re building something basic like this with scale. You can either 1) sell a stake in it like J. Money did, 2) see how much pricing power you have giving you immediate income off of the same amount of work or 3) outsource the work creating a semi-passive income stream (we would do number 3 most likely).

How to Come Up With a Quick $2,000

We read the entire article and agree that unprepared individuals would struggle to deal with a $2,000 payment. That said, if this was truly a “one time charge” (or restructuring charge as the finance community would call it) you could offset the cost by simply using the internet! That’s right, if you had ~1 year to generate $2,000 in a random one-time event there are many, many, ways to do it. Since we’re focused on keeping it basic for this post, anyone will be able to do this.

Step 1 – Internet Access: If you live in the United States (the greatest country on earth), practically every public library will have access to the internet. This means you will have free internet access if you need it. There are no excuses here, being born in the United States is a gift in its own right.

Step 2 – Zero Percent 18 month APR Credit Card: Now if you’re going to do something on the internet you’ll need a credit card. There are several credit cards that offer 18 month zero percent interest as long as you pay a very small fraction of the total balance each month. You’ll use this type of card for the return we’re dealing with about $2,000 is the goal.

Step 3 – Coming Up With Minimum Payment: To really get rid of the negativity (excuses), for a $2,000 balance… you’ll need a grand total of $20 a month. Now… Just in case someone is going to lie to us and say they can’t figure out how to get $20 we will happily say that you can come up with $20 looking for change on Wall Street over the course of a week (joke). For a grand total of $20, you can simply trade your time for money by working one extra hour for the month. If someone really can’t even do that… then become an Uber driver during rush hour one time or go recycle some plastic bottles. In short, there is no excuse for not being able to come up with $20 and anyone who disagrees should re-read this paragraph.

Step 4 – Get On Social Media: Now once you have that set up, you’re going to become a stalker! Not stalking other “friends” you know. But. Becoming a real stalker of what is “hot”. To make a quick turn around you’re looking for any product that has extremely high demand and limited supply. During our last Q&A someone asked about a quick “buck” to pay rent and that’s essentially what this situation would be. Your answer is the following: Technology devices (gaming products,most popular iPhones, etc.), Sporting events (limited seating), Concerts/Music festivals (limited units), 100s of collectable items that are limited edition.

Now that you’ve got the main items to search for on Google (listed above), you’ll narrow down to a set of maybe 5-10 items that are coming up in the next few months that will undoubtedly sell out. You then take these items to social media to help confirm or deny the trend. Kaboom! You’ve got at least 3-5 items that will definitely sell out so you get your hands on it.

Step 5 – Shipping: If you’re doing something that has tickets (sporting events for example) you won’t have to worry about it (congrats this got 100x easier!). If you’re doing a product here’s an easy way to set it up. You order the item (pre-order) on Amazon… Since you won’t actually get the product since you’re pre-ordering it before the sale you then want to *sell* the product just before the release. Why? You charge a shipping cost to the order! Now you won’t have to pay the shipping cost, it’ll pad your profits as you login to Amazon and simply change the shipping address. Ta Da! Update please see comment from “internet dude” below for the spam approach which also works where you flood the web with links.

How to Come Up With a Quick $100

Now come on guys, saying someone can’t come up with $100 is just crazy talk. Pull out your credit card go into “credit card debt” of $100 for the month (float it). You now have 30 full days to go ahead and generate an extra $100. Since this is significantly easier we wouldn’t even do the five step research process above. You’ll simply go and look up all the local stores that purchase goods (used auto parts, used books, used technology widgets etc.). Now all you have to do is look up all the “garage sales” where they give a way a bunch of free stuff or items at a deep discount and go “arbitrage” the difference. (Any affiliate marketer knows all about that arbitrage!)

Dying With Debt

This is a bit of a strange one. In theory dying in debt isn’t really a bad thing. If you’ve accumulated a million bucks then went crazy wild into debt towards the end in a ball of flames then that’s how it’s done!!! Definitely don’t want to die with $1,000,000 in the bank if you don’t have any family members to give it to. The flip side, if this is all student loans for a degree that didn’t help that is certainly sad and we don’t have much to add there. At this rate (we think education is massively overpriced now), the government should find a way to have the money forgiven.

Women Value a Man’s Wallet

All we will say is yep! If you’ve got 7 figures in the bank you’re always a seven! Instead of reviewing the entire post we’ll highlight the most important part of the article which is this… You have to know your income breakdown by city. Here is the general rule to follow.

“Unlike other places on the Internet, we are going to break down the income brackets for you in a simple graph.

As you can see by the graph, you need to make *at least* the median income in order to consistently date girls in the 6-7 range. If you are extremely good looking or have extremely high status (musician, DJ etc.) you can break these rules. But. Nothing else will help you if you’re below the median. If you have incredible social skills but can’t even afford to live in the city, the girl is going to ditch you. A girl who is a solid 7 still has dating options.”

School Debt Isn’t Viewed as Unattractive as Credit Card or Car Debt

This one is a bit of a head scratcher. We don’t view them as all that different. If someone decided to major in a Humanities degree that won’t make them any more money and paid $200,000 to obtain that degree… That is *worse* than having some car payment (easier to clean out). If someone has $40,000 in student loan debt but a degree in software engineering and a Career offer from Google… Well we 100% agree. Unless the debt is giving you a positive *return* we view almost all of it equally.

Summary

Now some of you are wondering why we’re linking to a personal finance blog that focuses more on saving/budgeting… Well we actually think he’s figured out how to get rich! Maybe we’re wrong but we think so (at current rates we predict he’ll become a multi-millionaire sooner than he thinks). If you can create a one time event of $75,000 in a single day (after building up an interesting business) why couldn’t you create a one time event of $750,000!!!! He could without a doubt in our mind. With that said here are the quick points:

1) You’re underpaid! Please feel free to argue against the two basic charts. And. The charts do *not* even include operating margins which means most businesses do not even take business that don’t generate a *meaningful* profit!….. 2) All you need is a credit card and internet access to obtain the ability to generate $2,000 in “one time” event…… 3) not being able to come up with $100 in 30 days is just a lie unless someone is lazy….. 4) women value money surprise surprise, a “politically incorrect truth” just like how men value looks (another shocker!)….. 5) unless debt is *earning* you a return it isn’t good debt plain and simple to us!….. 6) one of our young smart readers should use our outline and figure out a way to use his giveaway to start a biz!

My name is “Nixon” and I’m a money addict.  From close to 7 figures invested in equities, to multiple 7 figures invested in all types of real estate, if it makes money you have my attention.  However, these and other investments are currently side hobbies as my day job entails being one of the primary executives at a Real Estate Investment Trust (REIT).

I’ve worked at a few different REITs in my career and have probably done some type of business with the WSPs or their peers.  I’ve probably even rubbed elbows with the WSPs in Midtown and didn’t even know it.  Probably at a property that was owned by a REIT.

Do you want to invest in a Manhattan skyscraper or maybe even a hotel in Beverly Hills?  REITs are your best bet.  Let’s get started.

What is a REIT?

A REIT is a company that invests in real estate either through owning properties or through providing mortgages, while distributing at least 90% of their income to shareholders (You) in the form of dividends.  

There are considered to be four main “food groups” in real estate investing and this is where most REITs invest:  multifamily, office, retail, and industrial.  Besides the four food groups, there are numerous other types of real estate that REITs invest in:  storage units, hotels, single family houses, hospitals, golf courses, student housing, data centers, timber, etc.  Most REITs like to specialize in a specific area of real estate, but some will invest in as many types as they can.

REITs are basically spread investors, investing at cap rates that are greater than their cost of capital.  The lower their cost of capital, and the higher the *risk-adjusted* return, the more money they are going to make.  Note that REIT earnings are referred to as “Funds from Operations” (FFO) and not “Earnings Per Share” (EPS).  FFO adds back depreciation (massive non-cash expense for REITs) in order to get closer to a true cash flow metric.

Dividends are typically paid to shareholders (You) quarterly, although some, such as Realty Income (NYSE: O), pay dividends monthly.  If you’re gearing up for financial independence (or generating passive income), this is a fantastic way to get part of your income.  Also, REITs typically increase their dividend payouts every year, and some REITs increase their dividend payouts multiple times a year.

Why Invest in REITs?

1) Income/Total Return:  My favorite feature of REITs are the juicy dividends.  The average dividend yield for REITs is in the 4% range (some even pay in the double digits!) while the average dividend for the S&P 500 is in the 2% range.  REIT total returns have also typically exceeded the broader stock market over the long term when looking over various 20 and 30 year periods.

2) Ease:  If you’re still nervous about investing in real estate after reading OwnMyHood’s excellent post , there is no easier way to get started than buying shares of a REIT.  No repair calls, no chasing tenants for rent, no signing on the dotted line for mortgages, etc.

3) Liquidity:  Maybe you need to sell your real estate quickly in order to take advantage of another opportunity, or maybe you’re feeling bad about the real estate market and want to exit.  You can sell REIT stocks in seconds with a couple clicks of a mouse and get your cash out quick and easy.  If you’re investing in physical real estate, you’re probably talking a few weeks to a couple months (maybe more) to get liquid.

4) Diversification:  REITs invest in hundreds or even thousands of different properties in various locations (including outside the U.S.), so if one of their properties goes bust, it’s only a minor blip on the radar.  As mentioned above, some REITs also invest in multiple asset classes, so if one asset class is underperforming, another is likely outperforming.  Also, REITs are a great way to get some personal investment portfolio diversification when added to your bonds and other equities.  Lastly, you’ll get access to properties and areas you wouldn’t otherwise have access to on your own. 

How do I invest in REITs?

There are publicly-traded REITs and private/non-traded REITs.  This post is focused more on publicly-traded REITs, because if you have access to purchase shares in non-traded REITs then you are probably accredited, which means you shouldn’t be reading this post anyway (although I know for a fact there are *numerous* accredited investors that frequent this site!).

Nearly 200 REITs are listed on the NYSE and can be purchased through your brokerage just as you would any other stock.  There are numerous resources out there to help you analyze a REIT, including if you want pinpoint a certain asset class.  Google is your friend.

I personally invest in several individual REITs in which believe in the strategy and long term strength of their portfolio.  No, I will not share which companies, as you’ve read numerous times already that you never give away all your money-making secrets. 

However, for the average investor I’d just recommend DCA investing in the Vanguard REIT Index (NYSE: VNQ).  I also invest here due to the diversification benefit of investing in over 100 REITs (in addition to the other diversification benefits listed above), along with the tremendously low expense ratio of 12 bps. 

Note: potential inefficiency from inflows towards ETF/passive investing has been on my radar and has also been mentioned several times by WSPs.  If you don’t understand that sentence, maybe WSPs will educate with a future post.

Taxes and Dividends for REITs

Because REITs distribute most of their profits through dividends, they are exempt from paying taxes to the IRS.  Instead, the shareholders (You) pay taxes on that income through the dividends you receive from the REIT.  These dividends are generally taxed at your ordinary income tax rate vs. the qualified dividend tax rate.  This means the IRS takes a larger chunk in taxes of the dividends paid from REITs than dividends paid from other companies.  

However, because REITs distribute most of their income, dividend yields are typically higher for REIT stocks, as are the net after-tax yields.  For example, SPY (the S&P 500 index with mostly qualified dividends) currently has a yield around 1.9%, whereas VNQ currently has a yield around 4.4%.  After tax yields for VNQ (depending on your tax rate) are roughly 3%, whereas SPY is closer to 1.5% even taking into consideration the lower qualified dividend tax rate.

Note that because of the higher tax rates on dividends, REITs may be an excellent option to invest in within a tax-advantaged account like an IRA or 401K.

REIT Investing vs. Do It Yourself Real Estate Investing?

The short answer is both, however DIY may not be an option depending on your situation.  If you’re looking for easier, or more liquid/diversified, real estate investing then REITs are probably for you.  But if you’re willing to work hard, you can *absolutely*build more long term wealth through DIY.  If you’re not willing to work hard you’re probably a normal person (looking for a magic pill) that stumbled onto this site by accident and won’t last too long. 

That’s the high-level overview of REITs according to Nixon.  Thanks to the WSP for handing over the keys for another real estate post (terrible pun intended)!

As always, I’ve gotta run, the money’s calling!

– Nixon

(Full disclosure: long VNQ)

—-

WSPs Note: Similar to the prior guest post from ownmyhood, after vetting their credentials we’re allowing Nixon, RE Guy and Ownmyhood to post on Real Estate if they feel like giving blogging a try here and there with their free time. We would love to highlight that Nixon sent us this article during the “Final Four” because as he’s mentioned in the past he cares more about making $$ than watching dudes run around with a basketball. Since there is a recommendation by Nixon in the post regarding VNQ we are providing an overview of VNQ below.

Vanguard REIT ETF (Ticker: VNQ):  The Vanguard REIT ETF is set up to 1) track the performance of the MSCI US REIT Index (which covers about 2/3 of the US REIT market, 2) build positions in REITS with a minimum requirement of $100M in market cap and 3) own and manage properties in retail, office, residential apartments & industrial spaces. From a market sub-segment perspective as of this writing the mix of investments is as follows: (Retail REITs 21.6%; Specialized REITs 16.5%; Residential REITs 15.7%; Office REITs 13.9%; Health Care REITs 12.3%; Diversified REITs 7.8%; Hotel & Resort REITs 6.1%; Industrial REITs 6.1%)

From a ETf Overview Perspective: 1) Dividend Yield of 4.4% today, 2) 0.12% expense ratio, 3) ~$65B in net assets, 4) 158 holdings, 5) Turnover rate of 6.70%

The best way to avoid personal financial failure is by having as many income streams as possible. From our own experience you want to try and develop two streams of income at the same time. We’ve seen that people who attempt to develop 4-5 streams of income at the same time are usually left with nothing. All of their ideas are only 20-30% good and that’s just not enough to develop a meaningful income stream (we’ll draw the line at ~$2,000 a month to represent a meaningful stream). Once you develop two streams of income the move is to develop a third stream. Trying to squeeze the last 0.005 ounces of toothpaste from the tube does not make sense when compared with your other option (getting a new tube).

The Three Back Up Plans First

Backup #1 – 401K/Retirement Funds: For those of you that are working a career to start, you’re going to put all of your retirement money into the S&P 500 or a fund that mirrors the S&P 500 with low expense ratios (at least under 0.20%). Why? Well you can’t touch the money for some 40 years. This is such a long period of time that timing the market is meaningless. The best strategy is to go through the potential investment vehicles available to you and find the lowest expense ratio fund that largely mirrors the S&P 500. Sit back and throw money into it up to your employers maximum match at minimum. Eventually, you’ll stop contributing when you quit your career outright (free long term S&P market exposure!).

Backup #2 – Cash Fund: Knowing that your backup plan is already in place we have a simple calculation for how much money should be in your liquid cash account 1 month per year worked. As you accumulate more and more money, you’re not going to want to risk seeing it go away. This is why we can recommend S&P 500 indexing over the long-term but feel completely fine owning some bonds/cash as well. If you’ve been working and building a business for the last 12 years and something happens (market crash or business crash) you absolutely do not want to touch any principal. Besides you’re in your 30s at that point and the best years of a man’s life is in the 25-50 range, having to adjust your lifestyle would be horrible (1 year would get you through practically any recession).

Backup #3 – Staggering CDs: Finally, the last backup plan is a basic staggered CD. Every 3 months you should receive a small chunk of money, that money is then reinvested into a CD another 3 months out. You’re not doing this to get rich (it won’t work), you’re doing this to have a “one time charge” fund. Lets say everything is fine and then one day you break your collar bone in a skiing accident (we may or may not know someone who did this recently). Well that would be a one time charge of a few thousand dollars. You’ll have this money accounted for at all times. You use the lump sum to pay for it and spend the next year rebuilding that part of the staggered CD. Charge it to the game but you were prepared! The below table should give an idea of how it works:

Multiple Revenue Streams

Now the numbers above look daunting if you’re just starting out. The reality is that the first 5-6 years are horrible. You feel like you’re going no where. You’ve got one income stream (typically a career) and your arms are flailing around trying to get a second one up and running. This is normal. The good news is that your second and third income stream will likely hit around the same time. Why? Well check out the framework.

First Income Stream – Typically Career: You’ve made all the right moves and found a good career, the problem is that you’re smart and realize that it could go away tomorrow. The issue with a career is that the risk of being structurally unemployed increases over time. If you lose your career in year one or two, there are thousands of positions that will take you in. You’re not making a ton of money so it’s not hard to replenish. When you start making multiple six-figures… the Company is going to *search* for ways to replace this type of cost in their P&L (remember they are running a business). If this larger income stream goes away it becomes significantly harder to replace since there are not as many positions that pay in this range.

Second Income Stream – the Hardest: Forget the saying that “the first million is the hardest” the second income stream is the hardest! That is all the saying really means. If you’re able to get a second income stream up you’ll learn so much during the process that the third income stream will be easier to make. Once you’re able to replicate what you have learned to a few different sectors you’re all set because the cash flow model turns exponential.

Third Income Stream: The interesting part about the third income stream is that it typically comes at the same time as the second stream of income (~5-6 years of building a second stream). During this time you’re making money in your career (pocketing a large chunk of it every year) so your bank account will open up the door for that third income stream already. The most common third income streams we have seen utilized are Real Estate, Bonds, Dividend ETFs and REITs.

Worst Case Scenario Planning

No one is going to take the exact same path as laid out in the above chart (in fact we took a mix of two plans from this older post). Given that set up, we should think about where the “primary risks are”. Meaning, what items in here would make it difficult to become financially well off?

Primary Risk is Active Income: The primary risk to personal financial collapse is your ability to earn an active income. This is why we don’t really believe in “retirement” where you sit around on the beach drinking Mai Tai’s all day long. Since you’ll build a ton of skills over the next 20 years it will be hard to walk away from thousands of dollars in income. In addition, by avoiding active income your pulse on the industry will decline. With the framework set up above, you’ll dedicate at minimum 20 hours per week to active income even if you’re financially set (we also assume you’re under 50 if you’re reading this).

Second Risk is a Recession: This is why you’ll keep a large chunk of money in a checking account. If the economy goes into a recession and all the items to the right side of the chart (Real Estate, Bonds, Dividends, Reits) all get cut in half… Well you won’t have to sell any of it! By preventing a draw down on any real passive income stream (where you invest ~5 hours a year monitoring), you’ll never have to worry about cash flow again.

Worst Case Scenario Math: Lets say you’ve largely taken the path outlined in the chart. A recession hits at age 31. Conveniently right when you left your career! Well you can still take a lot of punches and survive: 1) assume your biggest active income stream goes away – extreme & unlikely scenario and 2) assume your passive income gets cut in half. Your cash flow now is $30K a year + 1,000 a month or ~$42,000 a year. Importantly, you don’t need to spend any of this for a year because you’ve saved enough to survive this scenario. You’ll build up a second income stream (again) over the next year and we know that recessions generally don’t last longer than ~12 months. By the time you’re through the worst part of it? You’re back to ~$60,000 a year + $24,000 in passive income or a 100% improvement in the worst possible situation.

What Are the Two Biggest Conclusions from This?

First Conclusion: Your biggest risks actually have nothing to do with your current form of income. You can earn money with a career for now, a business or (God forbid) a job and be perfectly fine. Adaptive income is the key to success. Back when humans had no real “economy” we survived due to adaptation “adapt or die”. In today’s economy “adapt or die” refers to skills learned to generate active income.

The Second Conclusion: We don’t have time. There is no argument against working hard when you have the chance (18-30 year old time frame, unless you hit it big early). We have heard it all and it never adds up. The only thing you’re left with if you don’t work hard when you’ve got the chance is a lifetime of regret. Life is just a game of probabilities and there is no amount of money that will allow you to get your time back.

As you get older your body will slow down. We don’t care if someone is on every drug known to mankind. There is no way to maintain peak performance from ages 30-60 as the body continues to atrophy. If it were possible, professional athletes would have much longer careers. Knowing that your “life energy” is going to decline over time (starting around late 20s), there is no physical way for you to invest your peak energy into earning money. The chart below summarizes it well: note there is no age where it’s “impossible” hence we deleted the x-axis, the point is that there is a finite number of years to live so by definition the number of chances at success declines. 

Finally, the probability of failure is not a good excuse. If you don’t try… your chances are exactly 0. In addition, what do you lose by giving up your early years? Nothing. You lose absolutely nothing by failing for ~12 years straight. Here is what you lose in summary: 1) you lose the chance to obtain permanent liver damage, 2) you lose the chance to hang out with people who will unquestionably drag you down and 3) you lose both money and women because the women are *largely* uninterested in some young dude out “seeing the world”. Sure, you’ll end up with a few cool stories. But. You’ll wake up with the realization that you’ll be working for the rest of your life (making someone else rich or barely scraping by!)

Summary Points: 1) you will not have more energy than you have today so use it wisely, 2) create both recurring income streams and a worst case scenario cash fund, 3) work on at maximum two ideas at once, 4) if you go down the “career” route, realize the risk of it going to zero *increases* over time and 5) make the assumption that your primary income stream will go away one day and see how the worst case scenario looks.

In economic theory we learn that every single one of us is trying to maximize our “Utility”. Utility is defined in various ways however, the underlying concept for utility is that we as humans do whatever it takes to maximize our utility. This could be in the form of happiness gained from having more money, a family, good health etc. Since we’ve focused primarily on income for the past few posts lets look at how to maximize your lifetime utility.

Our Framework for Utilitarianism

First Pillar – Health & Energy: This is the first pillar to any type of *long-term* utility maximization framework. This is also extremely complex because health does not simply mean you get to walk around. If you’re 25 years old and you can barely run or bench press your own weight, your health is actually sub-par. Health means that you’re in the top 10% for your age bracket. If you’re forty years old and you can still crank out sprints, squat a large amount of weight and look significantly younger than your true age… You’re winning in this category without a doubt. Without your health you cannot help your family, your friends, your bank account or anyone else in your life that is important to you.

Second Pillar – Time: If your health is in check, the next item you’re fighting is time. Time is not valued equally. We’re not talking about the ”future value of a dollar” but the future value of your time. If you’re 20 years old, we have no doubt your ability to both crank out long hours of work and party all night is sky high. Try this at 50 and it’ll be tough! No one likes to talk about this but life is also a game of time maximization or efficiency. “If you could spend $10M between the ages of 20 and 40 or if you could spend $100M between the ages of 60 and 80… which one would you choose?” We’d choose option number 1 in a heartbeat! Remember… Getting rich is easy. Getting rich young enough to enjoy it is a different story.

Third Pillar – Freedom: Once your health is in check and you’ve recognized the importance of succeeding quickly, you’ll find that your freedom is the third most important item to check off. If you’re making good money and are healthy, the next “dopamine rush” will come from overall freedom. In our case, freedom is living a private life without needing to answer to anyone. For others, it may be the freedom to simply work anywhere in the world. Typically, “freedom” is earned by having a large net worth.

Fourth Pillar – Your Family: Many people derive a material amount of happiness or “utility” from having a family. Two people gave up 18 years of their lives to give all of us a chance at the game of life. Not being able to pay it back or help them when they are close to their deathbeds is beyond repulsive in our opinion. Finally, if they are pulling you down, yes you should walk away. Just remember they did give you the shot in the first place so holding a grudge will not help you long-term.

Fifth Pillar – Self to Self Comparisons: There is no point in comparing yourself to anyone else. That person likely has a host of largely different problems than you have. We all know the multi-millionaires out there that crawl up into a ball when their wives come around… or the happy go lucky vagabond that can’t afford to pay for sushi. Comparisons to other people do not contribute anything to your utility.  If you’re making the right risk adjusted decisions on a consistent basis there is no reason to worry about comparisons because you made the right decision at that *point* in time. Overall, we would take a look at the table below to get a solid understanding of how we view the Five Pillars. (Click to enlarge map)

Reading the Table: The chart is simplistic however it can be understood as follows: #1 Health and Energy: no matter what we do the available energy we have declines over time, knowing this you’ll want to use money as a tool to offset the energy reductions. The conclusion is to accumulate assets in your 20s and by the 30-50 time frame you’re spending more without going negative, #2 Time: No one can pay to get their time back. Each day (by definition) we’re closer to the curtain call so your time should become more valuable over the years (even Bill Gates can’t go back in time!), #3 Freedom: with correct decision makings, your amount of freedom should increase every single decade with a goal of being set sometime between 30 and 50 at minimum, #4 Family: in an ideal world this will remain as a constant positive. If you have a good relationship with your family and decide for or against having a family, the amount of utility should always be maximized because it is within your control and #5 Self Comparisons: Similar to freedom, we should all learn to only compare ourselves to our past selves. Look back a year and if you have the same beliefs, that’s not a good sign! This is a skill that will be learned over time and ideally executed upon in the 30-40 range.

Reverse Engineer Utilitarianism

Another concept we’ve been flirting with is reverse engineering Utilitarianism. Given the number of punches that life that will throw your way, by simply avoiding the pitfalls you’ll reverse engineer utilitarianism.

#1 Avoid Getting Burned Twice: This can be in the form of being burned from a business, consumer purchases or even health. Being foolish once (touching the hot stove) is acceptable, continuously touching it is not. As an example, the vast majority of our readers are aware of affiliate marketing (cloaking) and the sketchy underworld of online sales. Maybe you were fooled once by a purchase that wasn’t even pre-loaded with aggressive copy, we’ll say that’s okay…. Once.

Next time, take a step back and ask “What is the person selling and can I check the claims”. If someone is selling testosterone boosters but readily takes anabolic steroids and injects exogenous testosterone… Why in the world do they have to use the steroids and TRT therapy if the product is so good? Another example would be diet pills where a proclaimed doctor is 50 pounds overweight but shells out “weight loss pills”… if they worked why is the seller overweight? So on and so forth. To avoid getting burned twice learn the lesson of what to look for next time instead of getting upset about it. Most will just get angry and upset which achieves nothing. Find the systematic approach to solve the issue instead.

#2 Make Statistically Intelligent Decisions: We know. The live it up today crowd is going to say you might get hit by a bus tomorrow so you better burn through everything you got! This is simply crazy talk as most people are not going to be hit by a bus and you can reverse engineer your life expectancy as well. Instead of commuting by car (extremely dangerous proposition), try to structure your life around walking and airlines instead. By making broad intelligent decisions you’ll likely live until the average age (somewhere around 80) and you can go ahead and take risks (without risk life is boring) since you’ve structured your life around statistically bad decisions that don’t add value to your life.

#3 Jump a Decade: We’ve used this trick maybe 100 times. Every 3-5 years sit down and ask “what can I do in this decade that I won’t be able to do later”. This question will bring up both small and large items such as attending a rap concert or deciding to have a family. If you find that you’ve never had a specific life experience that is eroding away (tougher to do in the future) go ahead and pencil it in for this year. You’ll reduce the amount of regrets you’ll have on your death bed some 400 fold! In addition, you can also do this on a 5 year basis as well (shorter mental jumps).

#4 Look Back Three Years: Every three years take a look back and decide if you missed anything. If you do this in your 20s you’ll get a resounding no. This becomes significantly more complex as you get older since you put a large amount of time into increasing your net worth. A broad stroke look at the past three years prevents an “event gap”. If we only do this once eery 5-10 years it will be very easy to look back and say “I wish i didn’t take life so seriously” a common complaint amongst individuals on their deathbeds.

#5 Reverse Engineer Your Happiness: The last thing we’ve added to the list is reverse engineering happiness. We’ve explained many times that it is 100% normal to be unhappy in your 20s. Most successful people are filled with intensity at age 20 as they have a lot to prove (see the chart – Pillar 5) which does not lead to consistent happiness. Happiness is earned (a mental choice) and tracking your overall happiness with life (if it’s improving or not) is critical to reverse engineering long-term utility. If you’ve gone from being easily angered to only “sometimes” angered, call that a win over the course of a couple of years. Make sure this is going up every single year.

Reverse Engineer Utilitarianism

This has been a much more “philosophical” post than we have done in the past. Importantly, there is no way that this framework will align for everyone. For example it certainly is possible to have kids in your 40s and it is possible to hit financial independence in a single year! Anything is possible. We have simply outlined a broad stroke idea for key turning points. The key turning points in our view include: 1) energy declines starting sometime between 30-40, 2) consistent decrease in time making each day more “valuable” from an energy perspective, 3) freedom as a necessity to increase utility as we believe people would be happier with autonomy over an extra $20-30K in income, 4) a decision point is eventually crossed when it comes to having a family and one cannot turn back on this due to point number 2 and 5) comparing yourself to only your previous self is a skill that is acquired over time. Finally, if you’re interested in maximizing your utility we have no doubt that Efficiency will help you do so.

You want to get rich. Everyone does. It’s just taboo to say so. No one wakes up and says “Hey I want to be as average as possible”. On this side of the web wanting to get rich and admitting so is encouraged (maybe you’re rich already)! Now that we have people visiting from all over the USA, we think it’s time to predict exactly when you’ll wake up and say “Well. Looks like I’m officially Rich!” from a purely financial perspective.

Feeling Temporarily Rich

One Time Windfalls: Almost everyone will feel temporarily rich several times in their lives, we think this is primarily due to one-time windfalls of income. Maybe you got your very first investment banking analyst bonus check, maybe you just closed your first $1M+ property sale and maybe you were gambling for fun at Vegas and won $10,000. Either way… you’re going to feel rich temporarily. From what we have seen, most people will feel temporarily rich when they receive a one-time windfall that pays for approximately one month worth of living expenses.

Large Currency Exchange Gain: If you spend some time traveling at some point in your life you’re going to visit a specific location that you enjoy. It could be Russia for the nightlife or it could be Brazil for the beaches and happy go lucky people. Either way, if you enjoy your first visit imagine what happens if you return to find that your currency has appreciated by some 20-100%! We’re using a wide range but the numbers are not out of the realm of possibilities. Going back to a place you enjoyed and seeing the cost plummet will make you feel temporarily rich for the month or so you spend in that location. For those in the United States, the recent currency moves over the past 2-3 years should have everyone feeling a lot richer.

Feeling Rich Based on Income and Passive Income

Basic Calculation – Relative Wealth: At this point in time. If you’re making $50K a year you’re in the top 1% worldwide (top 0.31% to be exact according to the global rich list). So congratulations on being in the 1% already. The problem is that you won’t feel rich because your environment is not Subsaharan Africa or Thailand, you’re living in the greatest country on earth: the United States. Here? $50K is approximately equal to the median household income so you’re smack dab in the middle. You’re unlikely going to feel rich due to your environment… take a look at the chart below for more details (2013 data).

As you can see, the median income and average income varies across the country. This will be a major determinant in feeling “rich” or not. Importantly, we also raise the bar a bit more and say that you must look at the Average income. The reasoning is pretty clear, the median is going to be lower than the average. There is a floor to earning ($0) and there is no cap (if Warren Buffet walks into a room of 50 people, the average net worth is significantly higher than the median). In that scenario, the average should be to the right of the median on the bell curve. The basic calculation to feel rich from what we have seen? ~2-3x Average Income

Location Scenario – Relative Location: It gets more complicated. Lets say you’re living in a major city and absolutely loathe it. Well even if you make 3x the average income… you’re not going to feel rich! There are a lot of unhappy people making a ton of money living in a place they absolutely hate. This is a big problem because it says that being rich could require more income if you’re forced to live in a city you don’t like at all. This is a bigger balancing act and from what we’ve seen it takes another full multiple to feel rich (locked into a city you don’t like). The calculation to feel rich in a place you dislike? ~4x Average Income

Now the plus side is that you may be able to reduce the necessary income to feel rich if you absolutely love the city you’re in! Generally speaking, if you spent the last two years traveling the world and found a place you love, you’ll need less money to feel rich. Psychologically it is quite difficult to give up money (any money addict will agree) so the multiple isn’t quite a full turn but somewhere around half a turn. If you find a city you love you’ll feel rich with ~1.5-2.5x average income.

Feeling Rich Forever – Passive Income: The main premise in feeling rich forever is that it is relative to your passive income (not semi-passive income). A well run business or a high paying career could go away tomorrow. Sure this is less likely with a business. But. The potential for it to go to zero is still there. This is why “feeling rich forever” is relative to your inactive income. If you receive $10M tomorrow, you’ll feel rich forever due to the passive income generated by the money.   The simple calculation = 1.5x your annual spending in passive income.

Feeling Broke Forever

The calculations to feel rich are pretty straight forward. The problem is that life is complex and there are many “curveballs” that will prevent you from ever feeling rich. Most of these curveballs are psychological where people become addicted to status items or beating everyone else in the race to the “highest net worth” game.

The Constant Comparison Game: No matter what, you’re not going to be the richest person in the world. Constantly changing the people you “compare yourself with” will lead to nothing but unhappiness. If you live in a major city it is practically impossible to become the richest man there and if you do succeed in that… you’re going to become famous which involves another whole host of problems. Importantly, getting relatively rich is the name of the game over here. Trying to become the richest man in the world usually leads to a life of constant work and stress. Figure out how much money you’ll need to live a life you enjoy, multiply this number by ~30 and put the blinders on. Trying to beat the guy who owns 1,000 income producing real estate assets is not going to make your life any easier!

Ignoring the Full Picture: The second easiest way to feel broke forever is to ignore the fact that life is a mosaic. Would you take an extra $1M in order to be overweight for the rest of your life? Would you trade $1M for a personality that leans to pure risk aversion (See no fun life experiences). Would you hand someone half of your net worth to be five inches taller and more muscular (we sure hope not). In short, ignoring the full picture makes most people envious. They see one piece of a person’s life and ignore the rest that they wouldn’t touch with a 10 foot pole. Instead, recognize that a person can be successful in one category while unsuccessful in many other categories… ask for advice on the piece that they are good at (ignore the others).

Earning Income You Hate: When you start with nothing, there is absolutely no way you’re going to enjoy everything you do. You’ll be forced to do dirty work to succeed even if you think it is “below you”. There is no choice. However, once you have a large war chest of cash, you can become much more selective in your income streams. Working in a position you loathe just to earn more money does not make sense if you don’t need the additional income. If your passive income already covers all of your living costs with a large buffer as well, doing things you hate will ensure that you’ll never feel rich.

Giving Up Your Freedom: This is a very common mistake. Once someone feels rich they load up on items that cause recurring costs. Huge recurring costs include stretch mortgages, car payments and addictions to status goods. Feel free to buy a few high end items just avoid that ones that kill your cash flow. Cash flow is significantly more valuable that one-time charges because the one-time costs can be avoided in year two but a recurring payment can last up to 30 years.

Not Valuing Your Time: This one catches a lot of people by surprise, if you’re already well off financially does it make sense to put off things that *can’t* be done when your older? It really does not make sense. Spending late nights working on a project you enjoy makes a lot of sense. Spending late nights working on a project you loathe when you could be attending a once in a decade event does not. If you have the means to do as you please, don’t wake up in 3-5 years and say “I wish a did XYZ”. There are no second chances when it comes to time (money can be made and lost rapidly).

Concluding Remarks: Everyone will feel temporarily rich at least a few times in their lives, in order to feel rich we estimate the following 1) you’ll need 2-3x the average income in your city, 2) 4x if you’re in a city you dislike, 3) 1.5-2.5x if you love the city you live in and 4) if your 100% passive income gets to 1.5x your annual expenses you’ll feel rich *forever*. Now if you’re interested in feeling broke forever we can recommend: 1) comparing yourself to everyone, 2) only looking at one trait of every single person, 3) continuing to work in positions you loathe, 4) giving up your freedom with heavy debt load items or recurring payments and 5) choosing money over life experiences when you no longer need it! Hopefully everyone got a good laugh out of the last five items, however, if you walk around this week see how many people fall victim to these psychological facts (there are many especially in high paying professions!).

There is no way to become an expert in time. Meaning? It is difficult to know with 100% certainty if you’ve made the right decisions until you’re 80 and look back saying “I have no regrets”. If that is the case then you’ve absolutely made it (visit a hospital and you’ll see that the vast majority are unable to say this). Time can only be understood or bucketed into segments and we’ll take a stab at outlining some key things we’ve learned (or think we’ve learned) about time.

Time and Value

Time is Second Only to Health: Largely speaking, the only thing more important than time is your health. Why? It can buy you more *valuable* time. If you’re eating healthy, working out and avoiding unnecessary stress (probably the most difficult of the three) you’ll increase your health. By increasing your health you’re elongating the amount of time you have and also increasing the quality of the time you have left! A year of life in a hospital bed at 40 is definitely not equal to a year of life for a man who can still play every single sport on the planet. In addition, time is certainly more valuable than money since $$$ can eventually become perpetual (Financially Independent).

Time is Not Valued Equally:  Now many of you see the conundrum here! Why do we focus on making money early if time is more valuable than the money? Well, if you get rich early on you can take advantage of *more valuable time*. A full year of free time to do as you please at age 30 is not equal to a full year to do as you please at 60. There is no real debate there since the human body degrades over the years. Knowing that time is not treated equally, somewhere around 40-45 (guesstimate) is when each subsequent year is less valuable than the prior year (capacity for new life experiences). To avoid negativity, yes there are millions upon millions of things you can do at 45+. Ignoring the fact that you’re less malleable when compared to 30 is preposterous.

The Masses Do Not Value Time: The masses value their time at nearly zero. They will look at the highest “hourly wage” as the best way to earn income and the best way to maximize their time. In addition, instead of looking at ways to create recurring income, they will look for ways to reduce one-time costs. This is the exact opposite of the correct way to get rich. If you’re creating nothing but recurring long-term income the one-time costs become meaningless… For fun here’s a quick way to see if your colleagues understand the value of time. Ask them the $5K question “Would you rather work all day today and make $5,000 or would you rather work all day and generate $1 per day forever?”. The correct answer of course is $1 per day forever. At a 4% interest rate assumption (not even risk free!) $365 a year is equal to $9,125 vs. the $5,000 one time outlay. Now… ask yourself if you can work all day today and create something that makes you just $1 a day forever (if you can your “annual wage” is $3.33 million!). The fact that no one reading this blog will trade their time for money (long-term) is the greatest thing about time (others are willing to happily do so). Another way to put it? If you can really find a way to generate just $1 a day for life and do this for a year… Your income is $133,225 for life.

Time Can Increase Your Long-term Value: The second greatest thing about time is that it rewards you handsomely for making the right decisions. If you made the right moves early then the rewards compound for you. This is pretty simple and the rule of 72 is the best way to do back of the envelope math. All of your assets should double in value every ~10 years assuming it gets a 7.2% growth rate. Taking it a step further, correctly used time allows your future utility to increase since it works in your favor to increase leisure and increase the set of items you can do with your leisure time.

Time and Risk

Risk is Almost Always Related to Time: We don’t know if we’ll wake up tomorrow and get hit by a bus. We don’t know if we’re making the right decision at all times (long-term utility). What we do know is that risk is primarily related to time since you could be doing something else. Given that backdrop, the biggest risk people take is doing nothing. Indecision is the worst use of your time since it leads to a 100% failure rate. The faster someone can make quick risk adjusted decisions, the more likely the person is to maximize their time over the course of 80 years.

As Time Passes Activity Risk Increases: If there is something you want to do today, we suggest doing it now if you won’t be able to do it ~3-5 years from now (stated this many times in the past). This is specific to anything that won’t ruin your financial life forever. The reason? Activities go away as years go by. If there is a specific recording artist you love, it is best to go and see them ASAP (their careers are shorter) similar to sports if that is your hobby.

Reliance Risk Increases: As time passes by your employment risk will increase. You’re going to be earning more money (more cost effective to be fired!) and you’re less likely to replace that income at another company. To put it another way… reliance risk goes up over time. Even in items outside of employment if you rely on any single item for either happiness, sense of life meaning or income, the risk of it going away goes up over time. Many people become suicidal after earning large sums of money and seeing their company go bankrupt or being let go from their high paying investment banking career. Risk related to *Reliance* on one specific item (for anything) goes no where but up over time due to a large amount of psychological factors.

Risk to Adaptability Increases: As time passes by our ability to adapt decreases. This is also due to psychological factors. If someone believes they have made the right decisions their entire lives they would have to admit they made a large mistake over 5, 10, 15, or 20 years. Stuck in their own minds. This works both ways. If we try to convince a retired millionaire that he wasted his time working a career for 50 years just to retire at 70…. It wouldn’t work. Similarly, there is no point in telling him such a rude thing because there is nothing that can be done to reverse the decision in the first place! When you’re in your 20s? You’re a jet-ski that can move and change directions rapidly. In your 30-40s? You’re a standard boat… and by 60? You’re a tanker ship with the decision already made. As a rule of thumb, if someone is hard set on a belief and has maintained the same thoughts for more than 5 years… go with “smile, nod, agree” to avoid confrontation.

Unproductive Use of Time

Arguing With People: This is still prevalent on every single platform you can find from Twitter, to Facebook to internet forums etc. It takes a long time to master this skill since it requires “quitting”. This is not something in the vocabulary of ambitious people, so it is rarely mastered! Arguing with people isn’t a good use of time because at the end of the day around 50% of people just won’t like you anyway. The presidents (Trump, Obama, Bush or Clinton etc.) all of these people don’t have a 100% approval rating. Just call half of the population a wash and chalk it up to the “numbers game”. There are 7 billion people in the world, it is better to find one of those 3.5 billion who will at least be neutral to you and have a real discussion on any given topic.

Doing *Everything* for Money: The best way to burn time is to focus 100% of it on money. That’s a strange comment given our website draw but it is true. No one wants to be around someone who is constantly worried about earning more money from ages 20 to 50… It eventually becomes meaningless. These individuals usually have trouble socializing and making long-term friends which is not a productive use of time (there is an eventual cut off). This blog and our book are no different, earning a few bucks selling an e-book is significantly less productive (maybe we’ll blow it all on throwing a party for our favorite commenters!).

Giving Up Time to Cut Costs: Re-read the first paragraph under unproductive use of time and you’ll find that no frugality blogger will ever agree with us. This is fine. We won’t argue. We just outline the points here which show skills are learned when you earn no skills are learned when you do nothing. If you’ve already cut your costs to the bare minimum it’s not going to go any lower… so why would five hours of research to save money on coffee outperform $2 spent meeting a potential customer for coffee? We give up.

Worrying About Opinions of Other People: Unless someone has what you want, their opinion shouldn’t be that meaningful to you. If you admire someone’s ability to earn money it makes sense to listen to their money advice. If that same person can’t do a pushup, probably best to ignore his fitness advice. So on and so forth. Lots of time is wasted worrying about living up to other people’s values. Create your own values and live according to those. If you’re not engaging with people who dislike you and you have some fun activities outside of making money, the chips will fall into place over a long period of time that will delete opinions from people you don’t respect in the first place. It’s a “win win”. The people who will never like you? Well they never get a chance to meet you either!

Thinking About the Past: It is one thing to learn from the past it is another thing to dwell on it. Everyone will make a wrong turn here and there. Maybe you take the wrong career or join the wrong firm. Maybe you jump at the wrong time. It doesn’t really matter anymore since it’s in the past. What really matters is learning if there was a “blind spot”. Find the blind spot and don’t let it happen again. Finally, maybe the decision was actually the *correct* move and it just didn’t happen to work out! If that’s the case, thinking about anything negative from the past is a colossal waste of time. Only positive things from your past should be remembered to improve your focus and emotions.

Time and Excitement

Time Spent to Achieve = Dopamine: Anyone who isn’t financially independent yet (but is serious about it) will receive an enormous amount of dopamine when they cross the finish line. We’re not joking when we say we’re jealous of those people that are on their way and have a clear path there. Becoming financially independent can take up to 10-20 years (standard version) and there are very few things in life that take such a long time to achieve. Think about other events where an immense amount of joy is shown and they are directly related to the time it took (athletes winning championships, parents watching their kids graduate college, so on and so forth). Once you experience something like this your views on time change forever.

First Time Experience Excitement: Generally, the first time you do something new from an experience perspective it has the most value. This is different from the large amount of dopamine obtained from achievement or success since it’s a repetitive task. If you go out and get drunk for the first time it’s typically a lot of fun… do this 200 times and it certainly wears you down. This is seen in drug addicts as well where they need more of it to achieve the same “high”. Knowing that dynamic, having a long list of interests is a great thing since you can get the “first time experience” hundreds of times over the course of your life (it also prevents you from developing a plain and boring personality as well!)

Time and Consistent Excitement: You’re a lucky person if you find five things you can do every day that constantly give a baseline level of dopamine rush. This can be anything from athletics to music to travel to reading. We only say “lucky” because it takes a good amount of effort to go through many first time experiences (second point) and find one that remains relatively constant. You’ll find that the main ones that create constant dopamine levels to rise rarely cost thousands of dollars to maintain.

Concluding Remarks on Time

Overall, life is a big balancing act. In order to obtain money you have to give up time (building recurring income streams of course!) and you also have to recognize that the time you’re using could be spent doing other exciting things that will become harder to do as we all age. We would really summarize this into 10 key points: 1) since health can improve both time and money we’d focus on activities that maximize this – athletics, clean diet etc., 2) consistently review activities to make sure life doesn’t pass you by and you don’t become a boring guy, 3) always look for ways to create recurring income and realize that 99% of people will trade their time for money happily – will fail the $5,000 question, 4) fail a bunch of times as early and as often as possible, this way as risk increases in the future you’ll be well positioned to avoid big mistakes, 5) diversify your life as there is no need to rely on any singular item for meaning, money or emotional support, 6) Don’t bother arguing with people – easier said than done!, 7) realize that money is only a tool and eventually loses utility, 8) the amount of time it takes to achieve something is directly related to the dopamine obtained, 9) have a growing list of first time experiences – things to try and 10) unlike money, time cannot be taken back choose wisely

While it is likely one of our competitive advantages, we realized that no one will follow this advice so we’ll give it away for free. If you’re having a hard time making a decision, personal, financial or otherwise you can utilize art to give you an edge. It sounds crazy but we’ve used it several times and it has not failed us once. 100% success rate. All you have to do is enter a large museum or art exhibit for a day. With that backdrop, we have no doubt that this will be an unpopular post, fading into the archives along with some of our other content.

Step 1 – Large Museum/Exhibit: For once you can interact with the masses (joke, you’re going to do this alone). You’ll want to find a very large museum with multiple levels. Ideally, the museum will also have various types of art (Body Art, Ceramics, Computer Art, Ceramic Art, Modern Art, Sculptures) with various materials as well (oils, paint, glass etc.). This will give you a wide range of items to view and create a consistency.

Step 2 – Put the Camera Away and Focus: Most people go into exhibits and swarm the popular items to take photos. This is not how you’re going to operate. You’ll put all electronics away and create a different type of focus. This type of focus is going to be entirely on the present. Stand approximately 10 feet away from the first exhibit and stare at it intensely. This will unlikely be one of interest to you but you’re doing it to focus entirely on exhibits. You will know that you’re zoned in once you can hear people walking around but have no idea what anyone is saying.

Step 3 – Walk Slowly: Take the speed at which you walk and decrease this by about 50%. Make sure the distance between you and the exhibit remains around 10 feet (don’t focus on keeping the exact distance at 10 feet we are simply creating a rough framework). Walking by each exhibit slowly you’ll stare with a blank expression as you walk by each exhibit. In addition, by moving quite slowly you’ll give each item a chance to capture your attention. When it does stop. Remember, this entire process you’re thinking only about exhibits and focused on walking no other thoughts (a blank mind)

Step 4 – Stop and Stare: There is no need to read the explanation of the art that is usually placed next to the exhibit (for now). Instead stare at the exhibit and see where your eyes wander. Take some mental notes on what is most interesting to you. Maybe you’re being drawn to photos of war, paintings of nature, specific sculptures etc. If this is your first attempt it is perfectly fine to scribble something on a note pad. The key is to find the consistency in *what* is drawing your attention. You’ll end up spending at least 5 minutes staring at the same exhibit, otherwise it didn’t capture your attention enough.

Step 5 – See Every Single Exhibit and Go Back: Do not miss a single one. This will take time but you’re only in the museum to make a decision because you’re surprisingly unsure about what to do. By the time you’ve seen every single exhibit you’ll have a small list of items that caught your attention. Typically, we’ve found that approximately five of them will be interesting (it may be different for you). On your return visit you can take out your cell phone and 1) take a quick photo, 2) take a quick photo of the artist and the description and 3) quickly read the description. You’re done now.

Step 6 – Find the Consistency: Now you have everything you need to make a decision. We suggest getting into a positive state of mind, think of a recent positive event, and begin the review process: 1) find out if it is a specific type of material that you were drawn to – paint, pencil, ceramic etc., 2) figure out if the artist is the same – you’ll be surprised sometimes it is, 3) decide if the scenery is the same – war, nature etc. and 4) see if the descriptions have a specific overlap in symbolism.

Step 7 – Analyze and Make Your Decision: Here is the part where we’ll lose everyone (hence the example piece below so you’ll see we’re not psychotic). The reality is that you’re constantly thinking about your problem in the back of your mind. It could be anything. Art is nothing more than access to the back of your mind. The item that you consistently find is your answer. If you’re constantly drawn to sculptures of battle (war) it probably means the answer is keep fighting down the path you’re on. If you’re stuck between two choices and you are drawn to photos of the ocean, it probably means you’re better off taking the more risky choice. If you’re drawn to exhibits of torture and pain, it likely means the life path you’re going down is not for you. So on and so forth. In short you’re using art to help develop your gut instincts.

Art Interpretation

Now that the vast majority of you think we’re insane at this point (by the way we’re fine with that), we’ll go ahead and use our twitter account as an example. Here’s our favorite all time photo with our own description “The enormous competitive advantage of being born poor vs. middle class in a single photo”.

Positive Responses: 1) “The Flower that blooms in adversity is the most rare and beautiful of all…. You don’t meet a girl like that every dynasty”, 2) “The lesson of appreciation”, 3) “The rich girl is bored with the abundance of flowers surrounding her. The poor girl appreciates the one flower”, 4) “The rich girl has grown bored of her decadence while the poor girl feels inspired and hungry to achieve greatness. I’ll take that any day” ß our favorite response so far; 5) “It’s assuming that the one who worked hard to grow all the flowers does not appreciate them or share”; 6) “Golly… Being poor at the beginning is Gospel. Be prepared for success by being prepared for poverty until you figure it out. Period.” ß second favorite response.

Negative Responses: 1) “For children, yes. But for adults with responsibilities, the reality is the opposite. The picture is comforting for child-minded adults”, 2) “rich girl will eye for that one flower though having in abundance”, 3) “I would guess that the flowers are the millions of deadbeats that the middle class has to takeover while the poor woman has 1 herself?”, 4) “Middle class have hedges and rose gardens?”, 5) “So middle Class is 1% now?”, 6) “Except there is no middle class”

Neutral Responses: 1) “Do the flowers represent resources available to the individual”, 2) “Photo?…Illustration… Reminds me of Guy Billout’s work… But his work made a heck of a lot more sense”, 3) “It’s assuming that the one who worked hard to grow all the flowers does not appreciate them or share, 4) “This would make sense if the flowers represent food but then it doesn’t… hmm”, 5) “Looks like; ‘I beg your pardon, I never promised you a rose garden’ AND ‘rose ceremony’ rolled up as one”, 5) “the point is that the poor can more appreciate the small things in life but idk why a middle class woman has a million flowers” and 6) “I was thinking the one person was happy with what she had the other person was unhappy at what they missed”

There is nothing wrong with any of the responses since it’s a simple picture and people will interpret the art as they will. The part we’d highlight is that the positive responses mainly came from people who are fans of the content (twitter/blog etc.), not surprising! If you can use art to find people who will view the world in a similar way as you that’s called a “coincidental connection” (something we don’t believe in). Art can be used as a tool to see how someone else feels at the moment. If it can be used to interpret a person’s mood at any given time, it can certainly be used on yourself.

Positive Responses Mood: There is no way to check this but we’d wager that those who viewed the photo positively were feeling good at the moment. If you started from nothing and made it that photo will likely make you feel better versus worse. You’ll recall your first win, your first success and your first step in the right direction. If someone started from nothing and made it there is practically no way they could view that photo negatively. If they are rich and happy today they won’t view the flowers side of the fence as a negative.

Negative Responses: Likely unhappy. Trying to spin it as a negative likely means their mood is not good. It could be temporary or it could be permanent. We don’t know. All we know is that the negativity should be avoided so we don’t respond and move on. No point in making enemies since they will likely be in a better mood tomorrow (hence why we don’t respond to negativity and delete all negative comments from the blog).

Conclusion: Now that all of you believe we’re crazy, lets see if someone is currently trying to make a decision. Lets see if someone actually tries it and reports back (we doubt it but it would be interesting indeed). On that note, back to stacking chips and our next post will go back to business as usual. Outlining ways to get money and avoid burning valuable time.

A guide to borrowing money to buy property: Commenter OwnMyHood here. Since the Playboys gave a few of us real estate guys the open invite to drop some knowledge, I figured I’d stop back in for another post… Having read this blog for a couple years now, I see the primary takeaways as: 1) Grind it out while you’re young and stack your chips, 2) Don’t follow the herd, 3) Regardless of how much you work, live an interesting life, 4) Don’t get hitched (legally due to penalties), 5) Avoid living in a city you hate…  and the Holy Grail: Start that business and *earn money while you sleep*

If you found this blog, the first 5 items should be pretty straight forward (and if it isn’t, the WSPs were nice enough to provide instructions for you).  But I’ll admit it, starting that business can be a bit of a challenge.

We’re lead to believe that every successful business is built around some totally novel concept.  All you need is a bright idea and some garage space and before long you’ll be the next Jobs or Wozniak.  VC firms will be throwing money at you and growing your business and marketing your product will be a piece of cake… Well, in the real world, it doesn’t quite work that way.

Let’s face it, most of us don’t have that novel business idea.  We may have thought of something that stands a decent chance of making some money, but who is going to back us? Even if you’ve saved up a few hundred large, you’ll likely need some outside help to to get things off the ground.

Think you’re a good salesman?  Walk in to a bank with no prior biz experience and ask for a loan to start that great restaurant, bar, car wash, gym, online store, propeller beanie factory, (fill in the blank) that you’ve always dreamed of owning. If you can convince them to give you a loan, congrats you have no need for this site.

Now for the other 99.9% who got the raised eyebrow and the “sorry, I wish I could be more help” spiel, there is another way.  There is one business where you need no experience, relatively little start up capital and have the ability to leverage it by borrowing large amounts right from the get go (sometimes with government backing). What biz is this you ask?  Real Estate.

So You Want to Buy Your First Property, Where Do You Start? Well pal, since you asked I’ll lay out four of the most common loan options topped off with some tips from the trenches meant to help you maximize the amount of money you can borrow for your investment.  Let’s start with what is likely the most common option, good ol’ residential mortgages:

Residential Mortgages

The bread and butter of the beginning real estate investor.  These are the loans individuals and families have been using for decades to buy single family homes and condominiums.  What you may not know is that they can also be used for multi-unit residential properties with up to 4 apartments as well, so if you’re looking for income property but have no prior experience, residential loans are usually a good place to start.

You can get these types of loans from a bank or mortgage broker and your lack of RE experience isn’t going to have any bearing on your chances of securing the loan.  In the residential space, your personal financial situation is paramount, the key things lenders look at are: 1) You have good enough credit and 2) You have enough income

Residential mortgage lenders use the Debt to Income Ratio (DTI) as their primary metric when determining whether or not you can afford to borrow money.  This is all of your monthly debt payments (mortgage, car, student loan etc) added up and divided by your income.  If you are at 35% or less you are usually good to go.

To sum it up here are some Pros and Cons of this type of loan:

Pros: 1) Ease: Relatively easy to get for beginners and you can put less than 20% down with private mortgage insurance or government backed programs: FHA 3.5% down, VA 0% down, USDA 0% down etc. 2) Rates: Lower rate with long amortization schedule (30 years) with ability to lock the rate for it’s entirety, 3) Low Hurdle: No RE experience needed, 4) Regulation: Highly regulated, so your chances of being “taken advantage of” by the lender are low

Cons: 1) Scale: You can only use these loans to buy smaller properties (1-4 residential units), 2) Four Loan Maximum: You can only have 4 loans per person if they are the type that are sold to Fannie Mae or Freddie Mac, 3) Underwriting: Underwriting is standardized, so your relationship with whoever originates the loan likely isn’t going to make much of a difference, 4) Red Tape: There is a fair amount of red tape that isn’t present with other loan types (multiple reviews of bank balances, employment verification, appraisals always required etc).  For someone with a relatively simple financial situation, these aren’t bad.  For biz owners or others who’s situation is more complex, these can be a headache; 5) Occupancy: May need to occupy the property to be eligible for certain programs

Commercial Mortgages

Once you max out your residential mortgages, want to buy apartment buildings with 5 or more units or commercial properties, if you’re borrowing from a bank, you’ll have to get a commercial mortgage.  Though on the surface, this is still a loan used to purchase real estate there are quite a few differences with the residential loans described above.

Some of the big differences are: 1) Rates and terms can vary a decent amount from bank to bank, so it is best to shop around; 2) Relationships with the banker (how much they like & trust you) and bank (how much you have on deposit) matter quite a bit; 3) Commercial loans are not governed by the same regulations as residential mortgages, so there is more likely to be some harsh clauses built into the contract (learn how read the docs and utilize a lawyer); 4) The primary concern of the bank is “will this specific property make money.” Your personal financial situation matters, but only as part of the bigger picture.  If you can convince the bank the property will make money and you aren’t a financial basket case, you likely will get the loan

The mortgage broker who originates your residential mortgage sees your investment as a transaction: you get a loan and he gets a commission.   Meanwhile the mortgage gets sold to another bank 1000 miles away while he moves on to the next deal.  If you default 5 years from now, it’s not money out of the broker’s pocket.

When it comes to commercial lenders, relationships do matter.  Commercial banks keep the loans in house, so the banker you’re talking to has much more incentive to make sure you and the property you’re pitching him are a good investment.  Also, the person you talk to when applying for a commercial loan is usually a decision maker, so getting them on your side can only help.

When it comes to determining the risk involved in lending you money, commercial banks primarily rely on the deal’s Debt Service Coverage Ratio (DSCR).  This is the NOI of the property divided by the mortgage payment.  Though there is quite a bit of variance across different geographic areas, property types and market cycles, usually you want a deal to have at least 1.2 DSCR when approaching a commercial bank.

Pros: 1) Range: You can purchase a wide range of properties with these loans; 2) Trust: If you do multiple deals with a particular bank and build a relationship with their staff, this can make future mortgages easier to get; 3) Terms: More flexibility regarding terms; 4) Limits: There is no limit to how many loans of this type you can have (though banks will have limits depending on their size and relationship with you)

Cons: 1) Interest: Rates and terms are usually worse than residential mortgages (shorter schedules with adjustable rates or balloon payments); 2) Complexity: Less regulated so you want to be more careful regarding terms, banks can put some nasty stuff in there; 3) Origination Costs: These can be quite expensive. Commercial appraisals aren’t cheap and banks can charge whatever the market can bear as far as fees go

Seller Financing

Ahh now we’re talking, you want to put the pedal to the metal when it comes to leverage?  This is one of the quickest ways to do it.  Seller financing is when an owner has equity in their property and is willing to “be the bank:” take incremental payments over time instead of one big up front payment.  How is this different than the above two options?  Well, for one the rate and terms are whatever you and the seller can agree on.  0% down with a 50 year schedule and a balloon after 25 years?  If you can get an owner to sign on the dotted line it’s all yours…………………. If only it were that easy.

Your average real estate deal involves a fair amount of haggling but in this case, in addition to the standard negotiations you’ve also got to convince the seller to invest in you via a mortgage.  This is essentially like handing them a junk bond in exchange for what could be their most valuable asset.  Needless to say it’s not always an easy sale (and I’d probably use a different analogy when pitching a seller…)  and though some sellers are out of touch, it’s uncommon to have price and terms vary widely from the market in general. Regardless, if you can make it happen, it’s seller financing that often allows ambitious RE investors to build massive portfolios in a relatively short amount of time.

Pros:  1) Can Be Cheap: This type of financing is inexpensive, oftentimes the only significant origination costs are lawyer fees (which you have to pay anyway when you utilize a bank), 2) Flexibility: Rate, terms and down payment are whatever you and the seller can agree on; 3) Speed: These loans can be some of the quickest to close.  When you work with institution, you do a lot of waiting: waiting on the underwriter, waiting on the appraiser, waiting on finding a date when all parties can get together.  With seller financing it really just comes down to when you, the seller and an attorney can meet and sign documents

Cons: 1) Regulations: There are few regulations regarding these types of loans so sellers can build all kind of stuff into their mortgages. Make sure to read thoroughly before signing; 2) Availability: There is limited availability when it comes to seller financing: there are many sellers who can not afford it or have no interest in holding paper, it’s up to you to convince the one’s who are open to it that it makes sense

Private Money

You could also refer to this as “friends and family” money.  Private Money in this case just means borrowing from individuals who have money to lend.  If you have a rich friend or Aunt who is looking to make some money and is willing to back an up and coming RE investor, this might be worth looking into. Notably, private money has the most in common with seller financing, in that the fees to originate the loan are low and the terms are whatever you and the lender can agree on.  That said there are some very important differences:

1) Loan is unsecured: In many cases the lender has no right to any collateral if the borrower defaults, so if you don’t pay them back, they’re SOL.  Even if they do require some kind of collateral, they are usually last in line were you to go bankrupt and would likely recover only a small fraction of what they lent you (if anything at all) and 2) Lenders are oftentimes not RE investors: With seller financing you are purchasing a building off another investor, this is someone who has at least some experience with market cycles, vacancy, the random nature of certain expenses etc.  When you borrow from old Uncle Vlad who earned his money working 9-5 in the same factory for 50 years and tell him that you’re going to be late next month due to having to replace a collapsing roof, he might not be so understanding.

Private money can be easy to come by if you know the right people, but I’d caution any investor before using it. As stated above your relationship with the lender usually goes beyond pure business, and this can make things tricky.  In order to avoid ruining personal relationships (which often are a whole lot more important than whatever deal you’re pursuing) I’ve put together some criteria for using private money:

Don’t borrow what someone can’t afford to lose: Let’s say Grandma is on a fixed income but has $50k in the bank, and it just so happens there is a beautiful duplex for sale that requires… you guessed it, a $50k down payment.  She would love more than anything to help her grandson get started building his future and wouldn’t hesitate to write you a check.  As tempting as it might be to borrow her entire net worth, tell Granny to keep her loot.  Even if you make the payments on time, what if she has a large medical expense 6 months after you buy your duplex?  Where’s the money going to come from to pay the good doctor?  When the rest of the family finds out what Grandma did with her emergency fund things are going to get awkward for you real quick.

Avoid the “active investor:”  You don’t want to borrow from a friend who thinks just because they loaned you some dough they suddenly get to be involved with the day to day operation of your business.  Partnerships are generally unstable to begin with, now throw in the weird dynamic of having to work with someone who likely has no experience with real estate.  Not a winning situation.  As with many things in the RE game, this requires being a good judge of character prior to signing on the dotted line.

Don’t use private money for your first loan:  Now, there are plenty of successful RE investors who got started with money from daddy (last I checked one was running the country).  That said, I strongly suggest saving up for your first purchase on your own.  Knowing what it took to earn your money will make you think long and hard before spending it, ideally leading to a more prudent investment decision.  More importantly, if you have a few deals under your belt, you’ll actually know what you’re doing.  This will lead to more confidence and a more realistic proposal when you go approaching your old college buddies hat in hand.

Pros:  1) Inexpensive: Can be very inexpensive, usually this is just a written or handshake agreement.  If the lender is well known to you its common not to involve a lawyer; 2) Flexibility: Rate and terms are whatever you and lender agree on; 3) Speed: You can get the money quickly, as soon as the lender hands you a check it’s yours to spend; 4) Legal: If you default, often the lender can’t come after your assets.  That said, if this is a major consideration when borrowing money you should see a shrink.  Don’t be a scumbag. Pay your bills

Con, Potential to Ruin Relationships: A wise rapper once said “Money and blood don’t mix.”  Given all the business names with “& Sons” tacked on the end, I’d have to disagree with him.  That said, one should not underestimate the power money has over personal relationships.  Not only does borrowing from someone close to you expose you to the potential pitfalls described above, it will generally change dynamics in any personal relationship.  Even though they’re earning interest, the average person who lends to you will feel they did you a favor, and that you “owe them one.”  I’ll let you use your imagination when it comes to how that could impact your friendship.  Just make sure before you approach someone to ask them for a loan, you consider what type of personality they have and how it might change the dynamics between you, them and the rest of those around you

Tips from the Trenches… Now That We’ve Covered the Basics

Looking for seller financing?  Target the oddballs: If you want to avoid dealing with a bank you have to find a seller who’s motivated enough to invest in something extremely risky: your real estate career.  Where do you find these types?  While they can be found anywhere, I’ve noticed they’re more likely to own oddball or run down properties.  Oddball properties could be a weird mix of residential and commercial units at one location, buildings in less than desirable areas, specialized commercial buildings that are currently vacant, multiple single family homes on one lot, and just about any other combination of traits that make them tough to market. Obviously if the seller thinks he’ll have difficulty selling, he’ll be more open to sweetening the deal by holding paper. Run down properties are a sign the owner is either uninterested in maintaining them, or has no idea how to manage property.  Either way these people aren’t up to dealing with the challenges of property management which often makes them more motivated than your average seller.

Want to do a deal with little or no down payment? It’s easier than you think:  Though high leverage deals come in all shapes and sizes, the most common types usually just combine two or more of the lending options I described above.  For instance, want to put only 10% down, on a 10 unit apartment building?  Get a commercial mortgage for 75% and a seller second mortgage for 15%.  I’ve done that exact deal and a few other very similar ones.  Want to put nothing down on that duplex?  Borrow 75% with a residential loan and get Aunt Wilma to put up the rest with private money.

When choosing a bank, go local:  As I mentioned above in the commercial loans section, relationships with bankers do matter and generally speaking, the smaller the bank, the more likely you are to be treated as a valued customer instead of a number.  If you do multiple deals with the same bank, are easy to work with, never miss a payment and have gotten buddy buddy with the lending officer there, it will greatly increase your odds of getting a loan going forward (and make it less time consuming as they will already be familiar with your situation). In addition to this, local banks are more comfortable with the surrounding area and will often be more likely to loan money for local properties that a big bank considers too risky.  Many smaller banks even have mandates that a certain % of their lending must go toward borrowers in their city, county, etc.  These factors can only increase your odds of getting the loan.

Don’t throw all your eggs in one basket, or dollars in one vault:  Though I recommend dealing with smaller banks, there are a few downsides.  They oftentimes will only be comfortable lending you a finite amount of dollars within a given year, so while it could have been a piece of cake to get your most recent purchase approved by Main Street Bank & Trust, if you approach them with another deal two weeks after closing, they may get nervous.  Also, if you do it right, there is a chance you’ll outgrow the bank and your deals will be too big for them to underwrite, or you’ll already have so many loans on the books that they won’t be comfortable lending you any more.  To get over this hurdle I suggest cultivating relationships at multiple banks so that if Maine Street Bank & Trust is cutting back on it’s Commercial RE loan exposure this year, you can talk to your guy at Community Credit Union in order to get a mortgage to buy that strip mall where your two pack-a-day aunt goes tanning.  The same goes for maintaining deposit accounts, as in all situations, money talks and banks will be far more open to working with you if you toss some dead presidents their way.

When starting out, don’t be afraid to “live the dream:”  Many RE investors get their start by occupying their first (or even first few) investment properties.  The reasons being A) we all need a place to call home B) Owner occupants receive preferential treatment from lenders and can qualify for generous government backed programs.  I’m not going to get into the different programs here as that would be an article in and of itself, but a simple online search will yield quite a few results.

Leverage can make you rich but only do the deal if you make money: No matter how sweet the deal is: nothing down, cash back on closing, whatever.  Don’t let it blind you to the most important factor: it needs to make money.  Prior to signing on the dotted line, always take the time to put together an accurate projection of what you stand to make and spend on a given property. If there’s red ink on that bottom line, walk away.

RealtyShares: If you’re interested in investing in real estate (passive or active) we can recommend RealtyShares, a crowdfunding platform for investments around the United States. By using a crowdfunding platform run by professionals, you can potentially benefit in the following ways: 1) ability to see how professionals look at real estate by viewing multiple approved projects, 2) access to a variety of asset types including single family homes, multifamily, retail and office, 3) access to offering types including debt, equity and preferred equity offerings and 4) a range of targeted returns and holding periods to meet your personal risk-return profile. Finally, we note that minimums are as low as $5,000 allowing you to get your feet wet in real estate investing for the first time or build a large portfolio of assets that provide passive income.

Thats that.  Thanks again to the WSPs for allowing me to post and thanks to all of you for reading. – OwnMyHood

No return is risk free. We know that many will say treasuries, are risk free but we’d argue that even those instruments have risk (government reliance, just ask Venezuela). Secondly, we don’t view any instrument including treasury bills as risk free because who knows what will happen to the *long-term* tax rate. If someone reaches financial independence with nothing but government bonds at an income of $5,000 a month net of tax … But. The tax rate on government bonds doubles, he’s done. For illustrative purposes, we’ll stick with $5,000 a month net of tax as the hurdle.

Diversification: Before any negative comments come in that state “1% risk free returns make it impossible to be financially independent”… We’ll highlight diversification. Specifically, a diversified portfolio is likely *less* risky than a portfolio entirely tied to one instrument! Why? The answer is the type of risk you’re exposed to. We would rather have 15 forms of passive income generating a combined $5,000 net of tax figure than have one form of passive income that hits the $5,000 a month marker. By keeping a truly diversified portfolio we would argue that your risk actually comes *down* versus loading up entirely on one product even if it is touted as “risk free”.

Conventional Ideas of Risk: You’re unlikely reading this website for conventional advice (none of it works!). Since we’re talking about something that is “well understood” we’ll go ahead and outline the conventional idea of how each instrument is viewed from a risk profile perspective to prevent spam in the comments section:  Cash, CDs/Treasuries, Money Market/Checking/Savings Accounts, Government Bonds, Investment Grade Bonds, ETFs/Large Cap Equities, Mid Cap Equities, Real Estate, Small Cap Equities, Derivatives. That is the conventional idea of “risk” and we’re taking the side that each one has a different type of risk. If for example, all of your money is in savings accounts (even at $10M) you’re at risk to hyper inflation, meaning you should never have all your money in one asset. A person with $5M in a savings account and $5M in 15 other asset classes is actually safer.

Types of Risk and Instruments: Here’s an example of a table showing *some* of the different types of risk you’re exposed to by instrument. Now there are a million different ways to earn semi-passive or fully passive income, but understanding the type of risk you’re taking is critical. While it sounds crazy we would caution everyone on putting all their passive income into one bucket even if it’s “risk free” treasuries. Note: we are sure we missed several types of risk in this example, it is for illustrative purposes and feel free to provide other ideas in the comments section. (Click to Enlarge)

Treasuries: Now don’t get it mixed up, they are largely risk free assets. We’ve read all those corporate finance books in the past and know all of the theory behind it. The trick here is that there is still government risk. The risk is small but it *does* exist. Knowing that your return could be impacted by the US government is certainly a type of risk. In addition, you’re also exposed to interest rate fluctuations (small amount due to assumed short time period of treasury), tax rates (who knows what the government does) and of course Location since it’s all in the USA.

Government Bonds: We’ll go ahead and take the cookie cutter finance approach and say this is higher risk than treasuries. It is essentially the same instrument but with more risk because you’re exposed to longer time periods (lets say a 30-year bond, where interest rates could go up in that time frame). Essentially a government bond gives you the same exposure to all of the risks associated to a treasury bond with the added risk of time.

Corporate Bonds: Here we look at it differently than textbook personal finance advice. We don’t think there is as much exposure to the government. That is correct. We discount that risk because… drumroll… tax inversions. Think about what has happened the last 5 years and you’ll find that tons of corporations that are “in” the USA pay practically *nothing* in taxes. Look at technology companies and look at other large multi-national companies. While these companies all started in the USA they are not really 100% exposed to the US government. If things really hit the fan they can always move. Now this doesn’t mean you buy nothing but corporate bonds. Why? You’re now exposed to different types of risk. You’re exposed to the standard interest rate risk, you’re now exposed to that company failing (we’ll assume large multi-national), corporate tax rates can change and of course you’re exposed to mis-management of the Company and product risk. Finally, we also remove location risk since businesses are actually quite nimble and are not exposed to one geography.

High Yield Bonds: This is essentially the same as a corporate bond with more added risk on the default side, the management side and the product risk side. One of those three are likely under pressure for the company to be in the “high yield” or “junk bond” territory. The benefit is that companies are still pretty nimble (meaning they are less exposed to one government or one location). This one is quite simple because it is a higher risk corporate bond. Your investment edge in this case would be knowledge associated with the Company issuing a junk bond.

Dividends: Since we’ve covered the broad stroke corporate side of the equation we’re adding a small section to highlight dividends. The reason? Well the tax rate is significantly lower! We find it humorous that all of the “early retirement” calculators don’t even account for taxes… as if they can avoid the government. A 15% tax rate versus a standard 30%+ tax rate is a huge difference because passive income of $10,000 is really $8,500 for a dividend compared to $7,000 or so for a bond… a 20%+ difference. Finally, dividends do give you equity exposure which is an added risk (in bankruptcy the bond holders are paid before equity holders) but we have no doubt everyone reading this already knows that.

Rental Properties: This is another interesting one, the type of risk is again different. You’re certainly exposed to some government risk since the house can’t be moved easily to another country (if the government decides to seize assets like China, you’re outta luck!). To keep it simple we’ll assume the rental properties are paid off so you’re really just exposed to interest rate risk, tax rate risks, location risk and management risk. The “product” risk is essentially off the table unless someone is excruciatingly bearish and believes a home could be worth $0 in the future (highly unlikely). This is likely why the phrase “location, location, location” came from the real estate crowd. The phrase highlights that *location* is one of the most (if not the most) risky part of the asset. Finally, management risk is always there even if you believe your property manager is a genius.

REITs: We’ve covered REITs in the past and you can classify this type of income as a different type of Real Estate risk. Management risk is a bit lower and you’re reducing your location risk due to the large number of investment properties around the United States. That said, returns are typically lower since you don’t have to deal with repair calls, tenants, mortgages etc.

A Product Website: We are biased. This is where you can see a lot of risk… just a different type of risk. If you sell products online it means that you are detached from governments in general. In an extreme scenario where the USA becomes a third world country, you could always pull an Eduardo Saverin (Facebook CFO) and renounce citizenship. Make no mistake, there is a lot of risk in running your own online campaign it is just *different*. The upside is that you’re not tied to anyone except your ability to sell a product (if that vertical goes extinct you’re also in a lot of trouble).

Bonus Item “Cash”: How safe is the government really? Not to get all tin-foil hat crazy… But. There is a reason that BitCoin has appreciated so much. There is always risk even with currency. We’re not in the camp that believes cash is going to go away in our life time, but we’re not going to take that type of risk either. Holding different types of currency (gold, bitcoins, silver, etc.) makes a ton of sense. We may talk more about crypto currencies in the future.

Risk Adjusted Financial Independence Calculation

Here is where the fun begins. If you put all your eggs into a single form of passive or semi-passive income then you should reduce the income stream to account for the *type* of risk you’re taking. Taking it to the extreme, if you have 1% exposure to 100 assets generating a total of ~$5,000, you’re likely set. On the other end, if you have 100% exposure to one asset class… That is likely not worth $5,000 it is worth less than $5,000 due to the heavy exposure to one or two types of risk (tax rate on that item could change or the type of risk taken has a one time “black swan” event that wipes it out).

Now we know what’s going to happen, hard core finance guys are going to look at this post and say that it doesn’t make any sense because bonds are paid out before equity holders. They will say that your risk is by definition lower if your passive income is 100% bonds versus 100% equities. So on and so forth. So lets go ahead and see what happens based on factual data from a Trinity study.

Kaboom. Take a look at the black circles. If someone loaded up on 100% bonds in retirement because they are “less risky” and maintained a 5% draw down rate… over 33% of them failed. And. At 7% the portfolio only had a 24% success rate! We’re simply pointing out that any asset class could have a material correction during any 30-year time frame. If we were posting back in 2006 our comments would likely be flooded with “low risk mortgage backed securities” being the answer to our problems. No one knows which major asset class will see the next major downtick…  during that time frame, equities were actually better (they may not be now).

Before we move on, the second key point from the chart is that your ideal “financial independence” number should be a 0% principal drawdown number. If you have ~$5,000 in net of tax income coming in monthly, then you’re in good shape (assuming that is equal to your base line living costs).  We have never understood why the calculation for financial independence has been on a gross income basis. There are certainly many ways to structure your personal finances to reduce taxes, however, there is going to be a tax rate associated with the vast majority of investment vehicles (no avoiding those capital gains taxes unless you live on practically nothing – Taxable income of ~$37K).

Putting it all together, knowing that you do not want to be exposed to one single asset and knowing that you do not want to touch principal… we’ve come up with a quick calculation to figure out where your financial independence stands on a risk adjusted basis. If you’re already a multi-millionaire it is unlikely that this applies (we’d wager you’re still working) but here it is:

Risk Adjusted Financial Independence = Post Tax Annual Living Expenses – (Passive Income * (Income Streams/8))… Overall, when you get to your targeted net worth to trigger the financial independence cliff, you’re going to diversify those cash flow streams.

Examples of Financial Independence

Now building off prior posts, we’ve found that there are really three types of people who become financially independent. The Career builder, the Entrepreneur and the Dual process method. For one reason or another they seem to have different cash flow set ups. None of these are “right” or “wrong” since all three don’t have to work for the rest of their lives. But. We’ve noticed they do seem to look a bit different

Career: It is highly unlikely that someone manages their finances exactly in this fashion. That said, from what we’ve seen those that have made their money from Careers tend to put more money into real estate and cash. Those two items really stand out and you can see it in their everyday conversations. Most will talk about owning some small rental properties and they’ll frequently reference emergency funds & the value of a cash balance. Finally, when they do pull the trigger (stop working) they tend to talk a lot about the “dividend aristocrats” or companies that give out increasingly larger dividend payments.

Entrepreneur: This individual is on the opposite side of the spectrum. You’ll see them talking more about creating passive income from “internet property” which is just another phrase for ‘”niche site that sells a small amount of volume”. Since most entrepreneurs on the Internet have skills to increase income in various niches, they prefer using this to generate income. The one “shocking” thing is that they tend to buy their own place pretty quickly (only one apartment or house) increasing their real estate exposure quite a bit up front. Finally, the last interesting thing about this category is how they try to monetize different avenues. Just because someone is good at product sales of say diet products does not mean they would operate a profitable content site (blog/news etc). For one reason or another they continue to try new avenues once they are already financially set.

Dual Process: There are not many of these but they exist. Typically dual process individuals take the shot gun approach to success trying practically everything and working long-hours to get there (reminder long hours are a key to any type of success). This results in a lot of various small skills that add up to chunks of money coming from many different angles. You’ll see dual process individuals flipping a lot of items and “hustling” which means flipping internet assets, flipping homes, flipping anything for quick money!

Concluding Remarks: Overall, your risk profile is going to be different however, we would encourage everyone to think about risk differently when compared to what the masses do. Risk isn’t just a text book item. It is related to concentration to a type of risk as well (as we saw in the bond example above). From an actions stand-point: 1) diversify aggressively if you get a windfall of cash, 2) write down all of the types of risk you’re exposed to *yes we believe you can even reduce government risk!*, 3) decide where your next passive income stream will come from, 4) remember to keep cash on hand at all times to avoid personal financial collapse and 5) for those that are serious about de-risking their portfolios we strongly recommend Personal Capital for tracking your cash flow, avoiding excessive fees and seeing your net worth grow (the product is notably better than Mint).

PS/Side Note

As a side note, we did not do a good job of explaining cash balances and Certificate of Deposit staggering in a prior post. With that, a comment came in and asked about it. We’ve provided an example below and note the following assumptions: 1) we assume you will get a 1% return over the course of a year to keep the math simple and your monthly cost of living is $5K, 2) we assume you *first* put away a few thousand dollars in case a one time life event occurs – injury or “something just happened”, 3) you will eventually hit an inflection around year 15 where it practically grows by itself making you *nearly* 100% resistant to a recession (most recessions do not last longer than 2 years or so). Here is an example of how the cash flow will look and please note that you will likely use differing time frames – not just 1 year CDs. (click to enlarge)

We provided an overview of the “Future of Wall Street” where we continue to de-emphasize cash equities, research and sales & trading. Overall, investment banking is not going away any time soon and unlikely going away in our lifetimes. Knowing that, it is still a relatively safe career that will allow you to develop an foundation of skills for your future (starting a business, going into a sales position, etc.). Given our recommendation of entering investment banking (if one is interested in Wall Street) we realized that not all segments are equal. With that said here are the trends as of 2017.

Verticals & Industries

If you decide to go into a specific vertical, say healthcare, technology, consumer etc. You’ll likely develop a wide range of skills within that broad vertical. More importantly, as you go up the chain (where the real money is) you end up specializing. We realize that many people take the Career route to becoming multi-millionaires and this will help you decide “where the puck is going”. Instead of doing a detailed overview we’ll give broad strokes of how to think about each sub-market.

Healthcare: This is a sexy sector. Why? The companies absolutely need to raise money and can be sold quickly since a single product success leads to material amounts of sales. Go into Bio-technology if possible. In a rare case going into the Equity Capital Markets segment in a bank that does a ton of biotechnology deals actually makes sense. If your bank is constantly on every single bio-technology IPO you’re going to make a lot of money even if you’re on the ECM side and not the vertical banker.

The other segments such as medical devices are much more stable and less “fast money” so to speak. In addition, one hurdle for Bio-Technology in particular is industry expertise. If you’re unfamiliar with the sector it makes it much more difficult to obtain a position. Someone with a degree in finance and a degree in a science related field will have a much better shot. For an overview of Healthcare click here.

Technology: This is a good sector if you’re in Internet or Software. That is essentially it and the rest of the sectors are going to see meaningless deal activity relative to these two. As money is produced online and we move to an age of automation/robotics the two biggest growth engines in technology will be Internet/Software. In addition, the fund raising within this sector is quite high so you could benefit by working within Equity Capital Markets if the bank you’re working for has stellar bankers in either sub-sector. For more details on Technology we have two overviews (Part 1, Part 2)

Financial: This is *now* becoming an interesting sector. With interest rates set to go up (according to Janet Yellen Comments) financial companies should see the most benefits. Banks make money by taking deposits paying a low interest rate and issue loans at a higher interest rate (therefore this segment should do well – Banks/Bank holding Companies). Beyond this segment, the other two interesting items near-term will be financial technology and Broker-Dealers. Smoother exchanges and decreasing middle man costs (financial technology) have been and continue to be growing trends. The insurance side and specialty finance will likely be more stable/steady. In short, this segment is one of the largest generators of revenue so it won’t be going away any time soon creating a more stable long-term career for you. For an overview of FIG Click Here.

Consumer: The movement is towards e-commerce (pro-tip Shopify has a ton of great data to start an e-commerce company/website). This is technically within the Internet sector for many firms, however the trend continues to lean towards e-commerce and some banks allow their consumer banker to pitch this sector. No surprise, this comes at a cost to classic brick and mortar sales for both hard-line and soft-line retail sales.

Now the interesting piece is that the large consumer companies will likely purchase the up-start e-commerce companies in the future. This means if you decide to go into the Consumer sector you’re probably best positioned to find a bank that does a lot of buy-side advisory. This means you’re going to find the bank most responsible for advising large cap companies on their purchase of small cap consumer companies.

The other sectors (Grocery Stores, Automotive parts, Quick Service) are more stable. This means you’ll find some consistent deal flow and unlikely see banner years of income. The money is in e-commerce if you can build a niche investment banking career there. For an overview of the consumer sector click here.

Oil And Gas: What a wild ride it has been in Oil. Consistently at around $100 a barrel all the way down to $30 and now we’re back to around $50. If you’re of the belief that this is going to sustain long-term you’re likely better off in the Refinery sub-segment of oil and Gas and if you believe we’ll see $100 oil soon, then you should jump into E&P. Overall, this is a cyclical business (historically), so you’re going to gain a lot when oil goes up and you’re going to lose a lot when it goes down (laid off/fired). For an overview of Oil and Gas click here.

Other: The reason we’ve outlined it as such is due to the categories outlined by Renaissance Capital when they track overall IPO proceeds. This gives you an idea of where the activity is and can help you understand which sectors will make more or less money. At the end of the day your investment banking career is dependent on generating money those large bonuses and all in compensation numbers are not going to be paid out to a utilities banker who got on a grand total of one IPO worth $100K to the Bank. It is going to be paid out to the guy who brought in $10M worth of revenue which will more likely be in Technology/Healthcare/Consumer/Energy and financials now that things have changed. (Click to Enlarge)

Here is a table and chart showing IPO activity. The key points are: 1) entering the green sectors is smart given that is where the activity is going, 2) items can be cyclical given that Technology has represented 31% of total IPOs over the last 5 years but just 16% in 2016 (50% cut!), 3) Financials have remained relatively steady over the past five years and 4) your income is also volatile given the deal activity explaining why bonuses were down in 2016.

Vertical / Industry Summary: Given the overviews provided above and the historical fund raising activity you can gather the following: 1) if you want to do healthcare you’ll focus on more on Bio-tech if interested in fund raising, 2) Technology focus on internet/software, 3) Energy is quite cyclical so expect ups and downs and 4) consumer and financials are relatively stable. From a “risk” standpoint, this means you want to choose biotechnology/internet if trying to maximize near-term income (get on the good deals get a top tier bonus with extremely high competition) and if you’re looking for stability you can go into consumer/banks/standard medical device type sub-sectors.

Groups

There are really four standard groups, that’s fund raising, M&A, leveraged finance and restructuring. These are typically the main four items in terms of groups. If the bank separates them out it means you’ll work on all vertical sectors (listed above) but only on deals related to fund raising, M&A, leveraged finance or restructuring.

Fund Raising ECM/DCM: Quite simple, if you’re looking for a long-term career we can’t recommend it unless you are certain the bank you’re joining will always be a leader in fund raising. That would leave it up to high quality bulge brackets (Goldman/Morgan). This is because your skillset is not as developed as someone in M&A. That said, you can make a large amount of money if the deal flow is consistent and you’re well liked politically moving up the chain every 3 years. If you go down this route be sure to build tangible skills on the side in case you get burned out of the career.

Leveraged Finance: Unlike the market activity position in ECM/DCM, leveraged finance does offer some more modeling skills for you. It also gives you more skills given that you’re constantly learning about structuring and capital structures. This is a good building block to transfer into other sectors, just not as robust as something like M&A.

Mergers and Acquisitions: No complications here. When a real estate agent sells a house he collects a fee. When an investment banker sells a company he collects a fee. This is the best product group to be in because you obtain 1) transferable skills, 2) access to private information to see how companies really run, 3) steady deal flow as M&A deals are constantly done and 4) difficulty in being automated given the level of privacy and interpersonal skills needed. Now you can explain to anyone why bankers make a lot of money. If you sell a Company for $1.1B and original negotiations were for a price for say $1.0B…. You just added $100M in value and you take a $10M fee. Good luck explaining why that guy is overpaid because he isn’t.

Restructuring: This is the “everything is collapsing” group. Essentially, when companies are in trouble, they are likely going to work with the restructuring division of the bank to reorganize the Company. This segment does extremely well during recessions given that bad market conditions usually require more restructuring (when your stock price is down 40% and you can’t raise funds…. Well you can fill in the rest). The skillset is solid overall and we’d say it’s a good place to work, just not as attractive as M&A.

The main points here? If you’re just trying to do something for a few years (go into banking not as a career but as a way to get money temporarily) just enter ECM/DCM and raise either equity/debt in a bull market and put your money away. If you’re looking for a long-term career go into M&A, deals will always be done and they are difficult to automate. And. Both leveraged finance and restructuring are great, if you have a special edge that will make you better at either always choose what you’re good at because getting promotions is where the real money is (not a lot of money in being a junior banker).

Concluding Remarks: As usual the game of investment banking is to get to the revenue generating role. This does not mean any of the groups are “bad”. If for some reason you can get to a revenue generating role in any of them faster (even as a materials banker for example) you should do it. The above is simply a quick glance at how to think about the groups/verticals you’re joining when unsure. Now… when someone says M&A bankers are overpaid you can explain the basics to them since they do not know how the industry works!