Today Theo and Travis will be going into the five different types of millionaires. This is based on a recent blog post that Travis shared on the www.joefairless.com site. Be sure to check it out when you have time.
Click here for more info on groundbreaker.co
We also have a Syndication School series about the “How To’s” of apartment syndications and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.
TRANSCRIPTION
Theo Hicks: Hello Best Ever listeners and welcome to the Best Real Estate Investing Advice Ever show. I’m Theo Hicks and we are back with the Actively Passive Investing Show with Travis Watts.
Travis, how are you doing today?
Travis Watts: I’m doing great, Theo. Happy to be here as always.
Theo Hicks: Today, we are going to be talking about another great blog post that Travis wrote called The Five Types of Millionaires. Did you know that all millionaires are not the exact same?
Travis did a really good job breaking down the differences between the different types of way, in a sense, you can be a millionaire. Obviously, you can apply this to being a billionaire, $10 million, but I think the concepts apply across the board. I’m going to let Travis kind of walk us through these one by one and then I will come in and kind of get my thoughts on each one.
Travis, as usual, I know you like to start off by explaining why you wrote the blog post, so explain that first, and then we can go into these five different types of millionaires.
Travis Watts: Sure, you bet. Happy to get started here. Thank you again, everybody, for tuning in. These are awesome. Just once a week is perfect for me and kind of gets that creative flow going, so I can make these types of posts.
Theo pointed out this is about the five types of millionaires. I started a study a few weeks ago on just learning more about millionaires in general as far as the stats and the facts. In fact, Dave Ramsey’s team did a great study. It’s called The National Study of Millionaires. I bought that from them. It’s all these stats and facts, which is kind of cool, but it doesn’t really explain anything. It’s just data, basically.
From that, I’m sure we’re all used to hearing generalizations about millionaires, right? Oh, it’d be nice. They’re a millionaire, or it’d be nice when I’m a millionaire… But what does that really mean? What type of millionaire are you or do you want to become? That’s kind of what inspired this post, is thinking outside the box and deciphering and distinctions between the different types.
With that, I’m sure there is more than five, but I took five common categories from what I’ve experienced in my life and just kind of what came to mind. I’ll kick it off on number one – the first type of millionaire that exists would be making a million dollars per year, or potentially greater. This is interesting because, of course, this isn’t the net worth definition. This is the income definition of a millionaire. But here’s the thing to think about – I point out in the blog, imagine that you make $1 million exactly in W-2 income or through a salary, through earned income, basically, and you spend $600,000 that year in lifestyle expenses; for housing and fun and vacation, whatever you do with your money.
Well, that would seem on the surface, like you’re living below your means, right? You make a million, you spend $600,000. That’s awesome. But you can’t forget about taxes. We all know that federal tax and state tax and so many types of taxes; payroll tax… You would at least be paying about 40% of your income in taxes. In some cases, up to maybe 60%, depending on what state you live in and what that state tax is. California, New York, high tax states, for example, as opposed to Wyoming or Florida.
The point is, you’d be broke. Yeah, you made a million bucks this year, but you spent $600,000 and after taxes are factored in, you’re left with zero or sometimes negative; you might actually end up owing more money than that.
We all know the celebrities and the lottery winners and the professional athletes that make millions of dollars and all of a sudden, they’re broke. How does that happen? Something to think about is if you strive to be that type of millionaire or you are, you must have a good grasp on your personal finances and a good understanding of taxes, and how all of that work. That’s number one type of millionaire. Theo, you’ve got any thoughts on that?
Theo Hicks: Yeah, this gets back to the episode we did about your spending habits and how it’s the house, the car and the food… And when people think of living paycheck to paycheck, they assume it’s someone who’s making somewhere around the median US salary or lower. So maybe they make 40 grand a year and if they were not to receive a paycheck, then they wouldn’t be able to cover their living expenses. Kind of what you’re explaining here is that’s not necessarily the case. You can be a millionaire, you can be 10-millionaire or 100-millionaire and still fall in that same category. Surely, it might seem because you’re making all this money that you aren’t living paycheck to paycheck, but I think there was one of the articles you wrote how there was one celebrity that had spent some insane amount of money per month on wine, I think is what it was.
Travis Watts: Yeah.
Theo Hicks: Yeah, that’s what it was. That’s kind of an example of that, just because you’re making a lot of money doesn’t necessarily mean that you aren’t broke, you aren’t living paycheck to paycheck. That’s what Travis just said. That’s kind of what this one reminds me of here.
Travis Watts: Just real quick, to cap off number one here, I was holding in my head these two extreme thoughts of, you have a person like Johnny Depp or a Mike Tyson – I think he made 300 million in his career and ended up middle-aged broke. You’ve got that. And then you’ve got folks that are part of the F.I.R.E Movement that save up a million or maybe 2 million and that lasts them infinitely, through a lifetime, and they end up dying with more than what they had at age 30 or 40. Quite extreme, and that all comes down to the personal finance side. So great point.
Jumping into number two is save your way to a million. This was certainly the thought process to my parents, being that they were very frugal and whatnot. It was just living below your means for life. That was the strategy. It wasn’t until later on in life that investing kind of became a thing for them.
What I point out here is let’s say you earn $100,000 per year in a salary. That’s your income. You’re going to pay roughly $30,000 in taxes per year. Let’s say that you live frugally. You live below your means. You’re going to live on let’s say $40,000 per year, though you make $100,000. Well, that gives you an opportunity to save about $30,000 per year. That’s what would be left over.
So if you’re going to save your way to a million given those circumstances, that’s going to take you a little over 30 years; it’s 33.3 years to get to a million which is fine. I’m not bashing that method, except for, it’s very lengthy, time-consuming… We all know that things come up in life whether that be a divorce, a tragedy, hyperinflation, who knows what we’re going to see in the next 33 years.
And then to think — let’s say that inflation speaking to that topic, as the Fed’s trying to keep it in the range right now… Let’s say it’s 2% a year, just to give a conservative low average. Well, two times 33.3 is 66%, almost 67%. Meaning, when you finally get there, it’s been 33 years and now I have a million bucks in the bank in cash – well, it’s worth 66% less, because it’s been killed by inflation. And we all know you’re getting nothing in the bank these days. So something to think about in terms of saving your way there. It is really a commitment, a working career or almost a lifetime of living below your means and living frugally, which, like I said, my parents did it, a lot of people do it, not bashing it, but just be aware of the realisms that come around thinking that through, if you will.
Theo Hicks: Yep, exactly. Then, as you mentioned, and we’ll talk about later, I think it’s number five, that’s a good start, but you need to then do something extra, rather than just having that money sit in the bank and make 0.1% interest or whatever. That’s all I’d say about that one. I think we’ll get more into this one in number five.
Travis Watts: Yeah, 100%. It’s a pretty basic concept. We all know what saving looks like and how that works.
Number three would be owning a million-dollar house. Now, I have to admit, I was guilty of this at one point. As I began my home ownership journey, it was get a little bit bigger, a little bit bigger, a little bit pricier, a little bit pricier… And as my wife and I were kind of heading up that path, that ladder, so to speak, it kind of got silly, because it’s just the two of us, for us, we don’t have kids, at least not right now… So it’s like, so what’s next? Do we need more spare bedrooms for the few people that visit each year? Do we need an overpriced downtown place just to keep paying more? Like, what’s the point here? We just keep upgrading and upgrading for what reason?
A lot of people get in this trap. In fact, I have some family members that their house kind of owns them. They have a beautiful home, a multi-million dollar home, but they have to keep working throughout their 60s because, what Robert Kiyosaki points out, “An owner-occupied house is a liability. It’s not an asset.” And why that is, is even if you have a paid-off million dollar home, $2 million home, you name it, you have property taxes you’re responsible for, you have insurance, you have maintenance, you have upkeep and the utilities, everything is more expensive on a more expensive house. It keeps you kind of in the rat race, it keeps you kind of in the grind. What are you going to do to make money to pay for that liability? It’s either working a job or having investment income, which we’ll get to later.
But I fully recognize home ownership is or was the American dream and there’s nothing wrong with it. But at some point, you probably need to question how much of your total net worth is tied up into an owner-occupied home? What is that really doing for you or not doing for you, financially speaking? That’s number three.
Theo Hicks: [unintelligible [00:12:59].22] similar to number two. I’m not disagreeing with what Travis is saying. I’m saying what you need to do is that extra step. I’ll just use a friend of mine, for example. He has his house, that’s not a million-dollar house, but rather than simply paying off the house or rather than keeping a high amount of his money in his house, whenever he’s able to, he’ll do a refi or he’ll do a HELOC, a Home Equity Line of Credit, so you can pull the money out of that house rather than it just sitting there, and then using that money to buy more real estate or to invest in something else.
Best Ever listeners, everyone’s heard of this strategy before. There’s the BRRR strategy. There’s strategy where I ask people how they get started, “I took a home equity line of credit against my house”, but the point here is that similar to saving up a million dollars is great, but what are you going to do with that money? Having a million-dollar house could be fine if you were using that equity towards something else, as opposed to having a million dollars just sitting in your house. So for a lot of these, they could be either really bad or they could be not as bad if you’re using them the right way, in combination with number five and number four or investing actively in real estate, which is what we’re going to get in a second in four and five.
Travis Watts: Yeah, 100%. 100%. Finally, what we haven’t been discussing is the investing aspect of being a millionaire. Unfortunately, we all know this, this isn’t trained in school, you likely didn’t get training from your parents, maybe you did, but most don’t… So this is kind of self-taught.
When we talk about investing, I’m on number four now, it’s invest a million dollars or have a million dollars invested in equity investments. I define the two between equity and income. Equity is like, I’m gonna buy a stock at $10 per share and hope that it goes up to 15, or I have reason to believe it’s going to 15, whatever that reason is. If it does, I’m going to sell it, and then I have a capital gain. I’ve just made 50% on my money or whatever.
Another example would be flipping a house. Okay, I’m going to buy a house at $100,000, I’m gonna put 25 in. I think it’ll sell for $200, 000 in and after all of my selling commissions etc. I’m going to profit some money there. That’s equity investing, and hey, I’ve done it. We’ve all done it. You’ve done it, Theo. Everybody kind of does this in one form or another. But the thing to think about long term is it requires our time, it requires an active commitment to this. If you’re flipping homes and you decide one day, “Hey, I’m 60 years old, I don’t feel like flipping houses anymore” then your income is done; or at least if you outsource it, it’s going to dwindle and go down. There’s ways around that, but that’s something that I point out in the blog, is that—again, I’m not necessarily advocating or bashing any of these, I’m just pointing out things to think about… And most people, statistically speaking, when you say invest, they think buy low, sell high. That’s what investing is. But it doesn’t have to be that, and that’s what I’ll get into in number five.
Theo Hicks: If you don’t mind, can you do number five first, because they’re kind of connected, and then I’ll chime in.
Travis Watts: Yeah. Number five is investing in income-generating assets. Instead of the buy low, sell high, which may be part of the equation that you’re hoping to achieve, but it’s not the primary focus… The primary focus is cash flow, it’s interest, it’s dividends, it’s passive income, it’s things where you go park your million bucks and then hopefully you’re getting back, let’s say $100,000 a year in some form of passive income, just to use a simple example. Things like this could be buy and hold real estate, rather than flipping; REITs (Real Estate Investment Trusts), bonds, CDs, tax liens, ATM machines, producing oil wells. There’s so many different assets out there. But the point is, truthfully, you should probably care less if the value goes up, because that’s not the point. The point is the income, and the beauty of number five and investing in income-generating assets is that you have the ability to live on that income. That’s real passive income. You can choose to change your lifestyle, or enhance your lifestyle, or retire one day, if that’s your goal, or work part-time instead of full-time. We talk about this a lot, obviously, the actively passive show here.
This is where financial independence is built, in my definition anyway. It can be built in steps of all five of these, but ultimately, it’s having more passive income than you have lifestyle expenses. When that exceeds your lifestyle expense, you have a lot of freedom and flexibility there, hence the word freedom in the definition. That’s number five and the last type that I pointed out in the blog.
Theo Hicks: As Travis mentioned multiple times, falling into any of those earlier categories isn’t necessarily a bad thing. It could actually be good if you are using that million dollars the right way. So kind of just taking it step by step.
Let’s say you make a million dollars a year, so you fall in the category number one. And then in Travis’ example, if you spend too much money on your lifestyle expenses, then you’re going to be broke, you’re going to be living paycheck to paycheck. So maybe the first thing to think about is okay, well, how can I move from number one to number two? How can I go from spending 600k a year to spending 30k a year or $300,000 a year, or whatever that number is; that way, the extra money that you’re saving up — but okay, well, that might take a long time, to save up a million dollars. So rather than just continuously saving it, take that capital and invest it into number fours and number fives.
Same thing with your house. If you’re number one and number three, obviously you can start saving money, but then you can say, “Well, I’ve got all this equity in my house that’s not really doing anything. Sure, my monthly payments outgoing are lower, but what if I could get a home equity line of credit, and then whatever that payment is, is less than whatever return I can make with that money? Well, then it makes sense to do number four and number five.”
As Travis mentioned, the goal would be to ultimately get to number four and number five, because of the fact that you don’t necessarily have to put in a lot of active work in order to make that money. Because if you think about it, number four and number five, they can kind of go either way. You can be an active equity investor or an active income investor, or you can be a passive equity investor and a passive income investor, right? A lot of people that I’ll talk to on the show, they’ll be fixed and flippers, so they’re the active side, but then they’ll have people who invest in the fix and flips. Those people aren’t actively doing the day to day fix and flips, but still at the same time they’re not making an ongoing cash flow and say, “Hey, I’m going to give you 100k and then a year from now I’ll get my 100k plus some return back,” which obviously is fine if that’s what you want to do.
Whereas on the other hand, you’ve got the income investments, right? That could be a buy and hold investor where I buy properties, I fix them up, I hold on to them and I generate cash flow… Then I can have someone passively investing in those, like passively investing in an apartment syndication, where someone’s actively generating an income, so they could also be number five; or you could be the person to just in passively invest into this and then you can make that income without having to do anything.
I guess my point is that number four and number five are similar, but they are also different where you could have an active and a passive component to both. I’m sure everyone’s ideal world would be number five, you invest money into some income-generating investment where you can live off of this income that’s coming in that you are literally putting maybe an hour or a month into.
Number five would be the ideal if the goal is ultimately to have money coming in to cover all of your expenses and more, without you having to do anything else.
Travis Watts: Yep. I feel like everybody kind of touches on maybe not all these categories, but probably most, throughout a lifetime, whether it’s just setting goals, “I want to make a million dollars a year,” or, “I want to have a million-dollar home,” maybe that’s a goal, or maybe it’s saving to the million. Maybe that’s how we start with our mindset, and then we get into maybe some equity investments. And then as we start earning more money, then we get into some cash flow investments, and then one day, we’re older, and we retire and we need cash flow, and we kind of maybe end up in number five. It’s different for everybody. Again, it’s not right or wrong. It’s just not black and white thinking here. It’s just to point out different observations, different ways to look at this. Yeah, I love those points. Thanks for pointing those out.
Theo Hicks: One last thing which I’ve kind of hinted at, but I kind of want to explicitly say is that, as Travis said, everyone has at some point been near one of these categories; maybe it’s not a million dollars, but everyone makes money somehow, everyone saves money somehow, most people have a house, maybe it’s not a million-dollar house, most people have invested in equity and income investments before… An important thing to understand, based on what you said about the step by step process is just where are you at right now? If you don’t fall into any of these, then maybe you can skip some of the steps that Travis has talked about has some cons to it, and go straight into the pros. Whereas if you’re already someone who makes a million dollars a year or someone who’s already saved up a million dollars a year, it doesn’t mean you just quit your job. “I’m not going to work anymore, because Travis told me not to make a million dollars a year.” It’s kind of understanding where you’re at right now. If you’re in number one or number two or number three, then you can do a certain thing. If you’re in neither of these, then you can just kind of jump straight to number four and number five.
Travis Watts: Exactly. Again, our other topic the other week was about self-awareness. I point out in the blog, whether you are a millionaire today or you’re trying to get there… Let’s say you already are – well, maybe you could reevaluate what it is you’re trying to pursue and why that is. I used the example of our house with my wife and I; bigger, bigger. But did that make any sense? Not for us, so we actually went smaller, smaller, smaller, smaller and we took the equity out of our home and invested it. Because I decided that category five was really the approach that we wanted to take more so than it was category number three.
If you’re trying to get to become a millionaire, maybe again, kind of recalibrate here – why is it you want to get there, and through which method do you want? A lot of people I don’t think even would realize, with number two, saving a million, how long that really would take and what that really would look like as far as the numbers, and then additionally thinking about inflation over that same timeframe. There’s a lot of things to think about there. But that’s really all I got. That’s what the blog is, there’s some more details in it, so check it out. It comes out tomorrow, I guess.
Theo Hicks: Perfect. The last thing I’ll end with, which is the quote in the blog, which kind of relates to what you were just saying about having awareness, like, what do I actually want? Why do I actually want to be a millionaire? The quote is that, “You can be rich by having more than you need or by needing less than you have.” By being aware, maybe you don’t need to be a millionaire, maybe you don’t need the million dollars to be rich, because it’s going to be relative to what you want. Maybe thinking about, “Okay, well, do I need to keep doing more and more and more and more or can I realize what my actual expectations are, my actual needs and wants are, and then build my goals around that?” as opposed to just kind of arbitrarily saying, “I want to be a millionaire,” and then saying, “Okay, well, I’m a millionaire. What am I going to spend my money on? I want to do this, this and this.”
Travis Watts: 100%. One thing I want to end with – I was just flipping through my notes here. I talked about this before, I think it was on our Actively Passive Show, or maybe not, but… My wife and I, after studying the F.I.R.E Movement and stoicism and all these different things, we sat down to think, what are the things that make us happiest in life? I’m not going to share all of mine right now, but I’ll share a few just as an example, and I’ll tell you why. Out of my top 10 it’s sleeping in, one on one time with my wife, with friends, with family, learning something new and educating myself, helping others in things that I’m also passionate about, music, concerts, exploring new places, finding a good deal, relaxing, resting.
The point is, does any of that really take any money? To your point, maybe we all don’t need to be deca millionaires or billionaires, maybe it’s just focusing on what makes you happiest and finding a reasonable way to get there. A big part of our passive journey has been about travel, and it’s on my top 10, ranked one of the highest. For us, we use our passive income to travel. For us, that’s just one thing that we thoroughly enjoy. It’s just, again, self-awareness, running through a quick easy exercise like that, what are the 10 things that make you happiest on a daily, weekly, monthly basis, whatever, and then realizing that, hey, private jet isn’t on here, an 80-foot yacht isn’t on here. That kind of stuff. You can get a lot out of life with a little, to the point of the quote too, needing less than you have.
Theo Hicks: Perfect. I think that’s a good way to conclude, Travis. Thanks again for writing the blog post, sharing your wisdom with us and for joining me today. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.
Website disclaimer
This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.
The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.
No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.
Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.
Oral Disclaimer
The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.
