Passive Investor Tips is a weekly series hosted by full-time passive investor and Best Ever Show host, Travis Watts. In each bite-sized episode, Travis breaks down passive investor topics, simplifying the philosophy and mindset while providing tactical, valuable information on how to be a passive investor.
In this episode, Travis poses two questions to investors: How much money is enough for you, and when do you know you’ve hit that mark? He encourages listeners to have a general awareness of what their desired lifestyle is and how much money it is going to take to fund it in order to know when they have achieved that goal.
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Travis Watts: Welcome back, Best Ever listeners to another episode of Passive Investor Tips. I'm your host, Travis Watts, and in today's episode what we're talking about is how much is enough, and how to find out. We're talking about income, and specifically passive income. Disclaimers - as always, never financial advice; not telling you or anyone else what to do educational, and informational purposes only.
And with that top of mind, as you probably know, there's endless amounts of articles, and blogs, and formulas out there to help you determine how much is enough to retire, let's say. The problem is most of these are based off of the stock market, which is where most people are investing their money, and a lot of this has to do with a net worth focus. So in truth theme of what this show is all about, Passive Investor Tips, I figured I would show you how to figure out how much is enough based off of passive income, something that very few people talk about.
So I'm going to share with you three steps on how to determine how much is enough. And before we get into those three steps, I'm going to put up on the screen for a quick refresher the hierarchy of income. So this is a little diagram that I've created, which shows someone moving up in the hierarchy of income. And at the bottom it's called self sufficiency. This is where somebody can basically support their living costs on an active income source, like a job. This would be someone who is merely paycheck to paycheck.
As you move up, with a little more income, you find stability, which is where you can eliminate bad debt, and maybe have a little bit of cash in the bank. Above this level I call flexibility. This is where you have more than just a little cash cushion for emergencies in the bank. You could perhaps take a year off of work, travel more, pivot careers; you just have more flexibility over your lifestyle.
Above this level is financial independence. This is where you can live off of your income that your investments generate. And above financial independence is what I call financial abundance. And this, quite frankly, is where money is no longer a concern. You have more than you'll ever need. It's usually a stage of giving back, because you can't possibly spend the amount of money that you're bringing in.
So this brings us to step number one, and that's to consider what is your goal. Frankly, not everybody strives for financial abundance; not everybody desires financial independence. Some people, quite frankly, are content with their career, they love what they do, but it might be nice to have flexibility of lifestyle, where they could take a break for a while and come back to it. Or maybe work part-time instead of full-time. Others are just looking to eliminate debt, and have a little cash cushion in the bank, while others seek that work optional lifestyle and that financial independence number. So number one is to consider what goal you're looking to achieve.
Now, that brings us to number two. And number two is consider the current income that you have through your job and/or any investments that you have. Is it enough? Think about if the paychecks and the income kept rolling in every month, but you didn't have to go to work. Would you be content with that scenario for the rest of your life? Are you able to live the optimal lifestyle that you desire based off that income? And the answer is going to be different for everyone. Some people might be making an abundance of income, and say, "Frankly, I could live on less than what I currently make." Others would say, "No, I'm at the beginning stages of my career. I desire a much higher income, and there's much more that I want to accomplish in life." So you do you, and decide what income would be sufficient to live the lifestyle you're looking to live.
Travis Watts: Now, before we jump right into step number three, I want to share this story with you for a little bit of perspective and additional context. So there's an engineer, and he's 24 years old, just graduated from college, gets synced up with a high-income job at an engineering firm, and he works himself up from bottom to top in this company, he puts in 15 years. And at this point, he's nearing 40 years old, he's got a handful of stock options, a really nice lucrative 401k; his net worth is going to be in the ballpark of let's say $2 million. And he thinks to himself, "I'm burned out, I'm tired of this. I don't see much more advancement here." I'm gonna branch away and create my own firm and my own company. And he does just that. He launches this company from scratch, he dedicates the next decade to building it up, and he's able to successfully secure a sale of this business for $5 million.
Now, between his net worth, his previous investments, and the sale of this company, his net worth is approaching $10 million at this point. His age is nearing 50, and he says to himself, "Well, that went really well. That was exciting. Let me do that again. I'm going to start another business." And he does just that. So this time, he wants to go bigger. He wants to get the big payday. He's dedicated to putting in 15 years of time to building up this firm. He does just that. His age is nearing 65, and he secures the sale of this business for $10 million.
Now, adding up his previous net worth and assets and the sale of this business, his net worth is nearing 25 million at this point, and he decides it's time to retire. "I'm 65, I've put in the work, and I'm done." Now, after listening to this story, you might think, "Hey, this sounds pretty good. It's a great success story." The great American dream, right? The dilemma is when we're younger, we seek money, but when we're older, we seek youth. And the problem with that is that you can always make more money, but you can never get your youth back.
Now, here's a couple takeaways from this story to consider. Number one, could this individual have retired at age 40, where he was leaving the corporate world with approximately $2 million of net worth? Let's suppose he had taken 500,000 out of his net worth, bought a house and paid it off, and then invested the remaining 1.5 million into passive income producing assets. And for simple math, we'll use the 8% yield per year. He'd have approximately $120,000 per year in passive income, a paid off house, and perhaps a low cost of living.
Now, this could have allowed him to spend more time with friends and family, or to travel, or just to do the things that most of us can do when we're younger, as compared to putting them off until an unknown age in the future. And if that scenario doesn't resonate with you in particular, consider when this individual was 50 years old and had an approximate net worth of $10 million. Perhaps he took 1 million out of his net worth, bought a house, paid it off in cash, and invested the remaining 9 million into passive income-producing assets. Assuming the same 8% annualized yield, that would give him approximately $700,000 per year in passive income, while still being able to retire early at age 50.
And the point of the story is to consider what's important to you. Is it money? Is it net worth? Is it freedom? Is it time with friends and family? And I call this scenario the success cycle. And it's really easy to get caught up in the success cycle, especially here in America, where it's spread all throughout our culture - work, work, work. Until when? And this, my friends, is number three to knowing how much is enough. It's what are you chasing? What is your desired outcome? What are you looking to get out of life? There is no specific answer to how much is enough. It depends on you; your desired lifestyle and what it would cost to live that desired lifestyle.
So I encourage you to keep an eye out and have a general awareness for this crossover moment in your life. Money may be unlimited, but your time is limited. Something to think about here for the week.
You're listening to Passive Investor Tips. I'm your host, Travis Watts. I truly appreciate you being here, week after week. I appreciate the support. Like, comment, subscribe. Have a Best Ever week. We'll see you in the next episode.
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