July 28, 2022

JF2886: The 4 Pillars to Financial Independence | Passive Investor Tips ft. Travis Watts


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 shares the four pillars that he personally used to achieve financial independence in full detail, plus some additional tips he’s picked up along the way.

 

1. Earn as much money as you can, using your highest and best earning potential.

Think about what you could do actively as a side hustle to potentially generate some extra income in addition to what you’re doing full time. You may even consider pivoting careers to something that pays better in the short term to help you reach your ultimate goal. 

 

2. Live on as little of your income as possible for a period of time. 

Take your total gross income and determine how much you can possibly save for a period of time — ideally five to 10 years. For example, Travis had a 70% savings rate for a period of time, which meant if he made $200K a year, he kept his personal expenses at $60K or below. 

 

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3. Invest the difference in something that produces positive passive income.

Take the difference between what you’re earning and what you’re using to live on, and invest it. The key to being a successful long-term investor is to focus on passive income and/or cash flow. 

 

4. Avoid bad debt. 

This includes high-interest rate debt, credit card debt, and personal loan debt. If you can reasonably and conservatively invest in something that produces passive income, and that investment has a higher yield than your debt, it’s a worthy investment to put your earnings into. However, if the investment does not have a higher yield than your debt, then you’re better off using your earnings to pay off the debt first before making any investments.

 

Additional Tips

 

Always have a budget.

It’s imperative to know where your money is going and flowing at all times. 

 

Reevaluate your housing needs. 

Do actually use all of the space you currently have, or could you downsize or rent a portion of your home out? You may be spending money unnecessarily on utilities, property taxes, and maintenance. 

 

Remember that the journey to financial independence takes time. 

It requires effort, energy, and self-discipline. It’s simple, but it’s not easy.

 

 

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TRANSCRIPT

Travis Watts: Welcome back, Best Ever listeners, to another episode of Passive Investor Tips, a short series dedicated to passive investors. I'm your host, Travis watts. Thank you for being here. Today's episode - we're on episode number three, it's called "The four pillars to financial independence."

Everybody is unique and different, and what they would do with financial freedom. What we all have in common, at least my opinion, is that we're in a pursuit to some form of financial freedom. So in today's episode, these are the four pillars that I use personally to get to financial independence. Of course, as always, not a promise, not a guarantee, not financial advice; it may or may not quite frankly be the right fit for you, but I do think there's some practical takeaways, if nothing else.

If you've heard me speak on stage or at various events, sometimes I do cover these, but I want to dive into a little more detail in today's episode. So step number one is to earn as much money as you can using your highest and best earning potential. So let's break that down. This is where you have to dissect for yourself what is your highest and best earning potential. I'll share with you quickly - years ago, my journey was basically working in oil and gas. I worked 100 hours per week, I was the W-2 employee, and I also flipped homes on the side for additional income when I had the spare time, which was quite rare. And I also had some long-term buy and hold rentals. That was my highest and best earning potential. So I encourage you to think, what could you do actively as a side business or a side hustle to potentially generate some extra income to tag on to whatever you're doing now? Or could you potentially pivot careers and what you're doing full-time to something that pays better in the short run to get you to the ultimate goal that you're after?

Number two is live on as little of your income as possible and as practical for a period of time. This is not forever, I don't advocate using coupons and living below your means till the day you die. This is just call it 5 or 10 years while you're on the active pursuit, the active journey, try to have a high savings rate.

For me, back when - let's just use some simple math; these aren't the exact numbers, but I think you'll get the point. If I made $100,000 working full-time and oil and gas I made $75,000 per year on fix and flip properties, and maybe I had 25,000 per year in passive income from my long-term rentals, if you tag all that together that's 200,000 dollars. I'm using that for example purposes only, but those numbers are probably not too far off from what it was. So I had a 70% savings rate. So that meant that my lifestyle, all my personal expenses were 60,000 or below.

Now, we're not having the tax conversation, we're not going to get into the weeds about all that. I'm just simply saying, take your total gross income, how much can you possibly save for a period of time. For me, it was around 70%. I still maintain today a pretty high savings rate, but it's not as high as it was back then.

Step number three is to invest the difference in something that produces positive passive income. So what we're talking about is the difference between what you're earning and what you're using to live on, that margin in between the two - invest. And this is where a lot of people fall short; they either don't invest, so they're savers, so they're just putting money in the bank for a rainy day or for something one day that might pop up, they're spending their money and living at their means, not below their means, or they are investing, but instead they're using a buy low and sell high strategy, which as we know this year in 2022 and as past examples, it doesn't always work in your favor, and recessionary periods when the markets are down, when government policy changes, things like that, you could be without an income for one year, two year three years, and you can lose a lot of money during those periods of time.

So the key to being a successful long term investor is to focus on passive income and/or cash flow. I covered this topic a little more broadly in episode number two, "Are you investing or speculating?" I'm not going to rehash it all out here, so check out episode two if you want to learn a little bit more about that.

 

Break: [00:06:43.24] to [00:08:30.12]

 

Travis Watts: Pillar number four is to avoid bad debt. We're talking about high-interest debt, we're talking about credit card debt, we're talking about personal loan debt. Here's the simplest way I can paint it for you, the way I look at it anyway - if I can reasonably and conservatively invest in something that produces passive income, and that investment has a higher yield than my debt, I'm not focused on paying off the debt. I'll give you a couple quick examples.

So let's assume that I have student loan debt at 3% annualized interest, and let's say that I can conservatively and reasonably invest in a real estate project that gives me a 7% annualized yield. So any spare money I have, any "savings", I'm going to put into the real estate deal, because I'm going to be earning more than what I'm owing in the debt.

But on the flip side, if I have credit card debt at 15% annualized, and I can only achieve a 7% reasonable and conservative yield in something else, I'm going to focus on paying off the credit card debt first. So hopefully that makes sense, and those are my four pillars. Same disclaimer as I gave earlier - it may not be right for you, you may not jive with all that, but hopefully there's a few practical takeaways.

Some additional thoughts I just want to share real quickly on financial independence or money in general... I always recommend having a budget; even if you think you don't need a budget, have a budget. I've kept a budget, believe it or not, since high school when I had my first job. And the reason is you have to know where your money is going and flowing at all times. You could ask me today about any bill or expense that I have and I could probably estimate that within about 10 to $15. You could ask me about a water bill, electric bill, insurance premiums, property taxes, what I spend on gas or food every month... I really do hold myself accountable, I really do take it serious, and it really is the fundamental core to this conversation.

The second thing I would say, I would really look at your housing needs, and your housing cost. Housing is usually in the top two as a primary expense for people; it's usually taxes and housing. Do you really need a 5, 6, 7-bedroom house if it's just you and a couple kids? Or is there a portion of your house that you could rent out? Maybe you have a guest house in the back, or maybe you want to move into a duplex and rent half of it out. There's different strategies, different ways to go about it; if you're younger, like I was, when I was 20-21, I had roommates, so that helped pay for my mortgage.

My wife and I discovered after years of owning homes that were 2,200 square foot, 2,600 square foot, 2,400 square foot, that we really only lived in about half of the house most of the time. So we were wasting a lot of money on utilities and bills and property taxes and maintenance. So here in recent years, even with the addition of our newborn son about six months ago, and our family now expanding in size, we decided that 1,300 square foot and a 3/2 size home, one story suits our needs best, and then we don't have any excess waste. Not saying that's the right choice for you, but it is something to consider.

We've also gone back and forth throughout the years on renting by choice, and then owning. So it's not always that one's better than the other. It really depends, especially when you're a full-time investor; you're always having to look at costs and percentages, and ROI, and what the markets are doing. So you might actually conclude that in your particular market it's better to be a renter than a buyer right now, or vice versa, depending on where you live.

The last thing to keep in mind is that the journey to financial independence certainly takes time. It takes a lot of effort, energy, it takes a lot of self discipline. If it were easy, everybody would do it. Everybody would be financially independent. So I'll leave you with this last stat to think about - the United States of America has the most millionaire households of anywhere in the world. And even with that, in a recent survey conducted by a firm called Spectrum - they do a lot of financial reporting - only about 10% of US households are millionaire households when you exclude primary residence. So as I always say, this stuff is simple, but not easy. So with that, thank you so much for tuning in to another episode of passive investor tips. I'm your host, Travis Watts. As always, my goal is to keep these episodes short, tight, to the point, and give you as much value in as short of amount of time as possible. Have a best ever week and we'll see you in the next episode!

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