April 6, 2023

JF3136: What Type of Millionaire Do You Want to Be? | 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 talks about several definitions of a millionaire and why the term is often misunderstood. He also discusses a number of paths to becoming a millionaire, whether it’s living frugally and saving money, working continuously, or investing in passive income streams to generate ongoing wealth for years to come.

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Travis Watts: Welcome back, Best Ever listeners, to another episode of Passive Investor Tips. I'm your host, Travis Watts. In today's episode we're talking about the five types of millionaires. Disclaimers, as always, never financial advice; not telling you or anyone what to do. Olease seek licensed advice. These episodes are informational and educational purposes only.

So with all of that top of mind, the first thing I just want to say real quick is that the idea or the perception of a millionaire, what that means, who that is, is widely misunderstood in our culture. So that's why I wanted to create this episode, share with you these five types so that we can better identify which category you either fit into or resonate best with. So with that, let's go ahead and get started.

Alright, so the first type of investor is the person who makes $1 million per year. And some people would use this definition as the definition of who is a millionaire. So you would think if you grossed a million dollars per year, that either a) that would qualify you as a millionaire. Or let's say you made a million per year, you lived off 600,000 per year; you might think, "Well, I'm living below my means, and I've got a large cushion that I'm saving", right? But that's rarely the case, and I want to show you why that is; how in many cases making a million per year, spending 600,000 per year would leave you with $0 at the end of the year. And in some cases, in some states, you may be underwater, and still owing more taxes.

So let's say you're a high income earner, you're living in Boston, Massachusetts - and the only reason I use Massachusetts as my example is because they have a 5% state income tax, a nice round number. So I'm gonna pull this up on the screen for you; I'm using smartasset.com. They've got a fun little calculator here where you can plug in your income and where you live, and it will give you a breakdown based on the 2022 tax brackets.

Alright, so as you can see here on your screen, I've taken the household income and I've put $1 million in that field. I've put Boston, Massachusetts as the location. And I'm going to go with a single filer, just for simple example purposes here. So as you can see, between the state tax, the FICA tax, the federal tax, someone in this situation could pay nearly 40% of their income in tax. Now, obviously, each person's tax scenario is going to be different, but I wanted to show you a hypothetical example of how this works.

So the question I have for you in regard to somebody that falls into this category is just because you make a million dollars per year - does that qualify you as a millionaire? What are your thoughts? And in my opinion, what I always like to say is it doesn't matter what you make, it matters what you keep, which is what leads us to number two.

Alright, the second type of investor is someone who saves a million dollars. A lot of people attribute this is more of kind of the net worth calculation "Do you have $1 million in net profit saved away?" So you can attribute this to somebody who has a working career, let's say they make $100,000 per year; for example purposes, we'll say each year they pay $30,000 in taxes, and they live below their means, they live very frugally and modest, let's say they only spend $40,000 per year on living, which means they could potentially save or pocket $30,000 per year. Take 100,000, minus 30k in taxes, minus 40k in living expenses leaves you with 30,000 per year. So while this may be possible for somebody to do, the reality is this takes an awful long time. In fact, it takes over 33 years if all you did was save your money. The simple math behind it is a million dollars divided by $30,000 in savings per year equals 33.33 years.

An additional consideration in this instance is will inflation potentially outpace your yield that you receive from putting money in the bank? So if inflation and runs at 3% a year on average for the next 30 years, and your bank pays you an average of 2%, then you're effectively losing money year over year, which begs two questions. Number one, what is a million dollars going to be worth in 30 plus years? What is it going to buy you in? And number two, is that going to be enough?

Break: [00:05:20.24]

Travis Watts: Alright, moving on to number three. This person is the person who has a million dollar home that is paid off. And it's the good old American dream, right? And while this may make some people proud, like maybe you, your parents, or Dave Ramsey for that sake, you've also got the contrary belief from people like Robert Kiyosaki, the author of Rich Dad Poor Dad and the Rich Dad company, who says "Your house is not an asset." So why does he say that? His point is, even if you've got a house that's paid off - we'll call it this million dollar home - you still have property tax that you have to pay, you still have maintenance, you still have insurance costs... So if you don't have a source of income, either from a job or from Social Security, or from a pension, or from investments, that it may be difficult to make these payments. And if you don't make the payments, you may be in jeopardy of losing your home... Which begs two questions for me. Number one, do you ever truly own your home, even if it's paid off? And number two, what is the definition of millionaire status to you? Is it really about owning a house?

And number four is the millionaire who invests in growth in equity investments. And what I mean by that is buy low, sell high stuff; this is the person who buys the stock at $10 per share, and hopes that it goes to $15 per share, and if and when that happens, they sell, and so they have a capital gain, or that's what's considered the equity.

You can look at a real estate example, somebody who flips a house they bought it for $200,000, and then they flip it and they sell it for $300,000. So that's the equity potential that they would have. But to me - and again, there's nothing wrong with this strategy. I've certainly used this early on in my investing days... But it poses the question, are you really financially free if you have to continue working for the income? In other words, if you stop being active, if you stop analyzing the stock market, or flipping the houses or doing the work, then oftentimes these gains or these profits just vanish, go away, or get significantly reduced.

And number five is the millionaire who invest in a passive income-producing investments or assets, if you will. So this really has little to nothing to do with buy low, sell high, although that could be part of the strategy, or maybe the icing on the cake, but we're talking about making investments that pay you out on a monthly or a quarterly basis, either cashflow, interest, dividends, royalties, you name it.

So the real benefit to using this strategy is that you could potentially live off this income, which means it could either allow you to retire, because you now have an additional income source, it might mean that you have more flexibility of lifestyle, and you could switch to part-time work, or you could take some time off of work, or you could switch careers... So there's a lot of things you can do with a revenue source that's continually coming in every month without you having to be active and work for the money. Some investments that may fall into this category, for example purposes, would be investing in cashflow-producing real estate privately, or investing in REITs real estate investment trusts that can be private or publicly-traded in the stock market. Additionally, bonds, CDs, money market accounts, annuities, tax liens, notes, private equity investments, producing oil and gas investments, dividend-paying stocks - these are just a few examples of income-producing investments.

So no matter what type of millionaire category you currently fall into or what you're aspiring to become, I think it's really important to know the difference between these five types of millionaires. This has been a very eye-opening discovery for me over the years, and I hope it helps clarify your investing and wealth building approach.

So with that, top of mind, the question I'll leave you with here for the week is, "What type of millionaire are you, or do you desire to become?"
You're listening to Passive Investor Tips right here on Best Ever. I'm Travis Watts, I truly appreciate you being here week after week. Thanks so much for the support. Have a Best Ever week, and we'll see you in the next episode.

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