Clay Finck (02:45):

So to fix that, there are two levers you can pull. You can either increase your income or decrease your expenses. The easiest and quickest way to bring that cash flow positive would be to cut unnecessary expenses. So if you’re going out on the weekends and spending $200 a night every Friday and Saturday, then you need to ask yourself, is doing that more important than building wealth to you? I’d encourage everyone listening to this, if you haven’t already, to create a list of all of your expenses over the most recent month, and just go down the line and see if you’ve spent more or less than you might expect in certain categories.

Clay Finck (03:18):

For example, a $10 meal at your local food joint down the street might not seem like much, but if you eat there five times a week for a year, that ends up costing you $2,600 over the course of a year, which in this case is over 4% of your income. If you spend a hundred dollars a weekend on alcohol and going out with friends, that ends up costing you 5,200 per year. That’s not to say that you shouldn’t go out to eat or you shouldn’t have fun with your friends. You just need to be intentional with your spending decisions if you want to build wealth over time.

Clay Finck (03:47):

Oftentimes, the best place to cut expenses is to look at what are the three biggest categories for most people. That is housing, transportation, and food. My co-host Robert Leonard has been able to turn his housing into an asset by house hacking a duplex and renting out the other side. He found a creative way to drastically reduce his housing costs. If you drive a $50,000 vehicle and make payments of $500, but you could get by just fine with a cheaper vehicle, then there is an easy way for you to reduce your transportation expenses. Either get your loan paid off on that vehicle or downgrade so that you can ensure you don’t have any monthly payments going out every month to pay for the vehicle.

Clay Finck (04:27):

I think another easy place to cut expenses is just to look at all of your subscriptions you are signed up for. If you’re like myself and most other people, you’ll find that a lot of subscriptions you sign up for, you don’t really use that often. When I graduated college, I purchased cable TV and paid roughly $70 per month for television. But I found that I would watch TV maybe just a few times a month. So I cut my cable subscription and have ended up saving just over $4,000 since then, just because of that one simple decision. So be sure to keep an eye out for those subscription services that you don’t really use. And again, think about those big three categories, food, housing, and transportation. If you can try and limit those, then that will be the easiest places to cut your expenses.

Clay Finck (05:11):

Also, I’d encourage the listeners to think about if what you’re spending your money on is truly adding value to your life. Does it make you better? Does it make you happier, or is it just a total waste of money? Ramit Sethi talks about this in his book, this idea of spending extravagantly on things you love, and cut costs mercilessly on the things you don’t. For me, I don’t mind spending a little bit more on quality clothing or a little bit more at the grocery store to ensure I’m getting the fuel I need each day to perform at my best. Other people might care way more about having a nice car or taking these vacations. It really doesn’t matter what you end up spending your money on specifically, just make sure you are spending it intentionally and spending it in a way that reflects what you value. On episode 164, Jim Kreider and I discussed this idea that money is simply communicating what you value. I highly recommend you guys check out that episode with Jim, if you guys haven’t already.

Clay Finck (06:06):

So outside of cutting your expenses, you can increase your income. This could mean so many things. You could get a promotion at work or switch to another job that offers a higher salary. You could pick up a side hustle that you do on the evenings or weekends. The list goes on. But the easiest way to start producing positive cash flow as soon as possible is to cut unnecessary expenses. Then you can focus on ways to increase your income if you’d like to go down that route.

Clay Finck (06:31):

So to recap, the first step to building wealth, you need to spend less than you make and produce positive cash flow. In a world full of instant gratification and short-term thinking, this can be hard for a lot of people to follow. Many people will spend more than they make, get into credit card debt and dig themselves into a hole that is very difficult to dig yourself out of with all the interest you’d have to pay on that debt.

Clay Finck (06:52):

Now, the second step to building wealth is to take that cash flow and invest it in appreciating assets. This is what we talk about a lot on the show. Investing in an appreciating asset could mean a lot of things. Some of the most obvious options for this is an index fund, a rental property, individual stocks, Bitcoin, a business, the list goes on, really. I’m also assuming that you don’t have any high interest debt. If you have debt with an interest rate of, say, greater than 5%, then I’d encourage you to knock out that debt as soon as you can. For example, if you had $10,000 in credit card debt and you’re paying 16% interest, you’re paying $1,600 a year just to hold that debt. It’s going to be hard to get over a 16% annual return elsewhere, so it’s probably wise to knock out that debt as soon as you can.

Clay Finck (07:40):

Now, the reason you’ll want to invest that money is because the money you earn at your job for many people is US dollars. These US dollars aren’t going to keep their value over time because of inflation. Because the money doesn’t hold its value over long periods of time, you need to put that money to work for you in assets. For example, had someone invested $10,000 in the S&P 500 just 10 years ago, that $10,000 today would be worth over 31,000 with dividends reinvested. Had you held that in cash, your real purchasing power would become less and less over time because those dollars will buy you less stuff due to inflation.

Clay Finck (08:17):

The most popular option among society is probably index funds as an investment tool, as they’re a popular tool used in retirement accounts and have had a very long track record of returns in the 8% to 10% range for investors that are in it for a long period of time. The appreciating assets of choice for me are index funds and Bitcoin. I like index funds because they are a great way to build wealth over the long run. During a depressionary type scenario, they could go down 40% or 50%, but over the long run, they tend to perform very well.

Clay Finck (08:49):

I also have high conviction on Bitcoin, which has appreciated at roughly 150% annually over the past decade. Historical returns are no guarantee of the future, but that’s just for reference. I believe that we’ll continue to see rapid adoption all over the world, and still has massive upside potential as the market cap or the total value of the Bitcoin network is still under $1 trillion, while another hard money asset like gold has a market cap of roughly 10 trillion. So that gives me sort of an asymmetric bet with high upside potential. But my downside potential is capped to what I have invested.

Clay Finck (09:24):

If you’re interested in Bitcoin and want to start learning more, I’d recommend checking out my episode with Andy Edstrom, which is episode 128, or our episode with Jeff Booth, which is 134. Both of these are fantastic episodes with very knowledgeable guests. So when I think about the appreciating assets I want to invest in, I think about if I expect that asset to beat the market or beat something like the S&P 500. If I don’t think there’s a good probability of that, then I think I’m just better off investing in the S&P 500 or just the general stock market.

Clay Finck (09:58):

For example, I had Justin Huhn on the Millennial Investing show back on episode 136 to talk about the uranium sector. And after doing my own research and chatting with Justin, I ended up taking roughly a 2% or 3% overall position in the uranium space. I think there’s a good chance it’ll do very well over the next few years and outperform the S&P 500, but of course there are no guarantees. For my co-host Robert, he really likes investing in real estate. A lot of times with his real estate deals, he’s able to invest in a property that produces a cash-on-cash return of, say, 10% or more, and also get many tax benefits and the appreciation of the home. So with a lot of his rentals, he’s probably able to beat the returns of an index fund consistently. He just has to put in a bit more work in doing so and finding the properties to purchase, as well as managing tenants and turnover and such. So it’s not quite as passive as simply buying an index fund.

Clay Finck (10:51):

Two of the most important aspects of investing is investing early and investing often. Charlie Munger is known for saying, “The first 100K is difficult, but you just have to get it done.” What he means by that is getting your portfolio value to $100,000. And the reason for that is because once you have a strong foundation of assets working for you, compound interest will start to do a lot of the heavy lifting for you. For example, if you have $10,000 and you earn a 10% return, that’s only $1,000, which really isn’t all that much in the grand scheme of things. But if you have $100,000 and you earn a 10% return, that’s $10,000 added to your net worth. And that is the point at which returns on your money really start to make a bigger difference. It will take many years to get to that first $100,000, but it is 100% worth the journey, in my opinion, to get that strong foundation put in place to work for you for the reminder of your life.

Clay Finck (11:46):

To help illustrate the power of compound interest, consider someone who saves $10,000 and earns an average rate of return of 7% per year. That person would accumulate $100,000 in almost eight years. The next $100,000 would come in just over five years. The third $100,000 would come in almost four years. And the fourth $100,000 would be in just three years. So in this example, saving the first $100,000 took this person almost eight years, but saving the fourth $100,000 only took three years. And it only gets shorter and shorter after that, assuming that they continue to earn that 7% annual return and continue to invest $10,000 per year.

Clay Finck (12:29):

And this is the trick that a lot of rich and wealthy people use to their advantage. They invest early, they invest consistently and often. And given enough time, they let compound interest do a lot of the work for them, and they just sit back and enjoy the investment gains. And you can get these returns over a long term time horizon simply by buying an index fund like the S&P 500. My favorite is a Vanguard ETF, which is the ticker VOO, which you should have access to on just about any stock broker. This example also doesn’t consider any increases in your amount invested, which would also help accelerate the growth of your portfolio.

Clay Finck (13:06):

Albert Einstein has the quote related to this that I’ll never forget. It goes, “Compound interest is the eighth wonder of the world. He who understands it, earns it, and he who doesn’t, pays it.” This leads us to the topic of financial independence or the FIRE movement, which stands for Financial Independence, Retire Early. This movement hits really hard on the 4% rule, which states that you are financially independent once your portfolio value is 25 times your annual expenses. So if your annual expenses are around $50,000 per year, then you’d need a portfolio of stocks at around 1.25 million or $50,000 times 25, which I believe is a lot less than many of us might expect they would need to retire, given they’d need to spend $50,000 per year. The 4% rule stems from if you had 1.25 million in your portfolio, you’d be able to withdraw 4% every year indefinitely, as the value of your portfolio is expected to go up over time. There is a whole lot that goes into this that we can maybe dive into in another mini episode.

Clay Finck (14:15):

Two other tips I would strongly recommend to people is to automate your investments and to minimize your investment fees. Automating your investments will ensure that you’re staying consistent. And if you’re investing the day you receive your paycheck, it’s like you don’t even see that you ever had the money. So it’s a good way to ensure you’re continually investing in the market and dollar cost averaging, or just averaging in whether the market’s up or down and not trying to time it. Also, always be aware of the investment fees you are paying. Nowadays, almost everyone should have the option to invest in a low cost index fund in their 401(k), IRA or brokerage account, and these are types of retirement accounts, for those of you in the US. Any fees in excess of 1% is excessive, in my opinion. Most people should have an option to invest in a fund with an expense ratio less than 0.2%. For reference, Vanguard’s S&P 500 index fund, VOO, has an expense ratio of only 0.03%. So that’s practically a 0% fee.

Clay Finck (15:15):

I’d encourage the listeners to think about your personal finances like a CEO or CFO would think about the finances of a business. They’re trying to optimize their finances to maximize the value of their business. Once you start producing positive cash flow and invest in appreciating assets, it’s only a matter of time before you are financially wealthy, whether that be 500,000 or a million dollars. Everyone’s numbers going to be different on what they need financially. The more cash flow you’re able to generate, the more you’re going to be able to invest in appreciating assets. The faster your assets are appreciating, the faster you’ll build wealth. It’s really that simple.

Clay Finck (15:49):

I hope you found this first mini episode helpful. If you enjoyed this episode, please share it with at least one of your friends. We would really appreciate you helping us spread the word about the show so we can continue to provide you all of this content for free. Again, feel free to reach out to me if you’d like to provide any feedback on the episodes, or you want to let me know what topics or questions you like to learn more about in the future. Thanks for listening, and we’ll see you again next time.

Outro (16:12):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin. And every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.