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Scott Trench, President of BiggerPockets.com came on the podcast to talk about his book, Set For Life and his unique and completely approachable tactics for wealth creation. Scott believes that there is no one path to FI, there are numerous paths- but that everyone can benefit from tailoring the four levers of wealth creation to build a plan that works for them.
While the path to FI is diverse, there are basic tenets to wealth creation that can be useful framework for tailoring your own personal wealth creation plan. Scott believes that luck is the intersection of preparation and opportunity- and uses the advice in his book to help you do exactly that.
By showing up regularly, and becoming a lifelong learner, you increase your odds of being successful. He advocates in Set For Life that anyone can increase their luck exponentially by exploring these foundational ideas and applying them regularly in their lives. Luck is a matter of learning, and showing up regularly.
First, Focus Your Savings Rate
Wealth creation begins with frugality- but where the Set For Life approach differs is that the frugal focus is on larger categories, not cutting out the small but fun purchases. Frugality is one leg of the stool that you can utilize no matter what your earnings or your financial past. Having a bit of cash in the bank allows you to be luckier when the right opportunity presents itself. Down the road, when you work hard and network, you’ll be presented with more opportunities that others have to pass up.
Keeping your expenses lean and your savings rate high mean that you can show up when others can’t. When stocks go on “sale” during a dip, you’ll have wiggle room in your budget to buy in. When the right investment property comes along, you’ll be ready.
If a family member needs your support, or you find a job opportunity that may require some level of risk to transition than you have in your current position, having money in the bank allows you to leap. By implementing this first lever of frugality, you’ll be able to float yourself during periods of transition. Having a frugal lifestyle allows you to snatch up opportunities the others would have to pass up. You’d be surprised at how empowering it can be to simply know you’d be okay in a pinch, and how that confidence opens up your vision to find opportunities others don’t even see.
How To Increase Your Savings Rate
While packing your own lunch or cutting out trips to Starbucks can make an impact in your savings rate, you can see faster results by going after the largest line items in your budget. Namely, your housing and transportation costs.
According to Scott Trench, on average, your two biggest expenses are housing (33% of your monthly budget) and transportation (17% of your monthly budget.) Together, this accounts for 50% of your monthly budget.
Easy ways to make a huge dent in your savings rate is to go after the largest slice of your monthly budget- which is your housing expense. House hacking is one of the fastest ways to knock out your housing expense. By renting out one side of your property or some spare rooms, you’ll knock your housing expense in half or even down to zero. If sharing a space doesn’t appeal to you, or you have a full house already- if you’re able to downsize or relocate to a lower cost of living area, this is another powerful way to cut your biggest expense of housing.
The ChooseFI blog has tons of articles on how to save on transportation costs, and other frugal tactics to cut your biggest and most annoying expenses to make headway fast. If you need more ideas, check out the ChooseFI Facebook group.
Scott’s recommended approach is to get 1 year of savings, or a financial runway by saving 50% off your income. Getting to a median income of $50,000 a year will make it significantly easier to make this 50% rate, and your first big financial goal should be to save up $25,000 to serve as your financial runway.
Next, Tackle Your Investment Approach
There is no perfect way to invest, and being honest about your risk tolerance and financial timeline is key to figure out where and how to invest. Creating your own luck in wealth creation means taking opportunities, but weighing those potential opportunities with what you’re excited about, and most willing to actively maintain to suit your goals.
Even if you’re not into house hacking or real estate, and prefer to take a different path, having a plan is key. Sticking to your guns and ensuring your investable liquidity is reinvested on not spent elsewhere, you can build asset classes that fit your level of risk and interests. For some, this means that index fund investing makes them sleep better at night, others prefer to actively search for houses to flip- but your investing pathways should reflect your own values of risk and reward.
Then, Set A Plan For Your Earned Income
How much income do you plan to earn, and how can you level up your earnings, or reduce your taxes owed to pocket as much cash as possible? Can you side hustle, trim expenses or leverage assets you already own to help you do more?
Taking time to both critically and creatively decide how you want to earn income today, in five years and in fifteen will be a part of your wealth creation toolkit. Of course, being cognizant of that earned income to avoid lifestyle inflation is also key. What you earn is as important as what you save!
Finally, Decide How You Will Approach Asset Creation
How will you create assets, and what assets excite you the most? Do you own a home, or would you get fired up about starting your own business? The various assets you can create and cultivate can be just as unique as your overall approach to FI.
While most people believe that buying a home is an investment, but Scott argues that simply hoping for appreciation is not a solid financial plan and can be highly risky. Instead, seeing your housing as an investment that isn’t simply a place for you to live, but a house hack that you can rent out partially, you can shield yourself from risk by padding your expense as an opportunity to cash flow. No matter what the market does- you’ll get away from a purchase that’s risky and one that’s shielded from a fluctuating market.
Creating assets, and seeing regular purchases that can be turned into income generating assets is a way to differentiate your thinking from the mainstream. Are you spending money on assets that reflect your values, a desire to learn and grow and preferred level of management? Knowing this is key to generating a life and a plan for wealth that fits you.
If you’d like to learn more about these various levers of wealth creation in more depth, check out Scott Trench’s book, Set For Life.