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FI Weekly – July 12, 2022: Simple Path to Wealth, Pre-Tax Investing, Kid Entrepreneurs

Choose FI has partnered with CardRatings for our coverage of credit card products. Choose FI and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. American Express is a ChooseFI advertiser. Disclosures.

The Simple Path to Wealth

JL Collins is our most downloaded podcast guest of all-time, and his book The Simple Path to Wealth is nearly required reading for every member of the Financial Independence community.

I saw a great post on Twitter by JRod Money with a curated set of 10 quotes from the book that will help you build an empowering wealth building mindset. 

Some of my favorites:

  • “Money can buy many things but nothing more valuable than your freedom”
  • “Stop thinking about what your money can buy. Start thinking about what your money can earn.”
  • “The market always recovers. Always. And if someday it really doesn’t, no investment will be safe and none of this financial stuff will matter anyway.”
  • “The harsh truth is, I can’t pick winning individual stocks and you can’t either. Nor can the vast majority who claim they can.  It is extraordinarily difficult, expensive and a fools errand. Having the humility to accept this will do wonders for your ability to build wealth.”

Pre-Tax Investing: Where Does it Come From?

Elijah wrote in with a critically important question that often gets overlooked:

“Hey Brad, I’m 20 years old and have listened to your show for over a year now and it has truly changed my life.

I had a question about pre-tax investing like in a traditional IRA. How do I do that? Where does that money come from? If it doesn’t come from my paycheck then where does it come from?”

My response:

“That money would really just come from your bank account when you have additional money there as “savings.”

You’d setup the Traditional IRA account then make a transfer whenever you had money set aside to contribute.

When you put the total amount contributed on your tax return, you get a tax deduction for it, which essentially turns it into “pre-tax” investing.”

Want to Turn Your Kid Into an Entrepreneur?

Mark Jenney is one of my favorite accounts to follow on Twitter because of his portfolio of luxury Airbnbs and amazing tips on building an automated Airbnb business.

His can’t-miss thread entitled, “Want to turn your kid into an entrepreneur? Here’s a great tip” immediately got my attention.

The framework (all quotes from Mark):

“First explain to your kids what entrepreneurs do. An entrepreneur is a person who adds value to society by solving problems. The larger the problem and the more people impacted by the problem the larger the compensation (solve big problems and you can make a lot of money).”

“Here’s how it works, to earn money your child needs to:

1. Find a problem
2. Come up with a solution for solving the problem
3. Negotiate compensation for solving the problem
4. Solve the problem
5. Get paid”

“Getting good at solving problems is one of the best life skills you can teach your child.”

“This concept is very simple and easy to do. It will teach your kids three very important life lessons/skills:

1. Problem solving
2. How to negotiate
3. They are in control of getting what they want in life”

ChooseFI Community Taking Action This Week

  • Michael said, “My 1% better may not seem like it on its face. It is about balancing all the other factors in our lives with money. My wife and I decided we wanted to move regions to a more preferred climate, to be closer to the arts scene, and to live a different lifestyle (we’ve got it good right now, but wanted to be closer to the ocean because otherwise I’m not gonna go surfing regularly). So, I just got offered multiple jobs in this new region, but the one I will probably take is actually a 10% pay cut for my current role (and the new region is actually more expensive). Unfortunately, the ability to negotiate is limited as it is a union role. However, my wife just got a promotion that is considerably more than what I will lose in salary. It is a tough pill to swallow to go DOWN in salary, but it’s also a really important question to ask how much money is “enough” in your pursuit of FI? Is getting to FI a few months earlier worth living in a still very nice but less preferred region/lifestyle, especially when I do generally enjoy my job?”
  • Jenny said, “My 1% better was that I finally opened up a donor-advised fund with the same institution that holds my after-tax brokerage account. I earmarked money from my bonus this year that I planned to donate, but instead of donating the cash directly to a charity, I invested that money in index ETFs. Then I chose the same number of the same ETFs that I had bought five years ago and that had appreciated significantly in value to put in the donor-advised fund. In this way, I kept my retirement savings goals AND giving goals intact, and avoided a capital gains tax.”
  • Amanda said, “My 1% better has been setting up a strong foundation for our family. I had a baby boy in mid-March. By the end of April, we had opened a Vanguard 529 account for our son, used my husband’s workplace LegalShield coverage to consult with a lawyer about estate planning documents, and I mailed in the paperwork to freeze both of our childrens’ credit with the three bureaus. It feels good to know that we are doing everything we can to set our kids up for a bright future. We’re also closing on our first rental property this week!”
  • Stephen said, “Hi Brad. The end of this month marks a milestone that I didn’t think was possible and I wasn’t even aiming for near-term… a 50% savings rate! My wife and I had been working to reduce expenses for some time (I’ve been following ChooseFI since 2018), but something always came up that required us to spend a little more than desired (car payments that are now gone, car service, vet bills, weddings, etc.). We have been saving about 38% on average, which is nothing to scoff at. This month, despite spending money on a little home improvement and going out for dinner a few times, I calculated my savings rate and found that it was 49.75%! The funny thing is, the month felt so busy and seemed like we were on track for another higher spending month. We didn’t feel like we were missing out on anything. ChooseFI has given me such a wonderful perspective on life and what’s important to me.”
  • Clint & Erin said, “Thanks so much for the awesome pod and newsletter! My wife and I are new to the quest for FI but since starting to listen to your podcast we’ve made some big changes. From decluttering emails and physical mail, to automating savings each month, to buying our first I Bonds and investing in Fundrise, we’re making leaps and bounds towards that end goal of FI! Each week, we make sure to do something that changes our life at least 1% for the better. Thanks again for all that you do!”

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Choose FI has partnered with CardRatings for our coverage of credit card products. Choose FI and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. American Express is a ChooseFI advertiser. Disclosures.
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