Scott Trench, President of BiggerPockets.com came on the podcast to talk about his book, Set For Life: Dominate Life, Money, And The American Dream and his unique and completely approachable tactics for wealth creation. Scott believes that there is no one path to Financial Independence. There are, in fact, numerous paths. However, 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. These can be a 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. In Set For Life, he advocates 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.
Podcast Episode: Scott Trench: Set For Life
First Lever: Your Savings Rate
Wealth creation begins with frugality. The Set For Life approach differs from mainstream frugality with a focus that is on larger categories. 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 expenses.
Easy ways to make a huge dent in your savings rate is to go after the largest slice of your monthly budget–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 can cut your housing expense in half or even down to zero. If sharing space doesn’t appeal to you, or you have a full house already, consider downsizing or relocating to a lower cost of living area. This could be another powerful way to cut your biggest expense of housing.
By implementing this first lever of frugality, you’ll be able to float yourself during periods of transition. Having a bit of cash in the bank allows you to be luckier when the right opportunity presents itself.
Keeping your expenses lean and your savings rate high means 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. Living lean helps you snatch up opportunities.
You’d be surprised at how empowering it can be to simply know you’ll be okay in a pinch. It is amazing when that confidence opens up your vision to find opportunities others don’t even see.
Scott’s recommended approach is to get one 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.
Related: Frugality Without Deprivation
Second Lever: Tackle Your Investment Approach
There is no perfect way to invest, and being honest about your risk tolerance and financial timeline is important. Knowing those personal tolerances will help you to figure out where and how to invest. Creating your own luck in wealth creation means taking opportunities. But it also means weighing those potential opportunities with what you’re excited about. And most willing to actively maintain to suit your goals.
Whether you are into house hacking and real estate or prefer to take a different path, having a plan is key. Sticking to your guns and ensuring your investable liquidity is reinvested can allow you to build asset classes that fit your level of risk and interests. For some, this means index fund investing. While others prefer to actively search for houses to flip. Regardless of your investing, the chosen pathways should reflect your own values of risk and reward.
Third Lever: Activate Your Earned Income
How much income do you plan to earn? How can you level up your earnings? Can you reduce your taxes owed? Can you side hustle, trim expenses, or leverage assets you already own to help you do more? These kinds of questions help you pocket as much cash as possible.
Taking time to both critically and creatively decide how you want to earn income today, in five years, and in fifteen years will be a part of your wealth creation toolkit. Of course, being cognizant of that earned income to avoid lifestyle inflation is also needed. What you earn is as important as what you save!
Fourth Lever: Decide How You Will Approach Asset Creation
How will you create assets, and what assets excite you the most? 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.
If you own your home, consider it as an asset with liability issues. Scott argues that simply hoping for appreciation is not a solid financial plan and can be highly risky. Instead, see your house as an investment. When it is no longer simply a place for you to live, but a house hack that you can rent out partially, you allow yourself some options. 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 create one that’s shielded from a fluctuating market.
Seeing regular purchases that can be turned into income-generating assets is a way to differentiate your thinking from the mainstream.
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: Dominate Life, Money, And The American Dream.