How to Build Wealth in Three Simple Steps

Scott:
Welcome to the BiggerPockets Money Podcast, where we interview Brian and Bo from The Money Guy Show, and talk about how to build wealth and keep wealth. We also discuss millionaires and we also discuss rising interest rates. Yo, yo, yo, my name is Scott Trench and I am solo today as Mindy is raging and partying and whatever else she’s doing on spring break. I am here to make financial independence less scary, less just for somebody else, to introduce you to every money story, because I and we, and we all truly believe that financial freedom is attainable for everyone no matter when or where you’re starting. That’s right, whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business, learn from the habits of millionaires or anything else related to building wealth, will help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.
We have a new segment of the show called Money Moments where we share a money hack, tip or trick to help you on your financial journey. And today’s Money Moment is use a raise to save more. If you’re living comfortably with your current salary and receive a raise, put that money towards a 401(k), Roth IRA or savings account. Don’t let the goalposts move, the goalposts being your everyday spending. All right, before we bring in Bo and Brian, let’s take a quick break. And we’re back. Bo Hansen is the Co-Founder and serves as a CIO and CCO of Abound Wealth while helping drive the long-term strategic vision in planning for the firm. He’s passionate about all things finance and loves helping people make smart financial decisions.
He knows it’s extremely fulfilling when solid financial planning clicks for the people he serves. Brian Preston founded Abound Wealth on the foundation of stewardship and family. The firm has flourished under an abundance mindset with over two decades of experience on personal financial planning and taxes. He’s driven to help others optimize their lives so they can focus on the things that truly matter to them. Brian and Bo, from The Money Guy Show, welcome to the BiggerPockets Money Podcast.

Brian:
Hey, Scott, thanks so much for having us on.

Scott:
I’m very excited to have you on today and chat about a number of things. Before we get started, would you mind just introducing yourselves and telling us a little bit about The Money Guy Show?

Brian:
We’ve been trying to let everyone know they have an opportunity to build wealth no matter where they come from, no matter what income level they’re at. We’ve been creating content since 2006. That’s right. We’ve been one of the early podcasters transitioned into both podcasting and YouTube in 2017. And Bo and I just love what we get to do every day.

Bo:
We’re both financial advisors, we’re CFPs, CPAs, CFAs, and so we want to marry what we get to do in our day-to-day professional life with just educating the masses on how to make really good, sound financial device.

Scott:
Awesome. And I understand that you have three core principles for this process of building wealth for the everyday American, would you mind introducing us to those three concepts?

Brian:
The big things we talk about is that I think wealth building is incredibly simple. If you can just master the art of being disciplined, of course, live on less than you make, use that discipline to create margin or money. Money is that second key element. That’s your army of dollar bills. It’ll start working for you and if you give them enough of the most important element time, your money can work harder for you than you do with your back, your brains or your hands.

Scott:
Well, let’s dive into each one of these a little bit deeper, discipline, are we talking about discipline on the income side, on the expense side, on both? What is that? How would you break that down for what it looks like for maybe a middle-class American worker?

Brian:
Well, Scott, it definitely is all the above because we assume when you come out of college or wherever you are, when you get that first real job, income is not going to be abundant. So you need to be very disciplined with how every dollar comes in and how you’re utilizing it, so it actually has a plan because remember, you want to save and invest first. You don’t want to wait and see what’s left over at the end of the month. And that means that expenses are, of course, going to be important.

Bo:
And I think another thing we’ve recognized as it relates to discipline, especially for folks who are in a situation right now and they want to move into a better situation, is being disciplined with how they spend their time as well, like, are they someone who’s constantly being a lifetime learner? Are they continuing to better themselves, advance their education or are they just letting life happen? Are they wasting time? Are they getting lost in all the distractions of life right now? We have found, in our experience, that the folks who were able to build wealth and actually move from where they are now to hitting the millionaire status or even multi-millionaire status, it’s really just exercising a little bit of discipline in various aspects of their life, compounded through time, that makes a huge difference.

Brian:
And I think it’s important that, I get people excited about saving and investing usually through a book recommendation or watching some of our content. I just want to make sure as you get those annual pay raises or you have more successes in your life, that when you reach your thirties, you’re not still saving and investing like you’re in your twenties. That discipline’s going to require as you get more responsibilities, you get more success with your financial resources, let’s actually utilize it and put it to work, so you get to have that great big beautiful tomorrow.

Bo:
But here’s what’s so frustrating, some people will say, you know what, I’m just going to wait. I mean, things are tight right now. Maybe I’m in my thirties, I’m in the messy middle. I’ve got kids and I’ve got obligations and mortgage and insurance and all this stuff. And because life is so difficult, there’s not a lot of margin for me to save, so I’m just… I’m going to wait till later when my income is higher, when life is a little bit easier. And what happens is the further and further out you push exercise in that discipline, the harder and harder it becomes. But if you’re someone who can figure it out early on how to… Even if you’re saving $20 a month, $50 a month, $100 a month, whatever that number is, if you can do that when you have a little bit of income, a little bit of money, a little bit of resources, that habit will build and stack when you actually have more money, more income, more resources.

Scott:
One of the things that I was excited to talk to you about today is that you guys, I believe, have made a very deep study of American millionaires. I see The Millionaire Next Door, which is one of my favorite books, right behind you, Bo, on the shelf there, did you see any themes in your study and do they map to the research that was done 30 years ago in The Millionaire Next Door by Dr. Stanley?

Brian:
I think it’s pretty amazing because The, of course, Millionaire Next Door is fundamental to my own journey towards wealth building. And then I think Ramsey Solutions has their big study and then we do an annual study of our own client base, because we are fee-only financial advisors, so we send out annual surveys to our millionaires. But here’s what I find interesting, is I know our study size is smaller than some of those other studies that I mentioned, including Dr. Stanley’s research and Sarah, his daughter’s additional research when she did The Next Millionaire Next Door. But I’m amazed at how much the data lines up, when you look at how many millionaires are first generation, and we even stratified a little further and say, did you receive zero? Did you receive less than $10,000?
And that 80% number that you remember that they talked about in The Millionaire Next Door as being first generation, that holds up for us too. I believe our number came in at 76%, had received nothing. And that’s the biggest part that gets me excited, is that anybody, I mean, absolutely anybody because we’re two humble guys from broke to zero that have built success. You, if you’re watching this for the first day, get energized because you can do it as well. And that’s what gets me excited, is if you’re an optimist and you actually practice the discipline and put your mind to work, you can be successful.

Bo:
What I think is so interesting is we’ve worked through our study and as we’ve worked with other millionaires, I think we always expect for there to be something amazing about them, something super unique where they had some crazy job or crazy opportunity or they were some wicked smart person. What’s really, really fascinating is that the things that they do are fairly unremarkable. They just do them for a consistently long period of time. They figure out how not to run up credit card debt, how not to live beyond their means, how to live on less than they make, how to not waste money, how to not keep up with the Joneses. I mean, these things that we hear over and over and over again, when you actually look at millionaires, it’s not like the lifestyles of the rich and famous or the cribs or the Keeping Up with the Kardashians, it’s just people making really sound financial decisions over and over and over for an entire lifetime.

Brian:
And Scott, I find it interesting is that I grew up in a household where I was told rich people are born into it. Well, I just told that, at stat, about 80% are first generation, so that kind of dispels that. So then that leaves, well, okay, they’re either executives, they’re professional athletes, they’re entertainers. Our research shows that the lion share of these people are just savers and investors. People who use, taking a little bit today, went through incremental good decisions and building that compounding growth that builds something pretty magnificent for the future.

Scott:
On BiggerPockets, I would say almost every one of us is looking to achieve financial independence early in life in some degree or other. Is that consistent with the goals of the average millionaire? Are they working for something else like generational wealth or some other goal that’s excluded from financial independence or is it an intentional approach to financial freedom early in life that the clients that you’ve surveyed, that’s their primary goal?

Bo:
I think that they’re working towards financial independence. What I think is different in the world in which right now is how people define when they want to do that. What we’ve found is in the world of TikTok and Instagram and Twitter, there are all these folks who, hey, I’m 23 years old and I’m ready to be financially independent. And while that’s an amazing goal, that may not be easily attainable for most folks. And what we find is that our folks are able to achieve financial independence earlier than the average, the normal retirement age of 65 or whatever the number may be. But what they’re not doing is, I’m not saying I want to be financially independent next year and I’m going to go find the thing that I can do right now to do that.
They recognize that it’s a process and it takes time to do that. And then what happens, and I’d be curious if you agree with this, is that their goal is financial independence and they become incredibly effective at achieving that. And then once they’ve achieved that, they’re like, oh, wow, I now have an abundance. Now, I can focus on legacy mindset and leaving something for the other generations, and hell, and pouring back into the world that poured into me.

Brian:
Well, Scott, I think it’s interesting. I think about my own journey, when I was in my early twenties and I first found these concepts like The Millionaire Next Door, Wealthy Barber, and these things that kind of lit my mind on fire, I immediately was like, I’m going to save enough in my twenties, thirties and forties so I can retire when I’m 50 years old. Now, the rest of the story is that I’m quickly approaching that 50 year mark and I no more want to retire than the man the moon because I actually wake up every morning and I have pep in my step because I love what we’re doing with content creation and our fee-only planning firm and the commercial real estate and all the other stuff we have going on, but here’s the reality, if I wouldn’t have had that goal in my twenties of starting to save and invest so I could retire at 50, I wouldn’t own my time now to where I’m purposeful and doing things on my terms. Everything I get to do now is because I own my life.
It’s not because of the obligation of paying bills or even our ability to move to Nashville. We’re both Atlanta boys. We grew up in South Atlanta, but when it came time for some opportunities but also for family needs because I have a daughter with autism, I was able to actually move to a whole different state because of some of that sacrifice and some of those other things, the deferred gratification and that’s what if you can be disciplined early, it opens up flexibility and you owning your life better. And that’s what independence is, there’s a reason we use the word independence, is because you don’t have constraints and obligations and encumbrances to hold you back.

Scott:
You, I think similar to me, discovered the concept of financial independence or wealth building or these items very early on in your early twenties, it sounds like. And that allowed me to just pursue this journey without any distractions. I didn’t have any bad habits, I didn’t have any bad debt or anything like that. Do you find that that’s typical among millionaires, that they started right out the gates with discipline in mind or is it achievable for folks who maybe are having to make a hard pivot from the middle-class trap, I’ll call it, in their thirties or forties?

Brian:
It’d be a mix of both. I really do, Scott, because I know that, and that’s why we talk about the term, financial mutants, is I’ve always been different. I’m leaving this weekend to go down to spring training with my high school buddies and if you asked any one of them, they would talk about my $7 date nights in high school, they would talk about, I always had coupons. So I’ve always been off a little bit, trying to hide my crazy, that I looked at the world differently. But there are folks that we have come into, that they found a concept, they started off with debt or the other things and they realized they were totally letting life happen to them versus being the active hero of their story of their financial life and took an active role. But for me, yes, I’ve always been different.
Sounds like you too, Scott, where we’re the financial mutants that hopefully serve as the tour guides or the hiking host that’s going to let everybody know what’s the efficient way that you can do this better. And in the beginning, when I started content, I was kind of sad, I didn’t have that story of failure that it feels like all of America wants where you have to fail before you succeed, before people will buy your story. But I think that people will hopefully recognize somebody who can harness the power of all their clients they work with, that have had success but also have shown the chicken or egg argument that this actually does bear fruit. The system wasn’t designed on top of the system. It was actually, no, let’s share you what we’ve seen work so you can put this to work in your own financial life as well.

Scott:
How about you, Bo?

Bo:
I think it’s interesting, me and Brian joke all the time about, we think that one day, they’re going to uncover genetically that there’s a saver’s gene, because you see this case all the time. You’ll have two siblings and you do the marsh… I’ve got two little girls and a little boy and I’ve done the marshmallow test with my two little girls, where you put a marshmallow in front of them, you walk away, say, hey, if you don’t eat it, when I come back, I’ll give you two marshmallows. My older daughter, she will literally just let it sit there. She’ll let it sit there for days, weeks, probably months because she knows there’s a reward on the other end. So she perfectly has that discipline. My five-year-old, I don’t even get the instructions out of my mouth before she’s already swallowed the marshmallow. It is gone.
So I recognize that when it comes to discipline and saving money, they’re going to have a different affinity and natural bent to what comes easy. What’s great, though, is through education, if my wife and I can do a good job of teaching them, they’re both going to have the opportunity to build towards financial independence, to start making some of those sound financial decisions, even though it looks like for my older daughter, it’s going to be a little bit easier than my younger daughter just based on her general consumption patterns. But I think that should be encouraging to those folks who you say that are stuck in like this, you say they’re midlife or they’re like, they just are now recognizing, man, can I change my circumstance? Absolutely. That’s one of the beautiful things about personal finance, that when it clicks and when you do figure it out, you really can take hold of your financial future and I think it can happen, not just for young folks, but for folks at any point in their financial journey.

Brian:
By the way, Scott-

Scott:
Well, at BiggerPockets, we obviously emphasize real estate investing and I would guess that almost everyone listening to BiggerPockets is looking to use real estate at some point in their journey as part of their portfolio. Obviously, many of us invest in stocks and other asset classes as well. How common are you finding real estate as a contributor to wealth in your client’s portfolios and the portfolios of folks that are not part of a real estate investing community? How does that skew in the general pool of millionaires?

Brian:
I think it’s back to that discussion on what’s the path to wealth. Now, I was talking, both Bo and I are part of an entrepreneur group, so it’s like a mastermind group where we share, and I can remember one of the discussions I’ve had in that and one of my groups was, I tried to explain get rich behaviors versus really rich people, folks that you even stack up more wealth on, and that’s why we recommend kind of, build that foundation of wealth. And you are probably going to do that with traditional cash reserves, your Roth IRAs and setting up those retirement accounts, getting that employer match. But then once you get to in our financial order of operations system, if you go to moneyguy.com/resources, we have a free download. But around step eight, after you built that financial foundation, you have bigger pockets.
You like what I did there? Let you go a little further with. I do love real estate because if you do it right, it is amazing, you’re dealing with leverage debt, you’re dealing with something that’s appreciating that you only have to put a small amount to get the benefit, but you better have the deep enough pockets or bigger pockets to weather it, because that wealth building could actually work against you. But I find it very common because we, even on our clients, Scott, because you don’t have to just actively buy into real estate, you can also buy into REITs, you can do ETFs these days. I mean, there’s so much access.
And I love real estate as a diversifier. Matter of fact, we did a show this morning, and one of the investment strategies that we were reviewing was the three funds. If you always hear on Bogleheads, you always got the large cap, you’ve got your international and then, of course, you have your bonds, the three fund portfolio. And I always say that’s great maybe as starting out, but as you build wealth, you’re going to want to add diversifiers like real estate because, man, if you want inflation hedges, if you want some of these ancillary benefits that protect you now that you have built wealth, real estate’s a great opportunity.
Plus real estate has the best lobbying arm for our tax code you’ve ever seen. If you think about small business exclusions, you think about cost segregation and accelerated depreciation. We love real estate, it’s just you have to make sure you don’t get caught swimming naked or skinny-dipping.

Bo:
Yeah, I think one of the problems is a lot of people understand the positives of real estate. They understand what the brochure says, oh, this is great, I can go borrow money and I’ll build equity and I can get a tenant to cover the cost and then I can do cash-out refi and I can buy more and I can multiply, multiply, multiply and on the surface or on a spreadsheet, that sounds fantastic, it could work but in our experience, the people that we’ve seen get in trouble or the people that didn’t have a good contingency plan, they didn’t have the appropriate reserves, the appropriate base or they just got way too risky.
They had, had some success investing in the broad stock market and maybe they went and did some rental properties and maybe they owned a commercial real estate but then they decided they wanted to get into development, and so they take all of their wealth that they’ve accumulated and they roll it into this big aggressive thing that then 2008 happens and they just got themselves overextended. So we love real estate as a tool and a mechanism for wealth building, but only if you understand the inherent risks and you’re attacking it from a prudent approach to make sure that it fits into your unique financial plan.

Brian:
Well, and Scott, I’m familiar enough with your content that I watched, you were doing some content on budgeting or spending and you’re like, somebody who made $5,000 a month and you ask them what they spend and they say 3,000 but then you bring up, well, wait a minute, you didn’t talk about any of your medical expenses, you didn’t talk about your annual insurance premium that’s due. I mean, I think the same thing applies to real estate. I mean, I will just make sure you’re not skipping steps so that you actually can survive and be an all-weather vehicle with your real estate portfolio.

Scott:
Yeah. We believe that you should invest in real estate from a position of financial strength and not before here at BiggerPockets. So I think that’s what you guys are saying, it sounds like.

Brian:
Well, it’s because people get… I think because real estate is so sexy and so fun, but see, people accelerate it too early and then if you do things… I mean, look, there’s so many analogies I can make that I’m trying not to get myself in trouble, but if you do things before you actually have the depth or resources or wisdom, you can just get caught in a bad situation because we know real estate has what’s called U-shaped recoveries. If you come through the Great Recession where there was a period from really 2009 all the way through 2011, so it was a two-year period, that if you didn’t have things shored up, you might have gotten caught. And that’s the biggest thing we want to protect people from.

Scott:
Going back a second though, what percentage, if you had to guess, of the clients you surveyed use real estate as part of their portfolio, the millionaires in there? What does that look like across the general population of millionaires, if I can use that phrase?

Bo:
When you say real estate, you mean single family, residential type real estate or commercial?

Scott:
Yeah, all of the above, maybe excluding REITs. They directly own some real estate outside of their primary.

Bo:
I would probably say, what, 30, 45% somewhere in that, maybe one out of two folks. Now, what’s interesting is, it being a part of their financial plan presently, versus having been some part previously because it’s not uncommon and we’ve seen a lot of our clients, especially a lot of our tech mobile clients that they may live in a really interesting area where they bought in at a good time, they have a good piece of real estate that they own and it’s in a tech sector community where there’s a lot of people coming in and out. And they may decide when they move on, they’re going to keep that primary residence and turn it into a rental property and they’re going to go buy somewhere else.
Well, they never had the intent to get into real estate, but it has now become very much a real part of their financial plan and when it works well, it works really, really well. So it can be a huge amplifier. So I’d say it happens often but not… I don’t know how often, at least for our client base, it happens intentionally, day one, that’s what they decided they wanted to go into.

Brian:
And Scott, I want to make sure I clarify that I do think there are strategies that let you do real estate earlier, like house hacking, I mean.

Bo:
It’s great.

Brian:
Man, if you live in a community that lets you, whether it’s a duplex, a triplex or quadplex, man, when… If you think about three, in the last two or three years, when interest rates were a little more affordable, right now, you have to be pinching yourself to think that you were able to play that game. So I like that. And then it’s not uncommon that successful people will almost become real estate people by accident. I mean, because even in my own life, I’ve ended up with rental property because I had a primary residence that wouldn’t sell or there was other things that, or you inherited a piece of property, it’s not uncommon for those things to happen as well. I think our cautionary tale, Scott, that would probably line up very nicely with what you’re sharing is there are strategies out there where people will tell you, without passing, without building up the emergency reserves, go load up your portfolio with eight rental properties, 10 rental properties. You might find that it’s not as passive as some of these hype people on social media have made you realize.

Scott:
Yeah. It’s also a path to smaller pockets, so we don’t want to go there.

Bo:
Exactly. You’re right.

Scott:
Now, let’s talk about diversification and concentration here. So it was one thing to build wealth, and you mentioned a three-part portfolio which is actually very diversified there with large cap bonds international, but would you recommend, for example, concentration in the wealth building phase to a certain degree and then diversification later? Do you diversify throughout the wealth building journey or how do you think about diversification and when it starts to really play an important role in wealth building?

Brian:
Well, remember, coming back, and but I really do believe in this resource and I think it’s important to people, in the financial order of operations, we always, and I’ll hold it up, moneyguy.com/resources, I feel like it’s on our show and we do that, is that if you go through the entire process because that’s going to require that you are saving and investing 20 to 25%, that’s just automatic wealth creations going on. So beyond that, when you get to steps eight and nine, concentration can happen because that’s happened to us.
I mean, during the pandemic, we bought a building for our businesses and we were able to… So now, if you would think about what’s happened with inflation and with other things, without us even meaning to, one of our best performing investment assets has actually been our commercial building in Downtown Franklin because it appreciated through inflation and it’s got a lot of good stuff going on, that has become a concentrated position but it didn’t distract us because we made it through having that foundation of steps one through seven.

Bo:
And it’s really interesting, at the beginning of your wealth building journey, we always tell folks, don’t get lost on the things that don’t matter. I mean, they’re early on, before your assets, before your net worth, it’s a critical mass. We think that your savings rate is exponentially more important than your rate of return. So the thing that you ought to focus on is, how much am I saving? Not, what am I doing with my assets or how am I diversifying them? There are really easy solutions out there, whether your solution is a total stock market index, or one of the things that we advocate for like target retirement index funds, where it’s just really easy, set it and forget it early on, focus on your savings rate because you saving an extra five to 10% of your income is probably going to do a whole lot more for you than you trying to figure out how to make an extra five to 10% on a thousand dollars or on $10,000.
So if you can focus on that early on, then you build your wealth and once it is a critical mass, once you start seeing these high six figure type numbers on your net worth statement, then you can benefit from diversification and not just asset allocation but asset location and spreading out your assets and looking at different things. But just the natural state of building wealth, I mean, what’s interesting is I think the average first time home buyer right now is 33 years old.

Brian:
Actually, it just got increased to 36.

Bo:
36.

Brian:
Post-pandemic, it’s gone up to 36.

Bo:
And you look at the median home value, in this country right now, I think it’s $446,000. It’s not incredibly difficult for someone who’s in their mid-thirties going to buy their first house. Almost out of the gate, the most concentrated asset they’re going to have on their balance sheet is going to be their primary residence. So concentration is almost something you can’t avoid early on, but when it comes to your portfolio, don’t get lost in the weeds. Don’t get busy doing nothing. Focus on the things that will actually move the needle for you over the long term.

Scott:
I want to go back one second to something you just said, where you bought a property in Franklin, Tennessee and now that is a much higher concentration of your wealth than you intended it to be. I believe this is very common among, I would imagine, many millionaires who are making some sort of specific investments that are not in the index fund, set it and forget it approach. If you make 10 investments, you’re unlucky if all of them fail. One of them, likely, will outperform the other nine, and now you have a very concentrated position at the end of that. So for example, if you bought Tesla stock 10 years ago, that may be a huge percentage of your portfolio. What do you advise clients to do in situations like that, where they have had a really lucky winner, maybe a real estate property in San Francisco or tech stock or something like that, that is now a big part of their portfolio, but their philosophy for investing doesn’t match with having such a great amount of their wealth concentrated in that? It’s a good problem, how do you extract yourself from that situation?

Brian:
I’ll take it a step, Scott, in the fact that I have some phenomenal clients that have built wealth, tremendous wealth in real estate, but I catch them when they come, realize, most of our clients are in their thirties, forties and fifties, but with the clients, and since I’m one of the older advisors here, I have the older client base, so they’re winding down things. I have found that some of my clients, I have one client specifically who did… I mean, you think about, just like we bought a commercial building right before the inflation, right at the beginning of the pandemic, it’s worked out incredibly well for us. I would say we’re fortunate in that I have a client that has a lot of rental property he bought during the Great Recession right around 2010 and 2011, that when you look at what he paid for these houses, you’re like, unbelievable that they were selling real estate so cheap.
So it’s back to, real estate can be cyclical and if you get in at the right time, you’re going to absolutely love how it hit. But because some of these residential rentals, as well as some of the commercial, they’re not passive. And no matter how much everybody says, you’re still probably… I mean, get to a size you can hire somebody but once again, that’s not passive if you’re having to have your own management company internally and so forth. But I have found that people, as they get older, they want to simplify. So I’ve had a few that are still keeping because they love it, because it’s like most things, I told you, I wanted to retire at 50 but here I am, I’m loving it, I’m not retiring.
I find that with all my real estate investors, if they’ve had success, they probably want to do it, but they are trying to figure out, how do we parse it down to a point where I’m not creating something that’s a harder thing legacy-wise for my survivors, as well as for my time because some of it has gotten hard to manage? So we do see some downsizing or diversifying out of some of the rental when they just don’t want to spend as much time on it.

Bo:
Some concentration is diversifiable and some of, it’s not. I mean, if you were to look at my balance sheet right now, the two largest assets that I have on a balance sheet are the value of the businesses that I own, the actual businesses that I own and run, and the value of the commercial real estate. So neither one of those are something that I want to diversify out of at this point. So my strategy has to be building wealth outside of those two factors so that as my other assets increase, the overall percentage that represents decrease. That’s a strategy for diversifying over the long term. In your example, and we have clients all over the country that do this, we might work with an executive who gets a bunch of RSUs and a bunch of options and all these ESPP programs and they might have a lot of concentration in their employer stock or maybe they bought Tesla 10 years ago.
It’s a big piece of their financial life. Those, I would argue, are diversifiable risks, because it’s just a matter of what’s the strategy through which you’re going to diversify. Someone comes into a windfall, we love for them to dollar-cost average that cash, you sell a property or you sell a business or you get an inheritance. We like for you to ease that money into the market over the long-term because it helps behaviorally. The same thing is true when you find yourself in a really concentrated risk position. Maybe you bought Tesla 10 years ago and it’s done incredible for you, but you recognize now, you’re at that financial independence point, perhaps you ought to start dollar-cost averaging out of that holding, or if you have a large real estate portfolio with a bunch of different residential properties, maybe you systematically start diversifying. So the first thing you have to define is, is the concentration that exists in my life right now a diversifiable one that I actually can step away from or is it not? And if it’s not, what’s my strategy so that, that single thing cannot completely derail me?

Scott:
I think that’s a fantastic answer.

Brian:
Well, and it’s also tied into, entrepreneurs have the exact same thing because you said it, your business is one of the biggest things, but that’s also a risk. All concentration is a form of risk. There will come a point with your rental portfolio that you will figure out, okay, I could keep going in this path, but it might make sense to diversify into something that, because real estate, even though, and we made the point when we were talking pre-show, Scott, that we just recently did a housing show and a real estate show, and I think a lot of these pundits that are trying to pick, is the market going up, is the market going down, are missing it that so much of real estate is location and it can vary that I think that you will get to a point to where you will say, okay, I’m not going to buy another rental property, but this thing is cash flowing so good.
Why don’t I just, with a small business, you want to start investing outside of it so that you can not be an either or that you’re an and, that you’re going to be wealthy with your passive investments like index funds, you’re going to be wealthy with your real estate portfolio, you’re going to be successful and wealthy with your small businesses? That’s what I have found, is that a lot of people, when you see all the people on YouTube and social media talking about, have multiple passive incomes, I’m amazed how it happens naturally just through success.

Scott:
Look, I think that’s a great answer. I’ve been noodling on this and I think this is really clarifying. If your strategy, if your philosophy, your investment approach calls for you to be diversified and you’re heavily concentrated, then you’ve boiled down to two very simple things, dollar-cost average out of that if that is a reasonable activity, or if it’s not because it’s in your business, for example, just start investing all of your cash flows in the next asset class to diversify away from it. I think it’s as simple as that. But I think it’s such a consuming question for folks that have had that happen to them, for example, the guy with 1,000,005 net worth, a million in Tesla, how do you do it? I think through all the tax consequences, so. I think that’s fantastic, guys.

Brian:
There’s getting wealthy and then there’s staying wealthy because unfortunately, staying wealthy is a pretty fleeting thing. Just like I gave that stat at the beginning of our interview, that 80% of millionaires are first generation and our research shows that too. The other side of that coin is 70% of that wealth disappears by the kids, 90% disintegrates by the time the grandkids. So you do, at some point, even if you’re successful, you will need to change your mindset to, I’m navigating a big enterprise here, I’ve conquered the, get wealthy part, how do I now actually risk adjust this to stay wealthy because it’s not assured?

Scott:
So how do you do it?

Brian:
I mean, that’s why it’s back to, I think you become a jack of multiple trades. You have independence and wealth and liquid investments, so that’s where we were talking about the index funds and the steps, the financial order of operations. But then there’s nothing wrong with your business and your real estate. If you look at the Simon Sinek book, the eternal game.

Scott:
The Infinite Game?

Brian:
The Infinite Game. That’s it. A lot of small business owners think that they’re going to build something. I think real estate investors fall prey to this too, is that they think they’re going to build it up and sell it, but if you do this right, you can just keep playing forever. There’s not a goal or endpoint where you’re trying to say, I’m just going to save the 3 million, sell it all and then go sit on an island somewhere. You can actually create a play to where your income, as well as the value of your assets are good enough that they fulfill all your goals, that you don’t have to just drop out. You just get to live your best life and own your time.

Scott:
How important do you feel that the keeping the goalposts from moving is in the context of keeping your wealth?

Bo:
It’s wildly important. I was going to say one of the things that has to shift when you go from getting wealthy to staying wealthy is the strategy that you employ, the mindset that you have. This is a ridiculous example, but when you’re dating, you have to have a certain skillset, you have to have a thing that allows you to do that well, to be able to attract a partner, to be able to attract someone else. But the skillset that you employ to be a good spouse is different than the dating skillset. It’s no longer about putting yourself out there and being attractive. It’s more about figuring out how to do that thing well, building wealth and keeping wealth is very similar. To get wealthy, you may have to be comfortable with risk and go out there and take calculated risks and be willing to take chances and be willing to take risks.
Once you’ve built up wealth, then it is more about preservation, it’s more about making sure that you are stewarding what you have built, what you have created really, really well. And so one of the places where we see people fail is they don’t actually even know what the goalpost is, or they have a very empty goalpost. If I just get to a million dollars, then I’ve made it. Well, they get to a million. I’m like, wow, okay. But what if I got to 2 million? Okay, well, five, 10?
If the only goal that you have is a number, I’m nervous that you’re going to get there and recognize that it is incredibly, incredibly empty. You need to figure out, what is associated with that number? What’s the thing that, that number allows you to do that’s the actual goalpost? Hey, I want to be able to travel the world as much as I want, or I want to be able to only work three days a week, or I want to be able to spend more time with family, or I want to volunteer, I want to… Whatever the answer to those things are, those should be your goalposts. And if they really are what makes you fulfilled and what really is truly meaningful for you, those won’t move. Numbers will move, data will move. The things that you actually care about, those will stay solid and those are the ones you have to worry about, continue to push out.

Brian:
I think on the expense side or the consumption side, goalposts, you have to be careful of them moving because that’s where you’re getting hurt because when you get to be my age and you have a house that’s pretty much paid for, and then you start going, oh, man, I still got free cash flow, I could go buy a house. And let’s just say a million dollars, I mean, because houses have gone up in value, yes, you could go spend a million dollars, but that million dollars might make you 40, $50,000 a year. And if you can change your mindset to where you’re thinking about what it cost you from a cash flow, you’ll think about consumption differently. So that’s what goalposts control that on the expenses and consumption. However, I do want to tell you, on the goal-setting, I think it’s okay to let some adjustment occur because us humans, we think linear.
We think 1, 2, 3, 4, 5, 6, 7, 8, and I know exponentially is what happens. And Bo, you’ve been good at that for me. I mean, when you and I started working together, I was trying to add two clients a quarter or something, you’re like, what are you doing? We could add so many more clients than that. And I was like, oh, we can? So I have found that as I’ve had success, that you do need to prepare to think exponentially that your goals and your desires will change. It’s back to the discipline but also understanding, like I was talking about earlier, I thought I was retiring at 50, but now my goal’s completely different, but I don’t think that’s unhealthy. I think it’s just that my perspective has changed because I did control the goalposts moving on the expense and consumption side, so I’ve been able, on the healthy side, the ability to build wealth. That’s okay to be fluid on that. I mean, because I think it will help you really be the controller of where you want to be in life.

Scott:
Transitioning a little bit here, we’re seeing a lot of rising inflation, interest rates are soaring, do you think… A two-part question here, first, do you think that’s going to result in a lot less millionaires in the next few years? Do you think there’s going to be a destruction of wealth going on that’s going to be detectable in any big way? And second, does this change the dynamic for investment advice that you’re giving to some clients, for example, are bonds, because of higher interest rates, becoming a little bit more prominent in the portfolios of folks that you’re advising?

Bo:
Well, I think it’s interesting. We’ve done some data looking at, how did equity asset classes performed in our last hyperinflationary environment? What did it look like in the late ’70s and early ’80s? And I think a lot of people are amazed, they heard CDs back then or cash holdings would pay 10, 11, 12%, but then you go look at what the equity markets performed, you’re like, holy cow, that’s very, very different. So to your first question, will it erode millionaires? I don’t think that it will erode millionaires. What it may erode is what a million dollars will allow you to accomplish.
If inflation continues to increase and interest rates rise, I think we’ll see more people hit the million dollar mark, but millionaire might not be the thing that allows you to have financial independence. And so what people are going to have to really hone in on is knowing, what is their number, is being a millionaire the goal or is getting to X dollar so that I can live X lifestyle really the thing that you’re working towards.
And while I think that inflation can be a headwind because all the things that we buy become more expensive and it makes it harder, if you understand the way that the economic system works, okay, yeah, if a can of Coca-Cola is going to cost more next year than it costs this year for me to buy it and I recognize I’m going to have to pay more for it, then I want to be an owner of Coca-Cola. I want to be in the other side of the equation so that I can own things that as inflation takes place, as it happens, it keeps me protected. Real estate’s another great example of something that can be a solid inflation fighter. So I don’t know that it’s going to erode millionaires but I do think people are going to have to be wise in the types of assets that they’re holding, to make sure that they can keep their purchase of power growing.

Brian:
Yeah. I think that because we do have all these headwinds, as Bo said, working against… It’s easy to become a pessimist and think that the system’s working against you. But I believe strongly in there’s going to be equity risk premiums, that you’re going to get rewarded for investing, whether it’s index investing or real estate, that you’re still going to be rewarded for putting your money to work. And you just need to keep that mentality and that discipline so that some of the darkest of times can actually create the maximum best opportunities to take advantage of in the long-term. And that’s the whole Warren Buffet, be greedy when others are fearful and fearful when others are greedy, because that’s the part where I think we live in the greatest time to be alive. I talk about the law of accelerating returns all the time on our show, is that if you looked at how much your life changed from the ’70s through the ’90s, it’s going to look a lot slower than we looked from, really, the ’90s to the 2020s because it’s just amazing.
My childhood was, the big improvement was when the color TV got a remote control so I didn’t have to sit in the beanbag down there in turn with my big toe for my father to now, we’ve got the computing power in our pockets with our phones and our watches that landed stuff on the moon. I mean, it is truly amazing. And now we have this disruptive technology like artificial intelligence and other things. These disruptions, as scary as they are to what it means, to capital and other things, you will be able to profit off of it if you are paying attention and just always be buying and taking advantage of this ever expanding economy.

Bo:
And then your second question was, okay, well, does rising interest rates change the investment landscape? Are fixed income investments becoming more attractive? And the answer may be maybe. We think that when it comes to portfolio construction for an individual, first, you start with the individual, not the economy. What sort of risk-on-risk-off portfolio do they need? I want you to determine that mix of assets. Then you say, okay, given this current economic environment, what’s the appropriate way to approach that risk-off or risk-reduced side? We’ve been, for the last decade, in this super low interest rate environment where navigating fixed income was pretty hard. You had to make some decisions from an allocation standpoint like shortening maturities, decreasing duration, maybe kicking it out on the risk spectrum a little bit, or you had to look at different alternatives, alternative type asset classes that have yield components in them.
I think as interest rates rise, truthfully, it probably makes it a little bit easier. I think it’s been more complicated for the last decade to navigate that side of a portfolio. And I think for this next decade, if we were in a higher interest rate environment, it probably will make it a little bit easier to navigate. I mean, you saw that stat where it was from 1980 all the way until 2010 because we’re in this declining interest rate environment, the average total bond fund returned 8% per year. I mean, that’s amazing. When the bonds are making 8% per year, it’s not really hard to have a really solid capital allocation. It’s been this last decade or so where I think it’s been pretty difficult, pretty unique.

Brian:
I can put a punctuation on that with just, I like the fact that as people get older and retire, you actually can get yield without going too far out on the risk spectrum. And that’s a healthy thing.

Scott:
Yeah. I’ve just been noodling, we go for, when is the stock market going to return? Everyone has a different opinion on what the right long-term number is. Usually, it’s between seven and 11%. Well, if you want to earn 7% right now, my buddy, or making $200,000 a year, is getting a mortgage for 30 years, 800 credit score, paying 7% interest, you buy the mortgage. So that’s what I’m thinking at a very simple level, is that back and is that a part of portfolios? So open question, I guess, for folks to consider because you got to start, to your point, Bo, with the person and not the markets about what you want. Well, guys, this has been really fun. We are so grateful that you came on the show today. Any parting thoughts before we sign off?

Brian:
We’ve had a blast, Scott, and I love, actually, I love that we’ve gotten to go a little deeper on some of this because that’s exactly… Hopefully, a lot of your audience has seen us, we do some YouTube shorts, we’re on TikTok and other things, and with our react videos, but our true passion is those shows we’re doing that are in the long form, they’ll let us go deep dives. And I would encourage anybody who hasn’t checked out our content, because like I said, we’ve been at this since 2006, go to moneyguy.com. If you’re looking for a better way to maximize and build wealth, the financial order of operations can tell you exactly what to do with your next dollar. And that’s what we’re trying to do. We just want to pay it forward so people can see that they can learn, implement this, grow and then reach a level of success that they’ll just be in a place that they never could have imagined was possible.

Scott:
Wonderful. Well, we will link to the moneyguy.com, to that resource and to your podcast, and the show notes here for the BiggerPockets Money Podcast. Thank you so much, guys. Really appreciate having you on and hope you have a wonderful rest of your week.

Bo:
Thanks, Scott.

Brian:
Thanks, Scott.

Scott:
All right. That was Brian and Bo, from The Money Guy Show. I love saying that. I don’t think that’s how they introduce themselves, but I had fun with it. They were fascinating. I had a really good time listening to them and I thought they had some really good nuggets of advice. And I love the fact that The Millionaire Next Door, which is one of my favorite books, was sitting behind them on that shelf. From the BiggerPockets Money Podcast, I’m Scott Trench, saying, see you soon, raccoon. If you enjoyed today’s episode, please give us a five star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Speaker 4:
BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Caitlin Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.