Wealth means many things to many people. Some people think wealth is solely reserved for the 1%, some view wealth as having enough money to retire, and some view wealth as unattainable.
Many people have a negative opinion of wealth. Many people have a negative opinion of the wealthy. Buy why? Why have the wealthy become demonized in politics and television? Why is there negativity and resentment towards those who have made money? I used to think that it was jealousy, but I now think that is a simplistic view. My opinion now is that wealth is viewed as a negative to many for two reasons. The first reason that wealth is viewed negatively is that people are scarcity minded. They view money and wealth as a zero sum game. In a zero sum game, you would think that if someone else has money, that means that you do not have that money or wealth. The second reason that wealth is viewed negatively is that people have never learned how to earn wealth. They are taught how to have a job that pays the bills. Money and wealth are shrouded in mystery especially if it feels like other people have learned how to make money while you and others struggle to put food on the table.
Here’s an interesting breakdown of wealth in the United States. In July 2018, CNBC had an article indicating that to be in the top 1%, a family needed an income of $421,926 per year, but the number varied greatly depending on your State. Interestingly, Julia Kagan also wrote an article for Investopedia showing that the Top 1% earned salaries of $718,766 on average, the Top 5% earned salaries of $299,810 on average, and the Top 10% earned $118,400. Even the Top 25% earn $67,280 and the Top 50% earn over $33,048.
Guardrail Finance’s Definition of Wealth
At Guardrail Finance, our definition of Wealth is a combination of both Cash Flow and Net Worth. To us, Wealth is an equation that not only shows that you have more Assets than Liabilities, but that also shows that you have enough Cash Flow from those Assets to cover your lifestyle.
This can be confusing, but the fact of the matter is that many rich people are not wealthy. Many people with money think that because they have money now that they always will. They live expensive lifestyles to keep up with the Jones’. They may earn good money, but more often than not, they have not built an adequate level of passive cash flow from their earnings to cover their lifestyle. As an example, assume that a person earns $700,000 per year. After taxes they have $490,000 left over assuming a marginal tax rate of 30%. If they have a $2,500,000 home, they could easily have a mortgage of $110,000 per year and real estate taxes of $30,000 or more. We can also assume that this family has two high end automobiles with financing of $1,000 per month per car or $24,000 per year. The children will likely also be in private school, which we could assume is $20,000 per child per year. General household expenses like utilities, groceries, extracurricular activities, etc. could easily cost another $3,000-$5,000 per month. If we assume $4,000 per month, that would be $48,000 per year. If both children have outside sporting, academic, and enrichment programs, that could easily cost another $10,000 per child or $20,000 per year. Also, even if healthcare is subsidized by an employer, it could cost a healthy family of four $10,000 to $20,000. I will assume the low end to be conservative. The last area I will assume is vacations/holidays. The family could easily spend $20,000 per year on vacations.
|Income After Taxes||$490,000|
|Real Estate Taxes||($ 30,000)|
|Private School||($ 40,000)|
|Household Expenses||($ 48,000)|
|Children’s Activities||($ 20,000)|
While wealthy people make more money, more often than not, they have expense levels that are also quite high. You may be saying, “Yeah, but, this person had $188,000 at the end of the year to invest.” This is very true, but my example could be simplistic. I know high income earners who spend all of their money annually and never have money left over. I also know that if you assume that this high income earner invests the full $188,000 and can obtain an 8% return, this person will earn $15,040 per year passively on the $188,000. If this person could sustain that cash flow annually, keep expenses in line, and invest all of the excess cash flow, it would still take this person 20 years to cover the $302,000 in annual expenses ($302,000/$15,040).
Frankly, the person in our example above is blessed. They are already in the 1% club from an income standpoint. I’m here to tell you that you can do it on much less.
I did. Many of my friends and family did. But we are different. And you can be too.
We work jobs for income, we try our best to keep our expenses low (despite having wives and children). We build up cash reserves for rainy days. And we invest in good deals where there is a good path to current cash flow and upside potential through increased asset value.
I grew up in a middle class family in Northern California. For most of my youth, that meant that we were primarily comfortable. My father worked in technology and my mother was able to be a stay-at-home mom. We had a roof over our head in a nice neighborhood, we always had food on the table, and we always had enough for clothes, toys, and annual vacations. But I do know that there were a couple of times during my youth where money was really tight. And when we did have money, we were predominantly consumers – we were not really investors. I think growing up middle class helped formulate my thinking. I had friends that were wealthy and I knew it. I saw their mansions, cars, and the businesses that their families ran, and I knew that there had to be ways to not only earn a wage, but to make money on the money I had, and to create wealth for myself. It took me time and took some trial and error, but I have worked out a system that works. You can do it too if you apply yourself…no doubt!
The trick is to maintain discipline. I have said before and I will say it again. It took me 10 years to build up a large enough net worth with enough passive cash flow coming in to cover my family’s annual expenses. But it is not always easy. You do not always get to see your cash flow or your net worth grow in a straight line. The trick is to maintain and/or grow your revenues while holding expenses steady. This will provide a better chance to have more disposable income that can be reinvested. Investing is my biggest expense every year…but is it really an expense? Absolutely not. The investments I make for my family are analyzed, evaluated, well thought out, and calculated. These investments are also the foundation for our lifestyle. I have just prioritized something that is vitally important to my family’s long-term health and well-being. You can do the same! You can make a choice and then live the lifestyle of an active investor who is providing for the family and affording that certain lifestyle you desire.
Most people go their whole life dreaming, but never really planning or taking action. We have programs that can help. We have programs that can help you go from broke, stuck, and confused to clear, driven, and on your way to wealth. The bottom line is that you need to follow a system that can assist you and keep you on the path to increased cash flow and a growing net worth. The steps that are required are simplistically shown below:
- Belief in Yourself
- Action, Action, and more Action
- Delayed Gratification
I wish you well on your journey to positive cash flow and an increasing net worth. If we can help you increase your wealth through the Passive Real Estate Investor Wealth Club, we would be honored to help guide you on the path.
You are responsible for yourself, you are responsible for your family, and you have the capability to be more than you are regardless of where you are in life presently. We believe in you and your abilities. Now is the time for you to believe in yourself and know that you have the wherewithal to be the person you are meant to be.
Until next time, let’s continue growing our cash flow and net worth together!