The following personal finance wisdom has been accumulated over many years of reading, studying and then applying what other personal financial experts have advised. Chances are, your interest in real estate investing is the result of wanting to improve your financial picture. That was my original reason for looking into real estate. I wanted to be financially free and so I figured mastering my personal finances was an important skill for attaining that goal. Along the way, I made some fascinating discoveries and in this video, you'll learn what has taken my entire career to understand. I wish someone would have put this video together when I first got started. And if you really like this, feel free to pass this along to friends and family who you think could benefit from the personal finance wisdom.
Personal Finance Wisdom for Real Estate Investors
In fact this could be for anyone but since I mostly speak to real estate investors it's going to be geared directly towards you. I want to share with you what I have discovered about personal finance, and how it can apply directly to your plans of becoming financially free. I would guess that you watch this video or came to discover about anything related to my program or my videos through the process of you trying to improve your personal financial situation. Am I right?
At some point you were researching how to become wealthy, how to make more money, how to have a home based business. At some point you were trying to improve your finances. That's how you may have stumbled upon me and other people's videos that talk about real estate investing. I believe that real estate investing if done correctly is the best small business in America by a landslide, but that's not actually what I'm going to cover here.
What I want to cover is the different schools of thoughts on personal finance that are out there and then share with you what I have discovered from all of this experience, as well as trying to test out and apply what I've learned from others. When I first got started and I began the journey of becoming a real estate investor, it all began because I just got out of college. I was flat broke. I had met several classmates in college whose parents were so well off financial. I couldn't believe it, because these people had started broke like me when they were getting out of college. I use to think to myself, "How the heck did it get there?"
I went to this place that's kind of a dinosaur these days, it's called a book store. They don't have that many around these days. Back then there was plenty of them. I went to this book store and I wandered into the personal finance section. Even today if you do so, I haven't been in one in a long, long time, I'm assuming many of the same titles still exist. This is what I saw, for the most part I saw a bunch of books written by people like Dave Ramsey. Ironically Dave Ramsey's from Nashville, where I'm from. A person named Suze Orman,These people and many others as well wrote books and they have radio programs and maybe they even appear on television, and they talk about creating a better financial picture for yourself. They all pretty much have the same advice.
This is what they're going to say. They're going to say things like, "Set a budget." You need to plan your spending. A budget is a spending plan, how much is going to toward your house, how much is going to go toward the car, how much is going to go toward food and insurance. You set a plan and you stick to that plan. Ideally you spend less than you earn, you live below your means, meaning you don't spend as much money as you earn so you save money. You save, save, save. What do you do with that savings? Assuming you've got a budget worked out, you're now living below your means, you're now finally saving money. This is where they're going to teach you to invest your money in things like mutual funds. You would set up a retirement account and you would try to max out your retirement account. After you did that then you'd set up other accounts and you would invest in mutual funds and/or other sorts of, quote, investments.
This advice right here has been around for eons. What I want to talk to you in this video is where this advice is wonderful, but where it also breaks down. Having a budget, absolutely brilliant. You have to have a budget when you run a business. You should always have a budget personally. What I do with my budgets is I use a system called mint.com. It will keep track of all of your expenses, you can put them in the right categories. Dave Ramsey for example, he teaches that you should never use a credit card ever. No credit cards whatsoever, you should pay everything with cash. At least I think that's what he ... He used to teach that anyways. He may not anymore, I don't know.
Living Below Your Means
In today's society you've got to have credits cards to buy things online and those sorts of things. You might use your debit card but I recommend you always put it on a credit card just in case there's identity theft. With credit cards Mint does a great job, it keeps track of all of the expenses and you can put them in the right categories to keep to your budget. Budget, wonderful thing, or call it a spending plan.
Living below your means, brilliant. Yes, you definitely want to do that, because you want to be a day early and a dollar long. You've probably already heard the other side of that phrase, which is, "A day late and a dollar short." Living below your means is wonderful. Being able to save, that is absolutely wonderful. I had a mentor of mine once tell me, he said, "If you cannot or will not save Phil, the seeds of success are not in you." I was like "That's pretty serious." Saving money is absolutely incredibly powerful. We'll talk more about that in a moment.
Invest in Mutual Funds
Their advice seems to trickle down to invest in mutual funds. Okay, we'll talk about the pros and cons there. Then no credit cards, and it's no debt, be completely debt free. I should say debt free.
Okay, enter a completely different view of this entire idea. Enter Robert Kiyosaki. You may or may not have heard of this individual. I have one of his books here in the office. That's a picture, that's a profile picture of him right there, Robert Kiyosaki. This guy came along and wrote a book called, "Rich Dad, Poor Dad." That book has sold, maybe you can Google it and check the number of sales, it's over 30 million. It's the most successful personal finance book ever written. But this guy's quite controversial because he not completely but for the most part just bashed this entire idea. He said that this right here was the slow way to wealth.
He said that doing it that way by the time you have enough money so that your investments, whatever you've done asset-wise that you've built up, by the time that that's paying you enough money to live off of, you're retired and your life is basically wrapping up. He said that this was the slow way to wealth. Kiyosaki's attitude was buy assets not liabilities, start businesses, invest and make mistakes. His attitude was, "Go out there and go big."
His theories really resonated with a lot of people. What was so interesting about what he had done here was he had also become enemy number 1 of mutual funds. He was teaching people not to invest in mutual funds but to go invest in their own businesses, go buy real estate and go have complete control over your investments. If you are going to invest in the stock market you better know what you're doing and buy individual stocks or play the game the way the other successful stock investors do, like Warren Buffet. He came from a completely different approach and by so doing I know he inspired a lot of people to go out there and basically ignore this advice.
What I've discovered is that it's not that this guy is right and these people are wrong, or these people are right and this guy is wrong. It's actually both. Both have incredible pieces of wisdom that you can learn from.
The Millionaire Mind, by Thomas J Stanley
This is signal. When I refer to signal I refer to truth, that which is not the noise.
What they've known for is their more popular book called The Millionaire Next Door. This is an interesting read. The authors basically did a study of millionaires and discovered their habits, what they spend money on, what they don't spend money on. I do think this is helpful, in fact a lot of the principles you learn in here talk about budgets, living below your means, saving money, investing wisely.
The Millionaire Next Door
You say, "How can the same author, Thomas J Stanley, talk about this but then all of a sudden incorporate it in this book right here?" That's the magic. In this book what he does is he breaks down the 700 to 1000 people that he personally met with in these focus groups and he takes the lessons he learned from those people that were millionaires and he incorporates it into this book. I've either listened to the audio or read this book so many times I've lost count, because it's the stories of millionaires and how they got there.
One of the greatest themes in this book is that the deca-millionaires, people $10 million or more, are business owners.Your million to 2 million people tend to be your 50 to 70 year olds that had professional jobs.
Deca-millionaires also followed some of this advice:
- living below your means
- have some debt
- didn't invest in mutual funds
- They started businesses
- They used debt wisely to buy assets
- did make mistakes along the way but they learned how to become successful investors and business people.
What I believe is the best model of all is a combination of the 2 here. This is where things get real interesting, there is a dichotomy. There is something in conflict, at odds here.
From a personal level, buying things for your personal use, you want to be frugal.
From a business level you want to be aggressive.
- The more money you save, the more money can go into businesses, can go into assets, can go into investing and can go into making mistakes on some of those things.
- That creates an education for you, you spent the money you learned what you're not supposed to do, but that makes you smarter and shows you opportunities that other people wouldn't see.
- What I've discovered from my own life and my own experiences is that so often too many people are too scared to spend any money on assets, starting businesses, investing, and what ends up happening is they stay in the safe zone, which, there's safety in this, but the problem is they never make the big returns.
Now that is part of this dichotomy. Yeah, you want to be frugal as you could be on a personal standpoint. You don't need to drive the nicest car, have the biggest house. In fact owning a home is usually a bad idea from a financial standpoint. It's almost always better to rent. Did I just tell you that? To rent a home as opposed to buy it? Yes. I invest in real estate, owning real estate of rental purposes or buying and fixing up and selling, you make a killing. But your own personal home is going to be a liability to you. All the things that go wrong in the house, all the things you have to fix up, that cost taxes, insurance mortgage, it's usually cheaper just to rent.
Nobody likes to rent but I'll tell you this, there's a gentleman by the name of Chuck Finney. He was in the duty free business. At one point he was working over 4 billion and nobody knew it because his wife was a French citizen living in the Bahamas and his entire businesses and assets were in her name so he never paid any IRS, any US taxes. Anyways, Chuck Finney never owned a home, he rented. He looked at the math, it was better to rent.
Frugal personally, that means you're not blowing money, you don't need to look rich, you don't need to act rich, you just need to be rich. One of my great examples of this would be Sam Walton, who started Walmart. He drove a beat up pick up truck even when he hit the billionaire status. When Forbes descended upon his property in Arkansas they found a guy with a beat up pick up. They said, "Oh my gosh, you're a billionaire Sam, why are you driving a pick up?" He does, "Why not? It gets me to where I'm supposed to go. Who am I trying to impress?"
Frugal Personally, But Business-wise Be Intelligent and Be Aggressive
You may have to take on some debt, that's okay because if you're taking on debt to buy a piece of real estate that real estate's an asset.
- Make sure cash flow's positive
- Make sure you have more equity than you have debt obviously, but the intelligent use of debt can make a huge difference.
There is good debt and bad debt.
- Good debt can make you extremely productive financially.
- Bad debt is a bad thing. Bad debt is going to be boat debt, car debt, anything like that.
- I own all that stuff outright. All my cars, boat, all that stuff I own it outright because having any sort of loan on a depreciating asset is such a bad idea.
If you do own a home the interest on your mortgage is tax deductible so some people leave a little bit of a mortgage on their home but again it's usually better to rent altogether. The best thing to do is probably own your home outright. Those are all personal, right? We want to be frugal personally. Business-wise, we want to go out there, start businesses. We want to invest and we want to make some money.
Now here's where this also breaks down. Okay, great to have a budget, great to live below your means, but you know what? In the real world you can only save so much on car insurance, ain't that right? I mean we have rising gas prices, rising food prices. You go to the grocery these days, you drop $300 that fast. The cost to live is pretty high. Your job, your income may not even bring you enough so you can ever budget to live below your means, unless you lived in a house for $100 a month and those don't even exist really. This entire model breaks down when it comes to the fundamental concept of bringing in enough money so you can actually budget, so you can actually live below your means, so you can actually save.
The Problem with Owning Your Own Business
This is a problem. Kiyosaki and others of his attitude their argument was you need to go start some business. You need to become your own business person. If we go back to almost the bible of personal finance, the deca-millionaires were their own business owners. They have started small, they built their own businesses. They give examples of people that own junkyards that are worth over $10 million, all kinds of businesses.
Starting a business is a great way to improve your income, but it doesn't improve right away. Usually it takes a while to get the business up and going. It can take a year, it can take 2 years just to even get it up and going so it's making enough money.
Creative Real Estate Investing
As you heard me say at the beginning of the video, I believe that creative real estate investing, the way we do it anyways, is the greatest small business in America. Makes incredible amounts of money. It gives you a great level of freedom and flexibility and you can also invest along the way.
But starting a business alone isn't the end-all-be-all of personal finance, because what you want to have happen is you want your businesses to bring in the money so you can throw that back into investing. You still live frugally, you save, save, save, and all that money is poured back into investments.
What Kind of Investments?
I'm not an investment advisor as they have these different designations for them and you take these classes and courses and stuff on that. My argument is you want to invest in assets that you have complete control over. Do you have complete control over a mutual fund? Absolutely not, you have no control over that. Now there is some value, some people diversify into mutual funds and you may consider doing that.
You've got to think of it like a Pie chart, you've got some in real estate and then you've got some in precious metals and then you've got some in a mutual fund. You can do it that way, that's fine because I go back to my theory on both. Might as well do both, live frugally, invest in some mutual funds, but also invest in assets that you completely control. Real estate's an example. Your own business is an example.
This is an awesome little tidbit:
Andrew Carnegie, one of the wealthiest people in American history, at one point he wrote an autobiography. In that autobiography he makes mention of how confused he is by how may people he knows that are business owners that take the profits from their business and pour them into other people's businesses. He used to say to himself, "Why don't they just reinvest the money back into their own business? That's the one they have the most control over. If your business has tremendous amounts of opportunity, you may want to reinvest it right back in your business, or invest it in my opinion in real estate. I think, and you can watch other videos, as I describe all the power of being a real estate investor.
The Key is Both
The wisdom of personal finance that I'm sharing here is that it's not Dave Ramsey versus Kiyosaki, it's really doing both. On a personal level being very frugal, living below your means, keeping a budget, I use mint.com, I think it's absolutely fantastic for that. But you know what? Having credit cards, in the real world you're going to need them. You know what, you should probably know how to use them reasonably, responsibly. It's a good idea to have credit cards if you're going to use them intelligently. You know what? If you're going to master personal finance you need to be able to have the discipline to have big credit cards with no balances on them, and only there in case you need them to deploy them on an asset.
The more you save the more money you can throw back into investing
The more that you have access to ... I'll say this, the older I get the more I realize how many people don't have just the little bit of money they need for the next opportunity they want jump into. They're always thinking, "All I need is an investor." Maybe you've seen the show Shark Tank, they're always asking these sharks for 25,000 or 50,000. Man, if they just had that money they wouldn't need to go begging and give away 30% of their business.
The key here is frugal personally, aggressive business-wise
If you don't have enough money coming in to even get to this level of budgeting, living below your needs and saving money, then you have to make some changes. Robert Kiyosaki would argue that the old wisdom of go to college, get good grades, get a good job, make a good salary, he eschews that altogether. He just bashes that. He basically says that that's what his poor dad taught him.
My attitude, if you have a job and there's a way where you can continue to earn well in your job and then save, save, save the rest. Fantastic, throw it back into assets. If you're just starting off and you're trying to figure this whole thing out, I definitely think the faster you can get into the world of business and become a business owner, understanding how to run a business is a much more lucrative way down the road. The first couple of years, all the people you know that went and got safe, secure jobs, they're going to be beating you. But over time this is what's going to happen, they're beating you and then boom, you knock them out of the park because you explode past them.
Another thing is taxes by the way. If you own your own business and you have assets and you structure them wisely, you can really reduce your tax liability.
People who just have a safe, secure job, you all pay the most in taxes.
- high income earn, they pay the vast majority in taxes.
Whereby if a lot of your income is coming from assets, then all of a sudden your income is not taxed as heavily. Which I know that's unfair, but it is the way it is.
If you need more money right now, you're going to need to figure that out. I think the best way to make money in life is to become a business owner, to learn how to make money in business. There's always new business opportunities out there. There's tons of them. If you know how to capitalize on them you're going to be a lot wealthier than those that stay in a job. Again I want to go back to this, The Millionaire Mind, it proves it. It talks about the people that are worth a or 2 million, the ones that are worth 10 million or more. It's the people that own their own businesses. It's just that simple.
You own your own businesses and you invest wisely. In other words we go back to this, it's both. It's both these people's attitude and their teaching, and it's partly his as well. He's got a lot of controversy by the way and some of the stuff I completely disagree with what he teaches. Definitely with caution on that side, but the overall framework of what he shares is incredibly valuable, about buying assets, not liabilities and starting business, investing, making those mistakes, getting out there and getting it done.
I really hope that this has provided you with a level of understanding on personal finance that maybe you've never had before. I really wish somebody had put this video together for me about 20 years ago. This would have been really helpful. I had to learn a lot of this on my own and go through that journey on my own and really discover where people were correct and incorrect. Because I went on a binge, I read all these personal finance books. These kind of things like budgeting, living below your means, this stuff is incredibly valuable. It's what most personal finance books talk about, but very few of them talk about how the heck you make the money so you can actually get to this level.