Aggressively saving at least 50%+ of your income and investing the proceeds will only get you through the door. Opening a Roth IRA as soon as you can is a step further and owning any kind of business is a giant leap in avoiding Uncle Sam. But there is one rule above all that one must adopt and consistently follow to be able to see their investments outpace their active income in no time.
Building wealth is not about how much you earn, rather how much you keep. You can be rich and spend poorly which is more often the case than we believe. No matter how high your W2 income may be, itâs W2 income after all and the more you earn, the more you have to give away. There will always be a pay ceiling and it rises with taxes. Plus itâs easier to become sabotaged into lifestyle inflation early on with a high income which ends up trapping most, especially since less than half of America is financially literate.
It makes sense we want what we donât have and money is the most viable outlet to getting there. If you donât upgrade your lifestyle after earning more, that would be strange and pointless. Money provides a means of support to earn a comfortable lifestyle and achieve our goals. Thereâs nothing wrong with growing your wealth to build a better lifestyle for yourself as long as you understand you must maintain and budget that lifestyle appropriately because it does end up adding quick.
Everything is more expensive and takes longer than it seems.
Without these reminders in place, a high earning individual can get themselves stuck in a sticky situation, fighting against themself as Jordan Belfort, the âWolf of Wall Streetâ did throughout his career. A lavish lifestyle isnât hard to attain. Keeping it, spending it wisely, and staying sane in the process is a battle in itself.
When you chase money instead of a goal, a purpose vanishes and money starts working against you not for you which can deter you from making more in the future.
Thatâs why having a backup and goal beyond earning is key.
Knowledge Is Power
The best investment is in yourself. You can only get so far with limited knowledge. The reason why we attend school is because a degree is an economic premium that cannot be replaced. Whether or not we actually learn viable applicable skills is a question. School certainly has its merits but cannot be considered an easy lift off to wealth as much as it used to be.
Each year there are millions of graduates from top universities that are unemployed or underpaid because they didnât believe in the infinite loop of curiosity outside of the classroom. This is where graduates get stuck. Too late they come to realize the educational institutionalized system hasnât been enough and barely touched the surface on what life involves, let alone no mention of vital skills including networking, mental health or financial literacy that they come to blame the system for instead of on themselves, the true driver of their life. School is a stepping stone and bridge to a better financial existence if you play your cards right. Depending on the classroom isnât always prudent especially when you can learn far more on your own and there are various other factors that contribute to oneâs success beyond arbitrary metrics and scores.
Brain Return
There is no question that to become exceptional starts with feeding your brain the right nutrients. Books, resources, and simply being curious are superpowers.
How does this correlate with the market?
With more familiarity within the markets and world around us, we are less likely to equate our emotions to our decisions and instead become more rational, patient, and pragmatic when it comes to handling our wealth. This allows us to adopt a frame of mind about how our wealth can be used in resourceful ways not just for short-term splurges.
Stretch your short-term attention span and crush your instant gratification. Put that phone away, quit social media, and take inventory of your time and your powerhouse, your brain. Your mind will design the life you want if you program it in the right way. Right now, Facebook has it programmed to click-bait and filtered photos.
We donât deserve to be sabotaged by Big Tech, also known by some critics as the 21st tobacco or nuclear weapon. Comparing ourselves feels miserable and we donât deserve that. This feeling leads us to make irrational quick decisions in other parts of our life that can inadvertently hurt our investment choices as well. We need to take care of ourselves because health = wealth and one of the few things in life that cannot be taken away from you is your mind.
If you lost everything, you could still start from scratch and build a life for yourself if you tap into your reservoir, your mind. Your mind is your greatest asset. Never treat it like junk food.
Double Trouble
So how does this apply to doubling your investment income?
Spoiler Alert: You donât need double your income to invest. Investing will do the work for you but there are of course no guarantees.
As much as Robinhood seems to be doing more harm than good, we have to thank them for their influence on the unbanked and attempt to promote the democratization of finance. Thanks to the power of retail trading platforms of free commission trading and fractional shares, with a few dollars everyone, anywhere can become invested.
By far the best investment advice Iâve ever received is to RISK whatever you are WILLING to loose. Your investment income wonât double if you are constantly rebalancing, charting stocks, constantly selling and buying, and a day trader. They loose 80%+ of their capital because of this madness.
Diversifying your portfolio at every age is necessary so you arenât heavily allocated and possibly leveraged in one asset class. If one flops, the rest will balance out in a diversified index fund.
Most importantly of all, investing is for the long term. If you need immediate cash, always have an emergency savings account with cash equivalent to 6â12 months of emergency expenses. If youâre debating on taking out a HELOC on your home or selling your investments, you are in a dangerous situation mirroring â08 on the brink of foreclosure.
Cash is king, patience is a virtue, and doubling your gains starts with investing rationally, not believing you will beat the market, or that anything is guaranteed for that matter as well.
No wonder passive investors historically beat active ivnestors. They trade, observe, rebalance, chart, and panic less. Investing is to make your life easier not more complicated or mathematical.
Leap of Regret
Once your investment income consistently grows and is noticeably greater than your earned income, this is the time to decide if your earned income is worth it. Becoming your own full-time investor might not be as fulfilling and liberating as most think especially since your earned income is the main contributor to those gains, not necessarily your asset allocation strategies or knack for making predictions.
No one is smarter than the market nor can fight the Fed anyway. Plus having several incomes can be gratifying and allow you to enjoy your main job more knowing that you are supported by other means of income and donât have to be an expert in diversification. If you are satisfied with your current living situation and prefer not to bother selling your investments to fund your upgraded lifestyle, continue the path that makes most sense for you. Just because you earn more, doesnât mean you should spend more. If something is working, donât change it right?
In this situation when oneâs investment income returns more than double+ their active income for a consecutive number of years, what tends to happen is that they become sidetracked and too reliant about their past returns and built-up passive income stream(s) that they end up going all in too quickly and become regretful.
They forget the market is unpredictable. Itâs hard to go back to something once youâve left it. Finding a job takes time and believing you are certain about your investment projections is a dangerous move especially in this frothy environment when it is hard not to loose money in this raging bull market!
It will be much more difficult in 2022 and beyond to outperform the markets with the Fedâs tampering, inflationary fears, tax hikes, supply-chain constraints, interest rate increases, climate change fears, etc. GDP is only expected to grow roughly 5.2% next year anyways. Many economists say we are in stagnation mode. Big Tech is not innovative anymore. Even unprofitable meme stocks made a comeback. Ironically within the market, almost nothing was NOT booming in 2020. Even Deltaâs projections and future outlook were audacious.
Taking the leap into becoming a full-time independent investor can seem daunting but exhilarating. It makes more sense to go all in if you manage several rental properties as it is a very time consuming job with tenants or run another business on the side that provides steady recurrent passive income that is proven to scale.
But at the end of the day, you might not want so much control over them as well. Too much of anything is a bad thing and especially within your portfolio, letting the market do itâs job is your best bet. Sure, day trading can become a lucrative career but majority who take that route donât do it full-time. To make this big life adjustment requires planning, risk management, accountability, and several back up plans. If you want to learn from the masters of retiring from the workforce and going in on their dreams in middle age, learn from the small percentage of solo-entrepreneurs who are surviving.
Our ego and unexpected past returns can block us into making the right future decision. Sometimes, itâs better not to look at your investment returns a couple times a year, the recommendation, until you desperately want a better lifestyle.
Thereâs nothing more dangerous than having zero drive or purpose to wake up in the morning. Sure, living off of investments is nice, but wonât make you a better person or lead to more fulfillment. Donât simply cash out because you can. Youâll incur a massive tax liability with the level of income youâre earning.
You can learn about that here within the conversion of a Roth IRA.
Once your investment income provides you the financial stability you need, thereâs always more to achieve and something bigger to do. Plus youâll most likely feel worse off having the markets, an uncontrollable force fund your lifestyle instead of your labor and abilities from a career.
Whether your goal is for your investment income to topple your active income so you can venture on the FIRE journey at age 40 or hit the milestone for self-approval, investments donât provide as much happiness as we may believe. We are made to contribute to society not just ourselves.
Our investment choices and the decisions we make with those returns can teach us a lot about our desires in life. Fund your lifestyle in the way that suits you best but remember itâs better to be less reliant than too reliant on something to always stay secure.