Can You Reach Financial Independence on a Median Income?

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2:21Mindy Jensen:What if earning a median income isn't a disadvantage on the path to financial independence, but instead a hidden advantage? Obviously, earning more income is generally better for accelerating a journey to financial independence. However, for those who don't start out with or currently have a higher income, there are some hidden advantages that, if acted upon, can compound meaningfully over time. We'll be breaking down all of those advantages today.

2:52Mindy Jensen:Hello, hello, hello, and welcome to the BiggerPocketsMoney podcast. My name is Mindy Jensen, and with me, as always, is my started working towards financial independence at$50 ,000 income co-host, Scott Trench. Thanks, Mindy. I was actually starting out at$48 ,000 and I felt like I was dished a reasonably good starting hand. All right, today we're going to be breaking down how somebody with a median income or maybe even a little lower can still achieve financial independence. Obviously, we're conceding the fact that a higher income is better than a lower income in almost every situation. And all the things we're talking about that someone at a lower income can do can also be done by somebody at a higher income.

3:29but we will argue as well that many of these things won't be done by people at higher incomes and they are real relative advantages if played correctly by folks who are starting at a lower income because they make sense. They make economic sense to be acted on by someone at a lower income level than they do for somebody at a higher income level. So that's a subtle but powerful point. We hope to argue it today and get your feedback. And of course, the obvious advantage here is the lower starting salary is going to force you to keep your expenses low, right? Especially if you're a saver, like I am, like Mindy is.

4:01But the thing is, if you want to save 20 or 30 % of that income, you have to spend 60, 70 % of that starting salary. And that forces real clarity in your decision-making. That means you're going to choose a very low cost housing setup. You're going to drive something very affordable. You're going to keep your fixed expenses very low. And those don't change as rapidly as your income may over the course of your career. And that is the core advantage. That's where I'm going to be diving into. So Mindy, what are some rules of thumb that are argued in a lot of personal finance about how much to spend on housing or cars or those types of things at various income levels?

4:38Mindy Jensen:So with housing, you want to keep your housing costs at or below 30 % of your income. This can be a little bit tricky. It can take some finesse and some pulling of different levers. Step number one, have a roommate. Having a roommate automatically cuts your total housing cost in half because you're splitting that cost with another person. Not having a roommate because I deserve to have my own space after having a roommate all of high school, that's the wrong mentality to have. Keep your housing expenses as low as possible because you can always change them in the future, but it's really difficult to go from a luxurious, beautiful apartment that you're paying all of your extra income into and then going to like a lesser apartment with a roommate, that can be a bigger switch to flip in your mind.

5:25Growing up, I observed in a handful of instances, folks who lived much more lavishly than my family. We grew up fine. Like my parents were solid income earners. We had a wonderful middle or probably, you know, arguably upper middle class lifestyle all growing up. It was wonderful. I had a wonderful childhood. But I remember observing friends or other folks in my network that seemed to be super, super rich. And not all of them, but a good percentage of them one day blew up and that wrecked their lives in some pretty horrible ways. And I think that there's a real lesson here in that we can bring down to the more relatable level of starting at 45 or a hundred thousand dollars in salary and those differences.

6:06If you can keep your expenses and live well within your means, you're very unlikely to see that blow up occur in your life. And it allows you to accumulate wealth much more rapidly and much more sustainably because those high incomes, especially in, you know, at those elite levels are very hard to sustain consistently through time. And that's really, I think where people get tripped up. So if you can start out at$45 ,000 and scale your income to 150 or$200 ,000 over a five to 10 year period, by employing those rules of thumb, you're probably not going to, you know, double or triple your housing costs when your salary doubles or triples over a 10 or 15 or 20 year career, you're probably going to keep it relatively consistent the whole way through.

6:43And that's a real blessing. That's a real advantage to you across your journey, even though you'll be living a lower standard of living to this higher income counterpart. When or if circumstances change, they're going to be at real risk and you are not in your situation. And that was certainly true across my career. My career certainly did not always see income years that were consistent. There were a few huge income years and there was a rising floor across that period, but I certainly did not start out or surpass many of my peers who I graduated college with, for example, until or unless I experienced those bigger pockets as the business was selling years.

7:18That's, I think, an important dynamic to address in this conversation.

7:21Mindy Jensen:Well, and something else that might not be readily apparent in these lower income years is that you don't typically have a job with a lot of responsibility. You have a lot more free time. Your 40 hour a week is a 40 hour a week. Maybe it's 45 hours on a real busy week, but you're not expected to work 70, 80, 90 hours a week at these more entry level salaries. Now, Scott, when you were the CEO of BiggerPockets, did you ever have a 40 hour week? Nope. More like 60, 70, 80 plus hour weeks. That's what you exchange for that higher income. So what you can do is go and put in your 40 hours at your company, and then you can look into side hustles, side jobs, other ways to generate income.

8:10Mindy Jensen:And this is where your entrepreneurial spirit can really shine. Look into the ways that you can generate income that work with your strengths. you can be generating$300 to$500 a month, which adds$4 ,000 to$6 ,000 a year to your income. At a$45 ,000 salary, this is like an extra 10 % that you're just making in your off times. This can be weekends, this can be evenings. What are your strengths? We just did a really amazing episode with Nick Loper about how to choose a side hustle that works with your strengths so that you can make the most money in the shortest amount of time. When I was starting my career, right, I wanted to get into real estate investing.

8:56I was making$48 ,000 a year or about$24 an hour with my hourly rate across a 2 ,000 hour work year. Because you're right, it was 40 hours. In fact, because I was non-exempt, I was not permitted to work more than 40 hours. I had to badge out of the building at around exactly 40 hours a week or they would pay me overtime and I'd get a conversation with my boss. That's how 40 hours that job was. And all jobs should be if they are in that range because they're non-exempt at that pay level. So anyways, there is more time in my day that was available. And so what I did with that time is I went on BiggerPockets.

9:31I listened to the BiggerPockets podcast. I read Mr. Money Mustache blog. I looked at properties. I've met with real estate agents. I put in the 500 hours that I believe is a requirement, a baseline requirement, to be baseline competent in analyzing your first rental property and committing a meaningful amount of capital to that. That same opportunity set is not realistic or desirable for my friends who graduated from college at the same time as me and went on to become doctors or hotshot lawyers. They're earning too much and their hours are too long to justify spending that extra time to learn about these alternative ways to build wealth.

10:08Of course, they had a better head start than me in terms of building wealth out the gate. But that advantage is also real where now I've developed a skill set as a real estate investor. And by the way, if I had become a CEO of another company, for example, it would have been very hard to justify diverting attention away from CEO job duties or family to learn the ins and outs of buying a duplex and analyzing it for cash flow and capex and learning how to screen tenants and all those types of things. But because I've already paid that price early in my career, it just stays with me for the rest of my career.

10:41I know how to do that. I can invest in real estate forever without having to repay that initial educational price. I have to do some refreshing in those types of things to do that, but that's a real advantage that stays with me. I got great feedback from somebody who was a doctor. I used to argue that doctors probably not good candidates for real estate investors that earn so much. And he's like, well, look, when I was a resident, I was doing this and making this little money and doing this. I'm like, absolutely. In that case, you paid the cost, the educational cost when your time was very cheap.

11:08And now when it's expensive, you still retain that benefit. And you of course can invest in real estate across your lifetime and reap those rewards. That's a real advantage, a relative advantage for a lower income earner versus a higher income in the early parts of one's career is because your time is less valuable. The ROI on self-education is way higher and you can stack up advantages over time, right? Again, not saying that it's better to earn less then more. I'm saying these are ways to play the hand of a lower starting salary relative to a higher income one if you're in that situation.

11:37Mindy Jensen:Yes. When you are earning less money, you have more free time to invest in yourself and in your future. You don't have the money necessarily to invest in the stock market and real estate, but that's okay. You're setting yourself up for when you do have the ability. That's a great point, Scott. Okay, Scott, what are some other advantages of not having a higher salary. One additional one, right? Again, using that framework of me as a non-exempt employee only permitted to work 40 hours versus a higher income earning peer who might've been putting in 50, 60, 70 hours is I could side hustle. So I did.

12:14I drove for Uber. I tutored. I attempted a winter tire rental business and a winter gloves business. They failed. Trenches Tease is still available on the internet somewhere. I think on Facebook, if you want to go look at it. I printed off a bunch of t-shirts and my mom bought one or two of them, I think. I still have a stack of them somewhere. And those didn't work. They were kind of comical failures one by one on one until they did work, until the house hack began to really pay off, until I one day wrote a book, which I would call as part of that component. until over time, these bets sharpened my mind, showed me what worked and what didn't work, and allowed me to play a cascade of them as CEO at Bicker Pockets, for example, over time.

12:59That didn't all work, many failures, but some did. And so those tales, this concept that a few activities out of hundreds are gonna pay off is very hard for people to grasp. And it makes all the sense in the world for somebody who was earning a lower income, like I was at the beginning of my journey, to play those cards one by one by one and get those learnings early in my career. And it probably didn't make as much sense for my peers who started out making well over$100 ,000 within the first year or two of their careers. That's a real advantage. Again, I'm like, I keep saying this, I can see the YouTube people saying, hey, you know, what is this guy talking about?

13:35You know, it's much better to earn a higher income than a lower income. Of course, of course it is. But these are real relative advantages that we can play with, that we can begin to leverage if we are starting out with a lower income early in our careers.

13:48Mindy Jensen:Well, and to all the people that are saying, oh, well, you should just earn a higher income. Not everybody has that ability right now to just say, oh, well, I am making$40 ,000 a year, but I'd like to make 70. So I'll just go find a job that pays me 70. Do that instead of these items, if you can do that, of course. Yes. If you can just, like, if you're just stagnant in your career and there's other opportunities for you to make 70, yeah, of course, go make 70. But if you can't, if you are in the $40 ,000,$45 ,000,$50 ,000 income bracket right now, these are the things that you should be doing to take advantage of this.

14:24Mindy Jensen:What do we call this? The unfair advantage. Your unfair advantage making $45 ,000 a year is that you have more time to start looking into side ideas. Maybe one of these side ideas becomes a whole actual job and you can replace your income and that would be awesome, but maybe it just gives you a little bit extra income to cushion your salary, to start an emergency fund, to start investing. It shows you what you like to do, what you don't like to do. It shows you opportunities. You're not gonna have these same opportunities when you're making$100 ,000 a year, which is more income, yes, of course, but you're not gonna have these same opportunities because you don't have the same amount of time.

15:06Mindy Jensen:And maybe you decide that side hustling is awesome. And maybe you decide that you wanna go back and get your degree or get some certificates or something so that you can make more base salary. But either way, this gives you options and options is the name of the game. Yeah, absolutely. By the way, I want to call it one more item. That was a huge advantage. One of those bets like I forget them after the years, right? All the things I was attempting at that point in time. But one of them was I got my real estate license. I'm a licensed broker today. I've had it for like seven or eight years and it would be preposterous to get my real estate license on the side while being CEO of BiggerPockets.

15:42But when I was a director of operations making 50 grand at BiggerPockets, that was a great use of my extra time. And I've been able to carry that license over time. And how many thousands of dollars did that save me? I mean, that's even when I bought my permanent house. Mindy, I bought two houses last year. You helped me. I pay Mindy a pretty solid hourly rate, actually, to make sure I don't screw up with the contract because I'm an agent. I'm a licensed agent, but I really want a real professional like Mindy watching over that contract, making sure I don't miss stuff. But it's a very tiny fraction of what I would actually pay a broker to represent me on the buy side on these deals.

16:14I'll have that same benefit when I sell them one day. That's a huge advantage. And it wouldn't make sense for somebody who's earning a much higher pile of money. And I couldn't have told you back then exactly which one of these or how they would actually spin up. But this concept of survivorship through repetition, the odds that any one of these activities is going to pay off is very low. But across a large number of bets, the probability that some benefit will accrue becomes overwhelming. That's underappreciated, I think, in personal finance. And it's particularly acute for the lower income earner who has some time.

16:47This does assume you have some time as part of this lower income because you're not in a job that is so demanding. It requires 50, 60, 70 hours a week. You know that feeling you get when checking your finances means logging into five different apps? That's why I use Monarch. Setup takes about 10 minutes. You can link your accounts, and everything you own and owe lands in one clean dashboard. Banking, cards, investments, even keeping track of recurring charges. After that, you can stay on top of your money in just minutes, not hours per month. Monarch saves you time and actually helps you use it wisely.

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18:59Mindy Jensen:Up to$500 ,000 if you're married. We did this 10 times. And now we have decided that we are in our last live-in flip. We don't want to do this anymore. I don't want to live in construction zones anymore. I don't want to do the work anymore. It's a lot of work. But I can tell you, I counted this up for a presentation a few years ago. I have made more than$700 ,000 tax-free dollars off of my live-in flips. It's a great strategy. It just is a lot of time. Here's what the irony is, right? That strategy probably appealed when you were earning a relatively low income compared to many peers you may have grown up with or graduated college with at that point in time.

19:43That house hack, however, once completed, the skillset translates directly to the next one. It's normalized. So even as your income rises or in your case, rose, the appeal of the house hack is still there. And that's a real advantage that compounds over time. And again, I don't want to beat a dead drum with this, but I will. It's better to have the higher income and across all these scenarios. But the lower income state does produce these relative opportunities. Here's another one I'll throw in here is lower starting income makes the appeal of at risk compensation that much greater. Right. So when I was at Dish Network, I was making forty eight thousand dollars a year with a small bonus potential.

20:21My salary is going to go up to like something like fifty two in a month or two. And instead, I chose the job at Bigger Pockets. Bigger Pockets job came with a$50 ,000 salary. So it was actually less than I would have made if I had stayed with Dish Network from a base salary perspective. And Josh had a whopping seven PTO days when I started. So there was a big reduction in PTO. Remember that, Mindy, the seven PTO days at the beginning?

20:42Mindy Jensen:I do. I also got those and I negotiated up to get an additional unpaid week because seven was not going to be enough for me. I remember that. I was jealous. Anyways, so I joined Bigger Pockets. But the thing was the$50 ,000 base salary also came with the opportunity to sell advertising on the podcasts. And the advertising on the podcast was kind of hodgepodge and not sold through and not streamlined. And over the next few years, that produced an enormous opportunity for me to sell those ads. If I had started my career, if I had been paid$100 ,000, I would have said no to that opportunity. And I would have fallen behind within two or three years.

21:18And that's a real trade-off that's not apparent to a lot of people. I think a lot of people optimize for base salary and don't optimize for bonuses or equity or the things that can truly make enormous differences over a long period of time. I talked to somebody recently who was considering a job and they were asking how to negotiate the salary. And I said, you don't need the salary. Who cares if the salary is, I'm going to make this up for other different numbers, but who cares if it's 165, 175, or 185? It doesn't make a difference in your life. but if you go in and say, you know, I'll take the 165 actually, take my salary down 10 grand, but make my bonus 30 % instead of 15 % if I hit my numbers, what kind of signal does that send to your employer?

21:55How much does that de-risk your position in a down market? And on average, how much is that going to compound to more total compensation over a long period of time? What if as part of that, you also ask for a little bit more equity because you're not showing down the salary? As a CEO, if someone said that to me, that's a real consideration. I'm going to be a little taken aback and I'm going to say, that's interesting. Yeah, I'll move in that direction. We'll negotiate the numbers there. That's what I did across my time at BiggerPockets. And oh, my God, that paid off way more than if I had asked Josh for a slightly higher base salary and negotiated that.