29: The 3 Simple Steps to Wealth

0:00This is a real good story about Bronx and his dad Ryan, Real United Airlines customers. We were returning home and one of the flight attendants asked Bronx if he wanted to see the flight deck and meet Captain Andrew. I got to sit in the driver's seat. I grew up in an aviation family and seeing Bronx kind of reminded me of myself when I was that age. That's Andrew, a real United pilot. These small interactions can shape a kid's future. It felt like I was the captain. Allowing my son to see the flight deck will stick with us forever. That's how good leads the way. Hey everyone and welcome back to the Rich Habits Podcast, a top five business podcast on Spotify.

0:36My name is Austin Hankwitz and I'm joined by my co-host Robert Croak. Robert is a seasoned entrepreneur in his 50s with more than 200 million in company exits under his belt and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business and actively advise some of the most well-known fintech companies around the world. As the show name might suggest, every episode we talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives.

1:11One from an industry veteran, which is Robert, and the other myself, someone who's still in the process of building wealth and figuring it all out. Robert, what are we going to be talking about in today's episode? I can't wait. In today's episode of the Rich Habits Podcast, we are going to be sharing our three steps to wealth, steps that anyone can begin working on today. Regardless of your age, if you're able to work towards these three steps, you're destined to retire wealthy and comfortable. These three steps are both taxed advantage, passive and diversified. So let's get into it. I am also very excited about this episode because I think a lot of people, they see the headlines, they see the TikTok videos, they see the Instagrams and the YouTube videos of all these people doing a bunch of different things of trying to build wealth.

1:55And I think this episode breaks down very simply and clearly how anyone can begin building wealth one, two, three, point after point after point. So Robert, kick us off with the first point here. People make becoming wealthy seem so complicated. All of the fake gurus want to sell people a$2 ,000, a$5 ,000 course and make it sound so scary and crazy hard to do. And at the end of the day, if you follow these three points, it really is that simple. So I'm going to start us off with number one, which is open a Roth IRA and contribute$6 ,500 per year towards it. That's maxing the Roth IRA out. And I believe this is one of the greatest tools to building wealth that we know of.

2:40A Roth IRA or a Roth individual retirement account is a retirement account anyone in the United States can open right now. Unlike a 401k, you don't need an employer to open the account. You just need an address and a social security number and you're on your way. The Roth IRA is taxed advantage, which means you pay zero taxes on your profits when it's time to retire. For some people, that could be hundreds of thousands and for others, it could be millions in profit. That's why we love the Roth IRA. Here's the breakdown on how to actually go about that. So you're going to want to head over to an online broker.

3:17Think Vanguard, Fidelity, M1 Finance, or maybe a robo-advisor like Wealthfront or Betterment. You're going to want to open up one of these accounts on their platforms. Again, they'll ask you for your address and social security number. Don't be scared. They need it. It's like opening a bank account, right? We're serious about building wealth, so we got to get this information to them. Once you open the account, take money from your personal checking account and deposit that money into the account. You're going to deposit from checking into Roth IRA. Once money is deposited into the Roth IRA, you're going to invest that money into the index funds we talk about so very often.

3:56We both like VOO, QQQ, and VTI. Then you're going to rinse and repeat this process annually for the next, call it 25, 30, 40 years, however long it is for you to retire. So for example, let's say you're 40 years old right now and you don't have a Roth IRA. If you do this,$6 ,500 per year and invest it into the S &P 500, right? VOO, you'll have$600 ,000 in tax-free profits waiting for you when you turn 65 years old and you're ready to retire. Always remember to everyone listening, it's not about timing the market. It's about time in the market. I can't say this enough. every single day people come to me and think they can time the market.

4:38Robert, I'm going to wait till it's at the bottom or man, I've got a way to figure this out. Well, guess what? You do not. You always want to be in the market for as long as you can and let compound interest do its thing and make building wealth effortless. I opened my Roth IRA when I was 18. I'm going to have it through the rest of my life. And I can't wait to get everyone listening right now to also have one of these accounts. Now, Robert, what's point number two? Point number two is a great one. Own real estate, but own it the right way. And it's just really important for people to understand this strategy.

5:12We're very empathetic to the fact that the median mortgage payment right now is$2 ,800. So achieving this step might not happen for some of you right away, but it's incredibly important to understand that this very simple concept when it comes to buying real estate. Real estate is special in the fact that it can both take money out of your pocket every month or put money into your pocket every month. The goal here is to get to a point where it's putting money in your pocket and cash flowing every single month the right way. This is a critical point. I strongly suggest anyone looking to buy a new home to consider house hacking by purchasing a duplex, a triplex, or a quadplex instead of your traditional single family home when you're getting started or you're getting ready to buy a new home.

5:59For those of you who aren't familiar, a duplex is essentially two living quarters under one roof. Same deal with a triplex and a quadplex. Here's why this is so important. You live on one side of the property and you rent out the other units of the property to tenants. The rent you collect will cover most, if not all of your mortgage, therefore allowing you to live free and enjoy the benefits of owning that property like capital appreciation, depreciation, and just being able to have that extra money every single month for you to be able to put towards other properties or your investment portfolio.

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7:13I just give my stylist my size, style, and budget preferences. I order boxes when I want and how I want. No subscription required. And he sends just for me pieces, plus outfit recommendations and styling tips. I keep what works and send back the rest. It's so easy. Make style easy. Get started today at stitchfix.com slash Spotify. That's stitchfix.com slash Spotify. This is something I've never done, Robert, right? I think the first house, I think everyone here knows, the first house I purchased was a three-bedroom, two-and-a-half-bath townhouse here in Nashville, Tennessee. I purchased it for about$280 ,000.

7:51And so I've never done this like house hacking duplex, triplex, quadplex. However, I do follow and I'm good friends with a guy named John Erringman. It's at John E finance on I think TikTok and Instagram. He is my age as well. So he's 27 and he has done this like twice already. So when he graduated college, he started working, I think as an accountant, he was able to save up and did the FHA loan, which essentially first home buyers can just put three and a half percent down on their first purchase there, allowing him to buy a duplex that him and his now wife were able to move into. So they lived in one of those quarters and they rented out the other side of the duplex to another family and they were cash flowing 500 bucks a month from that, right?

8:31So they were living for free or paid their mortgage. And now he just closed on another duplex. If you think about it, he's still living in that same first duplex. So he has three tenants now that are allowing him to have those capital gains, the depreciation against the W-2 income and cash flow like an absolute bandit. So I really, really like this strategy, Robert. I just, I never got around to doing it, but it's something I'm definitely gonna explore in the future. Well, my favorite pro tip here is if you're in a relationship right now and you're listening and you're gonna get married in the next year or two, each of you should go out and buy a duplex, triplex or a quadplex.

9:05Use the FHA loan separately because remember when you become married, you're one entity and you only can qualify for one FHA loan. do it separately for a year, live in those residences, that duplex, that triplex, or that quadplex. And then when you get married, then you rent out those units, move in together in your primary home, or maybe another duplex, triplex, or quadplex, and just keep on rolling. This is a great strategy for those of you that are going to get married soon, but want to take advantage of the FHA loans. So we talked about retirement investing. We talked about house hacking and and building wealth with real estate.

9:42So what's our third point for building wealth, Robert? Our third point today is diversify your portfolio, which might even mean to optimize for income. Diversification is simple. It means not having all of your eggs in one basket. For us, that means having exposure to precious metals, fine art, cryptocurrency, ETFs, REITs, and even income generating assets like dividends, stocks, and ETFs. This one is important because at the end of the day. The stock market is the stock market. The real estate market is the real estate market. They're all different markets, which means if there's a crash in one market, there may not be a crash in the other.

10:19That's why we always want to be diversified to make sure no matter what the market conditions are, we are in good shape and we're moving ahead in our wealth building journeys. The whole thing we're doing here with this podcast, Robert, is being transparent with our listeners. So here's my personal transparent breakdown of my diversified assets, right? I have real estate both in the physical form, you know, here in Nashville, as well as in the form of REITs, real estate investment trusts. I have that on fundrise.com, which is a REIT investing, auto investing sort of platform there. And then also I've got publicly traded REITs.

10:56I have Realty Income Corporation and VICI properties. I have cryptocurrency. I have that sitting in my Cold Wallet. Bitcoin, Ethereum, and Chainlink are the three cryptocurrencies that I hold. I have stocks and ETFs. My stocks range from dividend paying stocks and dividend growth stocks all the way out to those crazy tech names that we hear all the time and that are operating in these sort of secular growth trends. So I'm very diversified from that perspective. And I also have some exposure to fine art. I do some of that with masterworks. I've got exposure to fine wine on VinoVest. I also have exposure to rare whiskeys on vent.co and other collectibles on Rally Road.

11:35So like I am very diversified, Robert. But now here's the thing. I'm diversifying away about 25 % of my total invested assets, not including my physical real estate that just appreciated like crazy, right? But actual invested money, about 25 % of it is diversified into some of these new asset classes, which I think is a healthy section of my portfolio. I also want to call out that I think about diversification, to your point, Robert, as a way to sort of hedge against those crazy up and down swings we might see in the stock market. I fully believe much of my wealth that I will build in my life will come from the 75 % that's invested into the stock market, like the index funds we talk about, the big tech names, all those cool things.

12:17But I do want some diversification, So that's why the other 25 % exists. I do want a little bit of that fine wine, those rare whiskeys, the collectibles, the watches, things like that. That to me is also important. Everyone listening should diversify their portfolios to include income generating assets. Specifically, this income is usually passive and can offset losses in capital. For example, dividend paying stocks are a great way to generate extra income. And one of our favorites is the ETF SPYI. So for instance, if you were to put in$5 ,000 into SPYI, you'd probably earn around$600 this year.

12:55And then if you were to put in$10 ,000, again, that would be$1 ,200 per year. So these income generating ETFs and alternative investments to diversify through are just a great way to have a bulletproof portfolio towards building wealth. I'm a big fan of SPYI. It's actually the largest dividend paying asset in my portfolio. and what's so cool about them again is they have this distribution yield of 12%. So to Robert's point,$10 ,000 invested into SPYI, you could expect 1 ,200 or 12 % of your invested capital to be repaid back to you in the form of dividends because of the way they've done their covered call strategies.

13:33But just wanna reiterate, whenever people are optimizing for income, that might be rental properties, that might be dividend paying stocks, that might be something else, profits from a business. When you optimize for income in your investment portfolio, that income offsets the fluctuations of the stock market, the fluctuations of the real estate market, the fluctuations of how your business might be valued, right? Those capital losses, just like what Robert said. So I cannot emphasize enough how important I think as a 27-year-old who's trying to build wealth, how I want to build wealth with income in mind.

14:08These were three what we believe to be rudimentary steps that if everyone listening follows and takes action on these three steps, it's inevitable that you will create wealth in your lifetime. Well, with that being said, Robert, let's introduce this episode's sponsor. Yes, this episode of the Rich Habits podcast is brought to you by Nios Investments. Nios offers ETFs that aim to offer monthly income while providing core portfolio exposure across equities, fixed income, and cash alternatives like T-bills. Their ETFs may be particularly interesting for folks looking to generate passive income inside of their investment portfolio.

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15:19To obtain a prospectus containing this and other important information, please visit neosfunds.com. Please read the prospectus carefully before you invest. NEOS ETFs are distributed by Foreside Fund Services, LLC. An investment in NEOS ETFs involves risk, including possible loss of principal. The equity securities purchased by the funds may involve price swings and potential for loss. A fund's income may decline when yields fall. Fixed income securities will decline in value because of an increase in interest rates. As always, thanks everyone for sticking around as we script off our advertisement.

15:53We're very fortunate to be working with Neos. They help us fund a lot of the video editing, a lot of the distribution, everything that goes into building this podcast into what you all really love. And so we're super grateful for that. And we believe in their products. SPYI is again, the largest dividend paying holding in my portfolio. Robert has it as well. It's something we both really believe in and think everyone should consider. So with that being said, Robert, let's jump into everyone's favorite section of the podcast, the question and answer. Our first question comes from Donnie B. Donnie says, I have a question regarding interest rates.

16:24At what point do you consider an interest rate to be high, therefore high interest debt? My gut tells me about 10%, but I'm not too sure. So I like this question a lot. And I thought about this a couple of years ago, actually, when I was in college. And sort of what I came to the conclusion of was if it's five points above prime, which is you can think of as like the federal funds rate. So if it's five points above prime, that's high interest, right? So the federal funds rate right now is like five and a half or 5.75%. So if it's 10 and a half or 10.75%, you're looking at a high interest rate debt.

17:00So your gut was definitely right. Yeah. My takeaway is completely different from Austin's, but it kind of has the same sentiment. For me, I always look at positive arbitrage. I know you guys hear me talk about that a lot, but I think it's just so important to look at it from a perspective that if I can borrow money cheaper than what I can make with it, then I'm always going to borrow the money. So the way I look at it is maybe not that big of a spread of that additional five and a half percent or five percent. I look at it that if my interest rate like right now, say, is five or six percent, it's right on that verge where anything maybe up to seven or eight percent I would consider is high interest in which then I would tackle that right away.

17:40But for me, if I can make two, three, four points on my money above and beyond that interest, then I'm always going to use the positive arbitrage in my favor because I think it's enough to make it worthwhile, especially as you're working with larger and larger amounts of cash for this positive arbitrage. I couldn't have said it better myself. I mean, I've got a car loan, right? That's like 2.5%. Would I rather pay off that car or have that money invested? Well, I think I'd rather have the money invested knowing it's only a 2.5 % interest. So our next question comes from Ryan M. Ryan says, I'm a student who doesn't graduate until December 2024.

18:17I have$9 ,000 in unsubsidized student loans and$30 ,000 in my savings. Should I use my savings right now to pay off my student loans before I graduate? What should I think about interest? Ryan, this is a great question and it just really alludes to the question we just answered above. So let's get into it. I can't emphasize enough how important it is for everyone listening right now to understand your student loan situation as interest for loans are already accruing again, and you'll have to begin paying them again in October already, so it's right around the corner. For this question, there are two call-outs.

18:51Number one, unsubsidized student loans accrue interest while you're in school, which means the amount owed is likely to be above the borrowed amount. And number two, the 5 % interest is eating a hole in your pocket considering this is considered bad debt when looking at student loans and not generating you any sort of income. If you have the money, I would pay off the unsubsidized loans and park the other 20K into T-bills on public.com. Yeah, I think to this question, right? I mean, at the end of the day, let's like come back to this arbitrage, right? Because you always say like, okay, if we can borrow money for cheap and invest it, then cool.

19:30Well, what could someone, I guess, reasonably expect? So let's think about this from actual numbers, right? So$9 ,000 is the amount this guy owes. And if he didn't want to pay that off and took that$9 ,000 that he has in savings and invested, let's say he could get 10%. So$900. But again, now he does have 5 % interest he's paying on that. So that is 450 to the bad, which means he's only really profiting$450. But that's also before capital gains and taxes, things like that. So really, he's profiting 300 bucks in a year. So here's the deal. I mean, to me, just pay it off, man. 300 bucks, is that really a game changer for you?

20:07Is that going to make you a millionaire? No, right? So whenever we think about and talk about this positive arbitrage strategy and wealth building sort of mentality we have, it's about big numbers and big spreads. It's not about 300 bucks a year. So if I were you, I totally agree with Robert, right? Just take the nine grand that you already have saved in cash, pay it off, get rid of it so you don't have interest accruing, and then park that other 20K into tbills on public.com and earn your five and a half percent. Love it. Love it. Let's get into number three. Question number three is from username I heart Spanish.

20:39I also heart Spanish. They ask, I'm married with four kids and we live in a very touristy beach town. Every summer we move out and live with the grandparents and rent out our primary residence on Airbnb, allowing us to generate a consistent$40 ,000 every summer. However, I'm growing very tired of having to always move out during the summertime. What should I do? Should I just buy a property and rent it out? Should I find another way to generate$40 ,000 with a side hustle? Do I just suck it up and keep doing this? Well, I know what you're going to say. you're probably going to say, suck it up, buttercup, and just keep doing it because it's 40K throughout the summer.

21:14I'm going to put a different twist to this. I think it all comes down to the quality of life. If you look at the big picture, you should be able to replace the 40K with a side hustle or a small business and enjoy the property yourself year round. I personally would work on replacing the income and enjoy the property to the fullest. You're in this beachy town. You said it's an incredible area. I would look at what can I do in that town to take advantage of the tourism in a way that I could make up that$40 ,000 a year so I don't have to keep moving back and forth every single summer and having, you know, the distance with the kids, with their friends, or whatever is going on logistically.

21:56That's what I would do. And if you look at it from the big picture, you would only have to replace$3 ,300 a month to make up that$40 ,000 and be snug as a bug in a rug in your own bed and not moving around. Yeah. So you're right. I would say suck it up, buttercup, because here's the thing though. If I had the opportunity to just say like, okay, for three summers, three more summers, I could move out and do this, right? That's$120 ,000, let's say before, let's call it$90 ,000 after taxes or something like that, 80K. That 80 or 90K could be a really good college fund for your four kids. You know what I'm saying?

22:33And even if they're young, they might not remember not having these summers, but they are going to remember not having student loans whenever they graduate. So that's kind of the perspective I think, right? It's like if you're making all this money, can you do it just a little bit longer and be very intentional about the money you generate and be intentional about where that money goes so it can really impact their summers going forward. Yeah, the problem is we don't know the totality of the information. That$40 ,000 might be fully spent from every single summer's earnings and not have any positive benefit towards a 529 account or towards the kid's college or towards any wealth building.

23:13So in that instance, I just think you'd be better to create a side hustle or buy a small business that's existing with owner financing and be able to make up the$40 ,000. Or if you wanted a hybrid of your side of the fence and my side of the fence, do it one more year. Really make sure in the off season, you have a side hustle to make up as much of it as you can and take that$40 ,000, put it towards purchasing a business or starting a new business. And then the next year, you stay at your own home, enjoy the beach town year round, and you're away from those handcuffs of moving out of your house every summer.

23:52Good take. Well, everyone, thanks again for tuning in to this episode of the Rich Habits Podcast. We are eternally grateful to have your support to be number five on Spotify's business charts. We always love getting direct messages from you all on Instagram, answering your questions here on the podcast and hosting you all on TikTok every Thursday night around, what is it, Robert? 8.30 Eastern time we go live? Yes, I love it. We go live every Thursday night right around 815 Eastern Standard Time. So if you do listen to the podcast and want your questions answered live, go to TikTok and go check that out.

24:24Also, be sure to leave us a positive review if you like the podcast. We've got over a thousand people who have left us five star reviews. We can't believe the support. It is so, so exciting. And also share with a friend. Share the podcast with anyone you know that can really start getting after their wealth building journey themselves. Right. Maybe they don't have the Roth IRA figured out or maybe they've talked about a duplex to their friends. but they don't really know the different hacks and how to get started, or maybe perhaps they've not diversified yet their investment portfolios. We hope this episode can be a resource to lean on as they continue their wealth building journey.