36: Investing the Rich Habits Way

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0:35I 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. Hey everyone, and welcome back to the Rich Habits Podcast, a top three business podcast on Spotify. My 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.

1:18Since 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, one 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? In today's episode of the Rich Habits podcast, we're going to be sharing our three simple steps to investing the right way.

1:55Let me say that again, the right way. Not the way your Uncle Bob told you, not the way Dave Ramsey might suggest, but the rich habits way. By the end of this episode, you'll learn how to create a budget, find extra money inside of it, and stick to it each month. You'll learn how to calculate your total expense to income ratio, a more detailed way to understand your debt to income ratio, and more importantly, learn to calculate exactly how much you can invest every single month. And to give you all some added color and even some inspiration here, $250 per month invested toward the S &P 500, right?

2:33The 500 largest and most profitable companies in the United States from age 35 to 65, right? So about 30 years throughout your life is$500 ,000. That's after you take into account inflation. Now this stuff is attainable and we're going to teach you how to do it. We're going to walk you through every single step in today's episode. So Robert, kick us off with step number one. Step number one, create a budget. And we're also going to help you find ways to squeeze out more money to invest with. Make sure you do a complete and total budget when you're correctly estimating and including the variables that come with discretionary spending.

3:10Think Starbucks, think Target, etc. Any of those discretionary spending numbers. Also, keep an eye on those pesky subscriptions. I just had to cancel one of my Peacock premium subscriptions the other week because I realized that I had two of them. This stuff happens, So you need to identify them and take care of them right away. And also always ask yourself, do you really need nine different streaming services? Yeah, create that budget, right? There's actually a budget template in the show notes below. We like to encourage our listeners to go check out, download and play around with. At the end of the day, building a budget simple, the hard part is being true to yourself and being honest with yourself saying, wait a second, am I really spending this much money?

3:54Is this a habit or is that a one-time thing? create that budget, understand all the money coming in and all the money going out. Now, my little pro tip here for the budget, and this is something I was actually able to recently accomplish like literally two weeks ago, shop around for new insurances. I was with farmers for the longest time. Both my house and my auto insurance was with farmers. Combined, I was paying around$400 a month,$375 to$400 a month. And not only did they try and hike prices on me again this year. But after doing some research, I realized that I was paying way more than I should.

4:27So I switched to Allstate. Shout out to my boy Dallas, my Allstate agent Dallas, who mailed me, funny enough, a estimate for my house premium that got me thinking, wait, can I switch? So Dallas got me switched now to Allstate. I'm now saving over$200 per month for the exact same coverage, right? This is$200 a month that just incredibly magically appeared in my budget because I did one small thing and I switched. This for you might not be insurance. Maybe it is insurance, right? Maybe it's auto insurance or house insurance. But for my dad, for example, he switched from Verizon to visible wireless.

5:00Now he's saving about 120 bucks a month on his cell phone bill, right? So there's a bunch of little ways that you guys can think about finding 20, 50, 100,$200 per month extra in your budget. And remember, this money is not just to be found and spent on your new Abercrombie & Fitch jeans. This money is to be found and invested into the S &P 500, which again, back to our example, half a million dollars over 30 years, which we're gonna get into here in a little bit. But create that budget, find those little bits and pieces that can help you invest more and more every month and don't be afraid to get creative.

5:30Yes, I love this takeaway and it really makes me think about something that I preach to the mountaintops all the time to business owners. When times get tough and you own a business, you can't always increase your sales or increase your income. It's not that simple, but you can look from within and find cost savings that way. I remember one time, this was back during the Silly Bands era, I had leaned on a box one day talking to someone and the box where the Silly Bands was in was very squishy. So I brought the UPS agents in, my representatives, and I said, I have a question. And I showed them, I pushed down on the Silly Bands and I pushed over on the Silly Bands with a tape measure.

6:08And by simply lowering the height of the box by two inches and making the box one inch narrower, I was able to save$42 ,000 a week in shipping that no one had picked up on because we took a standard size box that it looked like it fit great. But it was simply switching that box size that saved me all that money. So never, never sleep on looking from within and finding those ways to save those 20, 50 or$100 or even more by looking at your expenses and finding ways to save money on them. Robert, if you have any idea on how I could save$2 million on shipping expenses myself, I would very much appreciate that.

6:48There you go. I love it. So what's step number two now? Step number two, calculate your total expense to income ratio. Many of you have probably never heard of this term. And basically, it's a more advanced calculation of what you truly have left over at the end of the month compared to simply calculating your debt to income ratio. I've used this version for years because it gives people a more realistic understanding of their net amount each month, allowing them to know more where they stand and be able to automate their investments. The textbook definition of debt to income ratio is how much of your total income each month is being paid out to lenders to service your debt.

7:29For example, if you make$5 ,000 per month and you pay out$2 ,500 per month to your mortgage lender, your car lender, your textbook debt-to-income ratio would be 50%. However, using the total expense-to-income ratio, this just takes it one step further, giving you a deeper understanding of what's left over every single month. Here's what to do. Now that you've created a detailed and accurate budget, you need to add together the total amount of all expenses, anything that's causing money to leave your bank account every single month. Now divide that by your take-home pay. If your total expense to income ratio is 85 % or less, you are golden and on your way.

8:13Yes. So the total expense ratio to Robert's point is sort of this reiteration of the debt to income ratio. If you've bought a house or you've bought a car or just had money lent to you in general, you've likely heard the term debt to income ratio. I think a lot of lenders like to see it below that 35, 36 % range, leaving some room for more discretionary spending, right? We want to include not only that debt to income ratio, but also the discretionary spending. We want to know exactly as a percent of how much money enters your bank account per month is leaving your bank account each month for things like not just your mortgage and your insurances and all the other debts that you might have, but also the restaurants, the eating out, those Abercrombie and Fitch jeans, right?

8:55We want to know everything that's being spent. And if your total expense to income ratio is close to like maybe 95, 100%, even 90%, right? That 90, 95, 100, you're not in a bad spot. You just now need to figure out how you can begin to cut back on spending to allow yourself to invest that 15 % each month that Robert and I think is that perfect golden number. Now that again, might be the insurance thing. It might be the switching the cell phone bill. That might be maybe even increasing your income a little bit there, right? There's different ways we can think about this. But if you're in the 90, 95, 100 % range, you're doing pretty good, right?

9:30That's where a lot of people find themselves. However, if your total expense to income ratio is above 100 % each month, you are perpetually going into debt on a monthly basis and you have a crisis on your hands. You need to figure out what's going on and find a solution immediately. If you are spending every single month more than what you are making, you are going further and further into high interest credit card debt, assuming that is how you are actually getting access to this extra money to spend, and at an interest rate of 30 % is unacceptable. That is how you perpetually stay broke and perpetually never make it to millionaire status, right?

10:05That is just not what we wanna be doing. So with that being said, right, come back to the build your budget, be honest with yourself. Look in the mirror. Really say, am I spending the right amount of money? Do I need to eat out? Do I need to buy this? Do I need to buy that? Understand your budget. Figure out how much of the budget is being spent on total expenses each month with the total expense to income ratio. And if it's 85 % or less, you're good. Go take a victory lap. Pat yourself on the back. If it's 90, 95, even 100%, that's not a bad spot to be in. We want to get closer to that 85. So maybe that might be some side hustles to implement.

10:36Maybe it's switching auto insurances or cell phone carriers. But if you're over that 100%, you need to figure out why and you need to fix it immediately. This 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.

11:09Allowing my son to see the flight deck will stick with us forever. That's how good leads the way. I love it. Let's go into number three. Calculate how much to invest each month. You figured out the budget. You now know how much you're consistently spending on a monthly basis with your total expense to income ratio. Time to get to the good part. Automating your investments. This is so, so critical because so many people don't automate their investments. You've got the 15 % figured out. You know how much you have to invest with each month. But if you don't automate it, guess what? You're going to let lifestyle creep jump in.

11:44You're going to spend some of it one month. You might skip a couple months. And guess what? That is a recipe for disaster. We want you to automate this. So if you've got that$500 or that$400, that$900, automate it and know where it's going before it ever hits your account. So assuming you're not crippled by high interest consumer debt and you've paid all that off already, then you know where you stand to get started in investing, what to buy, and how to get this train moving so you can make your way to financial freedom. So let's talk about investing, right? How much, where to do it, what to buy, and when to sell.

12:21For example, because we love giving examples, they're easy to understand and they might actually be you. So for example, let's say someone listening right now has a household income of$6 ,000 per month, right? $6 ,000 per month is entering their household's bank accounts every single month, and their total expense-to-income ratio is that perfect 85%. That means that every single month, this household has $900 left over to invest,$10 ,800 per year. Robert and I have talked about sort of this order of operations for investing, but just to catch everyone up, here's how we like to plan out the priorities.

13:01Priority number one is to get the match from your employer's 401k, right? This is the first and most important investment to make because it's free money. Then once you've got that free money, let's max out the Roth individual retirement account because it's tax-advantaged money. And then once you've done that and you still have money left over, let's now go back to investing and to the 401k only if you have autonomy over those investments, assuming you're able to pick the specific ETFs and mutual funds and you're not just being funneled into some target date fund, right? Assuming you do not have autonomy, that's okay.

13:33We're going to go to public.com and open an online brokerage account through them. Now it's time to do some math. Let's say your match at work is that normal 3%, right? Everyone gets a 3 % match on their 401k. So if you're taking home$6 ,000 per month for your household, that means you're doing about a$90 ,000 per year salary pre-tax. So that's where that 3 % comes in with that 90K, right? So the 3 % is of 90 ,000, not that 6 ,000 after tax. So you're now getting$2 ,700 per year in free money from your 401k match after you yourself contribute$2 ,700 per year. That leaves us now with$8 ,100 on an annualized basis to invest with.

14:15$900 a month,$10 ,800 a year. We now have$8 ,100 left. We all know the Roth IRA, we can max that out at$6 ,500, which leaves us now$1 ,600 to invest. Assuming your 401k doesn't offer autonomy on picking your specific investments, right? We're going to go down to the link in the show notes and download public.com and we're going to purchase VGT, VOO, and MOAT. These three index funds are incredible. You can buy 33%, 33%, 33 % weighting in all of them if you'd like. It's however you really want to chop it up, but that's the plan. I love it. If you haven't yet opened up a Roth IRA, you can do that on Betterment, Wealthfront.

14:57You hear me talk about Charles Schwab all the time. That's schwab.com. They're all straightforward platforms and everyone should be buying the index funds we mentioned. Like Austin alluded to, VOO, VGT, VTI, Moat, and QQQ are at the top of our list. If you want to get a little more aggressive, I love AIQ. It's really strong in global markets in the artificial intelligence market. So I love that one. A good mix of these in anyone's retirement account is going to do wonders. And you just let compound interest do its job. I know we might be a little overwhelming listening to all the math and all these names and they might, what are these acronyms?

15:36What are these? I don't know what this means. You got this. We promise. We listened to the episode, take some notes. It's super simple, right? We're creating the budget. We're figuring out how much money is leaving our bank accounts every month so we know how much we have left to invest. We want to have 15 % every month to invest. In this example, that's$900. We're going to get that match from the 401k. We're going to max out that Roth IRA. And then we're going to go to public.com and we're going to buy some incredible index funds that Robert and I both love. It's that simple. Now you do that.

16:07Now we're talking about$900 per month. If this is you and you have a household income of$6 ,000 and you are able to invest$900 per month, and you do that from, let's call it 35 to 65, you're going to have$2 million in your retirement account after inflation. That's after inflation. That's after all the craziness, right? $2 million in retirement. That'd be nice. It's so simple, guys. It's so simple. We can do this. This is the three simple step playbook on how to invest the right way, the rich habits way. I love it. I have goosebumps right now because the main understanding of an episode like this and all of our episodes of the Rich Habits podcast is really understanding that if you take notes, you take action and you be consistent, you will inevitably become wealthy.

16:57I promise you. Wealth is inevitable. Success is inevitable. Consistency, discipline, focus. You consistently do these things, you focus on this, it will come. We promise. Now, with that being said, Robert, let's introduce today's episode sponsor. Sounds amazing. You have the highs, the lows, the soaring spirits, and the gut punches. The stock market's volatility has been a good reminder of why we always diversify our portfolios. New data from UBS shows private assets like fine art can be especially valuable when looking for low correlation as they have historically moved independent of the stock market.

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19:00Love it. Let's go. Our favorite part of the podcast. And it seems you all love it as well. We're going to get into the Q &A. Austin, take us away on the first question. So our first question comes from Trevor H. Trevor hit us up in the DMs on Instagram. And he said, listen, guys, I'm 20 years old. I live with my parents. I want to get married in a few years, but I'm still in college. I'm only making about$2 ,000 per month, and I'm actually eager to start house hacking. I'm not sure, however, where to start or even how to lay out a decent timeline or a plan to follow. What do I do? What's the playbook?

19:33So I'm going to take a stab at this one. I think Robert's going to kind of rally behind me here. If I were you, as the 27-year-old, I'm kind of closer to your age here. I recently went through this myself. I would forget about all of this and graduate and go find a job, right? Your income is your biggest wealth building tool. So if you're only making$2 ,000 a month right now, that's not a needle mover. You're not gonna be able to buy anything with$2 ,000 a month. So focus on your grades, get your degree, and go find that job. Go get the internship this summer, whatever you gotta do, but find that job paying 50, 60, 70,$80 ,000 per year.

20:04I don't know what you're studying, but go get a job. Now that you have a job and you're probably 22 to 23 years old, make sure you're completely out of high interest debt. Maybe even pay off those student loans if you have any leftover. I think you mentioned in your note though that you do have a scholarship, which congrats on. It's also a really, really big priority to build an emergency fund. I want you to think$10 ,000 to$15 ,000. Something is always going wrong with my house and I bought it pretty new. So you're definitely going to want one of those. So next, have that emergency fund,$10 ,000 to$15 ,000.

20:33Now you've done all that, right? You got the job. You paid off the debt. You are making money. You have the emergency fund. You're ready to rock and roll. Time to think about house hacking. So Robert, I want you to jump in here. Share with Trevor exactly what house hacking is for the audience that might not know. And then talk about the new Fannie Mae lending opportunity. You all hear me talk constantly that buying a single family home is your first property and your first investment in real estate is a horrible idea. So in this instance for Trevor, I love the fact that we can look at him house hacking.

21:04And what that means is right now you go and you buy a duplex, a triplex or a quadplex, which is four doors, and you would live in one of those units for one year, rent out the others, it would make your overall living expenses much less, you still have the write-off of the depreciation of the property, plus you have the capital appreciation in your benefit as well. And now here's the pro tip. As of November 18th, Fannie Mae just released a new program for first-time investors, and it's called the 5 % Mortgage. And what that means is you can buy up to a million dollars, up to four doors for 5 % down.

21:44So if you do simple math, not saying that Trevor would go out and buy a million dollar property right out of the gate, but let's use that as simple math. Assuming your payment's going to be$8 ,600 a month on that million dollar property, and you rent out those other three units for, let's say,$2 ,200 a month. They're all two bedroom units, let's assume. Then all of a sudden, you only have a$2 ,000 payment for yourself to cover on a million dollar property. This is an amazing investment opportunity for anyone that's looking to get into real estate because it's lower criteria to qualify than the FHA 3 % or the 3.5 % loan, but it's still so great because you can do up to four doors and up to$1 million.

22:28I absolutely love this strategy. And just to add some additional color, I was talking with my friend, John Erringman at Johnny Finance on TikTok and Instagram. He's awesome. You guys definitely go check him out. But he's house hacks, right? He's 27, 28. I think the first property he bought with his girlfriend at the time, now his fiance was around the$350 ,000,$400 ,000 range. It was a duplex, bought that right out of college with her. They house hacked that together. They've since moved out of that and that's now a standalone unit, right? So now they've got two sort of people renting that out that he's cash flowing.

23:00And they went and bought another duplex now just the other month. They put 15 % down because it was before this Fannie Mae stuff happened. I'm assuming they would have only put down five if they could have, but they had to put down 15 because of other lending requirements. But now they're living in one unit and they now have three different units that they are renting out and earning cashflow from, right? That's the goal. So Trevor, as we talk about house hacking, right? The goal is not to just live in a duplex the rest of your life. You want to live in the duplex, house hack it, maybe refinance it when interest rates come down in a couple of years.

23:31So the actual payment you pay every month is lower. But once you've done that now, it's time to move out and maybe buy that second duplex or maybe that triplex, live in one unit, rent the other units out. And then you say, wait, let's say I've got a duplex and a triplex. Now I have five units and then it's time to go buy that single family home and use the cashflow from those five units to pay your fricking mortgage, man. Like that is how people are able to invest in real estate, leverage these awesome tools, like the 5 % down call out that Robert had about Fannie Mae and set themselves up for long-term success in real estate.

24:02Now, our next question comes from Katarina D. This one's pretty straightforward. She asks, is it a good idea to invest toward my company 401k if I don't have a match? Generally speaking, I would say no, right? If you think back to the kind of financial orders of operations, as we called it before with investing toward retirement, the first one to prioritize was that 3 % match, assuming you have that match with your 401k. If you don't, I would skip to number two, which is that Roth IRA. If you don't have a match, there's no extra free money to get excited about. So it's like you're just investing anyway.