56: The 3 Phases of Building Financial Freedom

0:00Hey, everyone, and welcome back to the Rich Habits Podcast, a top 10 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. Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business and I 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.

0:35However, we try and bring you two unique perspectives, one from an industry veteran, which is Robert, and then the other myself, someone who's still in the process of building wealth and figuring it all out. So Robert, what are we going to be talking about in today's episode? In this episode of the Rich Habits Podcast, we're going to be talking about the three phases of building financial freedom. Every single person listening right now is currently in one of these three phases, and each phase has specific priorities needed to become financially free sooner than later. That's the key here. We want to get you guys set up earlier than later.

1:10A lot of people ask us, where do I start? What should I prioritize? And what's the shortest path to wealth for my situation? Because remember, it's not a one size fits all when you're building wealth and financial freedom. So in this episode, we look to answer not only these questions, but inspire our listeners to take notes and take action so you can figure it out right alongside of us. Yeah, Robert, I'm living proof that if you can one, figure out what phase you're in and two, actually do something about it, you can begin to really move the needle for your own financial situation. So Robert, kick us off with phase number one.

1:48Yes, phase number one, this is where everyone seems to start. You're at a negative net worth. If you're like most 20 somethings and you just graduated college a few years ago, you've got debt, you likely have a negative net worth. So don't get down on yourself about this because we all have to start somewhere. Everyone thinks because maybe after college, you've got the job and you've got a nice car and you're out there having fun that you're on the right track, but you likely have a negative net worth. And that's something we're going to talk about today. So having this negative net worth should put a fire under your butt to fix it.

2:24And here's how to fix it. You need to put yourself in a season of earning as much freaking money as you possibly can. It's just so important to understand this beginning phase because a lot of times when we look at people that are in their twenties, just graduated college, you grinded through it. Maybe you didn't go to college and you've been in the workforce, but you're not focusing on the most important thing is putting in the work now to set yourself up later. And this is so, so critical. If you can just put yourself in the shoes of maybe your parents or grandparents or somebody else and look at the fact and say, you know what?

3:00I'm going to put in all this work now. I'm going to have the side hustles. I'm going to really educate myself on my finances and my literacy around building wealth. It's just going to be a game changer. I told someone this the other day, they were like, if you were 21 years old or 25 years old, what would you do right now? And I told them that I would move to Southern Florida where I am now, because I was from Ohio at that time, I would buy a van, I would get the best job I could. Or if I was going to go solo as an entrepreneur, I would build a service-based business and I would live in the van outside of the office where I'd probably rent a co-working desk and I'd have a gym membership so I could shower and work out every single day.

3:42And what that means to all of you listening is having that lean and mean mentality where you're really doing the work now to set yourself up later? I'm not saying that everyone needs to live in a van if they have a negative net worth. But what you should do, Robert, is be thinking about those side hustles. Sell some things around the house. Perhaps talk to your boss about what it might take to start earning more in your career. When it comes to earning more and more money to pay off the high interest debt, you have to have the mentality of what can I do? There's always something I can do for me.

4:15When I was in this situation, I was cleaning car headlights. I was selling website templates to dog groomers here in Nashville. I was doing so many random little things to try and make just a little bit more money because I knew that every dollar I would earn and then take to pay off my high interest student loans, my high interest car debt, things like that would be incrementally moving the needle for me to hit net worth break even, right? Net worth is zero because I was negative. I was negative, right? Six or seven years ago, So I was right there with a lot of you. I had just graduated college.

4:45I had that student loan debt, the negative net worth, and I had no idea where to start. So by focusing on earning as much as humanly possible, not just through my job, but also through side hustles, I was able to pay off my student loans of tens of thousands of dollars. I eliminated a monthly car payment that I just could not afford. And I set a foundation for myself to begin building wealth. And going from negative net worth to break even, which seems like, oh no, now I'm really at zero. like, oh gosh, no, that's accomplishment. That's an awesome accomplishment. And you should be very proud of yourself for achieving that.

5:19So don't make the mistake of thinking like, it all happens by accident, right? People don't win the Super Bowl on accident. So this is the most important phase of your financial journey because without a strong foundation, without learning how to track your net worth, learning how to track your monthly payments and the interest rates on your debt and finding the wiggle room in your budget and learning to earn more money, like these character traits and these skills are going to follow you throughout the rest of your financial journey. So phase one, where everyone starts here, where a lot of people starts, where I started, this is the phase where you learn and you begin to build that strong foundation.

5:57I love it. Yes. It's so important in this literacy phase of learning what's right and wrong, because so many of us in our twenties, we're ready to go get that new BMW or Mercedes. We're ready to go get the new iPhone right away and the Apple watch and all the fun stuff. But we forget that if you think about retirement in your twenties and thirties, you won't have to think about it in your fifties or sixties. So please remember that note. It's very important. So let's go to phase number two. So get your base built. You hear Austin and I talk about getting that first hundred K saved and invested.

6:31And this by far is the most important thing for you to do in your wealth building journey. So you ask yourself, how do we do that? Robert, it's not that simple. You know, food's expensive. Inflation is high. I'm not making enough money. Well, guess what? It doesn't matter. It's up to you to figure that out. And it's up for you to put on the big boy pants, the big girl pants, and just get to it. Whether it's the side hustles or more learning or whatever it is to improve your skill sets, only you can handle that because no one's gonna do it for you. So the first step, in my opinion, Austin's opinion, is getting your honest budget done.

7:08There's a link in our podcast description to download a template to use to help get you started. But really, again, the honest budget, that all-in, no-cheating budget, so you have an understanding of exactly where your monthly overhead is, so you can calculate your debt-to-income ratio and see what the desired 20 % amount for saving and investing is based on your current income. That's the key. getting that 20 % based on your current earnings and income, and then from there, expanding on it if it's not enough. So that brings us to what if it's not enough? You've got a goal. Your current earnings aren't high enough.

7:45That's what brings in the side hustles. Like it or not, you either have an earning problem or you have a spending problem or both. You hear me talk about that all the time. And it really is just so prevalent in US households that people just live beyond their means and don't know how to get out of it. So you just really have to dig deep, figure out where you are financially so you can get on the right track in your journey and your journey alone. Don't worry about what everyone else is doing because you have to look at your own financial situation and worry about that first and foremost. So now that you've created your honest budget and you've found the margin in your monthly budget, hopefully it's around that 20 % or so of your income, it's time to save and invest it.

8:28You need to build an emergency fund of three to six months of monthly household expenses and park it inside of the public high yield cash account paying 5.2 % using the link in the show notes below. Once you've done that savings process and you've got the call it nine, 12,$15 ,000 saved for you so you don't have to viciously go back and swipe that credit card like you might have been doing in the past when an emergency comes up. You have the emergency fund for that. Let's start investing, right? We did the saving. let's start investing. So open the Roth individual retirement account. You can do this on Fidelity, M1 Finance, Vanguard, Charles Schwab, anywhere you'd like, just Google Roth IRA.

9:08Open the account and deposit that 20 % every single month. But more importantly, don't just deposit the money. Once it's deposited into the account, you must invest the money. So invest the money into these long standing index funds. We talk about VOO, VGT, VTI, QQQ, MOAT. These are the index funds that you will be investing into now for a while, several years until you hit$100 ,000 invested. Yeah. And the most important part here is don't take phase two lightly. I promise you by getting that first 100K invested and making you money while you sleep, it is a tremendous step in securing your financial future.

9:51Intentionality plus discipline equals wealth. We're going to put this on t-shirts, coffee mugs, whatever we need to, to get everyone to understand that wealth doesn't happen by accident. You have to have a plan and follow the plan. So we said that in the last episode and we stand by it. Phase two is that math equation coming to life. This phase isn't an overnight phase either. You're going to be doing this for years, five, seven, maybe 10 years or more likely depending on how much you're able to invest each year. So look at it this way. If you were to invest$12 ,000 a year or$1 ,000 per month, you would likely hit that 100K milestone in six to seven years, depending on the current rate of return you would make in the markets.

10:37This is a process. Don't get discouraged. It just takes time, but trust me, it's well worth it when you get to that point and you're so proud and you can look at that account, see that 100K in there growing every single day. So, so critical. I mean, Charlie Munger said it best, right? I mean, what's his quote there? The first 100K is a bitch and it's really hard, but you got to do it. Because we all know, Robert, once you have that first$100 ,000 invested into the markets, compound interest is just going to take hold. Think about it like this. Let's say you had $10 ,000 in the markets. $10 ,000 invested into the stock market at an 8 % return?

11:14What is that? 800 bucks a year? That's not, I mean, 800 bucks, I'd rather go figure out how to earn$800 than passively try and take 10 ,000 and make 8 % with it. But with$100 ,000 at an 8 % return, that's$8 ,000 a year, right? That is several hundred dollars a month that you are earning while you sleep, because you now have this massive fund and this massive base built. Yeah, Austin, I love that outlook. And let's get that base built. I will stay on this hill for life that it's so important for everyone to understand. Get the first 100K first. Don't focus on being a multimillionaire out of the gate.

11:54You need the base. You need to make money while you sleep. It's just so important to understand that. I couldn't agree more, Robert. Now, before we jump into phase three of this episode, I mean, you all have heard us use the phrase, own the companies you know and love. But many of you might not know about the app we use to make that super easy for us. The name of the app is called Griffin. It allows you to turn your real-time spending into investments. Remember, we want to own stock of the companies we know and buy from. Yeah, whether it's buying groceries at Walmart, a Spotify subscription, a quick Amazon order, or any other purchases from publicly traded companies, Griffin will automatically invest$1 into the company you're shopping at.

12:34The main point is we want to be shifting our approach from a consumer-based mindset to an investor-based mindset. And Griffin really helps with that. A hundred percent. I'm personally an investor in this company. I have been a massive believer in their movement and their mission now for years. And I'm so excited that we now have a new partner that aligns so perfectly with the show, Robert. So you can simply download the Griffin app using the link in the show notes below. Once you've done that, you can connect a credit or debit card or even your bank account if you want to do that and begin passively investing into the companies that you're actually a consumer of.

13:09Every time you swipe your card, it will take an extra dollar on the purchase and invest it into the company's stock without charging any monthly fee or any commissions. So to be sure to visit the link in the description of this video. When you sign up using the code HABITS, all capitalized, you get an additional$5 of free stock. And of course, let us know if you have any questions. All right, phase three. Now that you've got the 100K saved and invested, now it's time to accelerate your income and get you to the next step of$1 million or more. By accelerating your income, we mean diversification, allowing you to make even more money while you sleep.

13:48This could be investing into small businesses, diversifying into cryptocurrencies, or other alternative investments like artwork. This could even be learning how to sell your own covered call contracts. We want you to get creative, get excited, and expand your income capabilities. There's a million ways to make money out there. We are living in the greatest time of my lifetime and all of your lifetimes as well to be able to really capitalize on all the opportunities. And it's just such an amazing time to be alive. You always hear the average millionaire, Robert, having seven or eight income streams.

14:22and this is the phase they begin to build that out, right? Most millionaires start with one income stream and they build it up, allowing them to get that first 100 ,000 invested, right? They build their base. But once the base is built, they begin to diversify their investments into other income streams, allowing the snowball effect of compound interest to take hold. I'm doing this myself and it has been a blast. Yeah, Austin, you're really getting into the fun part. Once you get that 100K invested, You're beginning to expand into other revenue streams. You're traveling more. You're ordering that two appetizers and two glasses of wine rather than worrying about it at dinner because you're no longer worried about your day-to-day life and paying your bills.

15:04And this is a great place to be. And just one of the most abundant feelings ever when you're finally not worrying about your day-to-day cash and living your lifestyle. So it's just really great because this is the first time in your life where you stop thinking budget and you start thinking forecast. You went from, I only have this amount of money every month to we're forecasting this much to spend every month because now you're living this abundant life and working your way towards having your investing on autopilot and being finally financially free and having all of your processes in order to advance your career and really reach financial freedom much sooner than may be expected.

15:46I know, Robert, you're well past this phase because you are financially free. And I'd argue I am myself, but this is where I kind of think I am, right? I'm investing aggressively still right now. I'm actively trying to build passive income streams. If it's with covered calls or investment properties with real estate, I'm diversifying my assets into artwork, wine, whiskey, crypto, and other awesome asset classes. I'm getting as much money invested and working for me as possible so I can not only hit my goals, but I could crush my goals. Yes, Austin. I love this episode because so many people out there in the finance world try to make it seem difficult and scary and just complicate things.

16:25I read through a contract the other day, a client and a friend of mine asked me to explain the expenses on their IUL policy. And the policy was like 40 pages long and I couldn't even figure it out, me. And that's one of the key takeaways of why I love what we do with the Rich Habits podcasting community is break it down so people understand it from simple nuggets of how to build wealth, because if it's too complicated to understand, it's probably not a good investment and we're never going to take you there. So I love this episode because it just really illustrates if you follow a plan, execute a plan, then you're going to be so much better off in your financial journey for the long run.

17:06Listen, guys, Warren Buffett, one of the best investors of all time, is worth over$100 billion. But he didn't make his first billion until he was, I think, 58 years old. And so I want everyone listening right now to realize this is a lifelong journey. We are not trying to get rich quick. We're trying to use tried and true methods to get rich slowly and certainly. We've tried to break it down into these three phases because these are the phases a lot of people find themselves in. We identify with these phases and we need to realize and have those sort of come to Jesus moments of, wait a second, I am in phase one.

17:43Or wait a second, I'm in phase two, but I'm living like I'm in phase three. Or I am in phase three, I can let loose a little bit, I can start flexing my spending muscle and enjoying sort of a little bit more of my life, right? Everyone's in a different phase of their life. And we just really hope this episode was able to lay out the playbook, kind of peel back the curtains and show you all that it's not as crazy as maybe these convoluted videos on TikTok or Instagram or Facebook might make it seem or even YouTube or these blogs about crazy if it's a life insurance policy or credit card churning or all these insane things that make you feel like you're not good enough or you're not smart enough or you're not capable.

18:22That's bullcrap. You are capable. You can do this. All you have to do is know the phase you're in and the priorities to focus on to help move the needle in your own phase so you can begin on your own financial journey. I love that. That was an amazing takeaway. We should just drop the mic, close the internet down today and go to lunch. Wow, that was amazing. Okay. Things are looking a lot better than they were a year ago. We avoided major bank collapses, but for how long? Small banks are barely staying afloat. Jerome Powell even admitted on record, there will be more bank failures to come and the biggest ones are either merging or reporting four-year profit lows.

19:00But there's nothing to worry about. That is if you're properly diversified in your assets. We were just talking about diversification, Robert, right? And that's why this Advertiser Masterworks is so important. The market's coming up on another crossroads with new CPI numbers, but no matter the results, you can still find growth potential and avoid volatility with low correlation, high upside assets like fine art. Now, Deloitte just released a projection saying that the art market is expected to grow to$2.9 trillion by 2026. That's a 31 % nominal increase in just two years. But you don't need millions of dollars to invest into this market.

19:40You just need our sponsors at Masterworks. Yes, Masterworks has acquired over a half a billion dollars of fine art. And we're not talking about computer-generated art. We're talking about legendary offerings like Picasso, Basquiat, and even Banksy. So over 915 ,000 users are on the platform and more popular offerings have sold out within minutes. But Rich Habits users can skip the waitlist and start investing today. Just go to masterworks.com slash rich habits. There's also going to be a link in the show notes below. So be sure to check that out. Robert and I both have invested into fine art. I started investing into fine art.

20:18I think it was in 21 or 22. And my annual return on these specific pieces that I chose, I think this is around, Robert, like 30%. It's kind of crazy. I'm up big on some of my artwork investments. Now, obviously, investing involves risk, and I might've just got lucky here. But regardless, go learn about fine artwork. Learn about diversifying your investments using Masterworks. Robert and I both highly recommend them. Yeah, this is the phase three part that we talked about, where you're diversifying, you're looking at other asset classes that can expand on your revenue streams and your profit streams.

20:49And we love masterworks. So now let's jump into an abbreviated version of our question and answer segment of the Rich Habits podcast. I know we're coming up on probably 23, 24 minutes right now, and we like to keep these episodes around the 30-minute range. So let's take a moment to hear from this episode's question submission, Tenny L. Tenny says, hello, Robert in Austin. My name is Tenny L, and I've been listening to your podcast for a couple months now. You guys are terrific and are exactly what I've been looking for to give me the push I need to get serious about achieving financial freedom.

21:20I'm 35 years old and last year I inherited a lake house as part of an irrevocable trust. This property is valued at$450 ,000 as is. There's no mortgage and I would like to tap into the equity to purchase perhaps maybe a duplex as well or do some major renovations and then rent it out for passive income. If you were in my position, do you think that this is the best use of the equity? Or do you have any other suggestions to maximize this potential opportunity? The house is not my primary residence. I currently rent in an apartment and I pay less than$2 ,000 a month in rent. Thanks to both of you, Tenny.

21:55Robert, you're the real estate guy. As the real estate guy, what do you think about this? I love the question. I love the situation even better. Without having all of the information, I would say you could look at the HELOC, a home equity line of credit. I would research that first, see what kind of interest rate you can get on the HELOC because that way you can pull some of the money out while still owning the home, get that equity out, invest in some other things because you don't want to just, especially because lucky for you, you have no mortgage. You just don't want to let that much equity sit there and be kind of that dead money.

22:28And it also depends on what the capital appreciation is in that area for a property like that. I'd love to know more about that in the future, but right now I would say your best bet would be that home equity line of credit to be able to get some capital out, look at a duplex, triplex, or a quadplex, and really look at the Fannie Mae 5 % down mortgage right now that's being offered because you can buy up to four doors, up to$1.3 million, and all with 5 % down. It's a great program through Fannie Mae. That's the strategy I would use here, but there are lots of different ways you can really look at this, and it just depends on what your goal is with this property.

23:06If it's a beautiful property on a lake, I probably would never sell it. So the HELOC would be a great option. I love that answer, Robert. And I'm actually going to pull up my investment calculator real quick to give us a little bit more ideas here. Because what I'm thinking about is this woman's 35 years old and she now has a property that's worth$450 ,000 that she owes nothing on. How crazy awesome of a situation is that? I mean, she's paying$2 ,000 a month right now in rent and And that's just going up like pixie dust, right? It's leaving her bank account every month. She's not building equity.

23:40There's nothing there. So I think it might be a cool idea, Robert, to... I mean, now I'm thinking about really beginning to try and build some real, real wealth here. I like the idea of tapping into the equity to buy a duplex and kind of start getting some passive income. I also like the idea of perhaps using a HELOC, to your point, Robert, or some other means of financing to... You mentioned$450 ,000 as is and that there are some, you know, renovations, major renovations to rent it out for passive income. Maybe those major renovations would cost you$30 ,000,$40 ,000,$50 ,000 if you can perhaps tap into some equity, borrow$40 ,000,$50 ,000 and then make those major renovations, making it now a sellable asset that's now worth, call it$650 ,000 and you only owe 50 to the bank.

24:27That is now$600 ,000 in cash that you are getting for selling this house, which, oh my God, at 35, and I had$600 ,000 to go invest, that$600 ,000 invested in the stock market would double on average every seven years. So by 42, you would have a million and a half invested in the stock market just there for you. So it really depends on the sort of way you want to build wealth here. Do you want the passive income perhaps allowing you to retire early? Do you want the opportunity for a major windfall. So you could perhaps have some larger capital appreciation down the road. It really depends on your specific preference here, Tenny.