653: 3 Ways to Escape of the Rat Race

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1:14Now, getting out of the rat race is simple, but not necessarily easy. To escape, all you need is monthly income from a source other than your job that exceeds your monthly expenses, right? Simple, but not always easy. I'm Nick Loper. you're listening to the Side Hustle Show, where we've been making day jobs optional since 2013. In this episode, I'm breaking down those three most common rat race escape routes, including the one at the end that got me out, the pros and cons of each, and how to choose the right path for you. So remember that freedom equation is non-job income that is exceeding your monthly expenses.

1:46The three most common ways to generate that income are traditional investments, real estate, and entrepreneurship. These are in contrast to, and probably more realistic then, the other paths that some people bank on, like an unexpected inheritance, a lonely Nigerian prince, or winning the lottery. But what's maybe even more surprising is most people don't really seem to have much of a plan at all. They're just going through life day to day with the assumption and hope that someday they'll retire. But it doesn't really work that way. And if you're not steering your own ship, I'm not sure you're going to ever get to where you want to go.

2:22The first step in escaping the rat race is to figure out your actual monthly expenses. What is your lifestyle cost? This isn't going to be a lecture on extreme frugality, but at the very least, spending with intention has got to be a part of your rat race escape math. I mean, why set the bar unnecessarily high? And if you've never calculated how much you actually spend on a monthly basis, it's worth taking a minute to figure that out. This was an exercise that my wife and I did last year, we kind of had this offsite retreat, we went through monarch money, and we're like, well, in our mind, we had a typical monthly budget kind of like bare bones.

3:00Well, we know how much the mortgage is, we know how much we roughly spend on utilities and groceries. But why is the credit card bill always so much higher? And it's like, well, we bought plane tickets, or we had this repair charge. It was always higher than what it was. So we looked at how much do we actually spend on a monthly basis? And the number is going to be different for everybody. It might be$3 ,000, it might be$10 ,000. But how much does your lifestyle cost? That's the income that you need to generate. That's your rat race freedom number. So how do real people achieve it? The first way is to save your way out with traditional investments.

3:37This is probably the most commonly prescribed path to retirement, whether early or not. And this is stocks, bonds, mutual funds, ETFs, stuff like that, paper assets. And this is how retirement has worked for generations, right? Amass a big enough nest egg during your working years, and then slowly draw down those savings after you stop working. The problem is, if you're listening to this, you probably don't want to wait decades until you've saved enough. Now, the FIRE movement, the Financial Independence Retire Early movement, has an alternative for you and argues that retirement isn't an age.

4:14You don't have to wait till you're 65. It's a number. It is 25 times your annual expenses in savings. This is from the Trinity study, I think was like late 90s. They did backtesting on a bunch of 30-year scenarios in the market and said, hey, you know, 95 times out of 100, if you're starting nest egg, is 25 times your expenses, you're unlikely to run out of money at least 95 % of the time. And this is not set in stone. Like if the market has a series of bad years, you could adjust your expenses downwards to hopefully make it last a little bit longer. So what does that look like in real numbers?

4:44If you're spending$40 ,000 a year, you could theoretically leave the rat race behind once you got a million dollars in traditional investments. You live off dividends and share price appreciation for decades under that scenario. If you spend$100 ,000 a year, you need two and a half million. Now there are a few advantages to this kind of traditional investment, this traditional path to retirement. One is that these so-called paper assets are accessible to just about everyone. You can even invest right from your phone with any number of different brokerage apps, stocks, bonds, mutual funds, ETFs.

5:17They're highly liquid, meaning you can buy and sell them quickly if you need to. And over the long run, they've performed historically well, like projecting seven to 9 % annualized returns would be realistic there. The biggest drawback is trying to get out of the rat race with traditional investing either takes a lot of time to let compounding do its thing or a lot of money. Now, despite enthusiasm from the FIRE community, which I would consider myself a part of, I like that they put a milestone, an end game, a goal post, something to reach, something that's hopefully attainable and doesn't have to be related to your age, more or less.

5:56But the truth is, unless you have a really wide margin, a lot of profitability in your personal finances, that's the gap between what you earn and what you spend, there's really no shortcut to building up that nest egg. Plus, if you have unexpected expenses that pop up during retirement, you know, your assumptions around withdrawal rates can probably go out the window. For the traditional investing path, if you go way back in the archives, you'll find episode 105. This is probably from like year two or three of the show. This is with Jeremy Jacobson from Go Curry Cracker, who retired in his late 30s, thanks to this high level of personal profitability that we're talking about.

6:35We were roughly saving 70-ish percent of income for quite a while. And then I probably worked three years too long and was saving nearly 100 % of income at that point if you're just living off the dividends and interest. If you're saving that percentage of income, it really only takes about 10-ish years in order to build up enough net worth to fund your lifestyle forever. What kept you working those extra three years? Was it just the, like, can we really do this? There's a little bit of that. Maybe I'd call it fear. Nobody does this. I've read stuff, but thinking you can do it and actually doing it are two very different things.

7:16That mindset shift from saving and investing and accumulation to all of a sudden drawing down, intentionally bringing your earned income to zero, that's a complete 180. And even if the math and the models and the projections that say you're going to be fine, I think it's a lot harder to pull the trigger in reality and just toss your career aside. So one thing that we're trying to do that we've seen some other friends do is as that nest egg grows, scale back some working hours. Maybe you don't jump off the cliff. Maybe you kind of start rappelling down, you know, one level at a time. Maybe that means negotiating a working part-time or only four days a week or transitioning to a role that is less demanding, doesn't require as much overtime.

7:59It's reducing your income by baby steps rather than going cold turkey all at once. So who is this traditional investing route best for? I think this is the best way to escape the rat race for high earners who live a relatively inexpensive lifestyle. If you or you and your significant other bring in, say,$300 ,000 a year, but you only spend$50 ,000, this is a great option. Now, if you ignore taxes for a second, because that always throws a wrench in any time on the air math. But you can see how it would only take five years if I'm saving, if I'm profiting$250 ,000 a year as a household, it would only take five years to accumulate that one and a quarter million that I would need to support that$50 ,000 a year lifestyle in retirement.

8:48So that means if your work is tolerable, I think those five years are going to fly by. And that assumes you're starting at$0 in savings today. Now, on the other hand, if you make$50 ,000 a year and you spend 49 of it, traditional investing is never going to get you out of the rat race. There's simply not enough savings margin there. Which brings us to option number two, which is to beat the rat race with real estate. And that's coming up right after this. A lot of side hustlers suffer from what-if-itis. What if it doesn't work? What if I don't have the skills? What if I pick the wrong path? But one thing 100 % of our amazing guests have in common is they took their shot.

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11:21Terms and conditions apply. Hiring Indeed is all you need. The second common rat race escape path is real estate. And for the sake of this episode, I'm going to focus on rental property investing. Real estate comes in so many different flavors and strategies, many of which we've covered on the side hustle show before, but we're focusing on rental property investing in this one. So how real estate works to escape the rat race, it's a pretty easy to understand business model, right? You buy a house, you rent it out, and you pocket the difference between that rent and your monthly expenses, your mortgage, your insurance, your maintenance costs, right?

11:56And lather, rinse and repeat until you got enough monthly cash flow to quit your job. This is what Dustin Heiner did, who for him, it was around 26 different properties and around$15 ,000 a month in reliable cash flow. He retired at age 37 and supports his family off the income from that rental property empire. So his big thing is invest with that monthly cash flow in mind, and then use it to start slowly chipping away at your own living expenses. Again, another argument for keeping those expenses low, because the lower they are, the less properties, the less cash flow that you're going to need.

12:32Now rental property investing can accelerate your climb to financial independence in several important ways. First, you can take advantage of leverage. That's borrowing money. In contrast to traditional stock market investing that we talked about a minute ago, where$20 ,000 buys you$20 ,000 worth of index funds, that same$20 ,000 could be used as a down payment to buy$100 ,000 or more worth of real estate. Then you can pay down that loan balance with the rental income that you receive over the next 30 years. The next big advantage of real estate is appreciation. As you know, houses tend to cost more today than they did a generation ago.

13:10By buying those properties, you can capture this appreciation when you sell, or you can borrow against that equity in your houses to fund future acquisitions. This is another thing that Dustin talks about, kind of like recycling that initial down payment money as equity as future down payments. And third, being a landlord comes with a bunch of different tax advantages, tax benefits, including the ability to write off your mortgage interest and even take depreciation on the buildings that you own. And finally, real estate can be a pretty passive income stream once you have your tenants and other relative or other relevant team members in place.

13:46Yes, there's an upfront time investment, but no trading hours for dollars down the road. So what disadvantages should you be aware of? Well, home prices don't fluctuate as wildly as the stock market, but investing in physical assets, it does take more legwork. And it also means that your cash isn't as liquid. And by that, I mean, you can't just push a button on your phone and sell a house when you need cash like you could do with an index fund. And although there are some creative ways to buy houses with no money down, like we talked about in our creative financing episode with Austin Miller, really fun episode, real estate is usually a takes money to make money option.

14:25And as a landlord, you're also going to face vacancies. If the house sits empty, that erases any positive cash flow you were banking on that month. Repairs and maintenance, roofs, windows, toilets, water heaters, nothing lasts forever. It all costs money. And if you're the owner, it comes on you. There are unexpected expenses. Like our friends in California had to redo their foundation to the tune of like$90 ,000. There might be tenant issues that come up and why some humans think it's acceptable to trash other humans' property, other people's houses is beyond me, but you might be lying if I said it didn't happen.

14:58On top of that, your local real estate market might not be a great place to invest, so you might be dealing with all of this remotely or through a third-party management service. So who's real estate investing best for? The people I see having the best success with real estate are those who take a long-term view and are committed to operating multiple properties. I don't think one house is going to get you there. Now, especially if you can buy multiple properties in one location, there are some economies of scale that might make life easier than having only one house or having houses in different cities across the country.

15:30The reason for that is that way you can have one property management company or one general contractor person that you have as your go-to in that space versus having spread out in different cities all over the place. Now, as your empire grows, you're also better able to absorb a vacancy here or there or an unexpected expense for a property or two in any given month. But just like traditional investing, real estate can and does work to escape the rat race if you have the capital, the patience, and the fortitude to stay the course. If the idea of accumulating a portfolio of cash flowing real estate appeals to you, check out episode 387 with Dustin Heiner.

16:07It's a super inspiring episode, and one of my favorite clips is where Dustin talks about getting laid off from his government job, his supposedly safe government job, and the identity shift that happened after that. I bought maybe two or three properties, and I was really enjoying it. But at the same time, I was working a great job. I was working for the county government. And then I'm working from Monday to Friday, just one week back after my fourth child was born. On Friday at 3.30 in the afternoon, I get a call from my boss's boss's boss's secretary, like the top dog. His secretary gave me a call and said, hey, Dustin, the boss needs to see you come to the office.

16:43I said, okay, and hung up the phone. And I sat there for a second, like, what is, why are they calling me? And then as I'm sitting there, I start to think, what could be calling about? And, oh, my goodness, back before I left, I heard some rumors or some rumbling throughout the entire office about possible layoffs because there wasn't much money. And this was like 2009, you know, right after the crash, it eventually trickled down to the government. I'm me working for the government. I'm like, I should be fine. I have plenty of seniority. I'm doing really well. They've always gotten raises. And so I get up and I start walking down the hallway to the boss's office.

17:17It feels like it's a mile long because I'm just thinking, what am I going to do if I get laid off? And as I'm walking, my feet feel like lead bricks. Like I just, it's hard to take that next step. And each time my heart started pumping a little more because I started realizing, my goodness, I have four kids. How am I going to feed them? How am I going to put a roof over my head? And I get to where my boss's office is. His door is closed. I turn the corner and I see the secretary. Sheepishly, she looks at me and kind of grins and says, Dustin, would you please have a seat? She knows exactly what's going to happen.

17:51What is happening? I don't. And she's trying to console me just by, you know, her eyes and her smile. She can't tell me. So I sit down. And as I'm sitting there, I'm feeling like a pit in my stomach thinking, oh my goodness, this is probably it. And I started realizing or thinking, am I a failure as a husband? Am I a failure as a father? Even as a man, am I a failure? And as I think more and more, it's like literally like 30 seconds or a minute. It's just sitting there. I start to sweat on my forehead. My hands get all clammy and then opens the door to my boss's office. And out walks a lady with a piece of paper.

18:25She's noticeably distraught, almost crying, but she's not really not saying anything, holding this piece of paper and walking out. And my boss says, Dustin, would you please come into my office? And so I get up and go in and lo and behold, I get laid off. And who gets laid off from the government? Well, I did. I absolutely get laid off from the government. And so I take that piece of paper, I go back to my office and I realize two things. Well, number one, I realized that I need to provide for my family. And everything that I need to do from this point forward is to be able to provide for my family, my four kids, my wife.

18:56And so I was blessed within maybe like a week later, I was able to find another job in the county because I had good reputations. So I got that. That was the number that my job was to find a job. And I did that, which is the first goal. The second thing was I needed to never, ever let this happen to me again, outside forces causing me to not be able to provide for my family. So what I decided to do was that point, as I'm literally sitting at my desk right after I got laid off, the second thing I realized, I am now an investor. Even though I had two or three properties, I was just a side hustle.

19:31I realized I am now an investor, even though like 98 % of my income comes from my side job. It's now my side job. Even though when 98 % of the money comes from it, my value is in what I give myself. And so what we usually say, what I would always say, if somebody says, Hey, Dustin, what do you do? Basically, what do you put value in? I would always say I work for the county government doing it work of the county government. No longer did I ever say that after that I said, I am an investor in real estate rental properties. So from there, I worked every single penny into another property. I was frugal.

20:05We only took one vacation a year, which was driving from California to Arizona to see the in-laws for Christmas. That was the only vacation. We didn't eat out. And so in making that transition, this was my goal. I said, no longer am I ever going to let this happen to me. And so I strove every single day, every single week to get that next property and that next property and the next property. So to actually taking that leap, honestly, it was a little hard to leave that W2 or a lot of hard to leave that stable W2 job once I had it. But once I realized I am losing money here, my value is so much more than this.

20:38And I'll be honest, now that I quit my job, it was so amazing to see how much more money I can make when I work for myself. So for everybody listening, that's my processes. I had to change my value in myself. No longer am I working for the government. No, I'm an investor with a side job. Same thing with you. You're a side hustle. Whatever your side hustle is, if you want to turn that into your job and you want to take that leap, literally change your vision and your value of yourself. And that's what got me to where I am today. Yeah, this is like the identity habit. This is a really powerful thing.

21:10That subtle shift from I'm a worker first to I'm an investor first. So I appreciate you sharing that. Again, that's from episode 387. Now, to be fair, for every Dustin, for every evangelist for real estate, there's at least an equal number of burnt-out landlords who bought into the leverage and tax advantages and cash flow of real estate only to get chewed up and spit out along the way. No business is without risk and headaches, and real estate is one that often gets oversimplified and oversold. It can definitely work. It can be a great inflation hedge, a great tax shelter, but it is real-world inventory with humans involved.

21:48It's a model that I got really excited about in college, even bought my first rental property, but perhaps didn't have the intestinal fortitude to stick it out over the long run. And that's one reason that I have shied away from direct investment in recent years, instead relying on alternatives like Fundrise, where you can begin adding some real estate to your portfolio for as little as$10. I'm an affiliate of and an investor in Fundrise since 2015. their model appealed to me as a way to benefit from real estate in a way that's diversified, that's totally hands-off. It does not come with the leverage benefits, at least directly, right?

22:25You know,$10 in is$10 in, but this is one that has appealed to me. Again, real estate, it's a long-term game. So it might take, you know, eight to 10 years, like in Dustin's case, to build up that portfolio to the point where it is exceeding your expenses and helping you escape the rat race. A friend of mine put it this way, like with traditional savings and investments done right and done well with a reasonably high personal profitability margin, it might take 15, 20 years to reach your fire number, which would still mean retiring or achieving financial independence way earlier than most, like in your early to mid 40s, which is fantastic.

23:00But with real estate, it might take eight to 10 years of concerted effort buying a house every year or two, stacking leverage, stacking cash flow. And with our third and final rat race escape option, it might take three to five years in that entrepreneurship. The third way to get out of the rat race is to build your own business. If you look at the Forbes 400 list of the richest people in the country, one thing should stand out to you. Most of them built their wealth through entrepreneurship. And even if you have no aspirations to build the next Amazon or Apple or Tesla or Facebook, like I don't have those aspirations either.

23:37But building a business is a realistic way to break out of the nine to five grind. That's how I was able to walk away from corporate America years before starting Side Hustle Nation. Entrepreneurship has helped, you know, probably thousands of friends, Side Hustle Show, our listeners, Side Hustle Nation readers do the same at this point. So how entrepreneurship works to escape the rat race is pretty simple. We tend to overcomplicate it, but I'm gonna try and break it down here. So a business is simply a system that solves a problem in exchange for money. It's a problem-solving machine. And the good news is we're all natural-born problem solvers.