Jay Papasan:
I’m Jay Papasan and this is The ONE Thing, your weekly guide to the simple steps that lead to extraordinary results.
Hey there, ONE Thing family. Jay Papasan here. I’m excited to be kicking off a three-part series on wealth building. This is super important. A lot of us have a lot of stress around our finances. It’s the number one reason couples fight. I know that lots of really, really smart people in my world worry about money because they didn’t study it. They don’t have a simple framework for understanding it. They don’t know if what they’re doing today will actually give them what they want in their future.
And what we all need is a simple framework to put our heads around this, so it doesn’t break our brains, we don’t have anxiety and fear every time we look at our bank accounts. And then when we think about our retirement and our wealth building habits, we actually have a little bit of confidence. It doesn’t feel like guesswork.
So, our goal with this series, with our episode today, is to take the stress out of our money, thoughts, and conversations, to simplify it into an action plan that everybody can follow and you don’t need an MBA. That’s our goal today. It’s gonna be a three-part series.
Today, we’re gonna talk about the path of money. It’s a model that Gary introduced me to when we wrote the Millionaire Real Estate Investor, published all the way back in 2005, massive bestseller, and it also changed my life. And I’ll talk more about that later.
The second episode, we’re gonna break down the habits of wealth building. Hey, we’re The ONE Thing. We talk about habits. What are the habits, the things that we need to be doing and avoiding that will make us go down this journey a little bit smoother, so that on any given week, we know that we’re doing the right things and avoiding the wrong things.
And the last one will be about your freedom number. What’s the amount of money that you need to be earning annually from your investments to be financially free, to feel secure, to not have the worry about money and to have your future feeling like it’s secured. That’s our goal with this series. And yeah, it might be a little bit long, some of these episodes, but I promise the payoff is there. If you, like me, have struggled thinking about this, this episode is for you.
Why me? I’m an English French major. I did not start this journey this way, but over the years, for The Millionaire Real Estate Investor, I had to interview 120 millionaires and learn from them. I’ve been taught this over the decades with Gary when we wrote the book and two other investing books. I’ve worked through workshops, thousands of folks, helped them simplify their understanding of money, so they can take more confident action. That’s what we want for you. You’re going to love this episode.
So, when we think about the path of money, we have to begin with a few fundamental facts. The path of money is a tool that we can use to build our wealth. And when Gary and I were writing the Millionaire Real Estate Investor with our late writing partner, Dave Jenks, we realized we had to actually define what we meant by wealth. And we decided to talk about it in terms of financial wealth. I think there are other forms of wealth. I write about it a lot. There’s time wealth, when people have an abundance of time. Other things that we can think about – wealth, wealth of relationships, wealth of love, wealth of whatever. But this is about financial wealth, money. How do we define it?
Financial wealth is having the passive unearned income to support your life mission without having to work. And passive income, unearned income, that’s kind of all over the map for a lot of people. But basically, what we’re talking about is you work for money, and if you do the right things with your money, your money will work for you. You can get dividends, your money can grow, eventually you can sell those assets and reap the rewards. How do we make our money work when we’re not working? That’s the idea of passive or unearned income. And how do you get enough of that, so that you can live the life that you’re intended to live without having to work?
Now, I want to stop there. I don’t know what retirement looks like for me. I love to do my work. I love to write. I love to do these podcasts. I love to think and noodle on ideas. I love to try to make complex things simple. So, I don’t really know what having to work looks like, but I do know that I don’t want to have to work just for money or for someone with whom I don’t share their values.
When Wendy and I started this journey, one of our clear goals was that we wanted financial freedom. I did not ever want to have to take a job to do things I didn’t love to do and work for people whose values I didn’t share unless I absolutely had to. We will all do what we have to do to support our families, to support our livelihood, but that’s not why we go to work. We go to work to provide. And eventually, if we do the right things, we will then build passive income, a retirement fund that will take care of us later in life and we will enjoy more choice. Choice is ultimately what we’re in it for.
I also know people who just want security. Why do you want financial wealth? Do you want the security that comes with knowing that you have enough money for your future? Do you want the freedom to have more choices in your life versus a lot of have-tos? Totally subjective decision, it’s up to you, but it will pay you to understand why. Why am I fundamentally doing this? Because, now, you know the cost. If I don’t do the things, and not all of them, they’re not complicated, but they’re not easy. Saving money is not complicated, but it’s not easy. We all struggle with that. But I need to know why I need to do that so that I’m motivated to do it.
So, Gary shared in an earlier podcast episode many years ago that he was setting down this journey of learning how to make his money work for him. So, he read all these investing books and I did the same thing. And what you get is a lot of conflicting messages. A lot of it feels really smart, but it didn’t really paint a path. There’s no map. I walk out my door. I want to go to my office. I don’t need a map today, but I did originally. I need to know where to go. Where do I turn left? Where do I turn right? Where do I go straight? There wasn’t a clear map out there for building wealth. So, he kind of built it.
And that early iteration of the path of money is what we based The Millionaire Real Estate Investor on. And we built on it, and we built on it over the years. So, this is a simple model for taking all of those ideas and putting them into a framework, a map, so that you know at each stage of the journey, “Well, here are my actual choices,” in simple human language.
On my journey, I vividly remember reading a book, and it was called What I Learned Losing a Million Dollars, and it was by – I have to look at my notes here – Brendan Moynihan and Jim Paul. And this was a guy who had lost a lot more than a million dollars, but it then focused him on going on a journey. He had lost this money in his job, and he’s like, “Man, I need to go learn the truth.” And he started breaking down all of these gurus – you know, Warren Buffett, Elon Musk, whoever it was – and he’s looking at how they built just mega wealth. They’re billionaires. And they had clear systems for doing it.
And his big takeaway and mine too was, wow, all of these paths appear to be true, but some of the information is absolutely conflicting. This person says you only buy money, like you value, you need to buy things that are undervalued. And this other person is saying, no, I need to buy things that I can add value to. There’s little distinctions along the way, and you’re like, “Well, how do I make sense of this?” So, I can remember the confusion. Like these guys, both, this individual, this woman, they both became billionaires, so they clearly followed something, but will this work for me? Is this something that would also work for me? I didn’t know.
And that’s where I came back to the path of money. It’s fundamentally simple. It is a roadmap for making better decisions, and I believe it helps you navigate those choices. When you hear what one person is doing, you can say, “Well, how does it fit into this framework?” And then you can understand it simply versus dealing with all the complexity.
Now, my wife and I are great examples. I remember at different times being interested in money and investing, but really feeling unqualified. My wife, I believe she studied journalism. She had an early career in marketing and PR and then went on, like myself, to become a business builder and investor. But it was at this pivotal moment that we were exposed to this model and we started living it. So, we began our journey going from people who just earned money like everybody else. I got a job, I’m going to earn my money, I’m going to pay my rent, to becoming thinking like investors around the time we were exposed to this model, the path of money.
Now that was in 2002. It was the first time we’d ever added up our net worth. We looked at everything we owned, not much. We didn’t own a house. We had a crappy tercel that was on, really, it had about 20,000 miles to go before it died completely and had to be towed out of our front yard. We had some bookshelves from Target and we had a very small investment fund, and we had some school debt. But when you added it all up, if we had cleared our finances, paid off all the debts, and taken all the money out, we would have had $2,200.
So, in some ways, that’s a victory. I know a lot of people that I’ve worked with that started this journey, and that number was negative, and a very, like six figures negative. Don’t worry about it if that’s what is in your head. It’s like, “Oh, my gosh. I got a PhD. I’ve got hundreds of thousands of dollars of school debt,” or “Oh, my gosh. I had a bankruptcy,” or “I had an illness and I have all of this debt.” Set that aside for now. You just have a starting point. Ours was humble. It wasn’t as humble as all of them, but it wasn’t privileged, that’s to say that for sure. We took this model and started making better choices.
And over the next seven years, we became millionaires. And in the interim, that was our original goal, $1 million in net worth, and we wanted $75,000 in passive income. Over the years, we’ve learned and grown, and we’ve built on that knowledge that began so simply, and we’ve gone on to become deca-millionaires, and we’ve got a portfolio of real estate and businesses. If you went back in time and talked to me, Jay Papasan in graduate school in NYU or an undergraduate at University of Memphis, I would have never guessed I would be here.
And that’s the power of having a simple framework, a model to follow that takes a lot of the guesswork out of it, that gets you out of the opinion game and the hack game, all of these people telling you what to do, but if you don’t understand it, you’re taking enormous risk.
So 23 years later, we’ve seen massive improvement. And over those years, for those advanced investors out there, we’ve tracked it very carefully. We’ve averaged more than 22% year-over-year growth in our wealth. And that, there’ve been years where it was huge, especially in the beginning. A big number can grow really fast. As it gets bigger, it tends to grow slower. But I’m still really proud of that average.
And as we get to the end of this episode and you understand the difference between dead money, and safe money, and healthy money, and wealthy money – I’ll break those four categories of money down for you – you’ll understand that somehow, some way, by following this model, we kept most of our money working in that wealthy money category, which is how we experience that growth. I want that for you too.
So last bit of the framework and then I’m gonna dive into the model. There’s three basic steps to investing, folks. You have to earn money, you have to save money, and you have to invest it. It’s not any more complicated than that. How much you earn determines, based on your lifestyle, how much you can save, how much you save determines how much you can invest. They’re very much tied together. So, people who earn more, if they can control their lifestyle, can save more and invest more. But it doesn’t matter completely that you have to earn so much because time is the other factor. Maybe you’re starting with very humble beginnings, but if you save some money and you invest it early, time will do a trick on that as well.
And I will go deeper into that in the third part of this series where we really look into the effect of time and how much you invest over time so that you can get to your number. So, my goal here is that you learn how to work for money and then get your money to work for you. Ultimately, you want your money working harder than you, so that the passive income is surpassing your active earned income, and that’s where you start to experience that freedom. You don’t have to work all the time. You may have better choices around the work that you choose to do. That’s my goal. I want you, either through security or freedom to reach that.
So, let’s dive into the path of money. Now, this simple model, if you want to look at it, I’m going to walk through it in such a way, I think it’s so simple that you could just keep it all in your head while you’re driving your car down the road to work, while you’re walking the dog, while you’re running on the elliptical at the gym, whatever it is you’re doing right now, maybe you just think, “Well, I don’t wanna look at it,” You can go to the1thing.com/pathofmoney, and you can grab a copy of this image there. And if it helps you to look at it, I’m kind of a visual learner, that’s why I’m making this available, I want you to do that.
So, you go to the very top, it’s like a little flow chart. You start at the top, and you’ve got two categories. And we very cleverly call them human capital and capital assets. But basically, that means you work for money or your money works for you. So, there’s two ways that you get more money in your life, and it can show up as a salary, it can show up as fees that you earn as a contractor, it can show as dividends, it can show up as asset growth that you could then borrow against or sell. There’s lots of ways, ultimately, that we end up with money in our bank account.
But fundamentally, there’s money that you earn and there is money that’s working for you, and I call that unearned income. So, think of it as earned income or unearned income. We all begin the journey having to earn every penny, but if you do the right things by following this model, you’ll start to build an ever-increasing supply of unearned income, those capital assets.
Okay, so the money is coming in at the top. Think back, how much money did you earn last year? Are you in college? Do you have a $15 an hour job? A $20 an hour job? Do you have a salary? Are you making $60,000, $70,000, $100,000, much more? You are earning a certain amount of money. Once you have that money, after you pay the taxman, depending on where you live, you have your net income and you have four choices. And those four choices break down very simply. You can spend money, you can donate it or give it away, you can save it, or you can invest it.
So, let’s start on that first one, and we’re gonna go deeper into this and the habits of money in the second episode, because how we spend money is going to determine how much we have to save. And learning to build a lifestyle around saving and investing is a journey for all of us. So, know that there’s no amount of investing that will cover up undisciplined spending. And so, at some point, we all have to have a budget. I’m just gonna break it down in simple terms.
If you’re earning $3,000 a month, you need to be spending less than $3,000 or you’ll have nothing to save. And depending on where you are on your journey, you can do that math. You can do it by looking at your bank account and your credit card statements, but how much are you spending and can you control it?
And next week, I’ll go much deeper in our journey. But at one point, my wife and I, you get married, you have two paychecks going in the same bank account, you have two people with credit cards or ATM cards. Controlling the spending gets even more complex when you’re in a partnership. And we had to do a lot of stuff to figure it out. Like we had to live on ATM cards for years, so that we would actually learn how to not outspend what we were earning because we just weren’t communicating well about it.
So first thing you can do with your money is spend it. And there’s money that we have to pay, like we have to pay the rent, we have to pay the mortgage, we have to pay our taxes, we have to buy gas, we have to put food on the table. There are the necessities, and then there’s the stuff that we just wanna do. We wanna go to that fancy restaurant, we wanna go on a trip. All of that is in the category of spending, and how well we do there determines how much we have for the rest.
The next category is donation. I know a lot of people who put that first. They take money right off the top of every paycheck, so that they can have money to give to their church, to the charities they care about. Maybe just setting it aside to give it to their kids or their family, taking care of someone else. But fundamentally, you earn money, then you can spend it, or you can give it away, donate it.
I would just advocate, I teach whole classes on it, if you haven’t developed a mindset of abundance, so that you can think about giving before you have to take care of yourself, it pays. It really does. I believe that the people who are gonna earn the most money are often the people who can also see a way to give the most away. It’s an amazing source of motivation to earn more when you see the good of giving it away.
In the beginning, I didn’t have much to donate, so I gave my time, but that might be where you are too. But over time, hopefully, you’ll treat that bucket seriously and set aside money to give away as you earn more and more of it, especially when it’s coming in passively. So, we spend it, we donate it, we can save it.
How is saving money different from investing, you might ask. When you save money, it is not earning a rate of return that is equal to or greater than the cost of things going up around you. We’ve heard a lot about it these last few years what’s happening with inflation. If inflation is at 3% or 2% and your money is earning at that or less, it’s basically savings. And a lot of times, our savings is actually getting less and less valuable over time because it doesn’t always fight inflation.
Think about your money market account or your savings account at your bank. You’re not earning a lot of money. There was a brief period during that run-up of inflation where we could get 4% and 5% on a savings account. That’s gone, folks. And it’s the only time in my memory where it happened, where you could earn a lot of money in a savings account but it was because inflation was so high. It was still dead money. It wasn’t growing over time. It was shrinking in value. So, if everything that you pay for goes up 5% every year, but the money in your savings account is going up at 2%, over time, you’re gonna have less and less money to actually spend. That’s what we mean by savings.
Why do we do it? You need a reserve, folks. What happens if the air conditioner breaks? If you get a flat tire, if your windshield gets broken, if you need to get a new battery in your car, we all need an emergency reserve. And I usually tell people at the very beginning, can you just have $500? And then, you can look up and say, can I aspire to have one month of my expenses? Can I have three months? And depending on how much of a scaredy cat you are, you might go as far as six months of expenses. That’s a personal decision.
You have enough savings in reserve when you can fall asleep at night and not stare at the ceiling. It’s all about your personal levels of risk tolerance. Like how much uncertainty can I deal with? I, just to be completely frank, lean towards the high end of that. I like to have three months or more. As fast as we could when we were building and growing our wealth, I wanted that money set aside so I could sleep at night. I’m kind of a worrier, that’s what I do. There you go, if that sounds like you, high five.
The good of that is that when surprises happen, we tend to be a little bit more prepared. The bad of that is when after a surprise happens, and you had to buy the new roof or buy the new air conditioner or fix the car or buy a new car and you don’t have those savings, you’re worried again and you have to start building it up again.
But those are the first three categories. And that savings account beyond reserves is also where you save up money so that you can invest it later. And some money doesn’t require you to save it, you can give it straight out of your paycheck, like in a 401k, but a lot of the investments that we want to earn the right to be a part of will require you to save up money over time so that you can play that game.
So, let’s look at the last category, and we’ll cover this and break it down before we go to break. So, the last category is we have spending, we can donate it, we can save it, we can invest it. When people say, “I’m investing my money,” I think they miss an essential distinction. There are two ways that we invest our money. You’re either lending your money to someone for a rate of return, or you’re taking ownership of something, you’re buying it. You’re lending or owning. Those are really the only two ways that you can invest when you look at all of the things and you break them down.
So there’s lending. And when you lend money to someone, the only reason they’re doing that is they believe that they can pay you an extra amount of money to give that money up front and they will have their goal satisfied. And if they’re an investor themselves or a bank, they believe they’re gonna earn more money with your money, that’s why they’re paying you that much. But lending, in general, tends to get a lower rate of return. And a rate of return just means how hard your money is working. If you’ve got a 1% rate of return, that $100 over the course of a year will become $101. If it’s a 10% rate of return, that $100 will become $110. You see how that works. It’s not complicated math, but sometimes we have to actually play it out.
If you’re taking ownership of things, there’s a little bit more inherent risk in that. Your money might be less secure. If your money is just sitting in a bank account, the banks are pretty secure. And so, they don’t have to pay you a lot of money to borrow that money and put it to work. But if you’re buying a piece of real estate, if you’re buying a business, if you’re lending money actively to someone else, if you’re doing something that’s a little bit less secure, you’re going to get a higher rate of return and ownership tends to fall into that category.
With that, we’re about halfway through the path of money. Let’s take a break and I’ll see you on the other side.
Welcome back, folks. So, we’ve covered the front half of the path of money, how we earn money actively or passively, what we can do with it, we can spend it, we can donate it, we can save it or invest it. Investing is basically lending or owning. Now, let’s talk about the two conditions that we do lending and owning under.
There’s basically gonna be four categories. You can lend money passively or actively. You can own things passively or actively. And we’re gonna break them into the passive and active categories. So, if you imagine like a little ledger, we’re gonna start on the left-hand side. And this, by the way, is where the lowest rates of returns live, but you can passively lend money or you can passively own things. Those are the two categories on the left side of the page.
Now, let’s start with, what does passive lending mean? That’s your money market, that’s your savings account. That could be a treasury bond. It could be a municipal bond. It could be a certificate of a deposit or a CD. All of those are forms of passive lending. You have money and you are loaning it to a bank, a city, a state, maybe a federal government, and that institution expects to do something with it in such a way that they have the right to pay you a little bit more money.
So, you can own companies that way, and that can be through stocks individually bought or through mutual funds. Mutual funds is just these different institutions. Buy stock in a bunch of companies, so that it kind of mitigates your risk. I’m buying a big basket of companies, and not all of them will fail, not all of them will succeed. So, they may not go as high or as low as an individual stock, but there’s also security in that.
You can also buy real estate that way, folks. There’s a thing called a Real Estate Investment Trust. I call them REITs. I don’t even know if that’s the correct way to pronounce the abbreviation, but you can buy real estate that way. People are raising funds to buy apartment buildings and commercial buildings, and if you are taking passive ownership in those institutions, which you can do right there through your app whatever it is you use, maybe even you have them available in your 401k, you can take passive ownership.
Ownership tends to throw off a slightly higher rate of return. So, even in the passive category. Now, in the passive lending, you might have been earning up to 4 or 5% on an amazing year, like a municipal bond or something like that. Passive ownership, most people would tell you the stock market over time will return 8% to 12%. So if you actually went and looked at the S&P 500, the Dow or whatever, and looked at their annual returns, you’re not gonna see 8% to 10% or whatever very often. But if you average it out over a long period of time, that is actually what it averages out to. I think going back to 1928, there has been one single year of returns that fell between 8% and 10%, 1993, when the S&P 500 was up 9.97%.
So, that’s that weird kind of thing. It’s like, so I can have expectations for passive ownership to fall in that 8% to 10% to 12% range, depending on which source you consult, but it’s not actually gonna do that very often in any given year, but over a long period of time, it should. So, low rates of return on passive lending, higher rates of return on passive ownership of stocks that it could be real estate or company ownership.
Let’s move to the active side, because this is where the rates of return get more and more interesting. So, if I’m going to actively lend, this might sound like greed to you, and I understand it did to me in the very beginning, but we’re at the beginning of the journey and I want you to just kind of understand it. You don’t have to know all of these terms. I’ll try to explain them, but active lending could be if you owned your house outright, you could offer owner financing.
So, if someone wants to buy your house, instead of getting a bank loan, you say, pay me this much down and then pay me every month at this interest rate, you essentially become the bank. Why would you do that? Well, if you already owned your house, now you’re getting monthly income in form of the mortgage payments. You’re earning interest on the value of that over time. And if you add up the interest you pay on a 30-year mortgage, it’s quite a lot on a home. And if they default, you get the asset back.
You know, Gary used to tell the story of his dad doing a deal where he had some farmland and he did a lease-to-own thing, which is like owner financing, and twice those individuals defaulted. They left, they paid him for a period of time with a down payment, but they ended up abandoning it and moving on, which sometimes happen. And basically, his father, who was a school administrator, would put three kids through Baylor College thanks to those active loans.
So, you can do private lending. Wendy and I have done that over the years where we will lend it to an individual at a rate of return, or you can do it very actively. A lot of investors, they’ll call it hard money loans. And if money is going at 6% or 7%, you might be able to loan money at 12% to 15% for a short period of time so that they can get their investment off and running and then they pay you back. Not gonna go into the terms of that. This is more advanced stuff, but understand there are lots of people out there, once you start looking around, that are active lenders. Now, you’re getting out of that dead and safe money into kind of healthy and wealthy money. And again, I’ll break that down in a moment.
The final category of how we invest is active ownership. That’s essentially buying real estate and buying businesses. Buying real estate because we can buy it on margin. That means I put a down payment down. If I’m buying a $200,000 house, I put 25% down as an investment, and I don’t have to put down $200,000, right? I put down 25% of that, but I get the growth on the whole thing. Leverage cuts both ways, which is why when we wrote The Millionaire Investor, we said that nothing down stuff, I’m a little leery of it, because you can end up having to sell an asset and write a check to do it. I would much rather have margin, I’d rather lose money than have to write a check on top of the loss.
So, we’re very conservative around that, but active ownership of real estate tends to have higher rates of return, and it’s a solid asset. There’s lots of little things that we could go into, how liquid is it, whatever. If you’re an advanced investor, we’ll go through that in another episode.
The other thing you can do is actively own businesses. And today that’s never been easier. You can start an eBay store. You can start an Amazon store. You can do side hustles, or you can go straight to the bank and borrow money, get a small business loan, and start your franchise or whatever it is. And the rates of return on businesses can be the highest.
You know, I’ve interviewed Gary, my co-author over the years, he founded Keller Williams, and I’ve heard different versions of the story, so if I get this wrong, it’s on me, but I believe they initially started Keller Williams Realty, what became the largest real estate firm in the world, with a $60,000 loan. They borrowed $60,000 to get this thing off the ground. And today, who knows what it’s worth, but the rate of return is practically infinite, right?
So, you look at some businesses and they can grow and grow and grow over the decades and that initial investment, what your return on it can be astronomically high. So, from left to right, you can passively lend, you can passively own. That’s like your money market for lending, that’s like your stock or your mutual fund on the ownership. You can actively loan money, right? That can be a loan to an investor who’s flipping a house, that can be some sort of financing you do on an asset that you already own. And then you can actively own things, and that’s usually real estate or businesses. And the farther you move into active lending and ownership, the higher your rates of return.
Now, let’s stop there. Just think about this. You’re processing it, you’re walking around. You maybe stop and the dog’s like, when are we going to start walking yet? Because you’re processing this. I get it. The first time I went through it, I was like, “I get it. But what are the implications?” I believe – and we’ll go into this a lot in the next episodes – a lot of people are only doing passive lending and passive ownership, but they have this expectation of the returns that come from active lending and active ownership. And the gap between those two is just understanding.
If they understood, then they would have the choice to learn what they needed to learn to move from passive to active, and then accelerate their wealth building journey. That was what happened to Wendy and I. We did the math. My very first job, I was putting 10% of my salary with the match into a 401k. And over time, that’s done really well because I started when I was like 24 years old. And I’ve just done it every year, just faithfully taking money off the top and putting it in a mutual fund through my 401k. Yay. But it’s also passive ownership. It’s only grown at a certain rate.
So, while that definitely can take care of you in retirement, it’s not the stuff that a lot of dreams are made of. “Oh man, I want to own a second home,” or “I want to go skiing in Colorado and take my family on trips.” Even not the extravagant stuff, not yachts and planes and helicopters. I’m just talking about the stuff that normal people dream about.
Now, at the end of the day, you have those four choices. Chances are most of you have some money in at least one or two of them. You might have a savings account. You might have a small 401k or a retirement account. Some of you may even have a few active loans out there or you own a home or an investment property and maybe some of you are even business owners. I know a lot of our listeners are. You get a rate of return from those things and that you go from the bottom to the top now. That becomes your unearned income over time.
And the trick here is that the earlier in the game, we can start moving some of our money into investing, any kind of investing, then we begin the journey so that those things can compound over time and grow. And the more active we get into lending and ownership, the higher those rates of return and the faster the cycle goes.
So, I’ve mentioned this a few times. We had those four categories. Let’s talk about the four conditions of money. This is also from The Millionaire Real Estate Investor, and it was really informative to me. So, if you think about something that has a rate of return of between zero and 4% over a long time cycle – we kind of refer to that as dead money – if you’re fighting inflation, you’re barely fighting it. As we saw from the last few years, inflation went way above 4% and your money was losing value every day it sat in your bank account.
So, when you think about those really low rates of return, functionally it’s savings at best and we need a little money there, but that’s not where wealth is going to be built. Most people who are investing, and I put that in air quotes for those of you not watching on YouTube, but if you are investing traditionally, that’s passive ownership, you’re counting on getting returns in that 5% to 8% on the low end, or maybe in that 9% to 12% if it’s doing really well in a good year.
But we’re now getting into safe money, right? Anytime your money is earning 5% or higher, it’s growing even at a small rate, and compared to what things are costing in your real life. You know, those eggs, that gas, they go up and down. We have to buy that. That’s how we have to live and take care of ourselves. Our money has to be growing a little faster than those are going up for it to actually be growing at all.
So, 5% to 8%, we’re gonna call that safe money. It’s out there, it’s growing, it’s outpacing inflation, but it’s not gonna make you fabulously wealthy unless you have a lot of money for a long time. Those stock investments, we count on 9% to 12%. You can become wealthy just in that category without going into anything active. It just depends on how long you have and how much money you put there. But we would call that healthy money. 9% to 12% is growing at a healthy clip and it will grow and double over time.
Wealthy money, and when you look at the most wealthy people in the world, they have either had a lifetime and if you look at Warren Buffett, he made a lot of his significant investments very early in his life and he’s had a tremendous amount of time for that to grow and compound. But I’ll tell you, he’s also got a lot of money in the wealthy county category. Some of his investments have paid massive dividends over time and he would tell you his whole wealth, all of the billions came down to a handful of really great decisions. And he didn’t make a lot of stupid ones to lose it either. But that wealthy money is 13% to 18%, and we do sometimes see it go above that, right? Especially if you’re buying something with a loan, like an investment property, because now your money has a little leverage and it can get in those higher categories. That’s a downside too.
But think of the four categories of money, dead money, safe money, healthy money, and wealthy money. Real simple framework for you to think about it. Ideally, you need to be looking out and asking the question, how can I get some percentage of the money I have saved to invest, not just in dead money as savings or in safe money, how can I get it into that healthy and wealthy category so that it can grow over time?
Now, I mentioned something and this is a really cool rule. This is a great hack for you. It’s called the Rule of 72, and it’s called a [racer]. It’s a framework. It’s a cheat. Our brains do not understand how things compound over time. It just doesn’t work. We just can’t mentally. We think linear. We cannot think about compounding, but the truth is that things will double over time around this rule.
So, the Rule of 72 says if you have something and you know what the rate it’s growing, 7% say, divide seven into 72 and it will tell you how many years it will take for your money to double. So, if you have $100 that’s earning 7.2% interest rate, you would know dividing 7.2 into 72, it would take 10 years and that $100 becomes $200. Now, you can kind of see how things grow really rapidly because that $200 will double in another 10 years and $200 becomes $400 and in another 10 years the $400 becomes $800.
And it’s not linear, right? It’s a curve because it’s not $100 to $200 to $300, it’s $100 to $200 to $400 to $800 to $1600. Things are doubling, that’s compound interest, but the rule of 72 gives you a really short framework. It’s like, “Well, if I’m getting 10% on this, that means about every seven years my money’s going to double.” And you can play around with that. If you get 12%, every six years my money is doubling.
And now you understand how over the course of your life, if your money is doubling every six years, you’re very much in that wealthy category because that $100 becomes $200 becomes $400 becomes $800 becomes $1,600 becomes $3,200. So this is getting us to the challenge. I’ve covered the path of money. We can earn money or it can come in as unearned because of how we’ve invested.
Once we’ve earned it, either way, we can look up and we can spend it, we can donate it, we can save it or we can invest it. All investing breaks down into lending or ownership. It can be passive or active depending on how we choose. Our rate of return will turn into unearned income, and we start the whole process all over again. And the rate of return we get will determine how fast our wealth grows. And so, we start to now have an expectation for how quickly we get to the finish line.
My challenge for you this week is to take 30 minutes. I want you to study the path of money. You could have drawn it out on a piece of paper or you can go to the1thing.com/pathofmoney and look at it and just ask the question – take 30 minutes – of the money I’m currently earning, passively or actively, through my investments or through my work, where is it going? How much of your money are you spending? Are you giving any away? Are you saving any? Are you investing? That tiny little step of awareness is the first step down this journey. You now know what your choices are. You now know that you have choices that maybe you weren’t aware of and the implications.
Wherever you are, you are. I can tell you when we started, we knew none of this. But we started in a humble place and we started learning. Just a 30 minute a week exercise, a little learning along the way, and we were able to build it very rapidly from a humble place to a really wonderful place. I want that for you too.
Now, next week, we’re going to go into the habits of building wealth. Now that you understand these fundamentals, the choices we have to make, what are the habits of spending money? What are the habits of donating and saving money? What are the habits of investing? What are the habits that we could build over time, start small, and build over time, that will take a lot of the luck out of this game., so that instead of us guessing that maybe we’ll get where we want to go, we’ll be able to start predicting more reliably that based on what we’re currently doing, we’ll get exactly where we want to go. Hope you enjoyed this episode. Can’t wait to share the habits of wealth building with you next week. I’ll see you then.
Disclaimer:
This podcast is for general informational purposes only. The views, thoughts and opinions of the guests represent those of the guests and not KWRI and its affiliates, and should not be construed as financial, economic, legal, tax or other advice. This podcast is provided without any warranty or guarantee of its accuracy, completeness, timeliness or results from using the information.
