What’s In It For Me?
Are you tired of the workweek grind? Do you work hard making someone else rich, but are not sure how to improve your financial position? In Set For Life, author Scott Trench reveals the blueprint for becoming financially independent within ten years, allowing you to live the best years of your life on your own terms. This is not a get rich quick scheme, but rather unorthodox yet simple advice that has the potential to put you on the path towards financial freedom and living the life of your dreams, all while you are still young. This book is written for the middle class millennial, but anyone looking to improve their finances will walk away with useful knowledge. Keep in mind that even if you love your job today, that might not always be the case in the future, so why not give your future self the flexibility to live life on your own terms?
The Big Idea
“The financially free design their day based on what they want to do, not what they have to do.” Set For Life p. 219
The book provides an actionable 3-step guide that takes you from zero to financial independence by slowly building out a financial runway. Part I starts with saving your first $25,000 and setting this aside in cash. In conjunction with significantly reducing your major expenses of housing, transportation, and food, you will set yourself up to then have more options, knowing you have a cash cushion, to not invest capital, but to take advantage of potentially better career opportunities. Part II focuses on going from $25,000 to $100,000 through optimizing your housing and income generation. The importance of trying to “house hack” is not to be understated in the path towards early financial freedom. Additionally, one has to be in a career the offers scalable income opportunity, ideally directly correlated by the amount of effort an employee puts forth. Sadly, most corporate jobs come with meager wage increases, unfair politics, and a slow rise up the corporate ladder. Meanwhile, the most active, healthy years of your life have slowly dwindled away. Finally, part III focuses on moving from $100,000 to financial freedom, with the goal of acquiring enough income producing assets (mainly real estate rental properties and stock index funds) to eventually produce enough cash flow from rent and dividends to finance your lifestyle in perpetuity. If your are pursuing financial freedom simply to sit on a beach all day and drink Coronas, that’s fine, but unlikely to lead to happiness. Instead, the author argues financial freedom is a noble pursuit because one has the ability to control how their direct their day, and take advantage of the best years of their life by spending it with loved ones or pursing interests that may not otherwise be possible without the support of financial independence.
Key Concept #1
Track Spending and Live An Efficient Lifestyle
“Design your life so it’s impossible to spend more than a few thousand per month—when you save 50 percent or more of your income each month, you begin making real progress towards financial freedom.” Set For Life p. 37
The wealth building process really begins with a close examination of one’s expenses. The book cautions readers to not fall victim to the marketing messages that “you deserve the best.” Remember, frugality will be worth it because it will buy you freedom.
The average American spends 33% of their income on housing, 17% on transportation, and 13% on food. Unlike other personal finance books that discuss cutting out lattes, the author astutely recognizes that to really move the needle on reducing spending, the three aforementioned categories need to be optimized. To reduce the housing expense, the author introduces the term “house hack”, which is buying a property with the intention to rent out a spare bedrooms to help cover the mortgage. In some cases, living for free is possible if you find the right house hack.
A long commute not only hurts your physical and emotional health, but negatively impacts your wallet as well. According to statistics from the book, the average cost of car ownership comes to approximately $9,000 per year when factoring in depreciation, insurance, gas, and repairs. Instead of buying a new car, try a used Corolla or Civic. Better yet, live close enough to work that you can bike or walk. On the rare occasion you need the extra seating or 4-wheel drive, rent that type of car for a day or two, as you will still come out way ahead financially that owning a more expensive SUV or truck that gets poor gas mileage.
Food makes up the final of the Big 3 spending items. The good news is much of the spending is from eating out at restaurants, so this is a habit that can be fixed. Instead of going out to eat several times a week, why not make it once a month? You will be healthier and wealthier, plus going out to eat will actually feel like a special treat instead of a standard weekly habit.
Try to cut back on any form of spending that does not bring you happiness. Saving your first $25,000 and keeping that in cash as a reserve is the first step to building out your financial runway. The book makes the argument that a single person who is able to optimize housing, transportation, and food expenses, as described above, should be able to live on approximately $25,000 per year. Therefore, a person with one year of financial runway will now have more optionality in life, such as being able to put a down payment on a home or pursue a career or business opportunity without fear of running out of cash. A frugal lifestyle enables faster accumulation of assets and reduces the amount of wealth needed to develop a financial runway.
Key Concept #2
Financial Impact of Housing Decisions
A key premise in the book is turning housing into an income generating opportunity. The house hack is the most advantageous way to buy a home for those interested in pursuing early financial freedom. It involves purchasing a property as an investment that would make immediate sense as a rental, but living in one of the units or bedrooms. It allows the owner to live for free or very low costs while the other tenants cover the mortgage payment.
There are four questions an investor should consider before buying their first house-hack:
- Is the property affordable with conventional financing?
Although a 20% down payment is the standard, if you have a good job and credit you may be able to put down as little as 3.5% using an FHA loan. However, keep in mind you will always want to have additional reserves for repairs and other home-related expenses.
- Are you willing to live in the property?
It may sound obvious, but make sure you buy in a location that you would be happy living in. Buy in a location that is acceptable to you given the other things going on in your life.
- Will the property cash flow?
Perform two cash flow analysis of the property, both with you as an occupant and you not as an occupant. A true house hack should still produce cash flow if you moved out and made the property a 100% rental managed with a property manager.
- Is there a reasonable chance at appreciation?
Try to pick a property where there is opportunity to add some value, such as an extra bedroom or bathroom, to give yourself some upside appreciation potential. Additionally, try to focus on a market with strong potential for job growth or other positive metrics that will make market appreciation more likely.
If the idea of having roommates in your 30s doesn’t appeal to you, the other option that can also accelerate your journey to financial freedom is the live-in flip strategy. This involves buying a property with a lot of value-add opportunities. The buyer can rehab the property while they are living in it, and then they have the option to sell, rent for a profit, or continue living in a much nicer home for a cheaper price. A tax benefit also occurs with this strategy, as live-in flippers can often exclude capital gains tax when they go to sell the property, a loophole as part of the Taxpayer Relief Act of 1997.
Many people think buying a home limits their flexibility and fear that if they do know how long they will be living in an area or if they will move on to another job, renting is the only option. However, if you approach the housing decision like an investor and think about the optionality you have to rent out your property when you move out, it can help ease some of that fear, and set you up on the path to financial independence by creating a cash flowing asset.
Key Concept #3
Earn More
“The traditional corporate ladder is unacceptably slow for those looking to achieve early financial freedom and must be discarded.” Set For Life p. 117
If you are already a fairly frugal person, you will likely have come to the realization that there is only so much spending you can cut out of your life. Income, on the other hand, does not have a limit. The advice given in this section is for someone who would not show up to work if money were no longer a concern. Even if you enjoy your job, chances are you would agree with the preceding statement. As it pertains to financial independence, the sole point of earning more money is to use that money to acquire more income producing assets.
A wage earning employee trades their time for money, so it is through more efficient and productive use of time that an employee will be able to earn more and escape the rat race of the corporate world. Therefore, it is important to track how your spend your time to ensure you are using it as efficiently as possible. Work related activities, including commuting time, and sleep will make up the largest percentages of most people’s day. The author points out that the problem with books that recommend side hustles as options to increase income is most employees have very little free time left to pursue side hustle opportunities. Therefore, they have to rely on their day jobs to scale income.
Unfortunately, in the corporate world, it takes years or even decades to climb the corporate ladder. The recommendation given is to consider pursuing career opportunities that are scalable. The changes necessary to increase one’s income are:
- Develop highly sought-after skills
There are a large number of jobs that can take you from earning $50k per year to over $100k per year without incurring the costs of a four year degree (contractor work, software developer, real estate agent/broker)
- Take control of your future
The problem with most salaried employees in the corporate world is they cannot take control of their income since there is a limit to their potential and someone else is subjectively making a judgement about their performance. If you want to have a shot at early financial freedom, you will likely have to give up a regular salary in a traditional career to attain it. Unless you are making $150k+ a year, switching to a career that allows for performance based pay may be necessary to scale your income.
- Find synergies between your work and lifestyle and investments.
Try to take skills from your day job and think about how you can apply them in freelance setting. The worst thing you can do is try to have two totally separate jobs at the same time.
The main message from this section is you have to put yourself in a position financially where you are not afraid to pursue an opportunity. You are more likely to realize satisfaction with your workday by taking control of your income in the form of performance based pay or scalable income opportunities. The cost of pursuing a new opportunity is often a reduction in base pay, but over the long-run the increased income potential will likely be worth it.
If you are in a career you enjoy with opportunity for significant income, focus on the five tactics below to help you earn more:
- Put yourself in a high achieving environment
- Read and self-educate forever
- Focus on continual improvement
- Instantly make trivial decisions
- Put yourself in a position to get lucky
Key Concept #4
Components of the Financial Independence Equation
Simply put, financial freedom is attainted when one no longer needs to work for money and is satisfied by the equation: Assets x Return > Lifestyle
Below we can briefly break down the components of the equation:
Assets
An asset is something that produces income or appreciates in value. Somewhat counterintuitively, the author argues that retirement accounts are considered “false assets” for the purposes of pursing early financial independence because they cannot be readily accessed until the traditional retirement age. Therefore, one should focus on investing in rental properties, stocks, or other income generating businesses/opportunities.
Returns
Investment returns are critical to wealth generation, but only for those who have significant assets with which to invest. The next section will cover investment strategies, but the author makes it clear that there is not a get rich quick scheme or hot stock tips that will allow someone to earn superior returns. The safe withdrawal rate, which is the percentage of your portfolio you can use to cover living expenses each year, can be used to help determine how large of an investment portfolio you will need to achieve early financial independence. For instance, if you and your family require $80,000 in annual living expenses, you may need a portfolio of $2 million to ensure you do not run out of money, assuming a 4% withdrawal rate.
Lifestyle
Your spending is likely to be the single biggest barrier between achieving early financial freedom because the higher your spending, the greater the portfolio needed to support your lifestyle. Using the 4% rule from above, you can simply multiply your spending needs by 25 to come up with the size of portfolio you would need to potentially last throughout your lifetime.
Key Concept #5
Invest Aggressively
The goal of investing, at least of the purposes of early financial freedom, is to continually build real assets with return sufficient to sustain an early financial freedom lifestyle. The author introduces the seven tenants of investing:
- Never spend the principle
In order to build sustainable wealth, you need to think of the principle of each investment you make as gone forever, and only spend the cash flow component. For instance, if you buy an index fund, you should be using the dividends to help finance your lifestyle, but not selling the principle.
- Reinvest most investment returns
Similar to #1 above, you cannot spend all your income from investments. If you have a rental property, use a portion of the monthly cash flow to save up for the next rental investment or stock index fund investment.
- To invest, one must have capital
To take advantage of opportunities, you must have capital to invest.
- Effort correlates with return only if you are in control of the investment
The prime example to explain this tenant is to think of someone who constantly checks the price of a stock investment they own. This is a complete waste of time, as they obviously have no control over the future stock price. On the other hand, a real estate investor does have some control over his or her investment, as they can manage expenses, make improvements, etc.
- Investment returns are impacted by knowledge
Knowledge helps decrease the risk of an investment for which the investor has some control, and failing to accumulate knowledge can reduce returns. For example, all the research points to the conclusion that investors are better served by buying an index fund, yet many investors still try to by individual stocks, often to their detriment.
- Do not confuse volatility with risk
Many investors think that stocks are too risky. However, if they took the long-term view, they would realize that it is actually significantly more risky to own a portfolio of Treasury bonds because your total wealth would be substantially lower in a 100% bond portfolio compared to 100% stock index funds.
- The best investments are specific to the investors personal situation
The greatest investments are often in things that reduce your monthly personal expenses.
The book gives a brief overview of investing in the stock market and real estate market. The conclusion for the stock market section is investors are likely much better served by investing in a low cost index fund instead of trying to pick the next great stock.
The argument for why real estate is an excellent investment for early financial freedom is explained:
- Rental properties build wealth in multiple ways
Rental properties help investors build wealth through income, appreciation, and loan amortization. Assuming the investor does his homework and buys correctly, a rental property should produce income in excess of the mortgage and expenses.
- Rental properties allow the investor control
Real estate investors have much more control compared to investors in the stock market. Value can be increased through rehabs, or expenses can be controlled through more efficient management systems. Additionally, since there are many amateur landlords, those who take building a real estate investing business seriously have the opportunity to differentiate themselves.
- Rental properties allow the investor to benefit from leverage
By only putting 20% down on a property, and investor can free up more capital to pursue other investment opportunities. Since leverage magnifies returns, there is the potential for higher returns in leveraged real estate compared to traditional stock index fund investing. Every year as the loan is paid down, your return on equity will gradually decrease, but your cash flow will increase, which is an important component for financial freedom.
- Real estate investors can trade up
Successful real estate investors can sell-off deleveraging properties and use the capital to buy more scalable properties, such as duplexes or triplexes. This strategy reduces the management time needed to tend to a portfolio of properties and reduces tenant turnover risk that is more likely in a single family home investment.
- Real estate is manageable while working a full time job
Many investors are able to invest in real estate on the side, which allows them to greatly accelerate their path to financial freedom. One transaction per year can produce life changing results in 10 years.
The author does caution that real estate investing has bankrupted many people, so he offers a few basic principles to increase the probability of success:
*Keep plenty of cash on hand to handle maintenance and repairs
*Buy properties that will cash flow after financing and operational expenses
*Buy properties in locations that are desirable or have great potential to become desirable
*Treat tenants and those you do business with honestly
*Act consistently, with a long-term outlook
The author points out that due to leverage, it is not a stretch to achieve a 25% compound return for the first several years on your real estate investment. Compounding your wealth at this rate can have a dramatic impact on your portfolio over the long-run.
Apply It
*Use a tool such as Mint or Personal Capital to begin tracking your spending. Analyze the data and see what areas you can cut back on, particularly needless subscriptions or spending that does not align with your values.
*If your mortgage is making up a significant portion of our overall spending, consider renting out a bedroom on Airbnb’s or better yet, consider renting out your guest bedroom to a tenant. If your current living situation is not conducive to this, consider looking for a duplex as an opportunity to give yourself privacy, while also benefiting from the advantages of a house hack.
*If you are in a career with little scalable income opportunity, consider retooling and learning a new skill or move on to a company that may have lower base pay, but offer equity ownership or incentive compensation.