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Episode 112: If You Want To Stop Trading Time For Money, You Need These Tools

Aug 23, 2021

This Episode

Solo Episode

You Will Learn

  • What does it mean to invest money in a way that will stop you from trading time for money
  • The difference between diversified investments and undiversified passive investments

Resources & Links

This week, I want to discuss some of the newest lessons that I have been recently reflecting on which due with building wealth. My family and I have recently been making some big changes which have helped me to re-examine the best approach to building wealth.

Justin (00:00):
Okay, what’s up. It’s Justin, welcome to episode 112 of APM success. The relocation is complete, and we’re now at the new global headquarters here in Portland of APM success. And as I was in the process of this move, I had several people point out to me that moving is among the top five most stressful events that a human can go through right up there with death of a loved one divorce, major illness and job loss. So I am pleased to report that we have come through mostly unscathed and excited to get back to it today. I want to talk about a couple of things as it relates to sort of the, some of the reflecting I’ve been doing as we, my brother and I drove across America and tackle a topic in particular as it relates to building wealth. And th the first thing I, I was realizing as a financial advisor, you know, I’ve been doing this 11 or 12 years now.

Justin (01:10):
I really love what I do. I love helping people make important, significant financial decisions for them and their families. Now, as you evolve as a professional, the way that you give advice, hopefully if you’re learning and growing also evolves. And I’m sure this is probably true in medicine and other professions, where at the beginning, when you’re green and inexperienced, you, you kind of give the textbook answer knowing that in many cases, it’s good enough and it’s usually right and accurate, but it is just that it’s the textbook answer. And I can honestly say after having gone through the last handful of months, watching my wife finished residency, and then moving across the country, the way that I had helped my clients navigate this same set of circumstances, I took a textbook approach, and I’m slightly embarrassed, a little abashed to say this out loud, but it’s so obvious that it’s, it just needs to be said that helping people to navigate this transition has been something that I, you know, I knew the right answer in air quotes.

Justin (02:24):
And you know, the idea of make the move live like a resident, continue to, you know, aggressively pay down debt, all that as you transition to attending hood, I’ve got to admit, I did not understand having an appreciation for the pressures of the stress of a move, as well as the achievement and accomplishment of finishing residency, as well as the desire to say, okay, I’ve had enough. I want to start spending my money in ways that reduce the stress of my life, especially in in our case, a dual income household where there’s two careers and there’s also a child, and we want to care for that child. And, you know, what does this mean in terms of spending in terms of lifestyle and how do you move towards financial success, financial progress in accordance with your goals while still living a good life in terms of lifestyle, a life that you and your spouse, if you have one you want.

Justin (03:27):
And so I had always intellectually understood. Yeah, you gotta like, you know, stave off the buying the bajillion dollar house and the, his, and her Teslas and whatever. But I, I had always been making those recommendations from a place of you know, knowing the textbook answer and not really understanding going through the stress and going through also the excitement and the achievement and wanting to celebrate. So I’m pleased to say, now that I’ve gone through it, I, I, and I’ve had this happen. A couple of these conversations where my clients are talking about taking their first job out of training and relocating and, and making financial decisions on the other side. And I’m pleased to say, by the way, we didn’t buy a $2 million house. So we didn’t buy two Teslas, but having you know, having a peer group professional peer group now that has a different lifestyle, we, I felt those pressures in, in a real way.

Justin (04:26):
And so now I can talk to these same clients and instead of saying, well I know what the textbook says you can do. I can say with a sense of understanding that I have here, two, four lacked. I know what it’s like, and we’ve got to keep your eye on the prize. And if it is in fact important to get financial independence and to build wealth and to pay off debt and to make progress so that you can avoid the stress that comes with economic scarcity and not everyone has the ability, like the ability to avoid that stress by intentionality is a real luxury, because a lot of people don’t have it when you’re a high income professional in a time of lifestyle transition, you have the ability to quickly accelerate the wealth building process. This is a luxury a hundred percent, and I understand that, but we can take advantage of that luxurious opportunity and deploy it in a way that’s going to contribute to our success.

Justin (05:23):
So it’s still the right thing to do. It’s still the right thing to, you know, live within or beneath your means at the beginning of your career, if financial independence is important. So just wanted to share that little anecdote. It’s been an important part of my personal journey and professional journey. I’ve, I’ve jokingly said in the past, there’s nobody in life who knows more than 25 year old CFP, somebody who like just figured out how compound interest works and they can run the spreadsheets and say, well, if you cut out the latte every day, you know, that’s going to equate to another $2.1 million when you retire. I just sort of have a philosophical difference of opinion about the latte conversation, but we’ll save that for another episode.

Justin (06:10):
So now onto the topic at hand, which is different but related I was on a podcast recently, I was a guest, and I’m going to share that episode on this channel upcoming when it’s released, but I want to talk about the, how financial independence is fundamentally the decoupling of time and money. And specifically what I’m talking about is everyone has a certain amount of what I’ll call human resource and financial resource. And over time, your, you know, if we picture a graph with an X and Y axis, when you’re at the zero point on the X axis on the you’re on the vertical line, as you move from left to, right, this is essentially a downward slope of human resource. So at age 30, say when you finished training, your human resource is it’s at its Zenith and you’re at year zero of your career and attending hood.

Justin (07:09):
And then in year one, year, two, year three, as you progress to the right, that human resource goes from its max down, down, down, down, down until you reach whatever age 65 or 70, when that line hits the X axis. So it’s a downward slope. It makes a wedge shape that human resource is the potential that any professional has to translate their time into money. So when you’re 30, you have a we’ll call it. We’ll just say to age 65, you have a 35 year career. You have 35 years to make money and turn it into a financial resource. Now for our purposes, the financial resource is something that’s going to continue to generate money. Apart from you putting in time, the financial resource graph is essentially the inverse of the human resource. So if you picture that wedge shape, it’s top left to bottom, right on your X Y axis the financial resource for someone who is saving for someone who is building wealth, taking money every paycheck every month, every year, and stuffing it into 401k for three B HSA, 4 57, IRAs, taxable investment accounts and other types of investment opportunities.

Justin (08:26):
The financial resource is going from bottom left to top, right? So except it continues indefinitely. And that’s the nice thing about financial resources is you don’t need to actively work on them for them to continue to grow. So what I want to discuss today is this principle, and we’ve got to harness it. We’ve got to make it work for us, but it’s very, very powerful, because at some point you don’t need to work any more. You don’t need to put in any more time. You don’t need to trade your time for dollars anymore in order to be able to pay your rent. When you’re a young attending, you just finished residency, you’re attending hood. You have no financial resource, maybe negative pro probably you have negative financial resource. So even though you’ve finished residency, it’s awesome. You know, we pop the champagne bottle at the end of the month.

Justin (09:14):
If you don’t earn a paycheck you, you have to pay rent somehow. So you need to trade some of your time for money to pay that rent. Now over time, that changes once you’ve been working for two or three or five years, you have financial resources. So what I want to talk about is how do we intentionally convert human resource into financial resource? Because it doesn’t happen automatically. There’s basically two places that financial resource can go as you’re trading your time for money. So I work for a month. I get paid, whatever I get paid, we’ll call it $20,000. In my checking account, I have an option. I can either put this towards wealth building activities, which is investing in, paying down debt primarily, or I can put it towards lifestyle, which is anything else, buy a car, buy a TV, go on a vacation, pay my bills, send my kids to private school, whatever these are not good or bad.

Justin (10:12):
They’re, they’re amoral. It’s, it’s the decisions you make about how you want to live. That’s how the money gets spent. Now. Obviously it’s like a Seesaw. The more you have in one category, the less you have in the other and vice versa. So as you’re thinking about wealth building versus lifestyle, you want to think about how is that Seesaw going to get calibrated for you and for your household? The reason that’s important is because it’s going to define the progress, the speed at which you move towards building financial resources and ultimately getting free of having to trade your time for money. So having said all that, what I want, what, when clients come to me many times, what they’re interested in is Justin. I want to get to a place where I’m financially independent, I’m building wealth and I don’t need to work anymore. Maybe they like what they do, but they want to do it on their own terms.

Justin (11:05):
Maybe they’ve lost the love and they just want out, they’ve been burned out. They’re tired, they’ve had it. They want to do something less stressful or totally different, or use skills that they’ve never had an opportunity to exercise. And perhaps at the beginning, that means they’re not going to make a lot of money doing it. That’s perfectly valid. And you need a money buffer to be able to get you through that. That could be in the form of savings or investments that could be in the form of a, a spouse that earns or in the form of, you know, some sort of other business on the side that makes money in a way that is decoupled from your time. Hi, what I want to do now is zoom in. If we’re talking about the Seesaw on the left, we’ve got wealth building activities on the right hand, we’ve got lifestyle.

Justin (11:57):
I want to zoom in on that left side, the wealth building activities, and talk about what does it mean to invest money in ways that are going to make those financial resources on that X, Y chart go from the bottom left to the top, right quadrant. What are the options that we have things that we can put our money toward, that are going to ultimately grow and make us financially independent, make it so that we don’t need to work and we’re still making money so we can still pay our bills. There’s three broad categories. And let me pause right now and say, this is not investment advice. I’m not going to talk about anything too specific, but I want to point out that you shouldn’t make life altering financial decisions in a vacuum, especially based on one podcast episodes, a please consult your personal financial advisor, investment advisor, tax advisor, to get specific insight in your life before you make any decisions about any particular investments.

Justin (12:51):
I want to break these down the investment options into three broad categories. The first is what I would call passive diversified investments. And I’m not going to use these words in the traditional sense. So let me describe what I’m talking about. Passive passive in the sense of passive versus active, as far as your participation goes. So this is a category of investment, the first of three categories, where you can put money into something and you don’t need to pay attention to it. It just is going to do what it’s going to do. You’re going to close your eyes and you’re gonna keep on stuffing money into that thing. Really, what I’m talking about here is the stock market stocks, bonds, mutual funds, things that you can invest in that will grow over time. And you could argue there’s other types of assets that you could put in here,

Justin (13:38):
Maybe gold or other commodities or Bitcoin

Justin (13:41):
Or things like that. That’s kind of beyond the scope of this discussion, but the point is, this is a category, a passive investment category where you don’t need to pay attention to it too much because the stock market is going to give you what it’s going to give you. Now, an advisor will be able to optimize this and add some value above and beyond paying zero attention. But the point is, you can, you can do this. And this is one category. This is the first of the three. It’s also important to point out that it is a diversified category. So I said, passive diversified. What that means is there’s no, what we’ll call individual security risk, or what’s also known as headline risk. So there’s no risk that if one company goes bankrupt, that this investment or bucket of investments is going to be meaningfully financially damaged.

Justin (14:34):
You know, if Johnson and Johnson goes under, or if some tech company, you know, even one of the big guys, Facebook, apple, Netflix, Google, the Fang stocks. If one of them has significant under-performance financially, if you hold that individual stock, that’s really going to hurt, but you have a diversified basket of thousands or even 10,000 plus securities, which is what I recommend for this bucket. Very, very diversified. What that means is any individual company performance isn’t going to harm you. And that is why you can afford to not pay attention. If you buy 10,000 companies at once, we don’t care. If a couple of them go bankrupt, because for everyone that goes bankrupt, there’s another one that’s doing an IPO or shooting the lights out and doing amazing. And it’s going to counteract that that’s the benefit of diversification. So what you’re going to get is the average, the longterm average return of this basket of securities, which, you know, for the S and P 500 over long periods of time, depending on how you cut it, you know, call it somewhere between seven and 9%.

Justin (15:35):
Okay? So that’s the, this category, the first place where you could consider putting money, passive diversified investments, the second wealth building, I’ll call it a sub bucket is undiversified, passive investments. And so notice these are still passive. We’re not making active business decisions. It’s not like you opened a store and you got to run the store. Or even that you had to hire someone to run the store. We’re talking about investments that you still are, hands-off operationally. You don’t need to pay too much attention to have them run. And so this could be, you know, maybe a real estate syndication or real estate with a property manager or being a minority partner in some kind of business or using a venture capital opportunity or private equity, or perhaps even picking individuals stocks. Now these are, this is what it gets problematic and more risky.

Justin (16:37):
Now there’s also a significant opportunity with these types of investments. And frankly, this is the category of investments where I have people the most asking me, Hey, what do you, what about this? What about that? I want to do some of these things. What do you think about them? And even though they are still passive, in one sense, they’re passive because you don’t need to actively run a business in order to invest in this way. They’re also diversified. I mean, we don’t hold 10,000 securities in this bucket. We now hold one, we hold two, something like that. So if one of these companies go bankrupt and it’s the company that you invested in, or the initiative that you’re putting money into in, in a limited partnership, if that goes belly up, it’s not that you take a five or 7% haircut, you take a 100% haircut and that money goes to zero.

Justin (17:29):
So this can

Justin (17:31):
Be a, you know, a powerful wealth building mechanism, especially once you’re a little further along in the wealth building journey. And you have a couple of million that you can of invest at your discretion, then something in this second category can make sense, but this is a category where there’s lot more risk. I just want to point out that the undiversified passive investment is an option that’s out there, frankly. Here’s the best practice

Justin (17:57):
Before you’re, before you have

Justin (18:00):
A couple million, and before you fully paid off your debt, I can make an argument that you should never invest in anything in this second bucket before that time, because you haven’t laid the foundation. Now, I’m sure there’s people out there that will disagree with me and likely for someone who is enterprising entrepreneurial and understands those undiversified risks and can take those on and accept them fine. Like you can do that great. But for the average investor, and by average, I mean, 90 plus percent of physicians out there listening to this podcast, this undiversified passive is probably not something that you should be thinking about before you have multiple millions in sales. Finally, the third place where we can put money in terms of financial resources to grow

Justin (18:44):
Wealth over time is what I would call an active investment. So

Justin (18:50):
On one end of the spectrum, we’ve got passive diversified in the middle. We’ve got passive and diversified, and then we’ve got active, active investments basically means it’s a business you’re running. This is something that can grow over time. This is something where perhaps it’s real estate that you manage yourself. Perhaps you’re starting a business where you’re making business decisions. This is something that can be a very powerful wealth building mechanism, frankly, for someone who’s, full-time employed as a, in this case physician to start a business that needs your operational elbow grease is very, very challenging. And I have friends and clients who do this and start businesses on the side and they are sometimes successful. It’s almost always as part of a consortium of either investors or advisors who are also helping to share that operational load. This can get really exciting because you have more ability to determine the outcome because it’s based on your decisions, your research, your money, your acumen.

Justin (19:53):
And so if there is an opportunity and you have the ability as a business person to exploit that opportunity, then there can be immense opportunity. Now with that opportunity, with the ability to earn outsized returns with the ability to make a lot of money comes the risk of losing all of it. So this is another category in which, you know, you don’t want to invest in an active business until you have the time and capital to be able to really focus on and to hopefully make sure that it’s succeeds. So as you’re trading in your human capital every year, and you’re trying to figure out how much of my money that I make, can I be putting into a wealth building activity? This is a decision you’re going to be making implicitly am I going into passive diversified? Am I going into passive undiversified? Or am I going into an active business now items two and three for the first, probably 10 years of your career, you can totally ignore those. And frankly, you can ignore them for forever.

Justin (20:58):
If you’re someone who is not disposed

Justin (21:01):
Personally, the way that you’re wired, the way that you think about risk and return. And trade-offs, if the thought of investing in some sort of, you know, syndication or owning a piece of real estate, where you have renters who could potentially destroy the place

Justin (21:16):
Or being a

Justin (21:18):
Participant in venture capital in a couple companies that one of them could fail and it could meaningfully hinder the performance of the fund. If that makes you lose sleep at night, then you don’t need it to be financially independent. And that’s another thing I want to point out here as we’re kind of bringing this to a close is you can make your financial life as complicated as you want to. I went to a, a seminar recently at a

Justin (21:43):
A physician

Justin (21:45):
Conference and there was a breakout session on investments and some of the investments being discussed, they were all in categories two and three. It would be pretty unusual to go to a physician conference and have a, you know, a conversation about investments that was talking about mutual funds and ETFs. And it’s because they’re not that complicated compared to business opportunity, LPs closed and funds, venture capital, et cetera. It’s much more sexy to talk about the deals that you have access to that you’re investing in these up and coming biotech or cannabis, or, you know, medical real estate funds. That sounds cool. That’s going to draw eyeballs to your car cause where if you’re saying, yeah, you know, save 25% a and invest it in a broadly diversified basket of global equities. That’s, you know, it doesn’t take very long to communicate that. So here’s the point.

Justin (22:38):
You don’t need all three categories, but you do need to understand how the role of each of these is going to be manifest in your financial life and then build into that intentionally. And to the extent that you’re doing each of these, you want to make sure that the sub decisions that you’re making, whether it’s in any one of these three, that the investments you’re choosing are the right ones for you, based on your time horizon, based on your risk tolerance, because you still have the ability, even if you said, Justin, I only want number one, you scared me enough to know that I don’t need to invest in any kind of businesses, whether I’m running them or not. I only want the passive diversified investments. You still need to understand risk return, trade offs. You need to understand best case, worst case. You need to prepare yourself for what that passive diversified vehicle will deliver to you.

Justin (23:25):
Because here’s the thing. As you plow money into these investments over time, they are go here’s, here’s why this matters. We’re going to pay you back. When you stop working, they’re going to allow you to be decoupled from punching the clock and doing the nine to five or the seven, seven, or whatever, with seven to seven with call they’re going to allow you to have that kind of freedom because they’re going to be paying you while you sleep. And here’s how that works. You know, once you build up 3 million bucks, say it’s in this pass, it will just to keep things simple, passive diversified investments. This is your 401k. For example, you got 3 million in a 401k that can kick off, you know, somewhere between 120 and $150,000 a year of income. Now that income is going to be taxable because it’s a pre-tax 401k, but eventually, you know, for every million that you add, it’s another 40 to $50,000 of income. So you can see eventually you’re going to get enough millions, whether it’s one or two or three or four or five, you’re going to get enough millions where you can live off the money that, that kicks out. And that is where you get financial independence. That is where you don’t need to trade the human resource that you have any more for financial resource, because it becomes a self perpetuating wealth building machine. Once you get critical mass.

Justin (24:48):
So I’ve

Justin (24:50):
Thrown a lot at you today. We’d love to hear any questions that you have about this content. I ordered a couple books. I’m going to be reading through them, particularly as it relates to this idea of trading time for money and the human resource versus financial resource. I want to read through them and figure out which one I liked the best. And then in the future, we’re going to do some free stuff giveaway. So thanks for tuning in this week as always, I never take for granted the most finite resource that any of us have, which is the attention that you have the time in your day to focus on a thing I’m really grateful that you chose to spend some of your attention here with us today. Hope you have a great week.

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