Two Practical Paths to Financial Freedom

Practical strategies for entrepreneurs to deploy their profits while growing their wealth.

Shawn Johnson shares a recent mentoring session he had with a friend who sought his advice on a current financial decision he was facing and his mindsets and strategies needed to achieve financial freedom. He shares insightful anecdotes and actionable advice, including leveraging home equity and exploring multiple income streams. Additionally, they present two contrasting financial plans, one inspired by Dave Ramsey's debt-free approach and another focused on strategic investments.

Watch this episode on YouTube: https://youtu.be/wBsMNCL6WD8

00:00 Introduction to Pay or Quit
00:27 The Financial Hamster Wheel
00:43 Wealth Mindsets and Financial Foundations
02:57 Living Below Your Means
03:28 Multiple Sources of Income
04:14 The Importance of Financial Freedom
05:35 Belief in Financial Freedom
07:48 Deploying Your Bank Account
08:52 Home Equity and Investment Strategies
17:47 Dave Ramsey's Debt-Free Method
20:58 Conclusion and Next Steps

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Transcript

 Welcome entrepreneurs to pay or quit, 

where we reveal the gritty truth behind business success. 

People see the glory, but not the struggle it takes to get there. 

We're here to share the real stories of entrepreneurs navigating the tough intersection of business and relationships. I'm Tony Klein, 

and I'm Sean Johnson, and together we'll guide you through the real challenges faced as serial entrepreneurs. 

Join us for the untold stories behind the scenes. 

Buckle in, it might get messy. Have you ever wondered why you remain in the financial hamster wheel of life and haven't found financial freedom? Or we often hear, the rich get richer and the poor get poorer. But have you ever stopped to really look at why?

Are there principles or wisdom that make the rich different? This morning I had coffee with a friend of mine who is a young man with a young family and I wanted to explain kind of the notes that I took from the conversation because he already has so many of the wealth mindsets that you have to have in order to build a financial foundation in order to take you to a large amount of net worth or freedom or cash flow and he was already so much on that road.

It was fascinating to listen to. The other thing is that he is facing some financial decisions and that's really why.  He had reached out to me and he wanted to know like some ideas of what I would do in that situation So I gave him my thoughts of what I would do and I also gave him an alternative Methodology that I have learned from Dave Ramsey and how he built his six hundred million dollar real estate empire Both can be done and I think both are very viable options.

It's really the path that you want to choose and so  Before we get into the actual financial models, um, then, and if you're watching today, I will show those on the screen. If you're listening, I will do my best to explain those real numbers, uh, on the, on the, uh,  uh, the podcast. So I'm excited to share this because I think that You know, my friend being a young man with a young family already has so much of what it takes and it was fascinating to hear him talk and encouraging because, you know, I don't think we're born with those, um, we have to learn them and we have to see the upside potential of what it takes to become financially free.

And his objective is to be financially free. Does he want to be rich and wealthy? Um, I don't think that is really the goal he has in mind, but he definitely wants freedom. He wants the opportunity to go visit his family for months at a time who live outside of the country or  to just really not rely on, uh, his body to do the work.

And I'll kind of explain what he has there, but it's fascinating to hear this. So the first one I recognized is that he is living below his means.  You cannot live a life of financial wealth if you spend more than you make. As a matter of fact, it doesn't matter if you are making a hundred million or a billion a year.

If you're spending a hundred million or a billion a year, it is the fastest road to stay in debt and be poor. The rest of your life. So spending less than you make was one thing I noticed right off the bat that he is doing really well. Then the other thing is that he understands that trading time for money is really filled with a lot of restrictions.

There is no autonomy to it. There's no freedom to it. And although he has a high value skill today, and he's leveraging that high value skill, he knows that that is something he cannot do forever. He's a carpenter, and so his body could give out. And if he doesn't do Take actions today Then he's very much on the the course of his body giving out and him not being able to produce an income for his family  In order to live and so he's looking for methods now as he's young Before his body gives out before it's too late to think of ways.

How do I capitalize on? Generating different sources of income so that I have a safety net That I can have freedom and autonomy in my life and I'm not reliant upon one single source of income I loved that mindset from him The other one  that I also love that i've kind of already mentioned is that freedom is his goal Why do I even bring this up because I think if we simply put wealth As the goal or I want to be rich as the goal.

I don't think that means enough What does it actually mean to be rich, you know, they say that happiness um is achieved Money makes people happy to a certain degree up and to about 500k a year. But anything above that, there's really no data to support that it makes you any happier. And what I have found out about money is that it really just makes you more of who you already are.

So if you're a jerk and you get rich, you just become a bigger jerk. You're a nice person and you get rich. Become a nicer person, a more generous person, if you will. So I love that he had freedom as the goal because freedom is bigger than himself. It's bigger than just money and it, and it ties in his family really well.

So when he think when he was talking about freedom, he's thinking about what that could do and the impact it can have on his kids, on his wife, on his. In laws and his parents to visit them and it's more than being strapped down by a nine to five job so I love that  the other thing I thought is super important, but Often overlooked is that he believes that he can achieve financial freedom So often we hear things especially from he's a christian brother of mine  especially from the church for whatever reason that you know having money being rich is bad and Um, it puts this negative Thought process in in a lot of people's minds that oh you don't want to achieve that because if you're if you're striving for that Then your your pursuit for money is more more important than your pursuit for god But he understands that he deserves he can be more abundant with his giving his life his time to others to serve  if  If he achieves it, right, so he believes that it's possible and he understands that he's worthy of making it possible I thought that was paramount  He also understands and I mentioned this a little bit, but he understands the importance of multiple sources of income I won't belabor the point because i've already made it but having multiple sources of income is extremely important To him because you know his high valued skill is As a contractor or carpenter and his body could give out right and then the other thing I loved Um, but he had some um, maybe some bottlenecks here is that he has built a nice financial Bank account, but the bank account is not being deployed. 

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So money in the bank He just doesn't yet know what to do with it yet. So he's built a nice Emergency fund and a savings account that he can invest with with but he just doesn't know what to Uh really where to take that and so I thought that was you know, that's a great step. It's A bigger problem to not have that bank account than to have a bank account that is full of money And not know what to do with it.

Although I will let me just mention that money In a bank is actually you losing you money in really two ways First of all, it's losing money at the inflationary rate So the dollar is getting less and less day by day because of inflation. We all know that Number two is the opportunity cost because the money's not deployed in an investment that Pays a return that is losing an opportunity cost at an opportunity cost.

So if it was in Um, say an smp 500 index fund gaining an average of 10  That money sitting there is losing that opportunity. So I thought that was that was neat. We did get to talk about that Okay, so let me discuss just kind of the format he has right now. He has a home and it's worth about 400, 000 Okay, he owes, he owes 63, 000  on the house.

So that's his debt, okay? Now,  now what I was, uh, talking him through is that, you know, his first initial inclination is to sell the home, and then take that money, and then go build another home, and maybe buy a, a rental property out of it. But he, remember his goal is passive income, or,  Additional sources of income.

So I thought, well, if you sell this house, if you sell this,  delete that,  if you sell this house,  then you're going to pay taxes on the capital gains. So basically you're going to pay 400, 000 minus the 63, 000  in capital gains taxes and a capital gains tax,  uh, could be 20. 22 percent that you're gonna pay on that money.

So I'm  I'm getting him You know, I my objective was to get him to think a little bit differently. So if we have 400, 000 let's see if we can take a HELOC a home equity loan of credit Or a line of credit out on that on that house and use that money to reinvest So that you continue with the house, the asset, and somebody else's paying down the mortgage, building your equity and your appreciation on the home.

You get it now as a tax benefit and it starts to hedge against inflation. So those are the things that, uh, I really wanna look at now. How much can you get a home equity line of credit against the house? It's about 80%. So 80% of if 400 is 320,000, that you could get that. So that means that there is.  80, 000 left over in equity.

Okay. So remember that he owes so this would make him. Oh, oops.  He owes 63, 000 and now he would owe an additional  Total excuse me a total of 320  on the house.  So if you got 320 320 and 63, 000 that means that he could have 257, 000  out in a loan  To pay for his next investment, that would be his investment Avenue.

And so I, what I think is important here is that when you take this money out on a home equity loan, this money  is tax free it's a leveraged.  Dollar amount and so this money does instead of you know, like we if we sell it up here at 400, 000 We're gonna we're gonna have to pay taxes on that versus if we get this money out  We get to keep the house and we are not paying taxes on that money and this money can then be Used for financial gain.

Okay, so I thought that was super Important to discuss with him now. His goal is to he has some land that's already paid for and to use money whether he sells it or if he Gets money out of it with a home equity line or refinance whatever  to then buy Or build a house on this land And so I wanted to talk to him about that because it's easy to think that I have equity in a house And so therefore I just need to transfer it to another house And live in that house The problem with this here is that this house here that he's currently living in and then if he builds a house over here Those are actually not  Um, income producing properties and therefore, in my opinion, it's more of a liability than it is an asset because there's no offset in income to, to offset this money with  rent money or whatever the case may be for income.

And the same would go for the, the house he builds on the land. So here, here was my proposal. Take this money  and then Build a house, because it's riverfront property, build a house over here that is designed for  an Airbnb. Now you're gonna take this money, build the house, and it could be paid for. I know you could build a house for that amount in our area.

I did it just a couple years ago, and it's very possible. You build now an Airbnb,  Okay.  With that is paid for. 

Okay. So  now we start to, uh, when we build this house, we're going to actually move into it first,  move here.  And then once we, uh, have moved in, we're going to start building the next house. And the next house, we're going to take the, uh, the equity of this first build and refinance this out. So now this house is built. 

We're going to now leverage the Airbnb. And 

take that money out. Let's just assume that you could build it less than,  uh, than it costs. I mean, excuse me, that, that, uh, you can, you can build it less than the value that it becomes after it's built. So let's say that that house is 350, 000, uh,  the Airbnb, and that's the value of that. And now we're going to go get a loan  against that house.

So 350, 000 times 80 percent again, that's 280, 000. 280, 000, oops, 280, 000 that you can now use to build  your actual house that you're going to live in. 

Okay,  so now, this is where I love, so now he's getting rental income here,  rental income in this situation.  Okay,  um, he would probably need to be around the 3, 000  And this is doable, 3, 000 a month  for this house to make sense because his mortgages will be about 2, 300 plus,  uh, taxes and insurance.  Um, 2, 300 a month in expenses.

So that's a 700 without maintenance cashflow.  Okay. So that is, that is really nice. So now he's made. 700 a month that's in this house. But now we're using this money to build the airbnb So  airbnb say it takes him a year to build that he's got cash flow here. He's building the airbnb Okay,  and he you know, he might be renting in this situation to to figure out his his uh, Or get an rv or something to live on the land while he's building the the uh, airbnb.

There's a little sacrifice there That's understandable  once this is Um, Airbnbs in our area is  He could probably make 2, 500  to 3, 000 a month  on that Airbnb.  So that is even better because that loan amount is only the 257  that it's going to take to build that. It's less than this one up here, 257 to  build the Airbnb and it's less than the 400, 000 loan, uh, 320 loan, excuse me, 320, 000 loan on his primary house now.

So that's fascinating to think about because now he's. Now he's going to really increase his cash flow here. He's probably going to be, and I'm just rounding numbers here, but we'll probably be in the 1, 300  a month range.  Now he's at 2, 000 total  a month after that.  While he's living, or after he's done living in the Airbnb, he's built his house over here.

He has two cash flowing properties for 2, 000 a month. While two people,  this over here and this over here, are  residents, tenants that are paying your mortgage, that are  paying down your mortgage, increasing your equity, increasing, um, the Appreciation on the house and you have the tax benefits of owning rental properties and it  leverages against  Inflation so I wanted to show that scenario.

That's what we talked about that Those are that's what I would do in his situation now I also talked about what Dave Ramsey did and I love Uh, his method as well, because I think it, it thinks differently. We're so used to a leveraged society and you utilizing bank notes to build wealth, which I'm a fan of, but I am only of a fan of it.

If it, you know, you never want to take a bank note or a loan if it's not going to then be invested, right? Otherwise, that's bad debt.  Dave ramsey's method was was this when he was young and in his 20s  He put every dollar that he had above The means that he had to live into an S& P 500 account and that money generated about 10 percent annually return for him and he built that up over the course of like five years big enough where he can pay cash for his first rental property. 

So now he pays cash for the first one and then he takes, you know, rents it out. Then he takes not only the money he was putting in. Continually putting in to the S& P 500 but also the rent proceeds that he makes off his first one and does the same thing Keeps putting it into an S& P 500 It continues to grow and grow and grow then he buys the second one and he does that process on repeat over and over Dave Ramsey has been able to build a 600 million dollar Real estate portfolio without debt.

That's fascinating to think about. It's, it's fantastic. So I wanted to present those two methods. Now  it's probably the comparison between, um, the old, I don't know what they call it, but the old adage of, would you rather have a million dollars today or a penny that doubles for 30 days? The penny that doubles for 30 days is probably the Dave Ramsey method.

And the. Million dollars today is probably the method that I explained, or at least how I would scale the situation. And it really depends on what pain you're in. And when you need a little bit more cash, right? Both ways will get you to multimillion dollars. If you stay focused on building the wealth that you have and continuing to snowball with these mindsets, right?

The mental mindsets that it takes to become wealthy. So  the. If you've ever done the math, a penny that doubles every day becomes about five and a half million dollars, I believe in 30 days.  Otherwise you can have a million dollars today. So it's far better to have compounding interest over time. And I think the Dave Ramsey method of zero debt.

It probably is really flat for a long time and then it starts to really increase And that's when that bell curve happens where his net worth Substantially gets bigger and there's no there's no debt to reduce the the net worth so two fascinating scenarios wanted to share you Share with you that method of investing when, when this young man is going through, uh, these decisions that, that are in front of him today.

Thanks for listening. We'll be back next time to cut through the noise of what it really takes to be a successful entrepreneur. 

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