Personal Finance

Why You’re Building Wealth the SLOW Way (and 3 Ways to Fix That!)

Expertise: Real Estate News & Commentary, Real Estate Investing Basics, Mortgages & Creative Financing, Personal Finance, Personal Development
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Hand Putting A Coin Into Piggy Bank In Front Of Blackboard Showing Graph

I’d be willing to wager that a fair number of readers meet the following three criteria:

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  1. Your primary financial goal is to increase your net worth as rapidly as possible.
  2. You are interested in real estate only insofar as it helps you achieve #1.
  3. You earn somewhere between $40,000 and $100,000 per year.

If these three things are true, I’m going to make a bold claim and say that there’s a good chance that learning to invest or creating a side hustle isn’t the best use of your time.

Wait… what?

Let Me Explain

That’s right — I don’t think that attempting to earn more money or invest more money is a high return use of your time, unless you earn very little (in which case you should be developing a skill to earn more), or you earn quite a bit (in which case you should be developing your investing skills to return more on the massive chunks of money you sock away each month).

Related: “I Want to be a Real Estate Investor but I Have No Money Saved”

I know this isn’t what BiggerPockets readers might want to hear, but I’m going with it anyway.

If you make between $40,000 and $100,000 per year, and your financial goal is to maximize your net worth as much as possible, then your highest return use of time is to focus on saving a higher percentage of your income, and NOT on earning more. Once you maximize your savings rate, by all means, go out and earn more. I’m just saying that these extra income strategies won’t come close to matching the return on increasing your savings rate and shouldn’t even be considered if you aren’t willing to do a little lifestyle design first.

Let’s examine the math on three basic strategies that the median American can implement to increase their savings rate and compare the return on time and effort to actively trying to earn more money or a higher investment return.

frugality

3 Strategies to Increase Your Savings Rate

Strategy #1:  Cut Expenses in Order to Maximize a 401(k) (or Similar)

Many of you might think that contributing $12,000 per year to a 401(k) or similar tax-advantaged retirement account is a ridiculous proposition. Between the rent, car, kids, and groceries, there’s no way it can be done!  I’d counter that line of thinking by saying that you can’t afford not to.

Here’s why:

A $12,000 contribution to a 401(k) at a salary of $50,000 reduces your tax bill by up to $3,000 (assuming a 25% tax rate for this article). That’s a 25% guaranteed return!

To accumulate the same amount of Net Worth by earning more income, you’d have to earn an extra $4,000 per year (that’s because for every extra dollar you earn at $50,000, you’ll get taxed around 25 cents). Personally, I don’t see how anybody could be willing to go out and slave away at a side hustle with their free time when they aren’t even taking free money from Uncle Sam!

Oh, and guess what — those 401(k) funds can be used to invest in Real Estate in many cases. If you come up with a better way to accumulate personal wealth to get that down payment on a property together, I’m all ears.

Strategy #2: Move Closer to Work

Americans on average commute 25 minutes to work. Assuming that equates to about 10 miles each way, then at $0.50 per mile, this commute costs you $10 per day. At 20 workdays per month, this equates to a monthly cost of over $200 per month or over $2,400 per year.

Furthermore, your commute is costing you the value of your wage — at $50,000 per year, that’s about $25 per hour. 50 minutes of commuting per day costs you 16.7 hours per month or $417 dollars per month. You can argue with that logic if you want, but if you have any respect for your leisure, family time, or recreational pursuits, you’ll absolutely factor that cost into your commute.

In total, your 25-minute, 10-mile commute costs you about $2,817 per year. To make up for that, you’d have to make an extra $3,750 per year. Oh, and you’re also going to have to earn that money on 50 minutes less per workday.

Often, I hear strong arguments from folks who like to say that living in their area is a necessity because “the schools are better.”

Here’s why I think that is baloney:

As a direct result of moving closer to work — and reducing your commuting cost to zero by walking or biking — you now save an extra $2,400 per year (ignoring the value of your time), which, among other uses, you have the ability to put in a 529 plan for your child’s college education. This reduces your tax bill by $600, which you can also contribute to your child’s 529 plan for a total of $3,000 towards his/her college per year.

Assuming you put this in an index fund and earn 7% for the next 18 years, you’ve saved $109,000 for Junior’s college. I find it extremely hard to believe that the school system in your neighborhood is $109,000 better than one within a 5-mile radius of your workplace.

A long commute is an utter destroyer of net worth to those of us earning between $40,000 and $100,000 per year. Moving from 10 miles away to walking/biking distance saves you $2,817 per month; you’d have to earn an additional $3,756 before tax to match those savings.

Isn’t it easier to just move a little closer and get your life back while you’re at it?

buy-properties

Strategy #3: “Hack” Your Housing and/or Buy an Income Property as a Personal Residence

Assuming that you've earned at least $40,000 for the last year and have built credit for at least one year, many people can qualify for an FHA or similar loan for a property in an area convenient to work.

For example, if you’ve accumulated $12,000 in a 401(k) with Strategy #1, you can probably buy a single-family home or duplex – fourplex at up to $240,000. I am a strong believer in Brandon Turner’s House Hacking Strategy, but even if you forgo that for a single-family residence, you’ll most likely win big over the long haul.

There are two advantages to buying a personal residence that are so great that it is almost impossible to overcome the Net Worth building deficit as a renter. I discussed these previously, so I’ll be brief.

They are:

  • Part of your mortgage payment builds equity in your home.

Assuming a rent of $1,000, $1,000 goes to your landlord for a total loss — you'll never see that money again. On the other hand, as the owner of a small home or condo, of the $1,000 in average monthly homeowner expenses, perhaps $300 will go to building your equity in the property right off the bat!

  • Your income taxes are reduced by your mortgage interest.

Of the $1,000 average monthly expenses in this example, perhaps $400 might go to a monthly interest payment. At a salary of $50,000 per year, this reduces your tax bill by $100 per month.

In total, you are building Net Worth — or "saving" $400 per month or $4,800 per year. This is before other potential benefits, which you as a BP reader are sure to capitalize on, such as passive or forced appreciation, cash flow from tenants or roommates, and more.

Related: How Much Do Americans Really Have Saved?

In order to accumulate $4,800 per year in Net Worth with a side hustle, you’d have to earn about $6,400 per year before taxes.

Conclusion

If we can agree that the three strategies above are reasonable and applicable to many BP readers making between $40,000 and $100,000 per year, then here is the net result of implementing these three strategies:

  • $3,000 from 401(k) contributions
  • $2,817 from a reduction in commuting expenses
  • $4,800 by buying a property

In the examples used here, that equates to about $10,617 per year. In order to increase your Net Worth by that much by attempting to earn more, you’d have to earn $14,156 more than you do currently! At $50,000 per year, that’s a 28% raise. Even at $100,000 per year, that’s a whopping 14% raise!

Why would you put in the kind of hustle needed to make $14K on the side in a year if you aren’t ready to make simple, relatively easy changes to your lifestyle that have a far greater return per the effort involved?

Looking to set yourself up for life as early as possible and enjoy time on your terms? Whether you’d like to “retire” from wage-paying work, become less dependent on your demanding nine-to-five, or simply spend time doing what you love, Set for Life will give you a plan to get there. This isn’t about saving up a nest egg. It’s not about setting aside money for a “rainy day.” Set for Life is an actionable guide that helps readers build the accessible wealth they need to achieve early financial freedom.

What do you think? Is my math reasonable? Do you think that it’s better to focus on side hustles or investments if you earn between $40,000 and $100,000 per year? 

Let me know in the comments below!

Scott Trench is a perpetual student of personal finance, real estate investing, sales, business, and personal development. He is CEO of BiggerPockets.com, a real estate investor, and author of the ...
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    Kevin Lowman Vendor from Durham, North Carolina
    Replied over 3 years ago
    Just a few questions, What is an SD 401k, and how do I get one? You keep saying to the nay-sayers of 401k’s who are saying real estate investing is better and safer, that they can invest in real estate with their 401k funds. I’ve searched high and low in my employer offered 401k and all I see are mutual and bond funds. I don’t see any provision for investing in real eatate in any fashion, or even individual stocks. Finally, what is House Hacking? Thanks!
    James Rodgers Investor from Birmingham, Alabama
    Replied over 3 years ago
    Hey Kevin, There is a hyperlink in the article to another about house hacking. B. Turner explains that well also in his book The Book On Rental Property Investing. I’m actually about to pull that one off, myself. I don’t think his 401k comments were about a self-directed 401k, because you can’t use that for any property in which you have personal interest. In a recent BP podcast, 20 episodes or less back, I heard a guest describing some method of taking out a loan or line of credit or something against your 401k balance. The specific terminology escapes me.
    Lauren Lockett Investor from Arlington, Texas
    Replied over 3 years ago
    Good read! Even better comments!
    Eric Jones Rental Property Investor from Rochester, NY
    Replied over 3 years ago
    I appreciate the perspective of of this article but would argue that the absolute highest ROI investment someone can make is to maximize their earnings in their current job. By busting your butt at work and getting promoted/getting a raise, you are generating more money with no additional time input. You also gain job security as you become irreplaceable at your job. An added benefit is then your 401K will increase proportionally to the growth in your salary. Then you can use those 401k funds to take out a 401k loan to make a down payment on rental property. You are then forgoing some earnings in the stock/bond market, but you’re using your tenant’s rent to paying yourself back at a guaranteed interest rate. So I’d say it’s best to 1.) increase your earning power in your job, 2.) save more, 3.)invest the savings in rentals to get sustainable passive income. It should really be a mixed approach.