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

by | BiggerPockets.com

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

  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?

The 20 Best Books for Aspiring Real Estate Investors!

Here at BiggerPockets, we believe that self-education is one of the most critical parts of long-term success, in business and in life, of course. This list, compiled by the real estate experts at BiggerPockets, contains 20 of the best books to help you jumpstart your real estate career.

Click Here For Your Free eBook!

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.


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?


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.


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?

[Editor’s Note: We are republishing this article so BiggerPockets’ newer members can enjoy it!]

Looking to set yourself up for life as early as possible and enjoy time on your terms? Scott Trench’s new book Set for Life, slated for release April 23, 2017, and can be preordered on Amazon, Barnes & Noble and other fine booksellers! 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 its 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!

About Author

Scott Trench

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 best-selling book Set for Life. He hopes to now share the knowledge he has acquired with others so that they will have the tools they need to repeat his results in just 3-5 years, giving them the option to go anywhere they want in the world, work any job, start any business, or finish out the journey to financial independence and retire young. Scott lives in Denver, Colorado and enjoys skiing, rugby, craft beers, and terrible punny jokes. Find out more about Scott’s story at JoeFairless.com, MadFientist, and ChooseFI.


  1. Hi Scott,

    I am not in this group as income is way, way higher but a factor I think you left out that is critical.

    In urban and suburban sprawl yes there is a cost to commuting. HOWEVER there is also a cost to living closer to work. That area if closer to downtown could be very expensive as a renter or an owner. The person saving 2,400 living in town could also end up spending 6,000 more to live closer to work for costs giving them a savings on time but more expensive losing 3,600 to live closer. So it’s all relative.

      • Courtney Sorrell

        I agree with you, Jamie- a close commute is awesome. I’m currently in a longer commute and use the time to catch up on podcasts but wish I could walk or bike instead.

        I tend to think that most of this advice is basic personal finance. When I hear people devising creative ways to fund their first deal but they’ve neglected their 401k or other expenses, I just shake my head. It’s also pretty shocking how many people are so interested in investing and so adamantly against house hacking.

        Scott, are you currently house hacking?

      • David Soria

        Not exactly “case closed”. You can’t ignore the fact that there could be a significantly higher cost to moving closer like Joel said. Try living/working in South Orange County where you can barely find a condo for near $300,000 and a $300/mo HOA on the lower end of the income bracket he mentioned. You need to be making AT LEAST $100,000 to even consider owning a home in some areas. There are no duplexes or triplexes in Orange County, so this form of house hacking isn’t even an option you can consider.

        For many people, the entire reason they commute is because the cost is too high or completely illogical to live closer to their job.

        Like Joel said, it’s all relative.

    • Joel,

      I agree that there are certain, isolated cases where individuals may need to commute. But that is a remarkably rare case. I have yet to meet someone that truly cannot move within 5 miles of their workplace and eliminate their commute at a similar cost of living. I’d certainly be interested to meet that person if you can point him/her out! But I’d be willing to bet that over 95% of those commuting over 10 miles to work are doing so at an enormous financial detriment.


      • So true. People underestimate their commuting costs by so much. They calculate it by just counting the gas costs, which makes no sense. Car maintenance and vehicle depreciation are completely ignored, but are huge costs.

      • Ever met a married couple who don’t work in the same place? Just asking. 🙂
        So this tip would only apply to those couples working with or near each other or a single person.

      • Hmmm, I don’t think any of you live in NYC. Go ahead and try living in close proximity to NYC on $50k per year and see how far that gets you. These suggestions borderline ludicrous, to be honest. A crummy 1-bedroom apartment, 1-hour away from the city in Queens will run you from $1200-$1400 per month. Factor in transportation costs from $120-$300 per month (depending on the means of transport), $200 weekly food costs, utilities, etc. on $50k…you guys are smoking that good stuff.

        I may need to start smoking what you guys are smoking because, as a real estate agent in Queens, I’m telling you right now that you’re not buying ANY multi-family not located in the cross hairs of a flood zone in Far Rockaway for $250k.

        The middle class is still being crushed due to the excessive inflation of prices in our industry, and we’re headed to another bubble burst. Here in Queens, listing prices increased 18% from two years ago. The bubble is about to burst, and the only buyers I see out here are people who have sold homes purchased many years ago in once disheveled areas that are now booming.

        This advice is ideal but does not reflect what’s actually happening on the ground.

        • Scott Trench


          You are right – many of my suggestions don’t apply to New Yorkers (and maybe L.A.). That’s part of the deal of living there. If you choose to live in a place like that, then I would hope that you are making a huge premium on your salary, and that you understand the true financial impact of not buying a primary residence and factor that in to your financial decision to remain a resident. If the difference in salary is great enough, then that may justify your decision to continue living and working in New York.

          In almost every other major city, however, you will be able to take advantage of the three strategies outlined in the article.


        • Tyler Herget

          I’ve seen shows advertise studio apartments in NYC for sale for over $1 million. You could buy a nicer place anywhere in the world at that price. Crazy city!

        • Noreen Eddy

          Thank you for saying this Raphael! This article offers great strategies, but the big bad apple is not only more expensive in terms of cost of living, but we also have to factor in taxes to the city on top of the state and federal… We looked for a one bed in Manhattan – saw a cute “cozy” one for sale in east midtown at $325k. Not bad, until you see maintenance fees are $2,500 per month. MONTH. As we say around here….fugghedaboutit. Jersey commute works better for me, even counting the increase in time and transportation costs.

        • Wanda Bentley

          It’s not much different in the DMV. I have recently sold to an investor, moved to southern VA, and now I am able to implement the all the strategies and advice I’m reading about.

  2. This is very interesting. I like the idea of saving time by moving closer to work, and I have always loved the house hacking concept – that’s what I’m doing now!

    I disagree with you that saving money by lowering taxes is a faster way to build wealth. If you got your real estate license, you would only have to sell one house to make up for the savings on taxes in these examples, and it could possibly take less of your time. From my experience, the best way to increase net worth is buying discounted real estate. If you really care about net worth, don’t waste time with tax advantaged accounts – buy a $100,000 house for $60,000. You can only save so much on taxes. When you start investing, your upside potential is *unlimited*

    • Skyler,

      That’s great that you are moving closer to work! It’s a fantastic way to save, and I believe its one true differentiator between those who are very wealthy and those who are not over the long term.

      I want to point out the reason that I believe that lowering taxes with a 401(k) and primary residence is the fastest way to building net worth:

      I believe that it’s faster.

      Getting a Real Estate Agents license is an expensive, time consuming task. It takes weeks for most people to study for that exam, and unless you are really good, it’s a TOUGH business. Many licensed agents never sell a single home, and very few make a full time living on it!

      Assuming you are an excellent agent – naturally gifted and in a great market – it might take you 3-6 months before your first transaction actually closes. That’s a long time! On the other hand, you can create more net worth for yourself tomorrow by putting systems like those described in the article in place!

    • Skyler,

      Here’s why I think that contributing to a 401(k) is a faster path to wealth creation than getting your real estate agent’s license:

      1) A Real Estate license takes time – for most people it is weeks of study, and even if you are very very good immediately and get a client on your first day, it might take you at minimum several weeks to close your first deal.

      2) Being a successful Real Estate Agent is extra work. There is a reason that the career of an average agent is extremely short – it is tough work and requires a specific skillset.

      For me it boils down to this – why would I spend a ton of time developing a new skillset like that of being an agent, when I won’t even bother to spend the time to protect that precious hard earned money that I already make?

  3. 401k is a dumb idea. Here is why. You put your today’s money in it but you cannot take it out until you are 59.5 without paying 10% penalty (AKA stupidity tax). You still owe taxes on that money and you future tax rate will be higher than what you pay today if you succeed financially.Your 401k contributions are subject to Social Security and Medicare taxes. So you pay these taxes but don’t see the money. Dumb again. 401k does not generate you any income. Your balance fluctuates with the stock market and you can easily lose 30-40% a year in a bear market.
    Want to buy RE with 401k? All you profits would go back there without benefiting you. When you withdraw that money it will be taxed as ordinary income.
    If you own a rental property in your name and not in 401k or IRA you get all the benefits of it. Cash flow goes to you and you spend or reinvest it. It is also almost tax free due to depreciation. Capital gains are either taxed at 15% or deferred forever via 1031 exchange. You may access these gains tax free via refinance if you’d like. Try that with 401k.

    • You are forgetting the primary benefit of tax deferred investing and that is compounding without having to pay taxes. Also, when you are 70, are you going to want to work day in and day out on your real estate business? Not likely, so you aren’t going to have a high ordinary income.

      Too many people think they are going to be rich off of real estate in the future so why save now. Multiple streams of income is much better

      • 401k does not lower your taxes nor does it give you “25% instant ROI” as someone wrote. Here is why. You future income will be higher than your current income. You defer 25% tax rate now but you may pay 38% when you start withdrawing. If you think that your future income will be in a lower tax bracket you plan to fail financially! Plain an simple.

        If you own rental real estate, most of your income (cash flow) is tax free anyway because of depreciation. If you start at 30 and do it right you won’t work on you business when you’re 70. You will have a system in place long before that!

        • Mike,

          I wrote that. It does work. It is an instant 25% return, “plain and simple”.

          I can see that I am not going to convince you that building net worth rapidly TODAY is the best financial goal you can have. If you disagree with that, you are potentially losing out on hundreds of thousands in easy tax free money over the years.

        • No it’s not an instant return. 401k is not tax free. It is tax deferred. There is a huge difference between the two concepts. If your current tax rate is 20% but your future one is 30%, why would you want to pay taxes later?

          As for “rapid wealth building”, most people have 401K’s from their employers and the investment choices there are limited to a dozen of mutual fund half of which don’t beat S&P500. What kind of “rapid wealth” is built at 7% annual rate with possible 30-40% drawdowns?

          If you want to build your wealth rapidly you need to be able to double your money every 1-2 years. You have much higher chances of doing it with real estate (“value play”) than with mutual funds.

          If you pay taxes now, save that money and invest it in rentals you will do a lot better than 401k (even better than SD 410k that allows you to invest in real estate).

          Speaking of SD 401k, you may be forced to liquidate your holdings and take a “haircut” if the custodian committed a fraud:

    • Mike,

      Thanks for pointing all this out. I will disagree with you on the 401(k) being a dumb idea and give some counterpoints to three of your arguments:

      1) Just because you can’t take money out of a 401(k) until you are 59.5 doesn’t mean that you can’t use the money to better your lifestyle today by creatively putting it towards investments that supplement your leisure activities. Further, there are many strategies that allow you to take 401(k) money out creatively before you are 59.5.

      2) I plan to live past 59.5, and will want that money then.

      3) All of the risks and investments you describe can be done with a 401(k). You don’t have to subject yourself to the stock market fluctuations, and you can invest in Real Estate with those funds!

      • Scott,

        #1 How do you get money out of 401K “creatively” without paying taxes or penalties? Borrowing up to $50K is the best you can do.

        #2 I plan to live beyond 59.5 too but I understand that income producing assets are more important than a large chunk of cash and I want that income now. Do you know that retirement has nothing to do with age? One your passive income exceeds your bills you’re retired. You may still work but you don’t have to.

        #3 I already wrote about RE in 401K. If you do that, your cash flow and gains go back to 401K and when you withdraw from it you will pay taxes in a higher bracket. If you do REI in your own name, your cash flow is almost tax free and your gains are taxed at 15% or deferred via 1031 exchange. Why would you trade tax free income now for taxable income in the future.

        • Mike,

          Having wealth at your disposal, that can be directed at your discretion is a good thing in my opinion, and the more you have and the more rapidly you accumulate it, the better. It gives you access to opportunities and investments that you would not have otherwise, giving you more power over your life. If you don’t believe that increasing your net worth, even though you can’t directly spend it, is a good thing, we will have to agree to disagree.

          There is no better way to rapidly increase your investing power than through a 401(k). No, its not usable without a penalty in the early years, but that doesn’t mean that you can’t buy assets that enhance or supplement your lifestyle with 401(k) funds. I think its unfortunate that this kind of thinking prevents millions of Americans from using the single most powerful wealth building tool at their disposal.

        • I am all for increasing net-worth but you cannot increase it by taking money from your left pocket (paycheck) and sticking it in your right pocket (401k) and hoping that whatever your bought with it will go up in value. That’s speculation and not wealth building. You build wealth by producing products or providing services and selling these products and services to your customers at a price that is higher than your cost. You build a business to increase your net-worth, a business that can function without you, not a savings account.

        • Kyle Hipp

          You can withdraw from your 401k at any time penalty free using the 72T provision. I max out my 401k, it costs me $13,500 from my take home pay and before investing it in anything my 401k account is at $24,000. My 401k account also acts as a reserve fund for borrowing.

      • Derek Johnson

        I agree with Mike on the limits of a 401k. These are products pushed onto the middle class by corporations and Brokeridge firms. I make $60k per year, and my company offers a 6% match on 401k funds. I take advantage of that match and no more, I would much rather have my money go to a ROTH IRA or real estate. My base options in my 401k were limited to a company stock fund or a few mutual funds (50 or less). I called and got an expanded variety of 6,000+ funds, but still prefer STOCK, which has numerous benefits over mutual funds including: limit orders, individual due diligence on companies, dramatically higher ROI. I can also access 100% of my deposited funds TAX FREE at anytime. Interest earned is TAX FREE after age 59 1/2, because I put after tax money in my IRA (assuming my taxes will be higher in retirement). The only downside is the deposit limit of $5,500 per year or $6,500 per year over age 50. While my 401k funds are stuck in my 401k unless I take a loan out or pay a penalty. So for earners between $40-100k the best option is to get whatever your company will match in your 401k, max out a ROTH IRA, THEN contribute excess to a 401k plan if you have money left, in my opinion.

  4. 401k is a joke. First of all, the government can change the rules for the worse regarding 401k tax rates at any time in the future and your $ is just sitting there waiting to get zapped. Second, our nation is strapped in tremendous debt and it is not unreasonable to imagine that our government issue a wealth tax on 401k balances where they would take 10% from everyones account to fix our debt problem like the government did in Cyprus. You would not be able to do anything about it other than withdrawing which would be a 10% penalty anyway. Third, is that stock market can tank at the worst time possible right before you are set to retire and you could possibly lose some 30% of your money. 401k is not worth it in my opinion…save your money for down payments on real estate or put that money that would have gone into a 401k towards your home mortgage as extra principal payments.

    • Much more likely that tax preferences for real estate would go away first. Both parties are looking at eliminating the 1031 exchange for instance. Mortgage interest and tax depreciation may not be around forever either.

      • Yes, but you are comparing applying a tax % that amounts to a couple thousand or so with real estate to a 401k that is a coupke hundred thousand. With real estate even if you take away all tax write offs you still can do something with the asset (cash out refi, profit off cash flow, appreciation, tenants paying for your property over time) but with 401k your cash is sitting there waiting to get zapped by mutual fund management fees and changes in government tax treatment.

        • Adam,

          I think that the risks that you point out are inherent in any investment and that you are no worse off investing in a 401(k) from a risk perspective than you are in any other investment. Furthermore, I believe that you are forgetting the single most important part of a 401(k) – that you get to save on taxes NOW. With a 401(k) you IMMEDIATELY get 25% back (at $50,000 per year)!

          AND, you don’t have to stick your money in a mutual fund or the stock market – you can still invest in Real Estate. You can still make virtually every single investment that you point out as being better than a 401(k) with 401(k) money. It’s the ultimate, unbelievably powerful way to build wealth because it’s tax free.

        • Nick Condie


          I appreciate your comments touting the benefits of the 401(k), and I agree that it is an important tool (and certainly not the ONLY tool one should use as you mentioned).

          I’d like to point out some calculations that might help bring this to light for some folks who seem to be anti-401(k), while also stating that I DO NOT believe a 401(k) should be the ONLY investment vehicle one has.

          Let’s say you’re considering saving $10,000 in a 401(k), versus your other option of receiving it as ordinary (liquid) income to be taxed (let’s assume your marginal rate is 25%, leaving $7,500 take home pay).

          Initial net worth:

          $7,500 X 133% = 10,000, so you actually see 33% greater net worth by differing that $ into a 401(k). I believe Scott mentioned 25%, but was actually calculating the reduction in net worth by taking the taxes up front, but I digress from the point I’m trying to make…

          Let’s say hypothetically you invest that money in an investment producing 8% returns.


          $10,000 X 108% = $10,800 – an $800 return

          $7,500 X 108% = $8,100 – a $600 return. $200 less than the 401K (now $2,700 less total!)
          Chances are good this investment vehicle is taxable, but for simplicity let’s assume it is also tax deferred (like the 401k).

          Year 2

          10,800 X 108% = $11,664, which is an $864 return

          $8,100 X 108% = $8,748, which is a $648 return. This is $216 less than our 401(k) return in Year 2. The return gap is widening due to compound interest…

          Net result after 2 years:

          401(K) total = $11,664 (1,664 in gains)
          Liquid total = $8,748 (1,248 in gains)

          Gross difference = $2,916 (416 difference in gains)

          Now let’s say the end of year 2 is also age 59.5, and we’re ready to withdraw funds and take into account taxes. For simplicity sake let’s say everything is taxed at 25%, although an argument could be made for the 401(k) withdrawals to come at lower (or multiple) rates.

          401(k) – withdraw 11,664
          Tax = 11,664 X 25% = $2,916
          $ left = $8,748

          Liquid account – sell all investments and take $ (you are taxed on gains)
          Tax = 1,248 X 25% = 312
          $ left = $8,436

          The difference here is that the 401 (k) option nets you an additional $312 plain and simple. This is a 3% bump from the alternative, an amount which we could expect to be significantly higher given a longer time frame (which gives a liquid account more returns to be taxed!) and more realistic tax scenarios.

          I also agree with Scott when he says that when you are withdrawing from a 401(k) your marginal tax rate will likely be lower. Mike was arguing that your tax rate will be higher as your income grows. I disagree, and would argue that if your level of ordinary income at age 59.5 is so high, why do you need to be withdrawing from your 401(k)? If that is the case you can likely afford to live off your daily paycheck and save the 401(k) funds for when you decide to stop working at age 65 or 70.

          I personally plan to start tapering off my work and letting my investments start working for me by that age, so at least a portion of 401(k) withdrawals should come in the low tax brackets (10% and 15% before we get to the dreaded 25%).


    • Kyle Hipp

      The federal government is the monopoly supplier of the US Dollar i.e. a currency issuer whereas you and I, states and businesses are currency users. The federal government is never capital constrained. Taxes do not fund the Federal government. If the American people actually understood the operational realities of our monetary system we could actually promote prudent fiscal and monetary policy. Spending should be based on wether it benefits the productive capacity of the US economy with inflation as a hedge not and idea that we need a balanced budget, which is mathematically impossible as we are a trade deficit nation, or that a monetarily sovereign nation can run out of money…

  5. While it is true the government can change taxes at any time on 401K plans, that is true of any form of income, including real estate, don’t forget the 2% tax on selling your house in the Affordable health Care act. I like increasing the amount of my 401K while saving several thousand a year which will earn me money until I pull it out. Also 401K are exempt from garnishment. If all my real estate pops like it did in 2008 for some and I go broke I still have all of my retirement savings. There is wisdom in not keeping all of your eggs in one basket. I increased my savings by adding new raises into my self directed retirement account. I never see it, I never miss it. thanks for the article. it was thought provoking.

  6. Nice blog Scott! This is one of those articles that probably rings true for many people, infact, it’s something I still practice as my family grows (2 kids now). I think people have a hard time focusing on the “penny saved in a penny earned” mentality because it’s not glamorous. I work with investors every single day (from all over the U.S.) and its easy to spot the ones that are just spinning their tires and not going anywhere.

    • Thanks Loren! I certainly agree, and find it frustrating that many people ignore the easy stuff to chase riches that are far less likely and require far more effort. Using a basketball analogy, a 401(k) is a layup or a slam dunk. I’d practice that shot first and hit it 100% of the time before chasing the lower percentage shots like building a Real Estate business or trading in the stock market.

  7. If you want to get your house off of the electric grid and onto solar power, by far the best strategy is to drastically reduce your energy consumption. Most people are unwilling to alter their lifestyle in order to do this.

    If you want to build wealth quickly and easily, by far the best strategy is to drastically reduce your consumer consumption. Most people are unwilling to alter their lifestyle in order to do this.

    • JT – thanks for the points. I think in this article, I’m assuming no change in lifestyle except for cutting out your commute. I’m just trying to point out that these three simple steps are achievable by almost every middle class American, don’t require a drastic degradation of lifestyle, and generate tens of thousands of dollars in net worth per year.

  8. The idea of walking or biking to work is completely unrealistic in urban areas where jobs and housing are widely separated. First of all, this assumes that you work in the same area for a long time, which is increasingly unusual in an era when employers view employees as an expendable commodity. Second, in many cities there are miles of slums between job-rich downtown areas and suburbs where people want to live. Also, if you’re over 30 and have a family you don’t necessarily want to live in an overpriced, cramped apartment near some tech startup hub.

    • Bob,

      We’ll have to agree to disagree on this one. I would be very interested to hear about a city where no reasonable and affordable housing exists within 5 miles of a given workplace. Perhaps NY, but if you are working in NY (or LA) I would hope that it’s because you are making a high premium over the same position in another city.

      Of course having a family affects your lifestyle choices, I’d just argue that financially, your long commute is costing you BIG. I further disagree with the suggestion that living close to work means that you have to live in a cramped apartment. In many cases, Americans live in homes that are actually more expensive than homes closer to work, an absurd proposition in my opinion.

  9. Very good article and your points are valid! I have bought and flipped many properties in the neighborhood in which I live. You can’t beat the commute, Home Depot is 5 minutes away and all the other suppliers I use are within ten minutes 15 with traffic. Also if you are going to be an expert on values in any area it would probably be first where you live and own.Besides buying in my neighborhood I love buying in my city as I despise traffic and wasting my time being stuck in it.
    I always say if I have to move any distance away I will begin to do business in my new location.
    Commuting sucks!

  10. Hi Scott,

    I think that one of the most important thing around wealth building is ideas. I mean, your new commodity is not your labor, it’s your ideas. Your own imaginations are the most valuable thing you possess. Everyone else is a salesman. If you don’t own a business, then you sell your manual labor to a company. I can say that, capital is a seed; learn how to plant it to produce the best harvest. When you do this, you will rule your finances.

    Definitely great post, many thanks to you.

  11. I just can’t agree with you on this. 1 gives the government even more power over you and takes away useful resources that can be costly to get back. 2 has far too many variables and I believe is less viable than you think for most people. 3, in my limited experience, is the only truly decent suggestion. I think better advice is to just tell people to slowly cut out non essentias from their lives. Do you really need that new car? The $800 dining table as opposed to the $150 table? The daily cafe coffee you could make at home at a cheaper price?

    • Scott Trench

      David I don’t disagree that telling people to cut out nonessentials from their lives is valid, I just personally feel that I’d rather find ways to cut out the parts of life that I HAVE to spend money on (like housing, car payments, etc), rather than cut out the things that I LIKE to spend money on.

      I think that I’d rather strategically design my living situation in a way where I am 99% as well off as before, but $500 richer per month, than focus on cutting out a Latte or two.

  12. Great article. I do all 3 of those things:
    1. I live within 1 mile of work (no communte rocks)
    2. Own a fourplex & live in one of the units (keeping tabs on the property is easy)
    3. Put the $12K in my 401K

    All of this makes perfect sense.

    By the way, I’m always amazed at the way you handle those who blatantly disrespect you, ‘yell’ at you, and make comments like “Kinda silly article!” I appreciate you sharing knowledge from your perspective (since it’s the only perspective you’ve got), and I hope none of this behavior makes you less inclined to share.

    • Scott Trench

      Heather thank you for your comment!! Yours really helps with the naysayers. As for the people who bash me, I expect and deserve it. I’m a 24 year old kid with no experience, who’s read a few books. Yet, I’m writing articles on the biggest real estate investing blog on the planet. Getting bashed is a part of that, and I’ll keep slogging through.

      It’s an incredible opportunity, and I’m not going to let a few people who disagree with me (or even those who are just total jerks or trolls) impact my writing. I write for people like you, not them!

  13. Hi Scott,
    Interesting to run across this article, as I’m a newbie real estate investor who is doing all 3 of these things at once. I’ve increased my 401K contributions (not quite to the $12K level yet) and just made an offer on a quad less than 2 miles from where I work. I’ll be house hacking while decreasing my commute time by 50 minutes. Thanks for the confirmation! 🙂

    • Scott Trench

      Eric – glad to hear – I’m obviously of the same opinion, and I think that what you’ll find is that your ability to reinvest your working income is going to skyrocket. It will allow you to plow tons of cash into your real estate business and really expand.

  14. Ryan Thiesen

    I fully agree with you on the part about people saving more in their 401K plans. They more you save here the less uncle sam may take from you at the end of each holiday season. That being said I believe their are 2 important factors people should consider when moving closer to work to lower their commute. Typically people work close to metro areas which have an increased cost of living all around. Additionally their could be cost of living benefits to their suburban lifestyle. In Minnesota their are ample parks and walking paths in the suburbs and some areas of the Twin Cities offer no such benefits.

  15. Thomas F.

    Excellent article, some great points and great food for thought. Slight issue with one point though.

    “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.”

    I grew up in the Southeast United States where my dad had to commute about 45 minutes to work each way. The areas where he worked were horrible and kind of racist with a very real threat of myself and my mother being targets of racial violence in addition to the heavy amounts of alleged narcotics and human trafficking going on in those areas, including the school themselves. So while it is hard to believe that some areas are terrible enough to justify $109,000 over the course of an entire childhood areas like that do exist. They are rare but they certainly do exist.

    • Kevin Siedlecki

      @Thomas F.

      Those areas do exist. In the Northeast, we have some of the best and some of the worst public schools in the country, sometimes within a 15-minute drive of each other. My wife and I are both teachers and have experience in a few different schools. It’s very hard for me to put a price tag on putting a child in the better school. If it costs you only $109,000 over the course of the child’s schooling, that is cheap. We are here to learn how to build wealth, but there is more to life than net-worth.

  16. Tyler Herget

    Hey all, I’m looking to invest in a 401K offered at work. They match 4% on a 5% contribution, so I want to get at least that 5% in this year and next year. The money is 100% vested right away, so my understanding is that if I put in the 5%, the employer contributes 4% and I can leave and have that 9% of my salary. I own a multi-unit property, carry my real estate license in PA, and have flipped properties. I couldn’t convince my wife to live closer to work or live in a multi-unit. I believe that diversification is smart investing and if I’m putting in $5 and getting a $4 match, I’ve got an 80% return on that money. I am worried about not being able to access that capital freely, but when I think about it, I put in $5, now have $9 and if I take it all out tomorrow, I have $8.10. So, even with the 10% penalty, I win. Ideally, I want to leave this in here forever, but you never know what opportunity might present itself and where you want to grab money from. I’m interested to hear about where I should look to take out a loan against my 401K and how that works. I’ve never had a 401K before, so I’m trying to learn what I can now. Any input is appreciated thanks!

    • I am self-employed who believe that SD 401K is the best vehicle to accumulate wealth by utilizing tax deferral on capital gains. This is a bit of a departure from Scott’s initial post But consider the following possibility.
      Lets say that through diligent effort you have the capacity and execute fix/flips as a investment strategy. This may not fit everyone’s comfort zone or circumstance, but the math will be so convincing in favor of this strategy if you are.

      Let’s assume that you can deploy 200K for a flip project for 15% ROI in 4 to 6 months for turn around. Let’s be conservative and say 2 flips per year.

      1st Year:
      200Kx1.15=230k (30Kx2=60K annual gain, tax deferred)
      Total Capital: 260K

      2nd Year: now you have capacity to 250K flips
      250Kx1.15=287.5K (37.5Kx2=75K annual gain, tax deferred)
      Total Capital: 260K+75K=335K

      3rd Year: now let’s say you go up to 300K flips
      300Kx1.15=345K (45Kx2=90K annual gain, tax deferred)
      Total Capital: 335K+90K=425K

      4th year: now you move up to 400k project or to two 200K projects at a time
      400Kx1.15=460K (60Kx2=120K annual gain, tax deferred)
      Total Capital: 425K+120K=545K

      I think one can appreciate the progression of wealth building of this strategy. Yes there are variables. The RE market is in its up trend right now and assuming that the trend will continue for next 10 more years, this is hard to beat. This strategy will allow you to control the risk factors unlike the equity market. Take this out to 10th year! Never mind what you have to pay in income tax when you withdraw from the plan. It is without penalty after 59 1/2.

  17. Cody Steck

    I have to completely disagree with this post. Everybody has the ability to earn more money and should. If you are making 50k per year and spending 40k, think how much better off you’d be by increasing income by 10, 25, or even 100k and still spending 40k/year. You can only decrease expenses so much before your lifestyle suffers immensely. However, income can be increased almost infinitely. It’s much easier to get wealthy making 100k and spending 40k than it is when your making 50k and spending 25k.

      • Erik Whiting

        I agree that wealth building involves using both income increase and expense decrease strategies. Offense as well as Defense. However, I think the point of the article was to show quick and simple changes that can be done today or within the next 2-3 months with a few phone calls and/or tweaks to current investment systems that are in place. Scott wasn’t trying for a dissertation on the best advanced, long-term wealth building strategies: he was giving simple tip that take relatively little time and effort and should work the majority of people.

        A quick and somewhat simple comparison of what Scott offers vs. what others are saying regarding earning more income.

        Increase your 401K contribution: Takes a phone call and signing a paper, maybe. 10 minutes.

        House hack? Maybe 1-3 months to find a multi-unit and move.

        Move closer to work? Can be done along with “house hack” all at once in some scenarios, but of course this doesn’t work for everyone (nothing works for everyone, ever notice that?). Even if no 4 plexes are available in your area, moving maybe takes 1-3 months.

        Compare that with trying to hone a new skill or get promoted at work to earn between $10K – $25K more per year. Most folks I know who work for “the man” get a max raise of 3-5% per year. Big raises in CORP America often require earning advanced degrees or certifications before stepping into mid-level management. Higher pay also often means working 50-60 hours a week for no over time pay (salary is a double edged sword). I’ve worked for two Fortune 500 companies in the past decade and this is par for the course. Mid-level managers show up at 7 AM and leave around 6-7 PM, and they are on-call whenever the stuff hits the fan on nights and weekends. You have to love that kind of environment to survive in it for long.

        Now, I confess that my experience is limited to only two companies….there are 498 others who may not expect their mid-level managers to work one minute over 40 hours…so there’s my caveat. Don’t kill me, please. I can only speak of what I know, but if my friends who work for other companies aren’t lying to me, then their experience mirrors my own. YMMV. Just wanted to point out that employers tend to milk employees for more hours and responsibility with only a marginal benefit increase, except for RARE circumstances.

        Bottom line: Scott’s tips will work for a lot of folks, are simple, and are quick. Take the low-hanging fruit first. But yes, long-term you want to boost your earnings via acquiring new skills, real estate, etc. I’m still at my company, and I’ve got more rentals than fingers…so living both strategies at once is very doable.

  18. Rachel Luoto

    Thanks for the article Scott! I meet all your criteria… and disagree about the side hustle.

    You are right if my side hustle is babysitting or pizza delivery for quick cash.

    But what if it’s the seed of something great? What if my 14k a year turns into a six figure business?

    Expenses can only go as low as your floor. Extra income can go through the roof 🙂

  19. Althea Kenton

    Interesting article. However, until you have children, you’ll never appreciate the level of personal sacrifice a parent makes for their kids. I chose a 45 minute commute to keep my children in an A-rated public school district. Moving closer to work would mean placing them in private school which is extremely expensive.

  20. Tom Chen

    I agree with Althea that for most metropolitan locations you may have to place your children in private schools if you want to live closer to town. Most of the homes in neighborhoods where urban public schools are highly ranked are also very expensive due to supply and demand.

    Going off on a tangent, IMO the best ROI would be to pay off any high interest credit card debt first.

  21. Kevin Lowman

    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?


    • James Rodgers

      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.

  22. Eric Jones

    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.

Leave A Reply

Pair a profile with your post!

Create a Free Account


Log In Here