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BlogArrowPersonal FinanceArrowThe 5 Financial Decisions That Make or Break Middle-Class Americans
Personal Finance

The 5 Financial Decisions That Make or Break Middle-Class Americans

Scott Trench
Expertise: Real Estate News & Commentary, Real Estate Investing Basics, Mortgages & Creative Financing, Personal Finance, Personal Development
73 Articles Written
computer-research

Yeah, yeah—this is another “list” related to finance. Here’s the deal. There are countless articles and books out there for folks who struggle with money. Most of those focus on things like “avoiding bad debt” and “saving for retirement.” This article is not for folks who need a day one intro to personal finance.

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This is for a professional who is basically responsible and earning a solid middle-class wage but wants to identify the biggest levers in their financial position and make a good to great choice in each area. If you make good or great decisions around the five areas I describe below, I believe you will have a high probability of generating a net worth of $3 to $5MM or more over a working career.

Honestly, to get somewhat rich—$3 to $5MM or more—on a median salary over a 30- to 40-year career, you don’t really have to be that good with money. I really believe that. You simply have to make a couple of reasonable decisions, the earlier the better, and not make a couple of critical mistakes. But if you decide to do at least a moderate amount of research and make a couple of great decisions, again the earlier the better, you have a real shot at building a huge net worth and having incredible options later in life.

With that, let me walk you through the five decisions that I believe will propel a middle-class American to a sizable fortune over a few decades—or inversely, less optimal decisions that can leave them struggling throughout life to stay afloat.

The 5 Financial Decisions that Make or Break Middle-Class Americans

Decision No. 1: Housing

No surprises here. Housing is the largest single expense category for middle-class America. It’s just about a third of total household spending and a serious killer for wealth accumulation. Optimizing in this area will, for many people, be the single best step toward long-term wealth generation. This will likely be true of all but a select few who are particularly savvy or aggressive investors and possibly entrepreneurs.

The least optimal approach: Buy or rent the nicest, best situated place that you can qualify for financially.

While there is a sliding scale here (especially for pricier cities), this means that if you are spending more than a third of your monthly paycheck on housing (rent or mortgage plus average home maintenance costs), you are likely in this category.

Modern apartment buildings exteriors or Contemporary Architecture Office In The City.

When you rent at the top end of your price range, you are simply blowing money. I won’t bore you with the reasons behind why that is a bad decision. More interesting are the reasons behind why buying a high-priced home is bad for your financial position. When you buy a home that stretches you to your financial limits, two things happen:

  • Your current liquidity (cash or similarly easy-to-spend assets) are wiped out.
  • Your monthly cash outlays usually drastically increase. Typically through the mortgage (principal, interest, taxes, and insurance) payments and the often-overlooked maintenance costs that come with owning a home. There are the small, regular maintenance items, as well as the large, infrequent expenses.

The end result is that folks take on a highly leveraged position against an asset that will typically increase in price slowly—at the rate of inflation—and in the process, use up all or most of their liquidity and take on a huge monthly liability. Housing is also illiquid, meaning that it typically can't be sold quickly and without high transaction costs (approximately 6 percent of the sale price is paid to buyer/seller agents alone, and that's just a start to transaction costs).

All of this means that the homebuyer purchasing property at the top of their household price range is stuck—they can’t move, they can’t quit or change jobs in many cases, and they have a greatly reduced cash reserve, leaving them vulnerable to the vagaries of life.

The most optimal approach: Live with roommates; “house hack” by buying a place and renting out rooms or additional units (like a duplex, triplex, or quadplex); or “live-in flip” by buying a fixer upper, moving in, improving the place, and selling a few years later—greatly increasing your odds of generating a huge tax-free profit.

All of these choices significantly negate the consequences associated with the former decision and allow for a flexible approach to major life decisions outside of housing down the line. And yes, all of them involve a very real change in lifestyle—a sacrifice. The cost-benefit analysis is for you to decide.

A good middle ground: Purchase a home or rent a place that costs one-fifth or less of your after-tax take-home pay.

No, perhaps you won’t be able to live in the cool part of downtown in your favorite city, but you will quickly reap the rewards of a dramatically faster rate of wealth accumulation if you make such a housing decision.

The stakes for your housing decision are likely the highest of the five decisions I list today. For most Americans, no other financial decision will have as great an impact on lifetime wealth accumulation as the choice you make in the first place, or few places, that you choose to live.

Decision No. 2: Transportation

Transportation expenses, including car transportation, public transit, and airfare, are the next largest category of expense for most Americans. Some simple decision-making in this arena can save you tens of thousands of dollars over a 10-year period, and hundreds of thousands of dollars over a career.

Driving a modern car on the road.

The least optimal approach: Purchase or lease a new high-end luxury vehicle.

A new car will depreciate 20 percent the moment you drive it off the lot and an additional 40 percent (60 percent cumulative) over the first five years of vehicle life. Leasing the vehicle is even worse.

The optimal approach: Forgo a vehicle entirely or buy a well-researched, older model with a solid life expectancy in spite of its advanced age.

A good middle ground: Purchase a 5-ish-year-old model of an economy vehicle that you will enjoy driving.

Maintain it well, and shorten your commute as much as is practical to avoid putting unnecessary mileage on it.

Overbuying on your vehicle purchase is inefficient, bad math. No matter what you drive, you will likely adapt to it after just a couple months. Insurance, maintenance, registration, and depreciation are all significantly more expensive in the first five years of a vehicle's life. Let someone else pay a premium for that, and enjoy a model that is a little older and a lot cheaper. It will still get you from A to B, but in a short period of time, you'll be considerably richer.

As a bonus, make sure to research travel rewards, such that you are able to score a couple of cheap or low-cost flights and hotels for those vacations or life events that you may fly to a few times per year.

Decision No. 3: Career

I can’t help but think that a shocking number of career decisions are made on a whim. Think back to high school and college. What influenced your decision on whether and where to go to college? What influenced your selection of a degree/major/minor? What influenced the decision to go work for your first company? Was it a conscious set of choices that led to your current job, your current desk, your current location? Or did life take you there?

If you are like me (the start of my career, specifically), much of that process was reactionary. The person who wanted to be a doctor, lawyer, or accountant and knew so from an early age is the exception, not the rule. For many of us, the selection of a career has more to do with circumstance, with decisions made as teenagers reverberating through the decades.

If you are in a career making a median income or close to it and either dislike or are apathetic enough about your job where you would leave it the moment you achieved moderate financial freedom, then you need to think long and hard about what got you there and where your career is taking you.

Related: How Much Money Do I Need to Retire?

The least optimal outcome: Work a job with poor prospects relative to your potential, where you are underpaid and where you are in a lousy environment that you don’t enjoy. Maintain ignorance about what your skillset is worth in your local market, and remain unclear about what advancement opportunities may or may not be in store for you.

The most optimal outcome: You are currently well paid, enjoy your work environment, and you have a clear picture of the work you would like to be doing. You have a realistic, well-researched understanding of what best-case scenario pay is for that future position. You continuously network and take steps on a quarterly basis year after year with deliberate intent to move toward your long-term career goal.

A good middle ground: Write down your current pay, benefits, and career prospects, and be brutally realistic with yourself as to the odds of improvement in the coming years and where you stand in relation to your current market value. If there’s a meaningful discrepancy (people with your experience have significantly advanced titles/salaries in your market), put yourself in a life position where you are comfortable interviewing at other companies or asking for appropriate title/comp change.

fence with metal grid in background

You likely spend most of your waking hours preparing for work, at work, and returning from work. What is your strategy with your career? Why would you voluntarily show up to something that you do not like, especially if you are accepting a lower paycheck than you could otherwise find in your market?

A surprising number of people seem to have no serious career plan, dislike their work, and are underpaid relative to their current skillset! This is a short-, medium-, and long-term loss. If this is even partly true for you, be honest and set about fixing this situation. There are myriad careers that pay well, offer great prospects, and do not require a college degree. You may be surprised at just how cheap the switching costs are.

As an aside, many people find themselves in this position partway into a career because they paid too much for housing, too much for their vehicle, and do not have a cash cushion capable of supporting them through any periods of no or reduced income while they contemplate their next career moves.

The costs of mismanagement in those other areas of finance force them into a liquidity trap, which makes the uncertainty and risks of losing income by taking time to find a new job or the risk of losing their current job unacceptably high. Because they live effectively paycheck to paycheck, these folks don’t have the option to take even a slight reduction in base pay for greater opportunity.

Don’t let that be you.

Decision No. 4: Your Investment Approach

If you make great decisions around your housing, transportation, and perhaps in your career, you will be able to pile up a surprisingly large amount of money in surprisingly short order. The next best way to lose in the game of long-term wealth accumulation is to abdicate decision making when it comes to investing and put your money in historically poor-performing asset classes and investments.

The least optimal approach: Not investing at all.

OK, we know this, so let’s move to the next worst thing.

Closely following the decision not to invest is the decision to invest in something you don’t understand just because a figure in your life told you to do it. Many people cannot tell you what they invest in inside their 401(k). They might own mutual funds, individual stocks, or REITs. But they couldn’t tell you why they are invested in each asset, can’t describe the breakdown of what they are investing in at a deeper level, and don’t understand the fee structure associated with their investments. They also have no long-term philosophical approach to investing. Rather, they make one-off decisions with little research or understanding behind those decisions.

Close up of unstable stack of coins on world map.

The most optimal approach: Understand and have clear rationale behind why you are making every investment decision, and be able to articulate exactly what is in every part of your portfolio and why it is there.

The most optimal approach is to read, listen, watch, or otherwise consume a material amount of investing and personal finance content from a variety of sources. Make this a life-long, or at least career-long, pastime. Then, arrive at a sound, long-term investing philosophy and stick to it through the ups and downs of the market. Invest with the end in mind, in a manner that makes the most sense to you.

The optimal investing approach may vary considerably depending on where you live, what you do for a living, and how much effort you choose to put into your portfolio. For example, I have investments in real estate in Denver, Colo. I also invest in index funds, I invest in small private businesses—like the one I work for—and I have a book (partly about investing, yes) that I wrote that produces royalty income.

Related: What’s a Better Financial Strategy—Making More or Spending Less?

A good middle ground: If you are unwilling to do the research above, a good balance is to assume mediocre investment returns over the long-term and gradually build out a portfolio that leans more aggressive in the early years (e.g., most of your investments in low-cost stock index funds) and more conservative in the years leading up to your retirement (e.g., a heavier weighting to bonds or other lower-risk, income-producing assets).

If you decide to do this, you should still pick up a book or two on investing, and invest a couple of dozen hours reading blogs, listening to podcasts, or otherwise educating yourself about high-level investing approaches.

Decision No. 5: Cash Cushion

This is likely to be the most controversial part of this post. Many people believe that holding onto a meaningful amount of cash (perhaps six to 12 months’ worth of expenses) reduces their ability to earn returns they might otherwise generate by investing this cushion. While that is true, I have come to believe that a significant cash cushion—12-plus months of expenses—is an excellent use of capital for the working middle class, a use that can produce significantly greater returns than all but the greatest investment alternatives.

The least optimal approach: Live paycheck to paycheck and/or have access to less than one or two months’ worth of liquidity.

If this is you, then you are in big trouble, and your life may be derailed by the next unexpected problem. The words “finance” and “money” will become synonymous with “fear,” and you will live in a state of stress. Ordinary and petty life problems like home and car repairs will threaten your lifestyle.

Everything you do and every financial decision you make will be in the context of playing not to lose. One mistake, and you are burned. You can’t watch your investments lose money, because your long-term investments are essentially your safety net both now and at retirement. You can’t purchase high-deductible (often far cheaper) insurance. You can’t make big purchases with the long-term in mind (think certain home improvements, your car purchase, your mattress, your tools, your cookware, your clothing, etc.).

The most optimal approach: Accumulate over one year of liquidity with which you have ready access.

This doesn’t have to be in cash, under your mattress, in a checking account, or even in a savings account. You could even “invest” your cash cushion in after-tax brokerage accounts in index funds if you are comfortable with the potential for huge volatility.

But having access to about one year of liquidity—liquidity which is specifically set aside for the purpose of giving you access to use it for life’s opportunities, challenges, and setbacks—will put your mind at ease and allow you to play the game of wealth accumulation to win, as opposed to not to lose, per the above.

You can make each of the countless day-to-day financial decisions that come up based on the long-term interests of you and your family when you have access to this kind of liquidity. You can invest for the long-term. You can remain at ease when your portfolio dips or you need a new car. You can rest assured you’re OK when you have a career opportunity, need to move, or have to take some time to care for yourself or your family. And when exceptional circumstances arise that create an investment opportunity, as they may from time to time, you can use this to make a calculated big investment bet.

Close up view of bookkeeper or financial inspector hands making report, calculating or checking balance. Home finances, investment, economy, saving money or insurance concept

A good middle ground: Aggressively build a three- to six-month cushion, and from there, slowly work toward building a full year or more of liquidity over time, balancing growing this cash cushion with regular investing according to your long-term investment philosophy.

It can take one, two, or even five years to build up to that position, and accumulating that much cash before taking other investing actions can be a burden on your long-term financial position. But if windfalls or opportunities come, or as your career progresses and your savings rate accelerates, keep top of mind the advantages of having a large cash cushion, and consistently build it.

The Bottom Line

I believe that these five basic areas of life have the potential to make or break middle-class America. Ask yourself—do you know anyone who:

  • Works a dead-end job but could easily find a better one and likely make more money?
  • Purchased a really nice home and is now effectively house-poor?
  • Drives a newer luxury vehicle but seems worried about money?
  • You suspect lives paycheck to paycheck, in spite of having a middle- or upper-middle-class job?
  • Doesn’t have a clear understanding of their investment portfolio?

I bet you don’t have to look too hard in your life to find someone who meets all or most of this description. This person will have a drastically different working career and retirement than their opposite, the American who makes conscientious choices in each of these five areas from the beginning of their career to the end of it. While I conservatively peg the career difference here at $3 to $5MM in incremental net worth, the difference could easily be $10MM or more over the next 30 to 40 years.

And to reiterate, of these decisions, the one that will have the greatest impact on your financial future is likely your housing choice. It’s also the decision that will be most difficult for the average person, because it’s the most meaningful change to your lifestyle.  The good news is that, really, you just need to make a good or optimal decision on housing on your first home.

Make good decisions, as soon as possible, and you will be amazed at how you can achieve previously unfathomable financial goals. Fail to make these decisions with intentionality, and you will be a member of the tribe that decries the decline of the middle class in America today.

I wish you the best of luck, and hope this guides you on at least a few of the big crossroads you face in the years ahead!

How are you doing with regard to the five decisions outlined above? Are there any important financial choices you’d add to this list?

Let’s talk in the comment section below.

By 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 ...
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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.
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24 Replies
    Ruth Lyons Realtor from Highland, MD
    Replied over 1 year ago
    Great article, Scott. Everyone has goals—most want to achieve financial freedom. Most don’t do what it takes. It takes discipline, wise decisions and drive. Implement the steps—and you summed them up nicely in this article—and you’ll get there. America still is the land of opportunity. Too many people self sabotage.
    Scott Trench President of BiggerPockets from Denver, CO
    Replied over 1 year ago
    Thanks Ruth - appreciate the comment and glad you enjoyed the article!

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    David Livesay
    Replied over 1 year ago
    Excellent article on personal finance filled with golden nuggets. I agree that it is vital to understand what is inside of your investment portfolio. Even someone that is uninterested in learning about investments should understand why they are in one fund over another, or how a target date fund changes with time. I like how you mention the cash reserve doesn't have to be in a bank account but can go into liquid assets. It is how I balance out the need for reserves and the desire to invest. Great read and thank you for the information.
    Scott Trench President of BiggerPockets from Denver, CO
    Replied over 1 year ago
    Thank you David! I am glad that you enjoyed the post and some of the philosophy resonated!

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    Jeffrey R. White
    Replied over 1 year ago
    GREAT ARTICLE! TRANSPORTATION!!!!!!!!!! 1996 Ford F250 - I LOVE MY OLD TRUCK because I can haul so much stuff, and not worry about it getting dinged up. My commute is 7 miles one way, and I only work 10 days a month (10 - 24 hour shifts). Just put new transmission, and speedometer in this week. Runs like a top. Gas milage you ask? Horrible but I rarely drive it. I bought it five years ago and have only put 14k on it. 2005 Honda Accord - Nothing ever goes wrong with this car. Just the usual brakes, tires, and other items that you expect need to be replaced. Just rolled 250K and still looks great. We have taken care of it. I've always bought the best Z Rated tires for it and they last. 2008 Toyota Yaris - Bought this for my daughter last year. Only had 14K on it, and I got a great deal. Paid all cash. The cost to maintain these cares has not been bad. We have saved a lot of money with no car payments and the depreciation as you mention. We get a case of the WANTS every now and then but always go back to our gols of living debt free. I write all of this to encourage others. I have been greatly encouraged by articles like this and hearing from other peoples experiences on how they achieve their dreams. Thanks for the great article Scott. Love the book Set For Life too. Blessings, JW
    Scott Trench President of BiggerPockets from Denver, CO
    Replied over 1 year ago
    Jeffrey - love your approach to vehicles!!! Thanks for the great comment and the love.

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    Jake Hottes
    Replied over 1 year ago
    I just can't do it! I love driving and I love driving high performance cars I like. I have a 5 year old Jaguar XF Supercharged. I just love driving it. It cost more than the economy cars you listed Jeffery. Now, I do buy used and so I paid 1/3 of the price of new. My justification for spending a bit more is for the joy I get from it. I think it's medium ground vs buying new cars. I think even in the medium grounds here we can find and enjoy the fruits of our labors while still being on a good path for saving. Good article.
    Scott Trench President of BiggerPockets from Denver, CO
    Replied over 1 year ago
    Jake - I actually think this is fine - so long as you identify this as one of the few areas you want to spend lavishly on - sounds like you understand that and that's what you like! To each his own - for those who don't get such joy, they will be better off with the cheaper used models.

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    Matt Sulkis from Denver, CO
    Replied over 1 year ago
    Nice, balanced article. Thank you. I’ve struggled with the details of a few of your points, however. I drove a 2000 RAV4 that I bought for 4K until little lady Gwen (that was her name) needed far more repairs than her blue book value. When I looked at buying another car I ultimately chose to buy a newer (not new) car because of the fact that it would be under warranty for another 65k miles and the loan I took out was at 2%. I decided to buy a car that was more of a cash outlay with far less risk of needing work. So who knows on that one. With older cars you either get lucky or you find you just wasted 6k and need to put in 4K more when the transmission fails. As for investing - it’s a tough one. I’m mostly in ETFs and they do...ok. Max out the 401k and employer match and put the rest into the ETF. However, most days it doesn’t feel like the highest and best use with all the volatility - though I know 40 years does a lot for that money. It’s tough assessing when to pull money or divert from there to real estate. Guess that’s why we’re reading Bigger Pockets. Time will tel!
    Scott Trench President of BiggerPockets from Denver, CO
    Replied over 1 year ago
    Thanks for the comment Matt! Good luck deciding how to invest - I will say that I personally try to think first and foremost for the long-term here.

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    Lucas Hall Rental Property Investor from Arvada, CO
    Replied over 1 year ago
    Well said. I loved the “most optimal, least optimal, and good middle ground” approach - which made it actionable.
    Scott Trench President of BiggerPockets from Denver, CO
    Replied over 1 year ago
    Thanks Lucas!

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    Stephan Cheek Rental Property Investor from Sacramento, CA
    Replied over 1 year ago
    Great article and the "nuggets" are golden! In some parts of California you need to "house hack" just to make the mortgage payments and maintain the right ratios. Once you are in though, you are able to ride the wave of appreciation. The biggest challenge I have found with my mentees is having the cash cushion and not spending it on all the things Madison Ave. wants us to THINK we NEED!!! Thanks for the post... I am sharing it!
    Scott Trench President of BiggerPockets from Denver, CO
    Replied over 1 year ago
    Thanks Stephan!

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    Rosalie St-Amand from Canada
    Replied over 1 year ago
    What a great article! Will definitely follow these advices in order to become financially independent. Thank you.
    Scott Trench President of BiggerPockets from Denver, CO
    Replied over 1 year ago
    Thanks Rosalie!

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    Paul Gugger
    Replied over 1 year ago
    You forgot the most important decision of all. The person you marry. If they don't have like aspirations or are unwilling to make the sacrifices to accomplish your goals, it is that much harder. If you are a saver and they are a spender it makes it that much harder.

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    Michael Caron from Dixon, California
    Replied over 1 year ago
    Hello Scott, Love the content of your article...even better, recommend your book ‘Set for Life’ to all I can! It is a great text that goes into more detail with clear explanation, comparison and justification on what you allude to in this post.

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    Austin Vantrease Investor from Wilmington, DE
    Replied over 1 year ago
    Really good article! Small choices over time lead to big results. I’m working on figuring out a house hack for my family and I over the next year or so... hopefully a duplex or triplex so we can rent some of the units out... this article solidified that I want to do it!!

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    Anthony O. Porter Rental Property Investor from Atlanta, GA
    Replied over 1 year ago
    Scott- What a great article! Love the content of the article. If these advices are followed one can become financially independent. Thank you. Blessings.

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    Christian NA Investor from Lithonia, Georgia
    Replied over 1 year ago
    Great article - and the actionable steps are very helpful. BTW, loved your book!✌🏾

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    Brett Peters Specialist from Lancaster, Pa
    Replied over 1 year ago
    I loved this!

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    John Murray from Portland, Oregon
    Replied 11 months ago
    The problems of the middle class lifestyle is consumerism, high taxes and the biggest is the lack of vocation. Vocation is the key to wealth, passion is the road to poverty. A person will work very hard at his or her vocation. The result, money! A person will work hard as his or her passion, the caveat. No money!

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    Kepa Bengoa
    Replied 10 months ago
    Great article. Really quantifies an example of what "On track" looks like for someone who wants to retire wealthy and/or early. I am at the very start of my investing career, intending to dive deeply into Real Estate in the coming years, and as of right now, this article has served as a great checklist which tells me I have been making the right decisions in my life. Last year I sold my beautiful 2015 Optima and bought a 2007 Prius for $3000 cash. Thankfully the debt on the optima was only around $8-9k while I was able to sell it for an even $13k, use the difference to buy the Prius and pay off some credit card debt. I keep my housing expense at $800 a month (Which is great for the area, and about 22% of my personal income) Always learning and growing in my career, with opportunity on the horizon. I haven't started officially investing yet, but over the last year I've built up a year's worth of runway and am studying every day. After reading this article, I feel like I am perfectly on the track I want to be on, and with continued pursuit of knowledge and maintained discipline, I'm confident I will achieve my goals. Thank you to you, and Bigger Pockets as a whole for providing this kind of feedback and benchmark to gauge off of and learn from! I know it's not good to compare myself with others, but I do believe using other people's results as a point of reference and education can be very effective! Anyway, thanks again!

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