I love Scott Trench because of his work on The Bigger Pockets Money Podcast, so it was a no-brainer that I would eventually read his book, Set For Life: Dominate Life, Money and the American Dream. Before I summarize my notes, a quick aside: do not let yourself be fooled by the titles of personal finance books. They are far more valuable than their cheap titles suggest. It’s unfortunately the case that there is no good alternative for a corny title – not to mention the fact that the book does explain exactly what it promises to.
The Core
Scott flips a lot of general wisdom on its head, and for good reason. Save up emergency savings and 6-12 months of expenses first, before starting to invest in stocks or other assets. Do not put all your savings into retirement accounts. Picking stocks is a waste of time (kidding on that last one – conventional wisdom already knows that’s true!).
The fundamental premise of the book is that financial independence is easy, so long as it’s coupled with explicit goal setting, strong discipline, and patience. It’s not rocket science. It’s easier to invest 35% of your paycheck for twenty years than it is to pick the next Amazon, and the former is much more likely to make you a millionaire by your forties.
Early financial freedom should be a powerful motivator. The result of attaining financial freedom is a life lived on your terms. A life of impact. A life of growth. That motivation should be the driving force behind many of the most important financial decisions you make.
Why Financial Independence?
Assets x Return > Lifestyle. That is Scotts simple financial independence equation. You are financially independent when your assets are producing a return that is able to finance your lifestyle in its entirety. Here’s why Scott says that freedom is important:
Choose exactly where you live, what you eat, and how you transport yourself?
Choose what job to work, not on the basis of salary, but based on the work itself?
Choose whether to work at all, or to work on a schedule that better fits your moods?
Build your own business one day?
Be able to tell others to buzz off when they want you to wake up at a certain time, wear certain clothing, or perform uncomfortable or boring work?
The books is about the behaviors and decisions necessary to achieve that freedom.
The Little Things
Set For Life is full of little nuggets of wisdom I loved. Here are a few:
You should become very uncomfortable spending money unnecessarily, because wanton spending delays your freedom.
This is not about being cheap. It is about wanting early financial freedom so badly that the choice not to spend is an easy one. Take pride in the fact that you live efficiently and don’t blow your money on outlandish toys that destroy wealth.
Those who take a position in which they will not settle for anything less than the best (when it comes to consumption, at least) are robbing themselves of valuable years of their lives… A 40” HD TV might cost $250. The same TV in 4K Ultra HD might be $2500. Even if the picture is marginally clearer, is the experience ten times greater watching a 4K Ultra HD TV than a regular HD TV?
Building an emergency fund is perhaps the single best investment available. The first $ 1000 to $ 2000 in the bank results in a state of mind unavailable to the guy who has bad debt and lacks emergency funds.
Going above and beyond in a salaried job often results in a punishment. What happens to the team member who can handle twice as much work as the next guy? Well, he’s given twice as much work! Is he paid twice as much? Heavens, no.
You lose almost all flexibility in career decisions when you stretch yourself to buy property. You have only two choices: stay at your current job or a very similar one that pays very similarly in your current city, or hope for a massive raise and huge signing bonus to help you out if you want to move elsewhere.
Pursue your passion professionally if, and only if, it is marketable, or if you are willing to do whatever it takes to rise to the top.
Investing
Scott essentially reiterates Ramit Sethi’s (and many others) advice on this one: invest in low-cost index funds on a consistent basis. One of the most effective aspects of this book are the simple examples. Here is Scott’s hypothetical on stock picking vs index investing:
Let’s suppose… he earned a 25 percent return on his $5,000 investment and brought home a cool $1,250 in 2014. Let’s also suppose that he was able to produce this incredible result, beating full-time investors like Matt and legendary greats like Buffet on just ten hours of research per week in his spare time. In this scenario, he would have beaten the market’s return of 11.4 percent by 13.6 percent. That additional 13.6 percent return (which again, is extraordinary as an investing achievement) is what investors like to call alpha—here defined as the return you generate in excess of the market average. On a $5000 investment, David’s alpha in this scenario equates to just $680. Over 500 hours (fifty weeks at ten hours per week in this example) of research went into that alpha. That’s roughly $1.36 per hour.
Here are Scott’s six tenets of investing:
Tenet #1: Never spend the principal
Tenet #2: Reinvest most investment returns
Tenet #3: To invest, one must have capital
Tenet #4: Effort correlates with return only if you are in control of the investment
Tenet #5: Investment returns are impacted by knowledge
Tenet #6: Do not confuse volatility with risk
Tenet #7: The best investments are specific to the investor’s personal situation
Real Estate Investing
Not surprising given that Scott works for Bigger Pockets and built a lot of his wealth through house-hacking, but Scott is a big proponent of real estate investing. Here’s a very reasonable statement on real estate investing:
For the right investor, real estate is a sustainable, long-term approach to building wealth with stabilized properties that will scale over time. It’s not for the aggressive entrepreneur, the man who is ambitious and hungry and ready to dive 100 percent into rapid wealth accumulation, nor is it for the totally passive investor unwilling to put in some hard work to get a head start in wealth creation.
It’s a later stage of someone’s investing career. First comes accumulating savings (and paying off debt!), then building up some net worth and financial freedom to cover a year of expenses, and then, once the investor is well capitalized, real estate becomes more attractive. As Scott says at one point, the majority of investors who lose money are those who buy real estate without enough capital, without enough cash flow, or without enough knowledge. It’s not an investment for the completely disinterested investor, whereas index fund investing can be.
Habits
There are a lot of common habits (particularly among millennials) that are not conducive to becoming financially independent. They are actually relatively destructive towards that goal. Here are the major ones Scott lays out:
TV/Netflix – Average Joe spends 2.8 hours of his day watching TV, including weekends. That’s two hours forty-eight minutes per day. Think about the life you could have if you just redirected half of that toward your goals, and the other half toward hanging out with close friends and family!
Sports Entertainment – It’s understandable to watch big games, and even to follow a club, but understand the opportunity cost of becoming a rabid sports fan. Those who make their favorite sports team a massive part of their day and identity become … great sports fans.
Luxury Living – It needs to be stated that in addition to the house itself costing a fortune, luxury living is in itself a bad habit that’s expensive and time consuming to maintain. With the luxury home comes luxury furniture, and with the luxury furniture comes fancy decorations, and with the fancy decorations come the inevitable deluge of expensive crap needed to match and go along with them. It takes, time, energy, and money to set up and maintain a luxury residence and all the trappings that go along with that lifestyle. It promotes other financial decisions that detract from financial freedom.
Eating Out – If going out to lunch, dinner, or worse, breakfast by yourself or with the same small group is your go-to move, then it’s likely eating your dreams. Bring a lunch instead. Cut your eating time and find something productive to do on your lunch break instead.
Social Media – If you want to see how your friends are doing and keep up with their lives, check in once a week with the feeds of just those you care about. Aimlessly trolling social media has no place in the day-to-day life of the ambitious early retiree.
The Snooze Button – The snooze button is the ambitious person’s greatest ally. It keeps the competition in bed, where they can’t compete! Better yet, it makes them groggy, unproductive, and way worse off than if they had just gotten out of bed in the first place.
Some others: Music at work, Nightlife, Shopping.