You’ve reached the halfway point to joining the two-comma club! Now what?
Just like you outgrew that small floor mattress in your first apartment, you’ve outgrown some of the money habits you had when you were trying to get your net worth to six figures. What got you there won’t serve you as well now as you hone in on becoming a millionaire and beyond.
As you set your sights higher, take these steps to shore up your finances—and move closer to your true life goals.
Update Your Estate Plan
Have a last will document? If so, when was the last time you updated it?
At a half-million-dollar net worth, you probably don’t need anything super fancy drawn up by an attorney. But you do need something legally binding, comprehensive, and in writing. Start with DIY platforms like LegalZoom or LawDepot to keep costs low.
This goes doubly for anyone with kids. Your will states clearly who should raise them if you meet an untimely demise. But it also protects your spouse and clearly states your wishes regarding how your assets should be handled.
Chat With a Financial Planner
I get it: You’re a brilliant real estate investor, and no one knows more about investing than you.
Do you know everything about tax loss harvesting? Which types of assets to hold in which tax-advantaged accounts? How often to rebalance your portfolio, or how to automate it?
It’s time to get over your ego and speak with an expert. They’ll help you spot the gaps in your knowledge that you don’t even know about.
I have them. You have them. We all have blind spots—and if we knew what they were, they wouldn’t be blind spots.
Start Rebalancing Your Portfolio
Your investment portfolio drifts over time as some asset classes perform better than others.
Rebalancing helps you sell high and buy low. It forces you to sell off your overperforming investments and buy the underperformers that will come back around sooner or later.
Robo-advisors can handle this for you. For example, I use Charles Schwab’s robo-advisor, which is free and requires just $5,000 to get started.
Form an Independence Plan
Do you want to have to work when you’re 80 to keep a roof over your head?
I want to reach financial independence as early as possible. When you can cover your living expenses with passive income from investments, work becomes optional.
Keep in mind that you come to this problem from the expense side, not just the investing side. If you reduce your living expenses, it gets much easier to reach financial independence. In fact, there are countries in the world where you can live comfortably on $2,000 a month. You might be financially independent already if you moved to one!
I know firsthand—I live overseas as an expat myself. And I still invest in U.S. real estate every single month, to keep growing my passive income.
Keep Adding Passive Income Streams
You can and should also attack the problem on the investing side: building more passive income.
Sure, you probably earn a little passive income from your S&P 500 index fund. But don’t expect to live off those dividends at the current yield of 1.27%. That’s lower than the inflation rate.
Every month, I invest in passive real estate investments through SparkRental’s co-investing club. I invest $5,000 at a time (instead of the typical minimums of $50,000 or $100,000), and most of the investments pay ongoing income.
On the low end, some of the syndications we’ve invested in pay distributions in the 4%-6% range. Others pay 8%, and some don’t pay any distributions yet if the property requires major renovations.
We’ve also invested in notes paying 10%-16% interest. One has matured and repaid in full; the others continue to pay as promised.
Some funds and private partnerships we’ve invested in also pay high yields. One land-flipping fund pays a 16% distribution yield.
The point: It’s a lot easier to start covering some living expenses with passive income when you earn those kinds of yields, compared to 1.27% from the stock market. Every $100,000 I invest in that land-flipping fund adds another $16,000 to my annual income.
Start Offsetting Passive Income With Depreciation
As you build more passive income and investment profits (capital gains), you’ll owe more taxes. Taxes may not have cost you much earlier in your journey, but they’ll start adding up as you scale both your passive and active income.
Fortunately, they’re easy to wipe off your tax return with depreciation.
When you invest in real estate—either directly or through syndications—you get to write off the value of the buildings and everything inside them. In the case of syndications, operators accelerate this depreciation write-off with a cost segregation study.
The bottom line: You show a loss on your tax return, even as you collect real income.
This forms the basis of the “lazy 1031 exchange” strategy. You offset your passive income, capital gains, and depreciation recapture by simply investing in new syndications.
Best of all, you don’t have to fool around with qualified intermediaries or stiff timelines. You just invest in new syndications in the same calendar year as you collected income or profits to offset them.
And when you invest $5,000 at a time, like I do, that gets extra easy and convenient.
Get More Strategic with Retirement Accounts
You can do more clever things with your retirement accounts than you realize.
At the simplest level, start by getting more strategic about which assets you hold in which accounts. For example, put your high-growth stocks in your Roth IRA, where they can shoot up in price tax-free. Put your more conservative investments in your traditional IRA or taxable brokerage account.
Earn too much to invest in a Roth IRA? Make backdoor Roth contributions.
Open a health savings account (HSA) as a secondary retirement account. You’ll certainly have no shortage of health-related bills in retirement, and these offer the best tax benefits of any account in the U.S.
When you’re ready to dig deeper, consider opening a self-directed IRA or solo 401(k). Read up on creative ways to use your retirement accounts and keep more of your own money.
Start Buying Back Your Time
Money is a renewable resource. You can create more of it.
On the other hand, time is not renewable. You have a certain number of hours remaining in your life, and the clock is ticking.
Wealthy people understand that their time is their most valuable asset. They look for ways to buy more free time and spend their working hours doing only what lights them up.
Do you need to do your own yard work? Or can the neighbor’s kid do it for you for $20?
We order most of our groceries online nowadays. I rarely visit the grocery store or run similar errands. Neither my wife nor I do housework or home improvement projects. I walk to a co-working space rather than sitting in traffic on a commute.
Some people don’t check their own emails. They pay a virtual assistant to manage their inbox and connect with them once a day for 15-30 minutes to update each other.
Start finding ways to buy back your time so you can focus on doing only the things that light you up. As you get closer to a seven-figure worth, aim to increasingly protect your time—to shrink the hours you spend unfulfilled and scale up the hours spent with family, friends, hobbies, and meaningful work.
I love looking over passive investments and speaking with other investors in our co-investing club about them. Even after reaching financial independence, I plan to keep working—because I love what I do.
As you earn more, put yourself in that position of loving your work so much that you’ll keep doing it long after it becomes optional.
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