Transcription
Two millionaires. One is free. One isn't. They had the exact same net worth. We'll just call it $1.5 million. Same balance or same number on a balance sheet? Same number. Their financial advisor would probably brag about, "We got you to be a millionaire." Same number. I mean, it makes them look like millionaires on paper, but one of them never has to work again. The other one is setting an alarm clock tomorrow morning. Getting in a car and driving to a job. Because if they stop working, the whole thing falls apart. Same net worth. Completely different lives. And the reason is one of the most important lessons nobody ever teaches you about money.
Net worth tells you what you own. It does not tell you whether you are free. It does not tell you whether your bills are covered every month. It does not tell you whether you can sleep in on Monday. It does not tell you whether your assets are actually paying you. And that is the difference between traditional net worth and what I call infinity net worth. Based on the book that I wrote, Infinity Investing. Traditional net worth is the number everybody chases. Infinity net worth is the number that actually buys your life back every year.
Surveys come out asking Americans what it means to them to be wealthy. You see numbers like $2 million or $2.5 million, sometimes more. And everyone looks at the number like that is a finish line. If I can just hit that number, I made it. If I can make a million bucks, if I can make $2 million, then I'm wealthy. If I can get to $3 million, then I'm safe. But here's the problem. The number may be completely, utterly meaningless because net worth is just a snapshot. It is a photograph. It says, here is what you own, minus what you owe at one point in time. It does not answer the question that actually matters. Does any of it pay you? Does it send money to your checking account? Does it cover your mortgage? Does it buy the groceries? Does it pay your property taxes? Does it pay for the life you actually want to live?
Because if the answer is no, then you may be a millionaire on paper and still be completely dependent on a paycheck. And that's where people get trapped. They build the wrong kind of wealth. Let me show you what I mean. I'm going to go through two households, the Carters and the Smiths. Let's just start with household A, the Carters. Let's meet the Carters. They're in their mid-50s. They're good earners, responsible people. They do what they're told to do. They bought a house. They paid it down. They put money in a 401(k). They bought decent cars. They stayed at a major trouble. And on paper, they look great. They have a paid-off house, $900,000, literally paid off. They have a 401(k). We'll say they have $550,000. They have cars, they have furniture. They have personal property. Let's just say other stuff, $50,000. What does it add up to? $1.5 million. Sounds fantastic. People would say, "Wow, they made it. They're millionaires. They really did it."
But let me ask you the one question that really matters. How much of that $1.5 million shows up in their checking account next month if they don't go to work? The answer for the Carters is zero. Not $10,000. Not $5,000. Not even a thousand. Zero. Because their house does not pay them; in fact, it costs them money. You have property taxes, insurance, maintenance, repairs, utilities, landscaping, air conditioning. The water heater's out. The stuff that always breaks at the worst possible time. And people say, "My house is an asset." Okay, maybe I kind of get it, but your house is not an asset that feeds you unless it produces income, unless you sell it. Maybe if you borrow against it, maybe you could sell it and downsize. Until then, it's not paying you. It is consuming. And that sounds like a liability to me. It sounds like I'm having to pay it. Liabilities bleed you. Assets feed you. Liability sounds like I'm having to pay that out.
Then they have the 401(k). What's the problem with the 401(k)? Is that real money? Yes. The only problem is it's locked up behind rules. There are age restrictions. Market risk. There's a tax bill that comes along. Every dollar that comes out of a traditional 401(k) is going to be taxable. So if you think you have $550,000, you don't really have $550,000 to spend. They get whatever's left after the IRS gets its share. And it's under terms you might have penalties, you might have tax on it too, depending on when you need it. Then you have the other stuff. You have the cars and the personal property. That stuff generally goes down in value, like, every day. So the Carters look like millionaires. They got the $1.5 million. You're sitting there, spike in the football. But they are one job loss away from stress. They still have to work. They still have to trade time for money. They still have to ask permission to take a vacation. They still need someone else to keep paying them. And that is traditional net worth. Looks good on paper, but it does not buy you freedom.
Now let's compare them to household B. We'll call them the Smiths. Now, same exact net worth, $1.5 million. Same age. But their money is positioned differently. They have rental real estate. Let's just say they have equity in rentals of $600,000. Less than the Carters, right? The Carters have it in their house. But let's just say that for the Smiths, they have a bunch of rental properties. After the mortgages, repairs, vacancies, and expenses, those properties actually net, I'm just going to put $3,000 a month from that $600,000 of equity. They also have what's called a dividend stock portfolio, my favorite, of about $500,000. All right. Stocks here. Stock portfolio. Let's just say on average they get about 3.5%, which generates them another $1,400 a month. Hopefully, you can read that. I'm scribbling all over the place. They have a small business interest. Maybe they have a private note. You add those up, maybe another $300,000. In those ones, they're going to generate about, let's just say $2,000 a month. Yes, they do. You can hear some of the comments. "You can put them in the comment. Hey, I think your numbers are bunk." And I can respond and say, "Here's what the averages are." And then they have home equity and cash of about $100,000. So we'll just say, I'll put a home equity of $100K. They didn't. They're not too interested in paying it down. They're interested in buying assets. And you add all that up. Where do they end up? $1.5 million. I think that's it. About $1.5 million.
Now, let me ask you a question again. How much shows up every month if they don't go to work? If I add this up, three, what is that? $4,000, $6,400. So the Smiths have $6,400 a month, about $77,000 a year, coming in. Whether they sleep, travel, work, play with their grandkids, go fishing. They're just sitting around twiddling their thumbs. Same net worth. Very different life. Right? When we look at this, this is the whole point. The infinity point. The infinity point is when your assets start paying for your life. Not when you have a certain number. Not when your net worth is $2 million. Not when you want to impress somebody at a cocktail party. Not when your house appraises for a big amount. I've seen that. All these real estate millionaires, "All my house is worth this." Try to sell it. After commissions and taxes and all the costs associated with it, it's not going to be what you think it is. It's going to take a while to. Not when your 401(k) statement looks good. That's it. The infinity point is when your passive income covers your expenses and working becomes optional. That's freedom. It's not a balance sheet. It's all about, it's not this number, right? It's cash flow. It's that number. That's what we care about.
The Carters have $1.5 million in net worth. The Smith family has $1.5 million in net worth. The Carters have most of their wealth tied up in their primary residence and a retirement account. They're not ready to touch it. The Smith family has most of their stuff put into income-producing assets. The Carters have zero a month in passive income. Zero. Right? The Smiths, they have $6,400 a month coming in. The Carters have to work. The Smith family gets to choose, and that's the difference. One is built on total net worth. The other is built on income-producing net worth. And only one of those buys your time back. This is why I tell people to stop worshiping their traditional net worth number. I've known many a millionaire who was a lost paycheck away from disaster. To lose their job. Boom. I remember 2007, '08, '09, '10, '11, the big crisis. A lot of millionaires learned that lesson the hard way. They had all this real estate, but it was irrelevant. Traditional net worth. It's not completely irrelevant, but it's incomplete. It's like saying, "Hey, somebody weighs 200 pounds." Well, it tells me something, but not enough. Are they 200 pounds and out of shape? Are they 200 pounds and built like a linebacker? Are they five feet tall, or are they six feet tall? Same. Same number. It's still 200 pounds. Different reality. And net worth. Net worth works the same way. $1 million in debt equity is not the same as $1 million in assets that pay you every month. $1 million in a retirement account you cannot touch without taxes and rules. It's not the same as $1 million producing monthly income. $1 million in collectibles, cars, jewelry, and stuff is not the same as $1 million in rental real estate, dividend-producing investments, notes, royalties, or businesses. Right? One is a big pile. The other is a machine. It's an incomplete machine, and I want the machine. It doesn't mean I'm ignoring everything that's over here. I don't want you to get the idea that 401(k)s are bad. It's just when we're building and we're comparing net worth, I'm looking at cash flow. Because that machine, if I can build that, then I can go spend a whole bunch of money on this stuff too. I could go buy a Lamborghini if I want it, as a matter of what it's worth, right? And that's because the machine feeds you.
Now, there's another piece that almost nobody talks about: taxes. And this is where the gap gets even wider. The Carters, they're living off a W-2 income. This is the most heavily taxed income in the United States. You earn it. It gets hit with federal income taxes. It gets hit with payroll taxes. Maybe state income taxes, depending on where you live. And as an employee, you get the least amount of flexibility. You don't get to deduct your commute. You don't get to deduct your work clothes or business deductions. No cell phone or computer deductions. They don't even get to deduct the lunch they ate because they were stuck in the office. They earned the money. The government takes its cut, and you live off of what is left.
Now, the Smith family, whether they meant to or not, are playing a different game. Their rental income that comes in off of this, maybe completely sheltered by depreciation, means you get massive write-offs with real estate cost segregation, bonus depreciation, and they have real cash going into their account. But it doesn't even show up on their tax return. It can even create a paper loss. That's not a loophole, by the way. That's just how the tax code works. The government has historically, historically, the government has historically encouraged real estate investment because it creates housing. Same with small businesses. Lots of employment there. Same with stock investing. Lots of employment, lots of commerce. Dividends, if they're qualified dividends, let's go here. They're making $1,400 a month, right? They can be taxed at preferential rates in some cases, depending on your income. That rate can be zero. Long-term capital gains, zero, 15%, 20%. Business income can be lowered with deductions. Retirement plans. Entity planning. Other tools that a W-2 employee, other than a W-2, does have the 401(k), but when you control your own, you can actually supercharge it. It's called a DB plan, or you're putting in hundreds of thousands of dollars a year tax-deferred if you want. So it's just, it's not the same. And it's not just that the Smith family has income coming in without working. It's not just that. It's that the income that they're earning may be taxed better than if they had worked for it. So there's two households. Both are millionaires. Same $1.5 million net worth. Different assets, different cash flow. Look at those different tax systems. It's not what you make. It's what you keep. And that is why the wealthy, they, they really do obsess over tax treatment. Sometimes they say that the tail shouldn't wag the dog, but it is something you need to really be considering. And they don't just ask, "How much money did I make?" The wealthy ask, "What kind of money did I make?" Was it earned income? Was it capital gains? Was it qualified dividend income? Was it rental income sheltered by depreciation? Was it some sort of business income that I can shelter in another way? Was it tax-free? Was it tax-deferred? And that's because the character of the income determines how much you actually keep. And what you keep is what matters, not what you gross, not what shows up on some net worth statement. What you keep, and it just keeps coming in. That's what you want. That's the game.
So how do you move from a household like the Carters over to the Smiths? How do you move from being a paper millionaire to being financially free? First, you've got to separate your net worth into two buckets. Bucket number one is traditional net worth. This is really easy. You take everything you own, minus everything you owe. Assets minus liabilities equals net worth. So your house, your cars, your retirement accounts, your bank accounts, your personal property. Everything. Bucket number two. I would be looking at your income-producing net worth. This is the portion of your wealth that actually pays you. I focus on five types of income: rents, royalties, dividends, interest, capital gains. Rents, royalties, dividends, interests, capital gains. I want rental property. I want dividend stocks. I want notes. I want royalties. Maybe oil and gas interests. Maybe I'm doing private lending. Anything that sends cash flow into your life without you having to trade hours for dollars. Now, be honest. Look at everything you own and ask, "How much does any of this actually pay me?" And for a lot of people, the answer is painful. They have $1 million net worth, but only $100,000 of it might be producing any income, or they're at zero. And that means their freedom number is not what they thought it was.
Number two, wake up the lazy assets. Lazy assets that may have value but don't produce income. And home equity is the one, the big one. People will say, "I have $800,000 of equity in my house." Great. What does it pay you? Nothing. In fact, it probably costs you money every month. Now, I'm not telling you to run out and borrow against your house or to sell your house. That's not the point. I am a cash guy. I am one of those guys. I hate debt, so I want you to pay off your house. The point is to recognize what is happening. Most of your wealth is trapped in an asset that does not pay you. Then you're going to need some other source of income to live. And that usually means you're going to have to have a job. Or in the same thing is true if you have cash just kind of sitting around. I understand you need emergency reserves, you need liquidity, you need to be prudent. But beyond that, idle cash is not freedom. Cash flow is freedom. In other words, the guy that put $50,000 under his mattress when $50,000 was worth a fortune. And you look at that $50,000 now saying it doesn't really, like inflation ate it. Yeah. You've got to put it in something that's going to combat that. At a minimum, it's like put it into a high-yield savings or something. But you don't just leave it in a checking account because it's basically melting.
Third, start stacking assets that pay you. And this is where Infinity Investing comes in. I mentioned I wrote a book on it, and it was an Amazon bestseller, won a gold medal. And I will actually give you that. I'll give you away where you can get the, you could actually get this book for free. I'll show you a way before we're done. But the goal is not to swing for the fences. The goal is just to build a system. Real estate that produces cash flow, dividend-paying stocks, maybe doing covered calls. You're doing the wheel strategy to get other sides of of income. So you're getting paid sometimes four ways on the same stock. Sometimes you're doing notes that pay interest. There's a bunch of ground floor prosper. You can go into some of the funds, depending on how much money you have and whether you qualify. There are certain types of funds that you can invest in that do very, very well. There are tax-advantaged structures that let you keep more of what you make. You're building income streams, not just a pile of stuff. And the beautiful thing is, once you understand the game, every dollar has a job. A dollar can either sit there or it can go out and recruit more dollars. And that's how the wealthy people think. Your money should be like your employees. It should show up and go to work every day, and it should go make friends and bring them home. Hey, bring other dollars home, and eventually your money should earn enough so that you don't have to work.
Fourth, know your monthly number. This is simple, but most people do not do it. How much does your life cost? Not your fantasy life, but your real life. Your mortgage or rent, food, insurance, cars, utilities, travel, giving, taxes, your kids, your pets. Everything. What's the number like? The easiest thing is to look at your bank statements. Add up what you spend. Grab your credit cards. Add up what you spend on a monthly basis. Figure out what you spend every month. If your life costs $8,000 a month and $8,000 a month in passive income is your first infinity goal. If your life costs $15,000 a month, then that is your number. The number is personal, but the formula is the same: Infinity Income (rents, royalties, dividends, interest, and capital gains) is greater than the monthly expenses that you need to live. Your work becomes optional. That's really the finish line or a great starting point to having a great second career. Like, once you get financially free and then you want to do the things you want to do, it's amazing. But it's not shooting for $1 million or $2 million or $5 million. The real finish line, the one that you really want to hit, is Infinity Net Worth, which is my infinity income is greater than the expenses I pay. Because once your assets cover your life, you're financially free. And I'll say this.
Fifth, pay attention to taxes and structure, because this is where people sometimes make huge mistakes. They build income, but they build it in the wrong place. They build it in their individual name, or they put it in the wrong type of entity, the wrong account, the wrong tax characteristics, the wrong ownership structure. Sometimes you marry that with the wrong estate plan, and they have no asset protection, and then they lose a big chunk of it. Taxes, lawsuits, probate. Your family loses out. It's just basically all bad planning. So you do not want just income. You want protected income. You want tax-efficient income. Income that can grow, income that can survive, income that can pass to your family without creating a mess. And that's why the structure matters. And by the way, this channel has a ton of content. Over a thousand videos on this. And you'll see this consistently throughout. The wealthy do not just own assets. They own assets inside a system. And that system is usually different types of entities: your LLCs, your corporations, your trusts, your retirement plans, your insurance structures. They have tax strategies. They have asset protection. All married in. And that's not because they're fancy. It's because they understand that building wealth is only part of the game. Keeping it is the other. You could say building wealth is half of it. Keeping it is half of it.
Now, let me be clear. I'm not saying everyone should go out and sell their house. I'm not saying everyone should empty their 401(k). And I'm not saying everyone should buy rental properties or dividend stocks or notes tomorrow. Your situation matters. Your taxes. All these things are personal matters. Your risk tolerance, very personal matters. Your age, your income, what your family is like. What I'm saying is that you need to stop confusing this number, net worth, with freedom. They're not the same thing. You can have high net worth and still be trapped. You can have lower net worth and be completely free because freedom is not measured by what you own. Freedom is measured by what your assets pay you. And that's the shift. That's the mindset change. And once you see it, you can't unsee it. You start looking at every asset differently. I don't care whether it's your house, your retirement account, your brokerage account, your cash, your business, your cars, your land, your rental properties, your insurance, your debt. You'll start asking a different question. And that's not, "What is it worth?" It's, "What does it pay me?" And that one question changes everything. Because the person who asks, "What is this worth?" they'll sometimes build a big pile that doesn't pay them anything. But the person who asks, "What does this pay me?" well, you can build freedom. And that is why two millionaires can have the exact same net worth, completely different lives. One is free, one is not. The difference is not the net worth number. The difference is the machine.
So here's your action step. Look at your own balance sheet. Add up everything you own, and then circle only the assets that actually pay you. Not, "Hey, they'll pay me someday when I sell them." Not, "Hey, only if I borrow against them." Not if the market goes up. The assets that send you money. Now, then ask, "How much do they produce every month?" Do that. Does that amount, by the way, cover your expenses? And then, if it's not, how long would your assets last if you stopped working and had to sell everything off? By the way, I have a calculator you can use on our site. It's Infinity Investing. I'll put it in the show notes, or you could just type "calculator" in the comments. That's probably easier. If you just type "calculator" in the comments, I'll send you the link directly to the calculator. And it lets you figure out the number of days you would last without any active income in your. Basically, you're living off your infinity net worth. How many days? Like, if I took your job away, how long would it take you to run out of money? Let's just say, for example, let's say you need $200 a day to live, which is about $73,000 per year, and you made no infinity income, but you had $500,000 of assets. Well, it would take roughly 2500 days at $200 a day where you're not working to eat through that $500,000. So your infinity net worth would be 2500 days. So goal number one would be to just get $1 a day in infinity income, and then move that, maybe move it up to $10 a day. Rent, royalties, dividends, interest, capital gains. You get up to, hopefully, you get up to $100 a day. You keep working at it until you have the $200 a day that you need. Then you're at infinity. Now you have enough passive income coming in that you would no longer need to work. Think about that for a second. Feel that. Yay! I don't have to work. You know, it's weird. People actually work harder after they hit that because they work on the things that they want to do. So let's do a reality check. Go use the calculator. What are your numbers? Calculate it. How many days would you make it? Just go do that. It's going to trip you out. And again, just, just do it. If you don't like the answer, that's okay. Because now you know what you need to fix. You don't need to panic. You don't need to freak out. You just need a plan. You need to start moving money from debt assets into productive assets. You need to produce. You need infinity assets. You need to build cash flow. You need to protect it. You need to let time and consistency do all the heavy lifting for you because they absolutely will. And that is how you become free. Not by chasing a number, by building a cash flow machine.
If you want help understanding this system, grab a free copy of my Infinity Investing book. I told you that I would give it to you. It walks you through the idea of building cash flow assets so your money works for you, whether you're asleep or awake or on vacation. I'm going to put the link to it in the description so you can just go get it. And if this made you look at your own net worth differently, subscribe to the channel. Because this is what we talk about here. How to build wealth, how to keep it, how to stop being a millionaire on paper while still being chained to a paycheck. Because the goal is not to look rich. The goal is to be free. Good luck, guys.