How To Invest In Dividend Paying Stocks & NEVER WORK AGAIN
Published: 2024-02-06
Status:
Available
|
Analyzed
Published: 2024-02-06
Status:
Available
|
Analyzed
Predictions from this Video
Incorrect: 0
Prediction
Topic
Status
AT&T was paying a 7% annual dividend yield at the time of recording.
"So, AT&T pays out a dividend of 7% a year annually at the time of me recording this video."
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Verizon was paying approximately a 4% annual dividend yield at the time of recording.
"Verizon pays about 4% a year annually."
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Pepsi was paying approximately a 2.9% annual dividend yield at the time of recording.
"Pepsi pays about 2.9% a year annually."
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McDonald's was paying approximately a 2.5% annual dividend yield at the time of recording.
"and McDonald's pays a 2 and a.5% dividend annually."
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VTI is a total stock market ETF by Vanguard, offering investment in the entire US stock market.
"So, if you wanted to just invest your money in the stock market, you can invest in a fund like VTI. VTI is the total stock market ETF created by a company called Vanguard."
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SPY is an ETF providing exposure to the S&P 500, representing the 500 largest companies in the stock market.
"SPY is another fund which gives you exposure to the S&P 500. That means now you're getting exposure to the 500 largest companies on the stock market."
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SCHD is an ETF focused on dividend-paying companies, providing exposure to this specific investment category.
"SCHD is a fund that gives you exposure to dividends, dividend paying companies."
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The speaker aims to explain how to generate sufficient passive income from dividends to replace a job's income.
"So, let's calculate how you can get enough passive income from your dividends. That way, you can replace your job income."
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To replace a $60,000 annual job income with dividends, one needs to generate $60,000 passively from dividends.
"So, if you want to replace your job income with dividends, you need to make $60,000 a year passively from dividends."
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Achieving $60,000 in annual passive income from dividends with a 3% annual return requires an investment of $2 million.
"That means if you want to make $60,000 a year with this 3% return in dividends, you're going to need to invest $2 million right now to make $60,000 a year in passive income from dividends."
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Dividends have the potential to compound and grow over time.
"The interesting thing about dividends is that they compound and they grow."
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If a company's stock price doubles and they aim to maintain a 3% dividend yield, their dividend payout per share must also double, resulting in a higher effective dividend yield for early investors.
"If they want to maintain this 3% annual dividend, they're going to have to double how much money they're paying out in dividends, too. which means now they're not paying $3 a share, they're paying $6 a share in dividends, but you didn't buy the stock at $200 a share. You bought in at $100 a share. So yeah, while the people that are buying it today are getting a 3% return on their money, you bought in here. So you're actually getting a 6% return on your money because you bought the stock for $100 a share and now they're paying you $6 a year in dividends per share that you own."
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Holding a stock for 10 years through two price doublings, while maintaining the dividend yield, can result in a 12% return on initial investment, a fourfold increase from the initial 3% yield.
"And so, if you bought into this company at this point and you held your stock for 10 years, and the stock doubled twice, and they wanted to maintain their same dividend yield, now you're making a 12% return on your money, not a 3% return on your money, which means you just 4x the amount of money you're making in dividends by doing nothing except holding the stock."
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Through sustained company growth and dividend increases, the investment needed to generate $60,000 in annual dividend income can be reduced from $2 million to $500,000.
"Now, if the company you invest and follows this type of growth where they can double twice and the dividend value doubles twice over the course of you holding it, now you don't need to invest $2 million to get this $60,000 a year. you need to invest half a million dollar, $500,000 because now if you invest $500,000 at this price and the dividends go up to 12%. Now this 12% return on $500,000 worth of invested cash is going to give you $60,000 a year."
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Reinvesting dividend income to purchase more shares can accelerate portfolio growth.
"The alternative, what you can do is you can take this $150 and use it to buy more shares of the stock. Well, I guess this arrow should go over here to the number of shares you have, but you can automatically have this money that you just got to go out and buy you more shares of the stock."
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ETFs simplify investing by reducing the need to track individual companies.
"The nice thing about ETFs is it makes investing a lot more passive for you because now you don't have to keep up with every individual company."
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VOO and SPY are examples of ETFs that provide exposure to the S&P 500.
"A couple ETFs that will give you exposure to the S&P 500 are V and SPY."
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A total stock market ETF offers investment exposure to the entirety of the stock market.
"So, a total stock market ETF gives you exposure to the entire stock market."
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VTI is an example of a total stock market ETF.
"kind of like VTI."
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VYM and RDIV are examples of ETFs designed to provide exposure to dividend-paying companies.
"A couple examples of ETFs that are focused on paying you dividends are VYM and RDIV."
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VWO and EEM are examples of ETFs that provide exposure to emerging markets.
"Again, a couple examples of this would be VM O and EMG."
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ARK Invest funds, managed by Cathie Wood, are prominent examples of innovation ETFs.
"some of the most popular innovation ETFs are managed through the ARC fund, which is managed by somebody named Kathy Wood."
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VNQ and IYR are examples of ETFs that invest in Real Estate Investment Trusts (REITs).
"A couple example of REIT ETFs would be VNQ and IYR."
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QQQ is an example of an ETF that provides exposure to the NASDAQ 100, which consists of the 100 largest non-financial companies.
"So the first example of this would be investing in something like QQQ."
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SYLG is an example of an ETF that invests in small-cap growth companies.
"This one gives you exposure to the smaller cap growth companies through something like SYLG."
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Investing in the stock market carries inherent risks, and there is no guarantee of profit; losses are possible.
"Investing money has risks. You are never guaranteed to make money when you invest. You might even lose money."
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Index funds typically have significantly lower expense ratios (e.g., 0.04%) compared to mutual funds (e.g., 2%), resulting in substantial fee savings for investors.
"0.04% in fees means that for every $100 you invest, you're going to be paying four pennies in fees. Compare that to the 2% fee you'd have to pay with a mutual fund where you're paying $2 out of every $100 you invest."
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Some index funds, like a particular Vanguard index fund mentioned, have a minimum investment requirement of $3,000.
"What you have to understand about index funds is a lot of them have a minimum investment. Like this Vanguard index fund has a minimum investment of $3,000."
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Index funds can only be traded once a day, whereas ETFs can be bought and sold like stocks throughout the trading day.
"Index funds like VFAX only let you buy and sell this index once a day... The alternative to investing in an index fund like this is investing into an ETF... because ETFs that you buy and sell these funds kind of like stocks. You can buy and sell these ETFs whenever you want."
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Vanguard index funds may have a minimum investment (e.g., $3,000), while ETFs like VOO (the ETF version of VFAX) do not have a minimum investment beyond the price of a single share.
"Remember, with the Vanguard index fund, you had a $3,000 minimum investment... With VO, you don't have a minimum investment. All you have to do is buy one share of this ticker symbol."
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Index funds often facilitate automatic investing, while ETFs typically require a brokerage service to automate the process.
"the index fund allows you to automatically invest or withdraw your money... versus with this ETF, you cannot do that unless you're using a brokerage that can passively invest your money for you."
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Index funds and ETFs utilize algorithms, which lowers management fees due to computer-driven operations.
"In your index fund for you. And because this is happening through an algorithm through a computer, you get to pay way less fees."
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The average monthly car payments in the US were $528 for used cars and $729 for new cars at the time of recording.
"the average used car payment in the United States is $528 a month. And the average new car payment in the United States is now $729 a month."
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Investing $528 monthly in an ETF for 30 years at a 10% annual return could result in over $1.1 million, contrasting with the depreciating value of car payments.
"If you took the $528 a month, I'm not even going to look at the benefits you're going to get from not having such expensive insurance or not having such expensive premium gas. But if you took that $528 a month and you invested this money into the stock market, maybe you just put it into an ETF giving exposure to the total stock market, you get a 10% return. You do this for 30 years, you're going to have an investment fund worth over 1.1 million."
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The home one lives in is an expense requiring continuous payments, unlike an income-generating asset.
"And when you buy this home to live in, you have to pay money to live in here. How do you make money to live here? Well, you got to go to work to continue making payments here."
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For a 30-year fixed-rate mortgage, over half of the payments made during the first 14 years primarily go towards interest for the bank.
"So, you're going to work to make the payments here. And then on your mortgage, if you get a 30-year fixed rate mortgage, the first half of your mortgage, actually, the first 14 years of your mortgage, more than half of your monthly payment is going directly into your banker's pocket with interest."
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Time is an unchangeable factor in wealth building; therefore, starting investments sooner rather than later is crucial for long-term growth.
"You cannot change time but you can change the return. You can change the dollars. But the one factor you cannot change is time. And this is why it becomes incredibly important for you to start investing sooner rather than later."
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Dividends from REITs are typically taxed at the higher ordinary income tax rate, unlike dividends from regular stocks which are subject to lower long-term capital gains rates.
"The government said, "Okay, because REITs pay higher dividends, it's almost like another income stream for you. So, we're not going to give you the long-term capital gains rate, which is a special lower tax rate. You have to pay the ordinary tax rate, which is the higher tax rate on REIT dividends.""
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Equity REITs own and operate real estate properties that generate rental income, while mortgage REITs invest in loans and mortgages, earning income from interest payments.
"On one hand, you have equity REITs. These are REITs that go out and they operate and they own real estate investments and they have tenants that pay them rent. Then, there are mortgage REITs, which invest in loans and mortgages."
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By law, REITs must distribute 90% of their taxable income (derived from rent) to shareholders as dividends.
"REITs are required by law to pay out 90% of their taxable income or their rent to you shareholders through dividends."
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Investing in a REIT solely based on a high dividend yield is ill-advised; a high yield can indicate either strong company performance with an undervalued stock or significant underlying problems leading to a declining stock price.
"You do not, I repeat, you do not want to buy into a REIT just because they're paying out a high dividend. A really high dividend yield could mean that a company is making a ton of profit and the stock price hasn't caught up to it yet, which is good. And it could also mean that the stock price is tanking because the company is having problem and the dividend hasn't adjusted yet. That is bad."
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For those who prefer not to research individual REITs, a REIT ETF offers diversified exposure to multiple REITs within a single investment.
"then you may want to consider investing into a REIT ETF. An ETF is a fund that invests in a whole bunch of different stocks. So now, instead of you going out and trying to find the best REIT to invest in, you can invest in a REIT ETF, which is an ETF, which invests in a whole bunch of different REITs."
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VNQ is an example of an ETF that provides exposure to over 180 different REITs, offering diversification within the real estate sector.
"This would be like investing in VNQ. Again, I'm not telling you what to buy, just giving you an example. VNQ is an ETF that invests in REITs. So now, if you bought shares of VNQ, you will have exposure to 180 different REITs because VNQ is a fund that invests in more than 180 different REITs."
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The speaker prioritizes cash flow producing investments, suggesting it's a personal preference but emphasizing the need to identify the right investment strategy for oneself.
"For me, I like cash flow. That's why the majority of my investments are cash flow producing and some are not. But you got to figure out what are the right investments for you."
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Real estate can generate cash flow through rental income when properties are purchased and leased to tenants.
"So now the way it works is you're going to go out and you're going to buy this property and then you're going to rent it out to somebody else and then somebody that's supposed to be an arrow, somebody is going to come in and live in this property and they're going to pay you rent."
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Saving 25% of income without pay raises would result in accumulating $100,000 in approximately eight years.
"At this rate, if you put aside 25% of your income, assuming you don't get a pay raise, because if you get a pay raise, you're going to be investing more money and saving more money... But if you don't get a pay raise, and now you're putting aside 25% of your income, well, it's going to take you eight years to have that $100,000 put aside."
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Stocks and real estate are identified as the two primary avenues for investing money to build wealth.
"The two most common places where you can invest your money are into stocks and then into real estate."
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For most individuals, investing in funds like index funds or ETFs is a more prudent approach than directly purchasing individual stocks.
"This is why most people shouldn't be going out and buying stocks when the next best thing is buying something like a fund, potentially an index fund or an ETF."
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Continuously buying during market downturns (crashes) presents an opportunity to acquire assets at discounted prices.
"If the market's booming, you keep buying. If the market's crashing, you keep buying. The only change that you'd make is maybe buy even more when the market is crashing because it gives you the opportunity to buy even more at a discounted price."
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The speaker prefers cash flow producing investments (stocks and real estate) because they provide immediate income.
"The bulk of my stock market investments pay me with cash flow. The bulk of my real estate investments pay me with cash flow. I like cash flow just because it gives me cash in my hand today."
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Real estate is considered a tangible asset that investors can see, feel, and touch.
"When you invest in real estate, now you're buying something tangible. You buy something that you can see, feel, and touch. You buy the bricks, you buy the land, you buy the windows, you buy the doors."
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It is recommended to maintain savings equivalent to 3 to 12 months of expenses.
"That means you want to have somewhere between 3 months and 12 months worth of expenses saved up."
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Avoid using debt to purchase items or assets that do not generate income.
"from now on, if it doesn't put any money in your pocket, don't use debt to buy it."
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There is no upper limit to an individual's earning potential.
"There's no limit to how much you can earn."
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A common mistake is increasing lifestyle spending alongside income without proportionally increasing investments and savings.
"The biggest mistake that so many people make is that as soon as they start to inflate their income, they start to inflate their lifestyle without inflating their investments and inflating their savings."
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Reinvesting dividend income to purchase more cash-flow-producing assets creates a compounding effect, where income generates more income.
"Because now, not only are you contributing more money to buy more of this cash flow, but you're using your cash flow to buy more cash flow."
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As a company's stock price doubles from $100 to $200, to maintain a 3% annual dividend yield, they would need to double their dividend payout per share from $3 to $6. This results in a 6% dividend yield for an investor who initially bought the stock at $100.
"If they want to maintain this 3% annual dividend, they're going to have to double how much money they're paying out in dividends, too. which means now they're not paying $3 a share, they're paying $6 a share in dividends, but you didn't buy the stock at $200 a share. You bought in at $100 a share. So yeah, while the people that are buying it today are getting a 3% return on their money, you bought in here. So you're actually getting a 6% return on your money because you bought the stock for $100 a share and now they're paying you $6 a year in dividends per share that you own."
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If a stock doubles in price twice over 10 years and the company maintains its dividend yield by doubling its dividend payout each time, an early investor who bought at $100 could see their initial 3% yield increase to 12%, effectively quadrupling their dividend income compared to new investors.
"And so for the people that bought here, yeah, they doubled their money, but you are now quadrupling your money because you bought in early. And so now let's look at the dividends. If they want to keep this 3% dividend yield because they want to keep attracting those dividend investors, what are they going to have to do? They're going to have to double this dividend price from $6 a share to $12 a share. You bought in when they were paying $3 a share in dividends. Now they're paying $12 a share in dividends. You bought in when they were paying a 3% dividend yield. Now it's going to be a 12% yield based off of the investment you put in initially. So, if you bought into this company at this point and you held your stock for 10 years, and the stock doubled twice, and they wanted to maintain their same dividend yield, now you're making a 12% return on your money, not a 3% return on your money, which means you just 4x the amount of money you're making in dividends by doing nothing except holding the stock."
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Achieving $60,000 in annual passive income from dividends could require as little as $500,000 if the investment grows with doubling stock prices and dividend payouts, resulting in a 12% yield, compared to the initial $2 million estimate for a 3% yield.
"Now, if the company you invest and follows this type of growth where they can double twice and the dividend value doubles twice over the course of you holding it, now you don't need to invest $2 million to get this $60,000 a year. you need to invest half a million dollar, $500,000 because now if you invest $500,000 at this price and the dividends go up to 12%. Now this 12% return on $500,000 worth of invested cash is going to give you $60,000 a year."
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Long-term wealth creation is achieved by accumulating equity or ownership in companies.
"The goal is long-term wealth creation. And in order to do that, you need to accumulate equity or ownership in this company."
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ETFs offer a passive investment approach, allowing investors to gain exposure to a diversified portfolio of stocks by investing in a single fund, rather than tracking individual companies.
"The nice thing about ETFs is it makes investing a lot more passive for you because now you don't have to keep up with every individual company. You just find the right ETF. You throw your money in there and you keep investing your money every week or every month and now you're just consistently building up this portfolio of this ETF or ETF that you like."
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The S&P 500 index comprises the 500 largest publicly traded companies in the US, and ETFs like VOO and SPY provide investors with exposure to this index.
"So, if you are a company and you are one of the biggest 500 companies on the stock market, well then you are going to fall into the S&P 500. So, this is literally just an index or a group of the biggest 500 companies on the stock market. A couple ETFs that will give you exposure to the S&P 500 are V and SPY."
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A total stock market ETF, like VTI, offers exposure to the entire stock market, including large, medium, and small-cap companies, unlike the S&P 500 which focuses only on the 500 largest.
"So a total stock market ETF gives you exposure to the entire stock market. Previously, we talked about the S&P 500 index, which gives you exposure to the 500 biggest companies in the stock market. Something like VTI will give you exposure to the entire stock market with big companies, medium-sized companies, and smallsized companies. So now you're literally just investing your money in the stock market."
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Companies with excess cash can distribute a portion to investors as dividends, representing a cash payment to shareholders.
"So, at the end of the year, some companies have a lot of cash in their bank account. And when a company has a lot of cash in the bank, there's a few things that they can do with this money... Or they can pay this money back to the investors. They can literally just give it back to you in a cash payment called a dividend."
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Small startup companies prioritize growth and reinvest profits, thus not paying dividends, while mature and larger companies with significant profits may distribute them to shareholders as dividends.
"Because if we're talking about a small startup growth company, well, this company's goal is probably not going to be to reward their investors because their goal right now is to get as big as possible as fast as possible. So what they're going to be doing is not saving their money... But some companies, your more mature companies or larger companies are going to have this extra cash pile because they're already very large. And at the end of the year, they're going to have a huge profit. And if they want to pay this money out to their investors, one way they can do that is through dividends."
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Emerging markets, due to their smaller size, have the potential for faster economic growth compared to larger, more established economies.
"And what you're hoping for here is that these smaller countries are going to see economies that are going to grow faster because they're smaller and they have the opportunity to grow bigger."
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Innovation ETFs carry inherent risk because they often invest in smaller, startup companies.
"Another thing that you want to understand about these is that these funds also come with their own fair share of risk because you're investing in a lot of smaller companies and a lot of startup companies."
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Real Estate Investment Trusts (REITs) are legally obligated to distribute 90% of their taxable income to shareholders as dividends.
"The thing that makes REITs interesting is REITs are required by law to follow something called the 90% rule, which says that REITs are required to pay out 90% of their taxable income or their profits to their shareholders, people like you, through dividends."
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Higher risk investments offer greater potential returns, but also a higher chance of losing money, while lower risk investments generally have lower potential returns but also lower risk.
"Remember, more risk comes with more potential return, but you also have more chances to lose your money. This again goes back to your goal. What do you want? More risk comes with more potential return, but it also comes with more risk. less risk compared to this comes with less potential return but also less risk."
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The most effective strategy for building wealth in the stock market is long-term investment, as historically, those who invest for the long term achieve the greatest financial gains.
"The best way to build wealth in the stock market is to leave your money in the stock market for the long term. Because the people that make the most money in the stock market are the people that invest for the long term."
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Historically, many mutual funds have failed to outperform the general stock market over the long term.
"What we've seen over the long term is these mutual funds don't always outperform the market. Actually, a lot of mutual funds can't even meet the returns of the general stock market over the long term."
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Index funds have significantly lower fees (e.g., 0.04%) compared to mutual funds (e.g., 2%) because they are managed by algorithms rather than human managers.
"0.04% in fees means that for every $100 you invest, you're going to be paying four pennies in fees. Compare that to the 2% fee you'd have to pay with a mutual fund where you're paying $2 out of every $100 you invest. So, the fees with an index fund are way less because now you substituted the money manager with a computer."
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ETFs like VO offer greater trading flexibility than index funds, allowing investors to buy and sell shares throughout the trading day without a minimum investment requirement, unlike index funds which have daily trading limits and minimums.
"But unlike an index fund, you can buy and sell shares of VO every single day whenever you want when the market is open. Remember, with the Vanguard index fund, you had a $3,000 minimum investment, and those transactions only happen once a day. With VO, you don't have a minimum investment. All you have to do is buy one share of this ticker symbol, and then you can buy or sell VO whenever you want throughout the day."
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Companies paying dividends may increase their dividend payout to maintain a desired annual yield as their stock price grows.
"And if they want to keep attracting these investors who are investing for dividends, they might have to raise the dividend price. And if they want to keep it at this 3% annual yield, they're going to have to double their dividends."
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Index funds facilitate automatic monthly investments, a feature not natively available with ETFs unless a brokerage service is used to automate the process.
"The Vanguard index fund allows you to automatically invest or withdraw your money versus with this ETF, you cannot do that. So, if you invest your money through Vanguard, you can automatically reinvest more money every single month through Vanguard versus with this ETF, you cannot do that unless you're using a brokerage that can passively invest your money for you."
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Long-term investors can see their dividend yield increase significantly (e.g., from 3% to 12%) if the company's stock price doubles twice and they maintain the 3% yield by doubling dividend payouts per share.
"So, if this company is making really good guac and the value of their company doubles, you're going to see the stock price double as well, which means you have just doubled your investment. But if they want to keep attracting these investors who are investing for dividends, they might have to raise the dividend price. And if they want to keep it at this 3% annual yield, they're going to have to double their dividends. But we're not done yet because I want you to be a long-term investor because the investors who make the most money are the people who have the long-term mindset. And so now, let's assume this company continues to make new guac and they create these new guac variations. And now five years later, this company doubles again. So now they're not trading for $200 a share. They're trading for $400 a share. And so for the people that bought here, yeah, they doubled their money, but you are now quadrupling your money because you bought in early. And so now let's look at the dividends. If they want to keep this 3% dividend yield because they want to keep attracting those dividend investors, what are they going to have to do? They're going to have to double this dividend price from $6 a share to $12 a share. You bought in when they were paying $3 a share in dividends. Now they're paying $12 a share in dividends. You bought in when they were paying a 3% dividend yield. Now it's going to be a 12% yield based off of the investment you put in initially."
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Holding a stock for 10 years, during which it doubles in price twice and maintains its dividend yield, can result in a 4x increase in dividend earnings (from 3% to 12% yield).
"So, if you bought into this company at this point and you held your stock for 10 years, and the stock doubled twice, and they wanted to maintain their same dividend yield, now you're making a 12% return on your money, not a 3% return on your money, which means you just 4x the amount of money you're making in dividends by doing nothing except holding the stock. And these returns really are not that unreasonable. Remember, we're talking about a 10-year span. So, we're talking about a decade. It is not unreasonable to see a company double their share price twice over a span of 10 years."
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Historically, the stock market and economy tend to trend upwards over the long term, despite periodic downturns, crashes, and corrections, provided the economy continues to grow.
"History has showed us that the stock market in the economy always goes up. That doesn't mean it will always go straight up. Sometimes it will come down, sometimes it will crash, and sometimes it will correct. But over the long run, it will continue to go up as long as the economy keeps growing."
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Achieving $60,000 annual dividend income can be reduced from $2 million to $500,000 if the company's stock price and dividends double twice over the investment period, resulting in a 12% yield.
"Now, if the company you invest and follows this type of growth where they can double twice and the dividend value doubles twice over the course of you holding it, now you don't need to invest $2 million to get this $60,000 a year. You need to invest half a million dollar, $500,000 because now if you invest $500,000 at this price and the dividends go up to 12%. Now this 12% return on $500,000 worth of invested cash is going to give you $60,000 a year."
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Investing $528 per month in the stock market with a 10% annual return for 30 years could result in over $1.1 million, contrasting with the depreciation of a car purchased with that same monthly payment.
"If you took the $528 a month, I'm not even going to look at the benefits you're going to get from not having such expensive insurance or not having such expensive premium gas. But if you took that $528 a month and you invested this money into the stock market, maybe you just put it into an ETF giving exposure to the total stock market, you get a 10% return. You do this for 30 years, you're going to have an investment fund worth over 1.1 million."
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A home purchased for personal residence is primarily an expense, requiring ongoing payments derived from work, unlike an investment property bought for profit which is viewed and managed differently.
"Because when you're buying something to make money, you're going to look at it very differently versus when you're buying something to actually live in yourself. And now, when you buy this home to live in, you have to pay money to live in here. How do you make money to live here? Well, you got to go to work to continue making payments here. So, you're going to work to make the payments here."
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In the early years of a mortgage, a significant portion of monthly payments goes towards interest for the bank, with minimal impact on building home equity, due to the front-loaded nature of mortgage repayment schedules.
"Because your mortgages are front-loadorded, your banks want to get paid before you get paid. So during the first year when you're paying your $2 $3,000 a month in your mortgage payments, almost all of your mortgage payment is being used to pay your banker's interest as opposed to building any equity in your home."
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ETFs offer a way to invest in a diversified basket of stocks, reducing the need for individual stock research and selection.
"If you don't want to spend all of your time researching stocks and picking stocks and keeping up with stocks, then another thing that you can do instead of just trying to invest in individual stocks is invest in something called an ETF or an exchangeraded fund. an ETF. You can kind of think of it like a basket of stocks, a group of stocks. Now, what you're doing is instead of trying to find the perfect company to invest in, you're investing in a group of stocks, which gives you exposure to a whole bunch of stocks."
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Time is the most crucial factor in wealth building, and while returns and investment amounts can be influenced, the inability to change the time horizon makes starting investments sooner significantly more important.
"One of the most important factors, I mean, you got three factors that will determine how wealthy you will become. You cannot change time but you can change the return. You can change the dollars. But the one factor you cannot change is time. And this is why it becomes incredibly important for you to start investing sooner rather than later."
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ETFs like VOO and SPY provide exposure to the S&P 500, which comprises the 500 largest publicly traded companies in the US.
"So, the S&P 500 is just the largest 500 companies in the United States that trade on the stock market. So, if you are a company and you are one of the biggest 500 companies on the stock market, well then you are going to fall into the S&P 500. So, this is literally just an index or a group of the biggest 500 companies on the stock market. A couple ETFs that will give you exposure to the S&P 500 are V and SPY."
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While there are limits to how much one can reduce spending, there is no ceiling on earning potential, suggesting that focusing on increasing income through creative means can significantly amplify financial growth.
"But there's no limit to how much you can earn. And this is where things really get fun because when you understand this now, you're going to be looking for new and creative ways to earn more money. That way, you can increase how much money you're putting here."
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The speaker prioritizes investments that generate cash flow, with approximately 75% of their portfolio consisting of cash flow-producing assets.
"I like to look at investing like I want to invest my money into something and start generating some cash flow. Now that's why the bulk of my investments, not all, but about 75% of my investments are cash flow producing assets. That means that I buy something and it pays me with cash flow."
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Total stock market ETFs, like VTI, offer investment in the entire US stock market, including large, mid, and small-cap companies.
"So, a total stock market ETF gives you exposure to the entire stock market. Previously, we talked about the S&P 500 index, which gives you exposure to the 500 biggest companies in the stock market. Something like VTI will give you exposure to the entire stock market with big companies, medium-sized companies, and smallsized companies. So now you're literally just investing your money in the stock market. And if the stock market goes up, your ETF should go up. If the stock market goes down, your ETF in general should go down."
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When managed correctly, rental income from real estate should cover all associated expenses, including property taxes, insurance, maintenance, management fees, vacancy costs, and debt, with the remainder providing profit.
"Now, if you do this the right way, this rent should cover all of your expenses. That includes your property taxes, your insurance, your maintenance, your management fees and cover your vacancy costs and cover any debt that you might have and then put some money in your pocket."
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Maintaining a savings cushion equivalent to 3 to 12 months of expenses is recommended, with the specific amount depending on individual life circumstances and risk tolerance.
"That means you want to have somewhere between 3 months and 12 months worth of expenses saved up. Now, I know this is a big range and the reason why it's a big range is because, well, it depends on where you are in life."
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High dividend yielding ETFs offer a way to generate income through dividends, in addition to potential stock appreciation.
"The third type of ETF that you want to consider are high dividend yielding ETFs. So, there's two ways that you can make money in the stock market. You can make money through appreciation... But the second way that you can make money in the stock market is through something called dividends."
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REITs are legally obligated to distribute 90% of their taxable income (primarily from rent) to shareholders as dividends.
"REITs are required by law to pay out 90% of their taxable income or their profits to their shareholders, people like you, through dividends. And so, a REIT's income comes through rental income because these REITs own these rental properties, these investment properties, and they make money from rent."
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REIT ETFs provide diversification across multiple REITs, reducing the risk associated with investing in a single REIT, which can be volatile.
"An ETF's job again is to minimize the risk for you. So now instead of you trying to find the best REIT to invest in, now you can invest in a REIT ETF that we get exposure to a whole bunch of different REITs that we don't have to worry about, but trying to find the perfect REIT to invest in because REITs do have a lot of volatility, especially the ones with the higher dividend yields."
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Avoid using debt to purchase items that do not generate income.
"And that means from now on, if it doesn't put any money in your pocket, don't use debt to buy it."
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Growth stock ETFs invest in companies focused on rapid expansion, categorized into large-cap and small-cap growth stocks.
"These are your companies that are trying to grow as big as possible, as fast as possible. And then within these growth stocks, you have your large growth stocks and your smaller growth stocks."
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Car payments, along with associated costs like gas, insurance, and maintenance, do not build wealth as the vehicle depreciates in value daily.
"So now, not only are you paying more money on your car payment, but you're paying more money in gas and your insurance and your maintenance and your oil changes and anytime something goes wrong. But what happens now to your actual car payments? Because all this money that you're sending to your car payment isn't building you any wealth. You're driving around in a car that's losing value every single day."
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Reinvesting dividends back into the company or fund is a strong wealth-building strategy, particularly for cash flow investors, as it increases ownership and generates more cash flow.
"Now, you might think, but what if I take this money that I get from my dividend and I reinvest it back into the company or I reinvest it back into the fund, which is actually a really good strategy when it comes to building wealth, especially as a cash flow investor. Because now, not only are you contributing more money to buy more of this cash flow, but you're using your cash flow to buy more cash flow."
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The QQQ ETF provides exposure to the NASDAQ's 100 largest non-financial companies, with a significant portion being in the technology sector.
"So QQQ gives you exposure to the NASDAQ, which is essentially the 100 largest companies which are not financial. So these would be companies like Amazon and Apple and Microsoft and Tesla. A lot of these companies are tech companies, but when you're investing in QQQ, you're getting exposure to 100 of the largest non-financial companies, which many of them are in the tech space."
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The SYLG ETF invests in smaller cap growth companies, including some lesser-known businesses like Crocs and Micro Strategies.
"This one gives you exposure to the smaller cap growth companies and these are going to be a lot of companies that you might not have heard of. A couple popular ones are things like Crocs and maybe Micro Strategies."
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Index funds, pioneered by Vanguard, aim to provide market-tracking returns at lower fees by using automated computer management instead of human money managers, unlike traditional mutual funds.
"So, the whole idea of index funds came about by this company called Vanguard. And Vanguard said, you know what? If we could let people invest in a group of funds like this without paying these super high fees. Well, the only issue with that is you need to pay this money to a money manager. So, Vanguard wanted to create this index fund where you can invest in a fund without paying all these fees. They also had to get rid of this person with a mustache right here. And instead what they did was they replaced that person with a mustache with a computer who automates this investments."
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Index funds have very low expense ratios, such as 0.04%, meaning only a few cents are charged per $100 invested annually for management fees.
"If you want to know how much fees these index funds cost, all you got to do is search it on Google. So like with this VFEX, you can see it says in the title that this is the Vanguard 500 index fund, Admiral Shares. It has the word index fund in the title. So you know it's an index fund. And over here you can see something called the expense ratio. This expense ratio is how much money you're going to be paying in fees. That's what you want to pay attention to. 0.04% in fees means that for every $100 you invest, you're going to be paying four pennies in fees."
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ETFs, like VO, offer more trading flexibility than index funds, allowing for daily trading at any time the market is open and without minimum investment requirements, unlike traditional index funds which trade once a day and may have minimums.
"But unlike an index fund, you can buy and sell shares of VO every single day whenever you want when the market is open. Remember, with the Vanguard index fund, you had a $3,000 minimum investment, and those transactions only happen once a day. With VO, you don't have a minimum investment. All you have to do is buy one share of this ticker symbol, and then you can buy or sell VO whenever you want throughout the day."
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Index funds offer automatic investing and withdrawal capabilities, while ETFs typically require a brokerage service to facilitate automated investing.
"However, the index fund allows you to automatically invest or withdraw your money versus this ETF does not. So, if you invest your money through Vanguard, you can automatically reinvest more money every single month through Vanguard versus with this ETF, you cannot do that. So, if you're looking for a passive way to invest your money, that index fund gives you the benefit because now your money can automatically be invested every single month without you having to do anything versus you can't do that with an ETF unless you're using a brokerage that can passively invest your money for you."
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Historically, the stock market and economy trend upwards over the long term, despite short-term downturns or crashes, provided the economy continues to grow.
"History has showed us that the stock market in the economy always goes up. That doesn't mean it will always go straight up. Sometimes it will come down, sometimes it will crash, and sometimes it will correct. But over the long run, it will continue to go up as long as the economy keeps growing."
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Investing a typical car payment ($528/month) in the stock market at a 10% annual return for 30 years could result in over $1.1 million, demonstrating the wealth-building potential lost to car financing.
"If you took the $528 a month, I'm not even going to look at the benefits you're going to get from not having such expensive insurance or not having such expensive premium gas. But if you took that $528 a month and you invested this money into the stock market, maybe you just put it into an ETF giving exposure to the total stock market, you get a 10% return. You do this for 30 years, you're going to have an investment fund worth over 1.1 million."
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A significant portion of early mortgage payments, particularly in the first 14 years of a 30-year fixed-rate mortgage, goes towards interest for the bank due to front-loaded loan structures.
"So, you're going to work to make the payments here. You're the one that's working to pay down the mortgage. And then on your mortgage, if you get a 30-year fixed rate mortgage, the first half of your mortgage, actually, the first 14 years of your mortgage, more than half of your monthly payment is going directly into your banker's pocket with interest. Because your mortgages are front-loadorded, your banks want to get paid before you get paid."
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Wealth is typically built through business ownership, stock investment, or rental properties, not primarily by paying down a personal residence mortgage.
"Wealthy people become wealthy because they build a business or because they buy a business or because they invest in stocks or because they invest in rental properties. They don't talk about how they become wealthy because they paid down the equity in their home."
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Time is an unchangeable factor in wealth building; starting investments early, even with small amounts like $100/month at age 21, is crucial due to the power of compounding.
"The one factor you cannot change is time. And this is why it becomes incredibly important for you to start investing sooner rather than later. Even if you don't have a lot of money to invest. Well, guess what? If you can start at the age of 21 with a $100 a month, that is going to be extremely powerful."
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Purchasing branded items without being paid to wear them does not constitute an investment; it benefits the brand rather than the consumer's financial growth.
"If you're not getting paid to wear the Nike, if you're not getting paid to wear the Lululemon, if you're not getting paid to wear the Gucci, it's not an investment for you."
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While small daily expenses like coffee can add up, larger financial decisions such as housing and car costs often have a more significant impact on financial struggles than minor daily expenditures.
"So now the question is where are the bigger money questions? Is it Starbucks that's keeping you struggling financially or is it a bigger question? Is it the expensive apartment that you have? Is it the expensive car that you drive? Is it these $50,000 questions? Or is it the $5 a day question?"
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True affordability means being able to purchase five of an item, not just one, highlighting the importance of financial capacity beyond immediate purchase ability.
"And a simple rule of thumb here because there's a difference between being able to buy something and being able to afford something, which is if you cannot buy five of them, you cannot afford one of them."
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Common paths to wealth include starting or acquiring businesses, investing in stocks, and investing in rental properties.
"Wealthy people become wealthy because they build a business or because they buy a business or because they invest in stocks or because they invest in rental properties."
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For most individuals, investing in funds like index funds or ETFs is a more prudent approach than picking individual stocks due to reduced research and management burdens.
"This is why most people shouldn't be going out and buying stocks when the next best thing is buying something like a fund, potentially an index fund or an ETF. This is where now you're not investing individual companies. You're investing into a group of stocks."
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A strategy for market downturns is to increase investment during crashes to acquire assets at discounted prices.
"The only change that you'd make is maybe buy even more when the market is crashing because it gives you the opportunity to buy even more at a discounted price."
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VTI is a Vanguard ETF that provides broad exposure to the entire US stock market.
"So, if you wanted to just invest your money in the stock market, you can invest in a fund like VTI. VTI is the total stock market ETF created by a company called Vanguard. What does that mean? If you go out and invest in the VTI ticker symbol, you're investing in literally the entire US stock market."
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SPY is an ETF that offers exposure to the S&P 500 index, covering the 500 largest companies in the stock market.
"SPY is another fund which gives you exposure to the S&P 500. That means now you're getting exposure to the 500 largest companies on the stock market."
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SCHD is an ETF focused on dividend-paying companies.
"SCHD is a fund that gives you exposure to dividends, dividend paying companies."
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Reinvesting dividend income quarterly into cash flow producing assets is a strategy to expand an investment portfolio and generate more cash flow.
"For me right now with my stock market investments, the things that are paying me cash flow, I'm not using that money. I'm taking that cash and I'm reinvesting all of it. So I get the cash flow from my investments every three months because I get my dividends every quarter, meaning every three months. And then this money goes right back into the market to buy me more cash flow producing assets."
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Profitable real estate investment involves rental income covering all expenses (property taxes, insurance, maintenance, management, vacancy, debt) and still providing a profit.
"So now the way it works is you're going to go out and you're going to buy this property and then you're going to rent it out to somebody else and then somebody that's supposed to be an arrow, somebody is going to come in and live in this property and they're going to pay you rent. Now, if you do this the right way, this rent should cover all of your expenses. That includes your property taxes, your insurance, your maintenance, your management fees and cover your vacancy costs and cover any debt that you might have and then put some money in your pocket."
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Maintaining a savings cushion of 3 to 12 months of expenses is recommended, with the specific amount depending on individual financial circumstances and risk tolerance.
"That means you want to have somewhere between 3 months and 12 months worth of expenses saved up. Now, I know this is a big range and the reason why it's a big range is because, well, it depends on where you are in life."
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Avoid using debt for purchases like cars; if leasing is considered, it should only be done if one can comfortably afford to buy the car with cash multiple times over.
"So what does that mean? You want to go out and buy a new car, great. Don't get a car payment. If you want to lease a car, okay, well, you got to be really rich to be able to do that. Leasing a car is like going and flying first class. Flying first class and sitting economy is going to get you to the same place, but flying first class is a whole lot more comfortable. Leasing a car is very comfortable. It comes with a lot of perks, but you got to have the money to be able to actually afford that. That means if you can't afford to buy that car comfortably with cash many times over, don't even think about leasing it."
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To significantly increase income (e.g., 10x), one must move beyond incremental raises at a job and fundamentally change their mindset and actions to explore new earning opportunities.
"Because if we just keep doing the same thing every single day, you're just trying to earn more money from your job. Maybe you'll get some praises here and there, but it's not going to be what you need. If you really want to take it from 50 to $500,000, and if you want to 10x where your income is, you're going to have to start changing the way you think. And you're going to have to start changing what you do."
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Investments are the primary drivers of wealth creation, while savings provide financial security, and spending money is for lifestyle enjoyment; prioritizing investment is key to becoming rich.
"Your investments are here to make you wealthy. Your savings are here to protect you against a financial emergency. This spending money is there to allow you to have the nice things, go on the nice vacations, eat at the nice restaurants, buy the nice cars. But this money is not going to make you rich. This money will make you rich. This money will protect you financially. This money will allow you to live your life. But you need to make sure that now you're not spending all of your money here. That way you always, no matter what, pay yourself first."
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Reinvesting dividend income is a powerful wealth-building strategy, particularly for cash flow investors, as it uses existing cash flow to acquire more cash flow generating assets, creating a compounding effect.
"Now, you might think, but what if I take this money that I get from my dividend and I reinvest it back into the company or I reinvest it back into the fund, which is actually a really good strategy when it comes to building wealth, especially as a cash flow investor. Because now, not only are you contributing more money to buy more of this cash flow, but you're using your cash flow to buy more cash flow."
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