SPEAKER_00 0:00

Welcome to the Real Estate Real Life Podcast. I'm Nick Stockaberg, and I have with me my wife, Dr. Elaine Stockeberg.

SPEAKER_01 0:06

Hello, everyone.

SPEAKER_00 0:07

Last week we had the privilege to speak at the White Coat Investor Conference, and we love getting the chance to speak live to a room full of hundreds of thought leaders and people who are on the journey of financial freedom. One of our talks was about the concept of wealth span, and it's such a powerful concept that we really wanted to share it with all of our podcast listeners and maybe any people from the Whitecoat Investor Conference who weren't able to make it to our talk or wanted to hear it again. We've got that here for you right now. It's a powerful concept, a life-changing concept, a really simple way to understand how money works, how wealth works, and ultimately how to create financial freedom and understand where you are on that journey. You can talk to a lot of different experts on what financial freedom is and how you get there. You can be a fuzzy, amorphous, abstract thing. We hope that in the short time we'll share with you today, you end this podcast with crystal clarity about what financial freedom is and how close you are to it.

SPEAKER_01 1:08

I'd invite everyone to enter into this space with a beginner's mind and recognize that what Nick and I are about to present has worked for us and has worked for our family and is a very different way of thinking, as with anything related to the podcast. We don't give financial or legal or tax advice, but this is what has worked for our family and it's a paradigm that we want to share. And essentially what we found is as we were growing our own wealth, we found many of the traditional rules around locking up dollars in retirement accounts or a 4% drawdown rate or some of the other things that you might hear pretty typically in typical financial circles. We had some sense of how they worked for others, very constricting when we were thinking about our own lives, right? We were chasing financial freedom even in our late 20s, even just something as simple as locking up dollars in a tax-advantaged account where there's a 55 or 59 or whatever age lockup period felt so constricting to us. I remember saying to Nick in those early years, this feels like anti-freedom. The money that I have in my bank account, I can do whatever I want with. Whereas once I transition these dollars into these tax advantaged accounts, I lose a lot of the freedom. And that's not what we're going to focus on here. I'm giving that as one example. In the years as we created Black Swan Real Estate, Nick and I have done hundreds of investor calls. We've honed in on this concept of wealth span. And again, I invite you into a beginner's mind. Appreciate how this is different. See how this could work in your life, see what gems you can glean, how you can merge this into some other paradigms and some other knowledge that you have. There's no one right way for everyone in the world to do money, right? That's the beautiful thing about money is that we can all have a different relationship with it. We all have different goals, different dreams, different risk tolerance, different ways of relating to money. And we want to offer to you what we believe through our own lived experience and from teaching hundreds of investors is a really simple, empowering way to think about financial freedom that I can speak for my own self, from my own life, my own experience with money over my life. It has given me this sense of relief that I don't need to make things super complicated. I don't need to make things super sophisticated. I think you will be surprised at the simplicity of the concept that we're going to present here with wealth span. I hope you get some enjoyment out of it. I hope you think of a way that you can apply it to your situation, or you're at least intrigued by it.

SPEAKER_00 3:53

So, first of all, let's just talk about what is wealth. It's incredible that we've had the privilege to coach a tremendous number of people in the journey towards financial freedom. And this is often a difficult thing for most people to define. How do you measure wealth? What is the unit of measure of wealth? A lot of people would say, of course, it's dollars. And yet we know plenty of people who are very wealthy people. And you probably have some of these people in your own life who you think of as very wealthy people, and yet they may not have so many dollars or their net worth may not be so high. We believe that wealth is measured in time. Wealth is measured in time. And you can think about this from concepts like lifespan, the number of years that you live, or health span, the number of years that you might be active or independent or mentally sharp. We believe in this concept that we're working on trademarking called wealth span, and that's the number of years that you can live without working. As soon as you just meditate on that concept for a moment, you realize that you don't have to think about a certain net worth target with a certain drawdown rate that accounts for inflation. Like you can get lost in the weeds for so long until you just throw your hands up in the air and say, I don't know how to do financial freedom or I don't know where I'm at. So if wealth span, if wealth is measured in time, what's the formula to do that calculation? It's an extremely simple formula, and you can draw this out on a piece of paper. You can draw this in your head right now. So there's a numerator and a denominator. So there's a dividing line there, and the numerator is your net worth. And then in the denominator, you can just write down in parentheses if you want, burn rate minus passive income. And these are very simple definitions. Your net worth is your assets minus your liabilities. Your burn rate, that might be a new concept to you or a new phrase. It's a common concept in the technology world that I come from. And that's your yearly spend to live, the amount of money you have to spend on food, shelter, transportation, and passive income. That might be the word you've heard before, but you might have none of it. And that's your yearly fixed cash flow that you receive without working. And it's very common for people to have zero passive income. That's the most common number that we see. We've had the privilege to coach people at different stages of the financial freedom journey. A lot of people, there's emotional resistance to writing these numbers down because maybe you're afraid that the number is worse than you would like. We've had the privilege to coach people who are very far along that financial freedom journey and actually have negative feelings about it because it's more than they would like. They're actually ashamed of how you know how much abundance they've created. We can all agree that it is good to know and it is bad to not know. You can just check all those negative feelings at the door. It is good to know. So, again, to revisit that formula, you'd have a net worth in the numerator. You're doing a simple division here, net worth in the numerator, and then in the denominator, you have uh burn rate minus passive income. And we'll run through a couple basic examples here. So let's say you have$100,000 of net worth that goes in that numerator, and then the denominator, you have$100,000 of burn rate. So you've got$100,000 in savings and$100,000 of annual spend on food, transportation, shelter, et cetera, to live your life, and you have no passive income. So you have$100,000 divided by$100,000 minus zero. And that gives you one year of wealth span. If you've got$100,000 in savings and it costs you$100,000 to live, you can go a year without working before you run out of money. And that might feel uncomfortable to contemplate, but it is critical to be in touch with that number. Let's think about a more joyful example here. Let's say you have that same individual with a hundred thousand dollar per year burn rate, but this person has a million dollars of net worth. So they have a million dollars in the numerator, and then that denominator, they've got a hundred thousand of burn rate. This individual, they've got a hundred thousand dollars a year of passive income because they put that million dollars of net worth to work and an investment that generates a 10% annual rate of return in the form of cash flow. And so they've got$100,000 a year in passive income. So that formula would be a million dollars in the numerator divide by$100,000 of burn rate minus$100,000 of passive income. And here's the fun thing you can even just think about the formula from this perspective. Once you have enough passive income to exceed your burn rate, like the numerator doesn't matter. You can simplify this formula to just you have$100,000 a year of passive income that exceed your$100,000 a year of burn rate. It's an incredibly simple formula. Hopefully you've been able to deal with some math in your head and you already have some notion of how close you are to financial freedom, to infinite wealth span.

SPEAKER_01 8:12

What I love about the wealth span calculation is that it is so simple. I have found through coaching dozens or even hundreds of people on their finances that people get wrapped up in the complexity of it around things like taxation, drawdown rate. What about this? What about inflation? What about these things? And there is some value in being aware of those things and having wisdom around those things. But what I find from a psychological perspective is that it collapses people's energy and then they don't want to make any forward momentum in terms of even understanding their finances, let alone having behavioral change around their finances and knowing that money is probably at least 50% psychological, and probably, you know, in reality, more than that for most people, the psychological aspect is incredibly important. So having a way to understand your journey toward financial freedom, which we define as wealth span in a really simple way, that's just three numbers, really only two, as Nick mentioned. That if your passive income exceeds your burn rate, then whatever's in the numerators is actually not relevant. Two or at most three numbers, understanding that, understanding how you can change those variables. How can you increase your net worth? How can you decrease your burn rate? How can you increase your passive income? Coming to understand your wealth span, ideally moving toward a place in your life where you have infinite wealth span because your passive income has exceeded your burn rate. And then from there, you can add on more complexity. If you want to add on things like future irregular expenses, putting a kid through college, taking care of assisted living, major lifetime vacations that you want to cover, various intricacies of the US tax code. You may want to add those things on as your financial picture becomes more sophisticated. But what we're offering is a way for you to have crystal clarity on the psychology of your money so that you can get unstuck out of analysis paralysis. You can realize that fundamentally at its core, this can be very simple. This can be something that you can hold in your head very easily. And because money is psychology, you can make change as a result of that. So let's take this a step further and let's speak to maybe some other variables that are coming up in your mind of wait a second, where is my active income? Where's the money that I'm earning now? Where is that?

SPEAKER_00 10:49

So many things aren't in this formula.

SPEAKER_01 10:51

Exactly. Remember, there's only three numbers in the formula: net worth, burn rate, and passive income. Active income is not in the equation. And that's because the purpose of active income is to invest. You take that active income, you turn it into investment. The investment then generates the passive income. And passive income is one of the three variables. And given that there's only three, they're all incredibly important in this wealth span calculation. And so my nudge to you today is to think about how you can convert more of your active income into investment so that investment can generate passive income for you. How do you do that? That's where that concept of burn rate comes in. Burn rate is how much are you spending annually to run your life? I encourage people to think of money on an annual basis. There are so many things that we all interact with that don't necessarily get captured into a monthly budget. For example, we're probably not buying the same amount of clothing every month. We might have a big burst as the seasons change. We might have a large summer vacation. We might have a large winter vacation. So maybe our travel spending isn't averaged throughout the year. Maybe things like groceries and car insurance and the mortgage, those are averaged throughout the year. But I really encourage people to think of their spending and their household on an annual basis. The burn rate is how much money are you spending to maintain your life, your household, your lifestyle on an annual basis. And that's how you maximize the value of your active income by using your active income to support your lifestyle, but more importantly, by decreasing your burn rate as much as possible. That's the most obvious thing to target first, so that you have a larger amount of your active income that you can convert to passive income via investing. Dave Ramsey says you can't earn out-earn your stupidity. In general, whether it's a household finances or a very complicated Fortune 500 business, it is way easier to trim expenses than it is to generate more income. And so what can you think about of the things that are low margin or low utility? We're not asking you to enter into a life of austerity or scarcity. We want you to have the lifestyle that you want and enjoy what you're creating. For almost everyone, there are things that aren't really providing a ton of value. Maybe some old subscriptions, some old memberships. Maybe you have an extra car that you're paying insurance on and maintenance, but you're really only using it a few times a quarter or a couple of times a year. There's generally something in every household that you can remove from your expenses that doesn't change your quality of life at all. But what is your burn rate today? What do you spend average every month? Multiply that by 12, add in those irregular costs that happen on an annual basis. That's your total burn rate. What is your total overall annual burn rate? And then what are some things you can do to reduce it right now? And specifically hone in on the things that are emotionally meaningless to you. Because if you get sucked into the idea of I don't want to reduce my burn rate because I don't want to go into scarcity or I don't want to deprive myself, that's going to halt your behavior change. It's no coincidence that the psychiatrist is talking about the psychology of money while Nick goes into the technical aspects of it, right? So if you're listening and you're like, I don't want to decrease my burn rate because that gives me a feeling of scarcity or deprivation, you're not going to make change. That's why I'm specifically calling you to pick the things that don't have a meaningful impact on your life. And then as you reduce your burn rate, that allows you more of your active income to invest, to convert that active income into passive income. And then what you notice is that in this very simple three variable equation, net worth in the numerator, burn rate minus passive income in the denominator, passive income is the most important variable of the three. You can't cut your burn rate to zero. You need a place to live, you need a source of food, you need a source of transportation, you need some clothing. I want you to be having an amazing life and doing some cool experiences and travel and gifts. So you can't cut your burn rate to zero. Cutting your burn rate too much isn't any fun. And you're going to have massive resistance to it because you want to be creating a big, amazing life. So then passive income becomes the most important part. And it is our belief that you must have passive income to be financially free. So then the next logical thing that we need to do is ask yourself, how much passive income do you have today? Even if that number is zero, great. Now and you can take action from that. It doesn't matter. But what matters is that you know it. How much passive income do you have today? I like to think of things on an annual basis. And then what's something you can do right now to increase your passive income? How can you convert more of your active income into passive income? How can you make an investment choice, tweak your investments, find something that has a higher yield? There's all sorts of ways that you can do it. But what's one thing you can do that feels simple and tangible that you can take action on to increase your passive income? And then finally, we'll comment on net worth. Net worth is the numerator in our wealth span calculation. And yet at the same time, it is somewhat of an optional variable. Because if in your denominator, burn rate minus passive income, if passive income is larger than burn rate, then what's in the numerator doesn't matter at all because you'll get to infinite wealth span. So it's the least important variable. At best, it buys you a few years. If someone has a million dollars, they're earning a 0% return on it. It's just sitting in the bank, take out inflation and you know every other variable, tax everything. Let's make it as simple as possible. They have a million dollars in the bank, they're earning a 0% return on it, they're spending$100,000 per year. They have 10 years. Unless they're at the end of their lifespan where they know they have a terminal illness, they probably want more than 10 years of financial freedom. Simply amassing a treasure trust of net worth, it's useful because it can buy you a few years, but it doesn't buy you that infinite wealth span that we're all looking for. To get to infinite wealth span, your passive income must exceed your burn rate. And you've heard us say that you know several different times just in the episode here, because that's the number one lesson we want you to leave with. When you end this podcast and you're stepping out of your car or taking the leash off the dog or whatever it is that you're doing right now, and you're thinking, what did I learn today? We want you to learn that when your passive income exceeds your burn rate, you have reached infinite wealth span.

SPEAKER_00 17:22

So just to recap that formula, you've got net worth in the numerator, and then in the denominator, you've got burn rate minus passive income. Ask yourself, how many years of wealth span do you have? And how do you feel about that? This is something you should be able to mostly think of off the top of your head. It's worth sitting down with a pen and paper to put together a relatively precise calculation, but this should be something that off the top of your head, you can probably come up with something that's accurate within 20% or something like that. What's your number? And how do you feel about that? Is it one? Is it zero? Is it 20? Is it infinite? If you are in a place where you have infinite wealth spans, just rejoice in that. There's so much power in that clarity. We know so many people that are slaves to financial freedom. They have enough and they don't know when to stop to enjoy the incredible abundance that they've created for themselves, their family, their employees, their patients, whoever it is that they serve. And once you get to infinite wealth span, that doesn't mean you have to quit your day job. Maybe you love your day job, but you you walk differently. You revel in the privilege that you get to do meaningful work. The whole purpose of our life is a search for meaningful work to serve our fellow human in a way that changes things. When you reach financial freedom, you're able to do that in such a powerful, such a free way. And so let's say you're not yet at infinite wealth span, which is probably the vast majority of people listening to this podcast right now, no problem. But you might be closer than you think. Let's run through some simple numbers to do an illustration of how quickly you could potentially get to infinite wealth span. So let's say after tax, you're earning$200,000 a year and you have$100,000 a year in burn. Let's say you put$100,000 per year into our Secure Freedom Fund, just as an example, that's where we pay the 10% fixed rate of return. In year one, you'd have$110,000, right? Because you get the$100,000 you save plus the 10% interest. Two years from now, you'd have$233,000. And seven years from now, you'd get$1.063 million in total savings. A lot of people struggle sometimes with how powerful compounding is. If you have a 10% fixed rate of return and you're putting away$100,000, it doesn't take 10 years to get it to a million. It takes less than seven years. So now, seven years from now, you have a million dollars in net worth and you're getting a 10% fixed rate of return in monthly cash flow from the Secure Freedom Fund. And that covers your burn rate of$100,000 per year. You are financially free. And that's assuming that you have a high income and a high burn rate, and you start with absolutely zero savings. Now, your numbers are going to be very different from these numbers. These are just representative figures. But in this case, this individual, they are only seven years away from financial freedom. And we're not saying that this is easy, but we're saying it's incredibly simple. Early in Elaine and I's life, I was working a long, difficult schedule in enterprise IT. Elaine was in med school. We had a very low income. We slashed our burn rate to almost nothing. We were spending like a thousand bucks a month on total discretionary spending. We rented out rooms. We had roommates basically our entire life until we had children. Actually, even after we had children, we were ruthless with our burn rate, and we poured as much of our active income as we possibly could into generating passive income because we had clarity. We knew that if we could just hustle for a very short span of time, we would get to infinite wealth span. That simplicity, that clarity gave us the power. It was a joyful thing for us. It was a game for us. How much could we reduce our spending, reduce our burn rate, and how much could we increase our passive income? So it should be a simple calculation to figure out what's your trajectory to financial freedom. Just to recap, we're sharing this with you today. We had the privilege to share this topic with hundreds of physicians at the White Coat Investor Conference here this past week. It's such a powerful concept that we're overjoyed to share it with our podcast group here because people they often ask us, how do I get to financial freedom? When can I retire? You know, I went and I bought half a dozen long-term rentals or a short-term rental, and now it feels like I've just bought a second job. And all these people, they're they're trying to get to the same thing. They're trying to get to financial freedom, but at no point did they stop to ask themselves, what is financial freedom? How is it measured? How close am I? Elaine and I, we just have a very simple paradigm, a very simple concept. Know that with absolute clarity. Wealth, it's measured in time. It's this wealth span concept that we teach. And all you need to do is plot out your burn rate, your passive income and your net worth, and you're able to figure out how many years you can live without working. That's your wealth span right there. And you should be very honest with yourself about that number, good, bad, or ugly. And we mentioned Secure Freedom Fund a few times in this podcast as well. That's our vehicle that we really built around this concept where we offer a 10% plus fixed rate of return, and it functions much like a bond or CD. It's an incredibly simple investment vehicle, but it pays a significantly higher rate of return. With some tax advantage and stuff that literally makes every single aspect of this calculation incredibly clear. Hopefully that gives you some insight into how we built that vehicle and why so many people have been so happy with it. So, some of our thoughts on Wellspan.

SPEAKER_01 22:12

We hope you enjoyed this episode of the Real Estate Real Life podcast and that it gave you a new paradigm or some ways to think about financial freedom and decide how this fits into your understanding of financial freedom. And my hope for you is that this provides a level of clarity and simplicity for you that is psychologically very empowering. As with all episodes of the Real Estate Real Life podcast, we do not give investing tax or legal advice. You can consider our episodes to be educational or informational in nature. All investing has risk, including the potential for partial or total loss of capital. Anytime you're making any investment decision, you should speak with your trusted advisors, including your attorneys, CPAs, anyone who's important in your life as you're making financial decisions. The Black Swan Real Estate Secure Freedom Fund is a Reg D 506C that is available to accredited investors only. And nothing in this message should be construed as a solicitation to sell securities to non-accredited investors. We look forward to seeing you in the next episode.