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Dentists Who Invest

Podcast Episode

Full Transcript

DR JAMES: 

What is passive income? Well, I’ll tell you what passive income certainly is. It’s definitely a massive buzzword because it seems to be the thing that gets people really excited, which is fine. I can understand why it’s very appealing or alluring to be able to conceptualize the concept that money will just passively appear in your bank account continuously, day in, day on, day day in, day out, and that money is obviously normally something that we work for. So I do get why it sounds so cool and appealing. However, we need to just delve into some of the misconceptions surrounding it, because I feel like the misconceptions surrounding it are the main thing that holds people back from actually achieving something that resembles it. So let’s talk about the term passive in the first place. Well, I have a little bit of an issue with the term passive income insofar as I don’t feel it fully explains how that comes to be in your life. How it comes to be in your life, and the reason I say that is this passive really means something that we don’t do anything active to achieve at any point. Now the thing about passive income is, if it was truly passive, we wouldn’t have to do anything in the first place for it to appear in our life, we wouldn’t have to take any steps or do anything differently in order for us to be able to attain passive income. Now, if that were true, it would be easy and everybody would be doing it. But in reality, what we have to do is we have to be able to create systems, processes, businesses or investments which will allow us to continuously have income from the point that they’re created forwards. Now, that is not that simple to do. There’s a reason why so few people attain inverted commas passive income, and that’s because they have to put a lot of effort in on the front end in order to achieve something that resembles passive income on the back end. So it’s about front loading your efforts rather than back loading your efforts, front loading your efforts in life. Now, the term passive, as I say, means that there was no activity at any point, that we were never active at any point. But we know that that’s not quite true because of what I just said. You have to front load the effort and then, when you create something that hopefully fingers crossed is able to generate you that income continuously, then it’s at that point that it appears to have passive income, but it wasn’t actually truly passive, because you did put some effort in the first place. So that’s why I really like the term residual income. I think that that is a lot better in terms of a description for that effect, for that continuous income that will appear in our bank account, residual, lee, going forwards and continuously for the rest of our life, once we design this thing, whatever it is that gives us that outcome. Now let’s delve into income for two seconds, because when you understand a little bit more about income, you’ll understand how you can go about creating the conditions in your life which will yield past, which will yield I almost said it myself which will yield residual income, because that’s what we really want. That’s actually what we need to do in order to create that residual income that we talked about. Now, the issue with passive income is, if we truly think it’s passive, we’re going to look for the easy solutions that give us that outcome and, in reality, if it were, if there were easy solutions, then everybody would have it. So, therefore, if we’re stuck in that mindset where it should be simple, it should be straightforward and it should be truly passive, then I feel like the fact that we’ve defined it in that way is one of the biggest things that holds us back from actually achieving it. So, first of all, let’s call it residual income. Now, just like we were saying a second ago, let’s delve into income and how it works, because that’ll help us a lot more in our attempts, or in our desire, or in terms of our likelihood of actually attaining residual income in our life. There’s two components to income. Income can only really come from two things. It can come from our work, or our job In our case, as Dennis, it’ll be clinical dentistry or it can come from our assets. It can only come from those two things. So if you can imagine a circle right in front of your eyes, right this very minute, divide that circle into two hemispheres of the circle. On the left hand side, that that income comes from your job is income created to your job, and on the right hand side is income created through assets. So let’s talk about assets first. Now, what is an asset? An asset is something that holds value, and it may also continuously throw off a yield as well. What is a yield? A yield is income that is associated with that asset. So now you see why assets fit in to the income sphere that we just talked about a second ago why they fit in with this methodology that we were just talking about, or in this structure or in this formula. So we know that there’s two ways to generate income. Like I say, it’s either through your job or through assets. Now, what are assets? We have to, obviously, invest in the asset. We have to either create the asset or purchase the asset in the first place. Let’s talk about how that’s done and how that comes about, because here’s what you might know about assets. You might not actually know that there’s, fundamentally, only four types of assets. Therefore, if we’re able to understand these four assets and how they work, we’re able to understand which is the best asset for our outcome, which is the best asset for our desire. Because if we don’t know what the four types are, we might just be picking one at random without fully understanding the ins and outs and pros and cons of that particular asset. But this is why I love frameworks, because it makes this information comprehensive. It allows us to fully understand how these concepts work and therefore make strategic and better decisions. So, like I say, if you’re going to invest in assets, there’s only fundamentally four types of assets, so you need to pick the asset that is most likely to give you the outcome that you want. So let’s talk about the four asset types. The first asset type is lifestyle assets. Second type of asset is business assets. The third type of asset is growth assets. And the fourth type of assets is cash flow assets, and this is not my idea. I’m not claiming this as my own. It’s actually my good friend Luke Hurley’s idea, ifa, who may or may not have heard on the podcast from time to time, but this is a flipping gem of a concept and he coined this all himself and it’s really, really, really cool, so it’s definitely worth listening to. Now, whenever you understand all of these assets, you’ll be able to make the best choice for you, because that’s what it’s all about. It’s all about choice and it’s all about empowerment for yourself. Let’s talk about the first type of asset. The first type of asset is a lifestyle asset. What is a lifestyle asset? So a lifestyle asset is an asset that you can only reclaim its value. You can only actually obtain some capital from this asset whenever you sell it on. What’s the classic example of a lifestyle asset? It’s your house. So you can buy the house. The house will go up in value 6%, 7% a year, whatever it is. However, the only real way for you to actually see some of those returns is to actually get some of that money back is if you either resell the house in your downsize or if you take out a mortgage on that house. You release some equity within the house, but then, of course, you’ve just turned an asset into a liability, so you don’t necessarily want to do that. Therefore, when we prioritize investing in our house, the only real way we can actually unlock some of our money, unlock some of that investment, is if we go and sell the house, which isn’t exactly convenient because you can’t just sell a room in the house, you can’t just sell the garage out the back. You have to sell the whole darn thing for you to be able to unleash some of that money, for you to be able to access some of that money. Like I say, that may or may not be convenient to you. Also, the other thing about houses is they don’t throw off any residual income. They don’t throw off any yield. Therefore, if our true intention is to obtain passive income that we talked about earlier, or residual income in my preferred term, then prioritizing investing in our house is not going to yield that outcome. Key thing to understand Second type of asset is a business asset. What is a business asset? A business asset is exactly what it says in the ten-day business asset is a business. Now, when we start a business, when we get it off the ground, obviously there’s a lot of pushing ourselves outside of comfort zone, a lot of long hours, a lot of will it want it work. We really don’t know if it’s ever going to take off. However, with a bit of luck, we’ll get ourselves to a point where the business runs itself to a degree and there’s a lot of things that are automated in the background. Now, when that happens, then you will, at that point, be able to achieve something resembling residual income. You’ll have money coming in without necessarily working you working hard every single day. Now, obviously, the difficult part of that is that we have to actually start the business and, as we know, it’s notoriously difficult, it’s notoriously competitive, it’s notoriously not easy. But if you do get to the point where you have a function in business, well, how cool is that? Then you have residual income. But try telling any business owner that what they have is passive income. They’ll tell you the absolute opposite, because they’ll know that they’ve grafted long and hard to be able to get to that point. Or at least, most often, the vast majority 99%, certainly any business owner I’ve ever met has had to put in a lot of time, a lot of effort, to get their business function to that level. But, like I say, at some point it becomes less effort if the business is successful, of course. Then, therefore, you are said to have something resembling pass income at that stage or the bit, and this is why the business owners will will be more appreciative of the residual income term, because they know that actually they just front loaded the effort and then it became easier with time. That’s the second way that you can get residual income. I’m sorry, big part of the second asset, and that asset is also one that might potentially give you residual income if it works, but it’s a big if, fingers crossed, it takes off and it actually goes somewhere. Third type of asset is growth assets. What growth assets? Growth assets or stocks, growth assets or bonds? Growth assets are generally paper assets, but not always there. Assets which are. The primary function is to appreciate and value with time. Now most people’s investment portfolio is consistent growth assets. Most people’s investment portfolio consists of A combination of stocks bonds at least those are traditional, the traditional assets that are used. Now here’s the thing that often confuse people people wanna invest in the stock market for passive income. The thing about it is that if you want to get the stated return off the stock market, which is about 10%, then 6% of that comes from the actual appreciation and value of the stocks and the other 4% comes from the dividends, as in the residual yield. So if you’re using your stocks portfolio for residual income and you’re actually shaving off 4% of the returns every year now, if you wanna be able to retire anytime soon, you need those 4% returns to be reinvested into your assets. You need them to be reinvested continuously back in the stock market, or else you’ll find that your retirement is delayed way past the age of 60, maybe even like 70, 80, because it takes so much longer for your portfolio to grow. So therefore, it’s not conducive to invest in indexes and index funds, rather In order to obtain residual income. This is one of the big misconceptions that are out there. Really, if it were that easy, everybody would be doing it. Now you can do it. You can take your dividends out. You can spend them on whatever the heck you like, but you’re also gonna slow the rate of growth off your portfolio by a really, really massive amount. So it’s certainly not advise, and if you go to your financial advisor whenever they’re investing your cash and you ask them to do that, they’ll go through the same explanation as what I have just done. They’ll definitely not encourage you to do that. Therefore, we know that growth assets are not really assets that are designed to give us residual income. For type of asset is cash flow assets. Were cash flow assets. Cash flow assets are assets that give us cash flow, or certainly that’s one of their main features. What is one of the biggest cash flow assets in? One of the biggest cash flow assets is property, because obviously we have rental income, which is super, super, duper cool. We also have the appreciation of the asset itself with time. Now, anybody who’s invested in property will tell you that it’s certainly not pass. Income is active. Income is a lot of stuff that you have to think about. The money that comes in at the end of every month is really cool, but of course, you have to Invest in the asset itself. You have to obtain a reasonable amount of capital in order for you to do that and yeah, I get that the property was kids out there say, oh, it’s not that much, and this and the other, if you know what you’re doing. But in reality, you still need to have to put some money down. So it needs to have that initial capital upfront invested in order for you to obtain that asset. So you need to obtain the initial capital and then you need to know enough about property in order Purchase property that’s profitable. You need to negotiate interest rates. You need to negotiate the tenants in terms of getting good tenants. You need to be able to make a margin. You need to be able to make some money. At the minute, property yields are really really not that great. There’s not that many people who are making too much money in property. So you’re at the mercy of interest rates massively and a lot of other factors that go on there. But of course, there’s a lot of people out there who are doing really, really well on property. However, it requires skill, requires know how, it requires understanding the market and certainly these are not things that we always have whenever we’re At the entry level of the property market, whenever we’re just starting out. So of course, property is. The is the received wisdom whenever it comes to creating residual income in our life, but of course, it’s not as easy as everybody makes it out to be. So there you have it. Those are the four assets that you can use to generate residual income in your life, and you’re probably thinking yourself well, none of those really sound that good. There’s no real benefit, there’s no real easy path to do it, and that would be exactly my point, or my opinion as well. There is no simple, straightforward way to do it, which is why so few people achieve it, especially through assets. Now, maybe over many years, many, many decades, you can get to that point, certainly not something that happens overnight. So growth assets are out and out, not designed to do that. Lifestyle assets, the feature of lifestyle assets, if they don’t give you residual yield. So I mean, the main example of a lifestyle asset is your property. Another example would be a car, another example would be a watch, for example, for you know, for those are three things that spring to mind. So none of those things actually give us continuous yield. You can sell them all time and make a profit, but of course, we have to actually sell them in order for us to be able to unlock some of the capital and equity stored within them. Third type of asset is the third asset that we cover, the order getting a little jumbled here. So we did lifestyle, we did growth, and none of those are designed for residual income. And the next one that we covered was business assets. Obviously we have to start the business and that is not or is not easy, really really not straightforward thing to do. A poll out on the group not terribly long ago and the poll said which is harder? Raising kids are starting a business and I think kids one by maybe a few percentage points. So that gives you a little bit of an idea as to how not straightforward it is to get something off the ground. Certainly it takes years. People say there’s a Five year hustle whenever it comes to business, as in don’t measure your results until you really grafted for about five years, and I definitely think that I would agree with that. Naturally isn’t the case everybody. Some people get really far really fast, but we’re talking about Average is here, we’re talking about the majority of people. Fourth example of an asset that can potentially generate a residual income is property, but of course our cash flow, assets, rather, and which the main one is property. Of course, as we know, property is not the goose that led the golden egg that everybody makes it out to be, so, whenever it comes to residual income and the asset side of the sphere, those are your options. Let’s hop across to the other side of the sphere, which is how we generate our wealth day to day, which is clinical dentistry. Now here is an interesting thought experiment. Think about dentistry like this. Let’s say you work five days a week and you’re in ten thousand pounds. Yeah, now, in that example, you’re working five days a week and you’re in ten thousand pounds. Now what a lot of people say is they would say oh, do you know what would be great if I could have an extra two thousand pounds every single month? Then what I could do is I would have twelve thousand pounds and I’d work five days a week, which is really really, really cool, and what I might decide. In fact, let’s just change that example slightly assets two and a half thousand pounds, because it’s rounder numbers. So in that example, people will say hey, I’m working five days a week, I’m earning ten grand at the end of the month and I’ve got two and a half grand off residual income. Now the outcome in that situation is that you have you have twelve and a half grand at the end of the month and you’re working five days week. That’s the total right. But here’s an interesting thought experiment. How is that any different from you just simply earning twelve and a half grand and doing it in five days a week, as in? If you receive that as your income from clinical dentistry, can you see how you actually have exactly the same outcome? Can you see how, in that exact example, you’re still working five days? In the second example, you’re still working five days a week and you’re receiving twelve and a half thousand pounds at the end of the month. Now, now that everybody is listening has even more of an education on how the two and a half thousand pounds can be generated through the Asset side of the sphere, you understand that it’s actually not that easy to do that when as you have exactly the same outcome if you just understand how to boost your income every single month, because you’ll still be doing the five days week and you’ll be on the twelve and a half thousand pounds. Here’s a beautiful thing. The reason why I wanted to make the math simple earlier is that if we see, if we reduce our working days by a fifth, as in if we go from five days to four days, and actually If we buy that same logic, if we reduce your income by a fifth, then we go from twelve and a half thousand pounds to ten thousand pounds. Can you see how we actually now have what? Exactly what we had in the very first place, which is the ten thousand points and we’re doing in four days, week Interest and just another way of thinking right? So really, in reality, we have an extra day off in that situation and we have just as much money as we did before, because we embraced understanding how we can generate more capital day and day out, weekend, week out In our clinical dentistry. But we understood, understand how to do that, because it’s not just your clinical skills is also having the ability to be able to be remunerated to the standard we deserve as well. So in both of those examples you can see how the outcome is exactly the same. The only thing that we changed was our mindset and how we looked at it. I think it helps to understand just how not straightforward it is to be able to generate residual income from the asset side of the column. If you think about it like this, really, what residual income is is front loading the effort in our day to day life is front loading the effort in terms of how much work we’re putting in to create something that will generate us residual income. Now, if you think about that for two seconds, really all that saying is all that saying is is that we get more out of each and every hour. We get more money out of each and every hour. Our output per unit input has increased. So, in my opinion, if you want something that will generate you residual income, if you want something that actually resembles residual income, it’s more about figuring out how you can receive more remuneration per unit time. Because, if you think about it, if somebody works one day a week and earns 10,000 pounds, or if somebody works one hour a week and earns 10,000 pounds, or even 10 minutes a week and earns 10,000 pounds, then don’t they, for all intensive purposes, have something that resembles residual income anyway? I get that that’s a little bit pie in the sky. I get that it’s not easy for everybody to get there and I do get that that’s not going to happen overnight. But can you see how, with that mindset, you’ve actually created something in your life which resembles residual income, that most people would call inverted commas passive income. Anyway, that most people would actually say to you hey, you know what you have, you have passive income, but they didn’t see the graph that went in beforehand. They didn’t see everything that you had to do to get to that point. So, in my opinion, the best way to create something that resembles passive income, better known as, or something that is residual income because this is literally how residual income works is basically just to boost your income as much as possible per unit time, and then it opens so many more doors to you. Good for thought.