Episode #073 - The 7 LEVELS of Investing!
Today hosts Braden Cheek, Brian Duck and Joel Thompson from The Criterion Fund discuss the 7 levels of investing and provide insight on how to move up to the "Sophisticated Investor" level that everybody should be striving towards!
you don't have any money at that point. But then as you progress along, then you get to the point where, okay, now you've got a professional job or a job that offers a 41 K. All of a sudden kids come along, maybe you do a 5, 29 the older you get, the more you, the more money you're making and then you go past the point where you've maxed out your 401k. Right? Because most of them just match up to four or 6% or something like that. Well now you get past that point and you're like, okay, I have extra money, I don't want to go out and and blow it. So now I wanna I wanna educate myself on on how to invest that money. Alright, what's up? Welcome back to how to invest in commercial real estate. And today we're talking about the different levels of investors. So there's beginning investor, you know, there's all sorts of investments for where you're at in life. Obviously we're talking about commercial real estate investments today and there's there's different levels of investors, right? We see the people signing up to the list, we see the people who end up investing in deals. You know, it's funny because they all have different types of questions, right, based on how high you get up in the levels. But anyway, today is all about the seven levels of investing.
So let's dive in and see what we can drum up. We kind of wanted to take this from Rich Dad, Poor Dad and cashflow quadrant. He talked about the seven levels of investing. There's other lists of investors and we kind of took a blend of all of those and came up with our own list. And when, as you're listening, you're gonna instantly put yourself in the category that you're in. And we want to talk about the categories, maybe the positives, negatives, and then how do you move yourself up that investor list to the ultimate level, uh, that we'll talk about ultimate investor. All right, Well what's number one on your list? What's the, what's the bottom level of investing? Uh, it's called the broke level. You, you have no money to invest, uh, no money. You don't even have money in order to get yourself into debt. I mean, there's lots of people that live paycheck to paycheck, right? I mean, I'll bet, I don't know, but it's a high percentage of people in the US live paycheck to paycheck and don't have extra money to invest. I think that's right. And that's the starting level. And so if you're in that level, it's not necessarily a bad thing.
It may be a result of circumstance for that one time. We were all there at one time. And, and so just recognizing, okay, I've got to start because a lot of times people never start to educate themselves on investing, They never start setting side money. And so they stay at basically level zero broke. And we want to encourage people to move slowly up the ladder and you don't have to have identified exactly where you want to go. You just need to say, hey, I want to start investing. I don't know where to go. Here's where I'm starting. Just get started. What's what's next? So so people in level one, they're probably not doing any sort of investing whatsoever. There broke. How do you move up to the next level? Well, yeah, most people at that are that we're calling broke and I it sounds derogatory and I don't want to necessarily be that is they're not spending any time thinking about investing, learning about investing. They are spending everything they make and uh that may be because their income is so low that they're surviving. Uh And so their first thing, their first action should be to increase income.
You know, there's certain levels of income that you're never going to have money to save or invest. And so so you don't really think about investing, you can still educate yourself, but you need to focus on increasing your income whether that's going back to school, getting better education, finding the next job that's going to give you more per hour or higher salary. So I'll challenge that. And I would say there's a lot of people that I think people would consider rich that are broke. You know what I mean? And I I would say you have to make more money, but I think more importantly have to spend less money and you have to decide I'm spending less money because I am going to invest. Yeah, they're obviously there you say there are people who have money that are broke. They, yeah, they're spending everything. They make this this level though, doesn't have any any money to invest. And maybe not, they don't have any extra money to spend. Um So the second level that I put, I put down as a borrower and so this person has a little bit of excess income. Uh and and they do something that I think is terrible is they go out and use that income as a down payment on a car or a down payment on a house and they get themselves into debt and now they're a borrower.
In fact, they're not actually, they don't have any money to invest because what little money they spent they spent on liabilities and they borrowed the money. So now they're paying other people interest and so it's like a negative or reverse investing where yeah, most of their money isn't being saved, it's paying someone else to return for whatever liability that they purchased. I'm not saying that that's necessarily a bad thing depending on where you are, but you're when you get a little bit of money, the first thing you should do is stay living below your means, not go out and borrow and get in a bunch of debt on a liability that's gonna go down in value. You should be saving to buy assets. Perfect example is, is the car, right? Because you, if you don't have great credit, you're going to have a super high interest rate. You may be paying 10 20% on a car that's depreciating in value every single day, as soon as you buy it depreciates the most and it and it gets worse. Yeah. Yeah. So that's so level two broke, you have no money to invest. Number two is the borrower, you, you have a little bit of money, you get yourself into debt, buying things that you shouldn't.
Um, number three is we call savers. Okay, so Savers can be one or two people, they have a little bit of money and, and instead of going out and buying things, they don't need, they are saving it in the bank. They are risk averse. They are not educated on investments or investment strategy or financial vehicles, but they do have enough wherewithal to say, I'm gonna, I'm gonna spend a little less than I make. Another type of saver would be. You know, they've listened to Dave Ramsey, they went ahead and got themselves in a bunch of debt, but now they're going to get out of debt. So they start saving, paying down that debt to get themselves out of the hole to where they can start investing. So that's level three savers, I think there's a massive percentage of people that are probably in this category, right? Like they're smart enough to not go by the 10%, you know, car that they can't afford. Um That's depreciating. They're they're probably spending a little bit less than they are, but they're not really going up much, you know what I mean? They're saving and then they blow it on christmas or one vacation and then we're right back to level up and down a little bit.
They say a little bit. Then they go spend a little bit, yeah, we do want to do a podcast on this, talking about budgeting because like we've said, most people think they're saving and they their account goes up, goes up and then something. It was an unforeseen event that you know, they need new tires, their car breaks down, they have a medical issue and it wipes out their savings and then they go back to doing the same thing again and they save save save until that next unexpected event comes always. So they should be partitioning that and saving for those events. They're not. And so they never get ahead. They're like, I want, I can never get ahead 10 years goes by uh you know, I still don't have any money and it's because they're not adequately saving. Alright. Number 4/4 level is I'm gonna call simple investors. And what I mean by this is these are people that probably have a good job. They are are not massively in debt. They have extra funds. They still don't have any financial education, but they their job may offer them a four oh one K. Uh Now the financial education is not is not given out.
You know what I mean? If you go get a degree, you get a very specific education field. High school doesn't require any personal financial literacy for for most schools. So I mean if if you don't think about it, you can accidentally go through your life. And a lot of people again don't start out with money. So it's not like you have to learn how to manage money because you have all this money, oh my God, I have all this money. You know, that's that's a problem that you, that comes on later in life. And if you don't force yourself to sit down and learn what to do with the money, Then you don't have any money. It disappears. You hear about the people who win the lottery and then, you know, five years later they ruin their life. You've got to learn. And those simple steps, I think that was a really good example as well. The company 401K. Right? Most people start with that. They don't pick stocks, they have no knowledge of stocks, bonds, mutual funds. They don't know anything about it. But the simple investor will take steps to put money in a 401K. Maybe they take advantage of the matching. Of course it offers some tax benefits. So they're doing the bare minimum. Uh, just, you know, maybe they have a savings account at the bank and a cd or something.
They're just a simple investor that that doesn't have education, but is taking starting to take steps. They probably love cash. This this level probably has a decent amount of the portfolio in cash. You know what I mean, saving cash. Simple investor, maybe they pay off their house, you know, that that's a guaranteed interest return. If your house is at 5%, that's guaranteed 5% return if you pay off your house. So that would be this category. I'm seeing myself in every category here actually is serious as I get older and older you've been in. Well, so it starts to get interesting around the next level. I've labeled this strategic investor. And what I mean by that is this is the level where someone may be getting along in their career. They now have a solid salary. They have expendable income and they're taking the time to educate themselves on investing. And when I say strategic, what I mean by that is these people have a plan, they put together a plan to retire, let's say they've worked with a financial planner. They say, Okay, I want to have this much money when I retire, I've got to save 8% of my income each year.
They've mapped it out. They've taken that kind of, that kind of sophistication and time. Yeah. And so uh they are putting a safety net in place and and checking that box and saying, okay, I'm gonna retire at 65. And they may be in their four oh one K. But they may also have stocks and mutual funds outside of a 41 K. They may educate themselves on which stocks are better, what sectors are better things like that. And that's this is where the education starts to kick in. They may be reading Books about investing and maybe you were in this category when you were in your 40s or something. Yeah. I have to ask you that you said you could identify with a lot of these give us a little time frame example of you in the sophisticated investor level. So, well I could probably take you through. It. Absolutely. Is is based on my age and a lot of people as you go through your professional career, you know, you graduate from college and you actually maybe have some some financial debt, uh student loan debt. And so you don't have any money at that point.
But then as you progress along, then you get to the point where, okay, now you've got a professional job or a job that offers a 401k. All of a sudden kids come along, maybe you do a 5 29. And the older you get, the more you the more money you're making and and you go past the point where you've maxed out your 401k. Right? Because most of them just match up to four or 6% or something like that. Well now you get past that point and you're like, okay, I have extra money, I don't want to go out and and blow it. So now I wanna, I wanna educate myself on, on how to invest that money. I think this is when most of our investors start to approach us to be honest because your simple investing level is your company 401K. It's things you can feel and touch and easily understand. It's what I would consider house rentals. You know, just buying 56 houses to, to carry into retirement for cash flow. It's a great little deal. But I find people really starting to listen and ask questions right around the time that they're looking for something else. They met with a life insurance guy who wants to give them 7%, you know, no risk returns and all this crap. That seems way too complicated. And there's something about real estate that I think a lot of people can identify with specifically because it kind of relates back to that simple one.
It's like, okay, houses are good investments. Most people own a house. They've been through a real estate transaction, maybe several at that point. And I think this is where other investments like, hey, let's invest in a company? Let's talk to my brother in law about that liquor story you always wanted to open or let's look at this warehouse or something. I think this is a big step because this is where you really start to get diversified, right? I think up until this point you've gone super narrow, like, hey, don't mess this up, Don't buy a stupid car that you know, you can't afford. You know, you're just trying really hard to not squander what you've gotten so hard. And this is the point where you need to start taking on some risk. I feel like, Well you kind of are touching on level six, which we're calling the sophisticated investor. And so after they've, they've got their long-term safety plan, they've got their retirement plan, they're maxing out their 401K. They are educating themselves on stocks and bonds and mutual funds and other investments. Now, they still have money left over and they wanted a little bit of a higher risk, higher return. And that's what you're talking about. They start looking into assets.
So sophisticated investor has all of those, the safety net done the life insurance, all those boxes are checked and they still have extra money and they want to hire return. They don't just want to fund more mutual funds and that's where our investors do come in because they say, okay, how do I get involved in buying assets? How do I diversify outside of just the stock market and how do I get some higher returns? And, and that's what we're calling the sophisticated investor. And that's a legal term as well, when we're raising money, it's people that have an education in investing matters and they have disposable income to invest. And I would say our most of our investors are in the sophisticated level where they can put 175,000 into an investment vehicle that should pay out 2025 30% Turns, which is way higher than the average. You know, 401K. Diversify to with their previous investments. That's right. I think those opportunities are out there all the time, especially right now in this economy, there's opportunity to be had everywhere. I've been telling our construction guy, you know, if you can get employees and product, you should have an unlimited amount of work and almost every business, right?
I mean, there's business closing because they don't have work, but anyway, I think this is the stage where wealth is created. I mean, there's, there's little wealth creation and all the other ones, like you said, the first three or four are safety nets not squandering what you've built. You know, building up following the path that you kind of should and a four oh one K. Isn't necessarily gonna make you rich, but it's, it's probably a necessary path you can take and it's not a horrible investment if you're getting matching and the tax deferred aspect and it's it's safety right? That's it's free from creditors. I don't believe they can get to your 401k. And so it's a retirement safety net. And those are good things to check off before you start risking additional funds somewhere else. You know, when people come and ask me, well what's your minimum and what do you want to, you know, can I invest with you? I take it seriously because even though our deals time and again have paid off, there's still a risk that one of them won't. And if someone brings me there 40,000 and that's all they have and they don't have a retirement safety net and they don't have some of these things, it's it's much harder for me to take that money because if the deal doesn't go well they're going to be really hurt financially.
And and that's why the rules are in place to only allow so many accredited or so many sophisticated because we want to make sure that people have those backup plans. Okay. So I think not everybody's gonna go to level seven but everybody should strive to get to level six sophisticated investor where you have extra income, you are turning that income earned income into passive income and you're earning high rates of return through investing in quality assets with you know, education, backing your decisions That's level six. Everyone should strive to get there. Some people will get there faster than others based on their income, but your whole life should be spent on becoming a better investor and earning more income. Uh And going back to your statement. Some people, they think that they can just be a hairdresser, an accountant, an engineer. In reality, all you're doing is that profession, you're trading your time for money. And so you really should think about. I need to become an expert in how to get money because that's the goal.
Yeah. I know it sounds terrible. But really that why do you spend all day at your workplace? There's some people that love their work, but most people don't. And the reason they're trading the one life they have or at least a half of it at the office is to get more money. So why not spend a little bit of your day becoming an expert on bo how to get more money and how to handle the money, how to invest the money wisely. That's right. And if you can transition that earned income and turn it into passive income through good investments, then you can quit the day job and do whatever you want. And then that's when we maybe hit the level seven, right? What is level seven Level seven I call the professional investor. And so this is where you really have mastered uh managing money and I'm not earning money. I would say you mastered earning money and this is where you are mastering managing it. Well, yeah, I I don't mean managing money is in like a portfolio, like a stock, you know, four oh one K. Advisor because they're they're taking a fee to manage the money, but they're not act creating the investments. Professional investor goes out and creates investments where other people feel so confident in our ability, let's say because we're professional investors that they're willing to give us their money and invest in our deal that we created that we offered, that's a professional investor is that we, you know, in our returns can be infinite because I can put together an investment and I can make fees and returns on that investment and never, I mean we do invest our money, but if I didn't invest any money in it, I would still, I would still get money out of it.
So it's an infinite return. Uh you know, I can make infinite amount of money and have no money invested. Only a professional investor can pull that kind of thing off. Would you call a business owner, a professional investor, do you think uh yeah, in some cases, because if it's a bigger business, not self employed business where they're working a job, but businesses job basically they're leveraging their employees and the employees talents in order to generate free income. Right? And so it's basically an infinite amount of return on that as well. So it can be big business owners could be a professional investor in in some sense, the more we talk about this, the more I'm just getting reminded how you have to be a professional and not only managing your own time of managing other people's time and really have this sense of appreciation for the time value of money. And and how much money time can give you. And I know we always talk about that we have a fine finite supply of time, and time is the greatest equalizer because we all have the same amount of it. But like you said, when you can start to appreciate leveraging other people's time and creating investment opportunities that that would give you an infinite scale.
I mean, look at amazon is just an extreme example. Like we've all seen the crappy picture of Brazos in the nineties dorm room. And and look at the the behemoth that it is and everyone is is trading in their time for money, right? And it's the biggest I'm gonna let you know the biggest secret ever, right? If you pay people enough money, they will stay working for you, right? And There's just a simple binary decision. Do they make me more money than I pay them? And 90% of the time, they know they make you more money than you pay them. They know it. But there's just nothing they can do about it. Well, yeah, I mean, obviously they're in a position where they need the paycheck more than they need, uh, than than they need the time or they have opportunity to to go to. So. But yeah, that's a great example is at this level, like we're we're mainly leveraging people's money. We're leveraging their money to make money. And of course, we're investing our own, but we don't need to invest our own. We can raise all the money to do an investment and I'll take a piece of that asset. But business owners do it with you like that. I did. Uh, people that are leveraging employees, right?
It's then it's infinite. It was on both scales. It's infinite. Uh, you know, if we were real ambitious and we knew, you know, private equity sources, we could go raise $10 million a deal or $100 million deal. There's no limit to the amount of money we could leverage. Same with Brazos and these in walmart is, there's an infinite amount of People that they can leverage to grow it to unlimited size. And that's how he's worth $200 billion dollars is he's got a system and he has great people that continue to build that company regardless if he shows up or not now. Uh, and I don't think everybody has to have a plan to be a professional investor. But sophisticated, they should, they should, everyone should always be trying to have enough passive income where they don't have to work. That should be a goal for everybody. My idea, my personal idea of retirement as to where I'm so busy managing my money and my investments that I don't have time to do a job. That that's all the effort I can expend that day is just, where's my money? Where what's my money doing? Do I need to do I need to fill out this form for this new investment and my receiving it back.
Do I need to file my taxes? Is there some legal dispute? Is there an operating agreement? I mean that's pretty much what brian does now. It seems like you could have have to have a lot of money to spend your all day just worrying about your money. And it's a short, it's a short day. Well if you've got enough money, you could, you could have people do that for you and they would grow and they'll grow your nest egg for you and that and that is a family office. Right. If you family creates enough wealth, you create an office to manage your wealth family office. Yeah. And I don't know people know about family offices or what that term even means. But yeah, under ultra high net worth individuals, they have so much family money probably north of $50 million and they can go into the hundreds of millions where they have a full time office with high uh, professional, high experience, you know, high educated people that all they do is just grow the net worth of the family that's called a family office. And so maybe maybe we'll, we'll get there one day. I don't know. Well, I think this is good, right? I mean, these aren't meant to, to label, these are meant to help and empower and, and just give you a roundabout idea of, hey, this is kind of what you should be focused on on the next step.
If you could identify yourself somewhere in a step, you know what you just conquered. You know what you have to look forward to. But I think half of it is just not making stupid mistakes, not paying stupid taxes. You know what I mean? For just not paying attention. Don't fumble the ball at the last minute. I mean, you just really need to focus on not losing your money and earning a decent rate of return until you understand enough and get presented with the right opportunity. You know, and that's maybe level five or 6 where you can find an opportunity with us. All we're trying to do is give people, let them know where they might fall on the scale and give them a roadmap to what, okay, what should I be doing next? Uh, like I said, it's not to label anybody, but if you're broke, you need to earn more income. That's, that has to be the first step. If you don't have any money, let's say you make 15 bucks an hour or whatever that's in today's society. It's just enough to cover the bills, the utilities, the rent, the cell phone bill, the T. V. And so if that's all you can you can do, you don't really have a choice. You've got to figure out a way to increase that income by any means possible.
If you're in the borrower category, you need to pay off. I mean to be increasing your income most of these steps, you need to focus increasing income. But you could be paying off that debt, especially bad debt because every dollar you're spending an interest, paying off a loan, car loan, credit card, whatever it should be going to saving or to investing. Um And that that could be investing in back in your own business, right? I mean if you have, I mean, how many investors do we have that say, oh maybe I'm out on this one. I'd buy this new piece of machinery. I'm out of this one. I had to build a new lake house. Maybe for some. But you know, there's there's different forms of investing. It's not just giving your money to somebody else that could be investing back in your own business, investing back in yourself or investing in education, investing in education, right? All of those are gonna bring you to the next level. Well, I think that's it. Well that was the seven levels of investing. If you got anything out of this, make sure to like and subscribe so you can get a notification the next time we post, which is next week. Make sure to like and subscribe. And we will catch you next week on how to invest in commercial real estate. Thanks guys.
