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By Michael Yardney

Do you understand the Five Levels of Investing?

If you want to become a successful property investor you really need to understand the five levels of investing which is a model I’ve created to explain the progression most investors take in their path to developing financial freedom.

Just to make things clear…this has nothing to do with your level of income.


I’ve seen many people who earn hundreds of thousands of dollars a year, yet by spending most of it on a flashy lifestyle they fail to ever build a substantial asset base.

Having said that, I’ve also seen successful investors build a substantial property investment business while working at what some would call menial day jobs, earning relatively little in their pay packet.

In other words, their job becomes something they choose to do, not something they have to do for their primary source of income.

As I share these investor levels – think about where you fit into this model.

Level 0 – The Spender

Level 0 are really not investors – they tend to be spenders and borrowers and as a result, end up with a high level of debt.

They spend everything they earn and often more.

Their money runs out before the month does.

They usually survive from pay packet to pay packet, using credit cards and store credit where they can.

If they have some money they spend it, if they don’t have money they borrow it.

These are the people who, when they need some cash, go to the ATM and pay a fee to collect an advance on their own money and then pay interest on it.

Their solution to financial issues that arise is to spend their way out of it or to take on more debt.

Do you know any level 0 investors?

A large part of our adult population falls into this category and they will never become wealthy unless they do something radically different.

Level 1 – The Saver

The vast majority of people who are not spenders will generally be what I call savers.

Their main investment is their home, which they aim to pay off over time.

Sometimes they save a little, squirrelling away a few dollars of what’s left over after paying tax but in general, they save to consume, not to invest.

Savers tend to be afraid of financial matters and are generally unwilling to take risks.

They’re following the plan their parents and grandparents followed – get a steady job, buy a house, pay it off and save a nest egg for retirement.

Save Money For Home Cost

The problem is savings, or even owning your home outright, doesn’t make you rich.

What usually happens is that they work hard over their lifetime, diligently save or pay off their home and are left with what will be a modest, most likely old and tired house.

Savers are what I would call financially illiterate.

They need to focus their efforts on building a solid base of financial and investment skills, upon which they can grow their financial future.

They will get the most leverage by investing in themselves and getting a quality financial education and beginning to build a network of peers that they can make the journey with.

Level 2 – The Passive Investor

Level 2 investors have become aware of the need to invest.

They realise their superannuation won’t get them through retirement, so they start learning about investment and begin accumulating assets.

While they are generally intelligent people, they are still what I would call financially illiterate – they don’t really understand the rules of money.

But remember it’s not their fault – nobody taught them.

If anything, their parents taught them old-fashioned, outdated concepts about money.

Rather than taking responsibility for their financial education themselves, Level 2 investors tend to look for answers to their investment needs from outside sources or “experts”.

This makes them easy prey for the newest “get rich quick scheme” advertised in magazines or the latest flash-in-the-pan investment strategies spruiked by telemarketers.

Instead, they should refine their financial and investing education and focus their efforts on choosing a specific wealth vehicle that they are going to master.

They must unlearn the flawed, incorrect and misguided lessons they have learned about money and wealth from unqualified teachers.


Level 3 –The Active Investor

Level 3 investors realise that they must take responsibility for their financial future and become actively involved in their investment decisions.

They become financially literate by building a knowledge base of investment strategies and techniques.

They are starting to get their money working for them.

These investors actively participate in the management of their investments and concentrate on building their net worth.

Their main focus is on growing their asset base.

As this is the asset accumulation stage of their investment life, these investors have in general moved to high-growth, low-yield investments to grow their wealth.

This is where residential real estate really shines – it’s the best asset class I know for growing your wealth safely.

Level 3 investors usually leverage the time and expertise of a network of industry professionals as they realise that they can’t do it all themselves.

They also upgrade their network of advisors and peers, often joining a Mastermind group of like-minded people.

Level 4 – The Professional Investor

A very small group of investors move to the top rung of the ladder and become a Level 4 “professional” investor who has built and now manages a true investment business.

A Level 4 investors’ property investment business has a substantial asset base that generates sufficient recurring passive income to pay for their lifestyle costs, they keep growing their investment portfolio whether they work in a real job or not.

They are well-educated; financially fluent, comfortable with the language of money and understand how the game is played.

They understand the “system” of finance, tax and the law and use them to their advantage.

These investors tend to concentrate on optimising the performance of their properties, whilst at the same time minimising their risks.

While they are still accumulating assets, they are now more interested in cash flow that will allow them to gain the most out of life.


Rather than investing what is left after they have spent their money, they have the correct tax structures in place that enable them to spend what is left over after their money-making investment machine ploughs more cash back into further investments.

They have a finance strategy and financial buffers to buy themselves time and see themselves through the ups and downs of the economic and property cycles.

And they understand the law as it relates to property so that they don’t make the mistakes many beginning investors do.

These professional investors don’t hand control of their investments over to others; they retain control whilst employing a proficient team: accountants, finance brokers, property managers, solicitors and property strategists who have great systems that achieve repeated and consistent results, which are reliable and predictable.

This gives Level 4 investors the freedom to choose whether they get up in the morning and go to work or not.

Many still continue working because they enjoy it, but now they go to work because they choose to, not because they have to.

Others find the time to contribute more to their community or to charities.

Neither the state of the economy nor the stage of the property cycle seems to affect the professional investor who makes money in good economic times and bad.

Level 4 investors rarely stop educating themselves.

They read, still attend seminars and surround themselves with a team of advisors and mentors.

They’re prepared to pay for solid advice – not only to increase their wealth but also to protect their assets from opportunistic family members, lawsuits and the government.

You will find that Level 4 investors personally own very little in their own names.

But even though they “own nothing”, they control everything through companies and trusts.

By controlling the legal entities that own their assets, these investors gain considerable legal tax benefits and asset protection.

A final point about Level 4 investors is that they teach their financial knowledge to their children and pass on their family fortune to future generations as their companies and trusts endure after they have departed this life.

Asset Growth first, then the income stage

It’s important to understand that the first stage in becoming financially free is to educate yourself; the next stage is that of asset accumulation – your job as a Level 3 investor is to build a sufficiently large asset base to fuel your “cash machine”.

Then, only when you have grown a substantial asset base, you transition into the cash flow (income) stage of your life as a level 4 investor.

Sure you need income (cash flow) to service your debts as a Level 3 investor, but your focus must be on asset growth rather than income growth.

What is your Level of Wealth?

Now it’s time for some home truths … How far up the Wealth Pyramid are you? Where do you currently sit in this hierarchy of investors?

Everyone starts at the bottom – at Level 0 – but not everyone makes it to Level 4. In fact, few do.

But you can once you understand why the rich keep getting richer.

Remember, this assessment of your current level of wealth has nothing to do with your income.

You can be a “low-income” earner when it comes to your day job, but still be a Level 3 investor and have financial security.

Likewise, you can be considered “rich” by working income standards yet still be at Level 0 Wealth, spending every dollar that you earn.

What I want you to understand is the pay packet that you work for every day has nothing to do with what level of wealth you are and in fact is

one of the worst predictors of wealth.


What level of investor are you?

Now it’s time for some home truths …

How far up the investment ladder are you?

Where do you currently sit in this hierarchy of investors?

Remember, this assessment of your current investment level has nothing to do with your income.

You can be a “low-income” earner when it comes to your day job, but still be a Level 2 or 3 investor.

Likewise, you can be considered “rich” by working income standards yet still be a Level 0 investor, spending every dollar you earn.

What I want you to understand is that the “active” income you make (the pay packet you work for every day) has nothing to do with what level of investor you are and in fact is one of the worst predictors of wealth.

One great thing about freedom is the freedom to choose to live the life you want to live.

It’s your choice but you can’t do it alone. But that’s where we can help you…

About Michael Yardney Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.

Good article Michael, I knew nothing about trusts back when I was 18 and most of the advice I recieved from professionals was that I didn't make enough money to "negative gear" so anything I did with regards to property was simple called "compulsory ...Read full version

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Would be interesting to know the population breakdown of these investor types?

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