You’re Doing It All Wrong (The Truth About Financial Freedom)

Budgeting your moneyYou don’t need to earn a lot of money to achieve financial freedom quickly. You just need to follow two simple rules:

  1. Live within your means (and)
  2. Invest the rest.

I’ve never paid myself more than $60,000 a year, I don’t live frugally, I spend $700 / month on food, entertainment and other stuff plus I donate $100 monthly. Yet I still manage to invest nearly $18,000 each and every year.

Isn’t it about time you make a spreadsheet, face your own truth and make some changes in your life? Take a look at mine and see how you compare, look for places you can improve and make decisions about what expenses truly bring you sustained happiness and which ones are holding you back from achieving your potential.

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A Single Sacrifice Is All It Takes To Retire Early

necessity-vs-luxuryLast night I met with a colleague of mine who said she didn’t have any money to invest in her retirement. As it turns out, within five minutes I found several instances where she was believing her own lies. The biggest one? Her car costs as much as her mortgage… that’s nuts!

Mortgage ($810 mortgage + $140 property tax)
$950 / month

Car ($465 payment + $250 insurance + $240 gas)
$955 / month

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Pay Attention to the Small Things, Because They Add Up Quickly!

Light bulb vs. LEDShort term pain for long term gain. Many people will avoid spending $100-200 to replace their lights with a more efficient alternative.

Recently I replaced the last 16 bulbs in my house with LEDs, the investment of $128 will break-even in less than 18 months and save me approximately $2,000 over the next 20 years.

At this pace, assuming no increase in electricity cost for the next 20 years (which is unlikely), worst case scenario I will earn an annual ROI of 33.3%; which is far greater than the historical average ROI of the stock market historical average of 10.1% (8.7% adjusted for inflation). There are many cases when masterful saving can outperform systematic investing and it’s worth paying attention to.

Take a look:

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Retiring a Few Years Later Can Make All the Difference

compound interestOne of the most important lessons in investing is to learn about the power of compounding. In many cases, investing early and regularly can make all of the difference in the world.

Let’s take look at a chart that shows the impact of investing $100,000 by age 30 vs. investing $200,000 by age 45 (assuming 8% average return each year). As you can see, even though the second individual invested an additional $100,000, they will have nearly $600,000 less at the age of 65… that’s a breathtaking difference!

the power of compounding

Investing $100,000 at 30 years old vs. investing $200,000 at 45 years old

But what if you haven’t had the luxury of starting to invest early? What do you do then?

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Our Love for “Luxury” is Costing Us Our Freedom

luxury house with poolDoes that $30,000 kitchen renovation really make you that much happier? Did you need granite countertops, new stainless steel appliances, built-in double ovens and recessed ceiling lighting?

Alternately, would new modern cabinetry with a standard countertop at a tenth of the price have been sufficient?

What about that $30,000 pool install? Did it need to be installed in-ground? Did you also need to replace your patio and extend it with high-end interlocking stone?

Alternately would an above ground pool that was a tenth the price have been sufficient?

Do these “luxurious” upgrades really bring you increased sustainable happiness or are you a victim to consumerism, short-term lust for higher-end physical possessions and, of course, trying to keep up with the Joneses.

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It’s Just One Purchase… It’ll Only Irrevocably Change the Final 50 Years of My Life!

Investment DecisionsWhat can $100,000 buy you?

  • Home expansion / renovation (~500-750 sq. feet)
  • Luxury car & costs for 5 years (insurance, gas, maintenance, etc.)
  • Camping trailer, insurance & lot for 5 years

What can $100,000 earn you?

Alternately, if you deposited the $10,000 saved each year over the duration of 10 years instead of spending on one of the luxuries above and then earn an average return of 7.8% each year for the next 30 years you would own investments valued at $694,763.08.

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Financial freedom: Where Do I Begin?

Steps to Financial FreedomThe first step is to consider what area interests you the most; it’s always easier to choose something that you have some degree of interest in because you will be more likely to best absorb the materials and take action.

If you’re a beginner and not sure what area interests you most I recommend you read one of the following blogs I’ve written that are geared for beginners on these topics:

Blogs

Financial freedom

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How to Perform a Real Estate Cashflow Analysis

This is what a real estate cashflow analysis looks like. It informs you of your up-front costs, assesses cashflow positivity with current and potential future scenarios, budgets appropriately for vacancy/repair/contingency and accounts for overhead costs even if they may be unrealized (e.g. property management, accounting, bookkeeping, etc.). It is also vital to highlight any assumptions and verify them in writing, absolutely no exceptions.

real estate cashflow analysis

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How can I make money in real estate?

disorientedEarlier this week I had a meeting with one of the local startups that I am mentoring.  Over the last year his company’s bank account has been reaping the rewards of their hard work and so he has been considering his best option to invest the returns from his compounding successes.

Knowing that I am an active real estate investor he wanted to learn about how real estate makes money.  He had performed a number of cashflow analyses, but, was failing to find lucrative returns.  I could sense his frustration mounting in each additional word that he was saying.  “The best cashflow I’ve been able to find is approximately 8% on a real estate investment and that’s just… well average”.  He frowned.  I smiled and excitedly said “That’s fantastic, you should put in an offer, do your due diligence and buy this property if everything checks out.”

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Save An Hour of Salary, Prevent a Day and a Half of Work in the Future

The power of saving and investingOver the last 112 years, the stock market has averaged an annualized return of 8.5%*.  If you were to invest a single dollar into the market and receive the average returns, in 30 years it will be worth $11.56 (see “The Power of Compounding”)!

Let’s translate this into a figure that will scorch an image into your mind that will hopefully transform your perception of the importance of saving and power investing.  Let’s talk in terms of something that keeps us away from doing what we want, when we want to.  Yes, that’s right… work!

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