At graduation last month I had a student ask me to describe the best was for them to get to financial freedom. That is a tricky question. The reason being, that the answer is dependent on a number of things.
Age being one of the most important. If you are under 30 you have the greatest advantage and the most opportunity. The older you get, the less options you have. When you are young, putting in 60 to 80 hours a week is physically not that hard. Doing that when you are even a healthy 60, is tougher. Being Single is also a huge advantage. You make all the decisions, and they only impact you. If you have to live in your parent’s basement, or live out of your car for 3 months that can be accomplished. You also have the immense advantage of TIME. If you make a mistake, there is time to make up for it.
Being male or female makes zero difference. Attitude and work ethic make ALL the difference. Having a good dose of patience is also a bonus. Wealth/Financial Freedom are not quick fixes. Buying lottery ticket always comes up. Should you buy them? That is up to you. You can’t get many tickets for under $2.00. I can’t understand people who say they can’t save $50.00 a month, but spend over $20.00 a week on Lottery tickets. Unless you are winning more than your spending YOU ARE LOOSING MONEY!!! If your lucky numbers have not come up in the last couple of months, just how lucky are they!!
What can you really do? Having money to invest, or lets say “Put to Work” is the key. My imaginary friend TED is a good example. He has just graduated from college, and is living in his basement apartment with reasonable rent. He has a $10,000 student loan and $2,500.00 on his credit card. After doing a Financial Needs Analysis he finds that he could have $225.00 a month to save without affecting his life style significantly. (He is making slightly more than the minimum monthly payments on his bad debt. ($350.00.) Ted has found that if he uses the “Debt Snowball solution” and adds $100.00 a month to his bad debt payments they will be paid off in 24 months. Ted will also put away his extra $125.00 every month into an investment. Ted chooses a Mutual Fund that pays 6% per year. (Historical average) Any extra money, raise or birthday cash, Ted will put 75% of the money into investments and leave the rest for his use. After 2 years Ted should about $5000.00 in his investment. (Ted is putting the investment into a TFSA account) Since, after 24 months, his debt is paid off (and he has not incurred more debt) he now has the additional $450.00 a month he use to spend paying down debt, to invest. So, after 36 months, he should have roughly $12,000.00 in his investment account.
Teds first goal is to buy a house.
This presents the first Wealth Building opportunity. Should Ted buy a single family residence, or should he buy a duplex or triplex, and live in one of the units? If you go look at house prices you will find that you can often get a Duplex or Triplex for the same amount of money as a single family home. If you are going to live in one of the units, you only need 5 to 10% down payment. (If you’re not living in it, the down payment is 20% minimum.) Buying a duplex or triplex does involve dealing with tenants. So, question one is, how bad is that? Remember this is NOT a forever situation. What this does, is give you a place to live while someone else is helping to pay the mortgage.
Ted is a pretty handy guy so he is able to look at more distressed properties and get a good deal. He buys a small triplex. He will live in one unit and get rent from the other 2. Ted gets $1400.00 a month in income and pays out $1100.00 in mortgage and expenses. Ted puts the $300 extra rent a month into his investment account. Ted also buts $500.00 a month into the account, as if he was paying rent. He also continues to put the $525.00 a month that used to go into bad debt payments and his monthly saving into the same account. After 1 year his investment account is worth $18,000.00.
Time to buy the next Triplex or 4 plex. Yes, it has taken 4 years. But with the second rental property, within a year Ted is able to buy a nice single family home, with the rental properties paying that mortgage as well. In 2 years time, Ted sells the first triplex for a profit, and uses that to buy a small Commercial building.
In 10 years, Ted has as much money coming in from his investments as he does from his Job. Now Ted works for fun not because he has to. He has reached Financial Freedom 10 years after graduation. (Not too shabby)
Don’t like Real Estate and Tenants, then start a small business out of your house. Manage it well and, in 10 years you could sell it, or be able to let it run itself, and still generate income.
Don’t like either of those? Then take as many investing courses as you can afford each year, invest in the market. Again after 10 years you could realistically generate a monthly return that will cover your monthly expenses, and you are financially free.
If you’re in your 50s, I would recommend that you do a combination of these. Setup a Real Estate holding company, for the income properties, invest in good Canadian Dividend paying stocks, and maybe run a business out of your house that involves one of your hobbies.
The point to remember is that Financial Freedom is having enough money coming in to cover your monthly expenses, without you having to go to a JOB. JOB stands for Just Over Broke, which is where you probably are, if being an employee is all you have. Remember, at a JOB you get paid what the position is worth. NOT WHAT YOU ARE WORTH!!
Most Financial Planners want you to invest in Mutual Funds so that you can have an account that has $750,000 to $1,000,000.00 in it so that you can take out $50,000.00 to $60,000.00 a year to live on. If you have enough Assets (made up of a business, portfolio investments, and Real Estate) to bring in $5,000.00 to $6,000.00 a month in income, you don’t need the $1,000,000.00 nest egg.
By the Way. When Ted reaches retirement age, he will own most of his Real Estate outright. Being an investor, Ted will sell some of the properties, but instead of taking the cash, he will hold the mortgages and take the monthly payments. The same with his business. Ted established a Real Estate holding corporation which actually owns the properties. Ted is drawing a small salary out of that company. The company leases a vehicle, and pays for its expenses. (which Ted drives) Ted’s children own shares in the corporation, so if something happens to Ted and Mrs. Ted there is no inheritance issues as a corporation out lives the death of a shareholder. What the kids do with it is no longer your problem. Hopefully you have trained them to understand the way money really works.
If you are in the United States, you have a distinct advantage. Financing Real Estate is way easier than here in Canada. You also have way lower overall Taxes to pay. (You also have a ton more things you can deduct from your income. Like your mortgage payments.)
The key to remember is that you live off your monthly income. That also determines, to the most part, your lifestyle. Financial Freedom is achieved when you have as enough money flowing in each month, from non JOB sources, to pay all your expenses. It does not mean that you have to have $1,000,000.00 in an RRSP. (Having $600,000.00 in a TFSA is the same thing.) Remember, having Assets that generate enough income to cover your monthly expenses plus, is an alternative.