One of my friends suggested this video as an intro to my next post to help illustrate what I was trying to figure out, my Phase 2:
In my first post, I shared with you how I came to be seeking Financial Independence. In my next post, I set my objective, $8,500 a month in income, in ten years, from a source other than my job. So, I guess the next step is to figure out how to do this. In other words, what’s Phase 2?
I’ve spent hours and hours scouring the internet for ideas on how to make my objective. There’s a lot of good ideas and information out there on this topic, but I found that a common theme across most of the different sources I read on this is that there are three main components to success:
- Free up cash/Save
- Start small/Find what works
- Scale up
All three of these steps is important, so I’ll share how I am handling each one of them.
Free Up Cash/Save
This is the first step, and probably the most important. No matter which vehicle you use to reach your financial objective, you are going to need capital to do it. And you can’t get rich by spending your way there. You have to cut the fat from your budget, and set aside the cash you are going to need to meet your objective.
In my case, I was already setting aside money for retirement through my company’s 401k, but I wasn’t saving much beyond that. I sat down and wrote a list of all of my regular expenses, starting with the biggest and working my way down. It was a big list, and included lots of things I didn’t even realize I was spending so much money on. I went through my bank statements line by line, and not just one month, but several, until I was confident I had accounted for all of my expenses.
Once I had my list put together, I started looking for opportunities to cut.
Here are some examples of things that we were able to cut out right away. I switched cell phone plans to a lower cost provider, got rid of our cable (switching to Amazon TV), and got rid of my wine of the month subscription. I reduced the frequency of my hair and nails appointments, and even cut down on my Starbucks. By the time I was done, I had already freed up over $200 a month in cash. I kept working on this, refinancing my student loans and re-evaluating my insurance policies, among other things, until I had bumped up my now freed up cash flow to almost $800 a month. And I’m not done, I continue to work on trimming my expenses. The returns I’m getting now aren’t as big as the first couple, but every dollar helps. The bottom line is that I started to build up a pile of cash that I could use to get started with my investing.
Start small/Find what works
So here is where things start to get interesting. How am I going to get to a point I am generating $8,500 a month in additional income? I did some research to find out how others have tackled similar challenges, and the results were interesting.
For example, one approach is to save your way there using high yield accounts. Do you know how much money you would have to save in ten years to get to $8,500 a month in interest income in? Let’s just say you could find a savings account that paid 10% interest. You would need to build that account up to $1,000,000 in order to generate $8,500 a month in income. Contributing monthly, earning 10% interest on my savings, I would need to set aside $4,500 a month in cash in order to hit my goal. And that is using a very generous 10% interest rate. Most savings and money market accounts I found were only paying closer to 1%.
I didn’t do this math all on my own, I had some help. But the bottom line is I don’t have $4,500 in monthly free cash to save. It’s pretty obvious I am not going to hit my goals by savings alone. So, I shifted my approach a little bit and started looking at ways I could add and build up a side income. There are a lot of good articles out there on this topic as well:
As I was reading through various articles on this topic, two things started to become apparent. First, most of the ideas listed are not scalable. For example, you can use Uber to generate a side income, but there is a top limit to how much you can earn on this as a side income. Once you’ve maxed out the amount of time you can dedicate to this, you can’t go any further. This is true for many of the things I looked at. I knew that whatever I did had to be scalable, so if it wasn’t, I didn’t include it on my short list.
There is another thing I really started to notice as I was reading through the many articles on the topic of generating a side income. That is, in many cases, one of the common vehicles recommended to generate additional income is real estate investing. I know people who have real estate investments, but I’ve never done anything myself, so I started reading up on it. This is actually how I ended up on the Real Estate Investor Forum website.
As I got more familiar with real estate investing, I was getting more confident that this would be the vehicle I would use to meet my objective.
One of the things I really like about real estate investing as a vehicle to generate income is that it is scalable. I know that I am not going to be earning $8,500 a month right out of the gate, but if I can achieve success with a smaller amount, I can grow that to where it needs to be.
For example, one of the approaches I am considering is to buy a single family house, fix it up, rent it out, and then refinance. Based on some sample properties I’ve looked at, I think I can earn $300 a month in free cash flow by doing one of these. And I think I can do more than one a year. So if I do three in one year, that puts me at $900 a month in income.
If I do three per year, for ten years, at this rate of return, I’ve exceeded my objective. That’s a lot of houses, a total of 30 by the time I’m done. So I may have to look at starting with houses, but then scaling to something with an even bigger return, like multifamily, after a couple years. I could also add the occasional flip into the flow so that I don’t have to rely just on rental income. But the bottom line is that this is a vehicle that can get me to my objective. Real Estate Investing is the path I will take to achieve my Financial Independence.
See you next week!
Next week- Getting Started