How to Start Investing for Financial Independence, Part (1)
By Chris Anderson, PhD
By Chris Anderson, PhD
Today, I am going to start a mini-part series about how to go from beginning investor to being "finacially independent" in a steady and predictable way. At our website, we get tons of emails about how do I start, how do I start with little $'s, ect., ect., ect. If you are saking this question, congradulations because you are ahead of most. All of us have been there at some point.
I must warn you.... What I am about to share with you for free is what "gurus" across the nation charge thousands of dollars for in weedend seminars. the "secrets" revealed are going to seem pretty simple because quite frankly, there is no real secrets. The methods used have been done for centuries and there is no reason to complicate them. Let's apply these principles to see how fast someone might become financially independent without beeting the farm.
Realize that everybody has wildly different starting points and different financial goals. For this series of articles, we assume that an individual has access to at least $15,000 liquid capital (or home equity) to start, is at least breaking even with their current income verses expenses, and has decent credit to obtain financing. Not there yet?.... See the footnote below.
To start, what you need is to make your money grow while keeping your current income stream, and current expense level in place. I can't say this more plainly.....To change your financial path, you have to use your money and your time to grow additional income streams that increase wealth. There is many ways to do this but we are going to use investing in real estate as an example.
Now for beginners, here is really bad news.....As an investor, you reap rewards by putting your money in HARMS WAY. You do everything in your power to minimize your risk but bottom line is that real investors money by taking CONTROLLED risks. As investors get better, they learn how to make fantastic investment returns doing things that all their friends and relatives think is crazy.....However, they know exactly what risks they are taking are why those risks are small in comparison to the potential rewards.
One reason people really like real estate is leverage; i.e, you can purchase an expensive property using 0-20% of your own money while financing the rest. So if you put 10% down for example, and then the property goes up by 20%, you have made 200% return (ignoring expenses, taxes, ect. for simplicity). Of course this works in reverse...If the property drops by 20%, you have lost not only your original investment but have to come up with another 10% as well.....Ouch!
For someone begginning, here is what I would suggest:
Now let's say after you did your analysis, looked at what had happened in the past, looked at why you thought more and more people would want this property, ect., you decided that you think this property will average 20%/Yr escalation over the next 2 years. MORE IMPORTANTLY, you decide that barring a major meltdown in the market, you think there is little chance that you can't at least break even after 2 years.
So if you end up being right about growth, then you might make a tidy $43,000 (before taxes) or so after everything is considered. After long term capital gains at 15% let's say, then you just picked up about $36,000 of the "market's money". That is money that if you take a loss on the next investment will not be nearly as painful as if you lost your original money. When you combine this with your original investment amount, you now have around $55,000 of operating capital for step 2.
Realistically, you cannot predict how much you will make from the investment. When I invest, I try to establish in my mind what is reasonable. Frequently, I have been surprised to the positive and made much more than expected. Sometimes I have made less. The key being to put yourself at low risk situation where you have a strong reason to believe the market will go in your favor.
To accomplish this first step, let's look at what you really had to do:
To me, this is a recipe for disaster. By the time we finish this series, you will see that with very few simple steps, implimented over time, many people will put 100's of thousands of dollars at risk but know almost nothing about what they are doing. If you chose the path of making your investment dollars grow steadily with time, I hope this does not end up describing you.
** Footnote: If you are not yet at that level, here is what I suggest. First, read michael Masterson's book called "Automatic Wealth". This is an excellent book on how to rapidly change your financial position while staying employed. Next, I would read Van Tharp's new book called "Safe Paths to Financial Freedom". Van uses a very differnt thought process from may and so adds a great deal of rounding. Like anything else, you will not agree with everything written in these books but they provide some great thought processes. When you have some capital and are cash flow positive, them come back and revisit this article.
I must warn you.... What I am about to share with you for free is what "gurus" across the nation charge thousands of dollars for in weedend seminars. the "secrets" revealed are going to seem pretty simple because quite frankly, there is no real secrets. The methods used have been done for centuries and there is no reason to complicate them. Let's apply these principles to see how fast someone might become financially independent without beeting the farm.
Realize that everybody has wildly different starting points and different financial goals. For this series of articles, we assume that an individual has access to at least $15,000 liquid capital (or home equity) to start, is at least breaking even with their current income verses expenses, and has decent credit to obtain financing. Not there yet?.... See the footnote below.
To start, what you need is to make your money grow while keeping your current income stream, and current expense level in place. I can't say this more plainly.....To change your financial path, you have to use your money and your time to grow additional income streams that increase wealth. There is many ways to do this but we are going to use investing in real estate as an example.
Now for beginners, here is really bad news.....As an investor, you reap rewards by putting your money in HARMS WAY. You do everything in your power to minimize your risk but bottom line is that real investors money by taking CONTROLLED risks. As investors get better, they learn how to make fantastic investment returns doing things that all their friends and relatives think is crazy.....However, they know exactly what risks they are taking are why those risks are small in comparison to the potential rewards.
One reason people really like real estate is leverage; i.e, you can purchase an expensive property using 0-20% of your own money while financing the rest. So if you put 10% down for example, and then the property goes up by 20%, you have made 200% return (ignoring expenses, taxes, ect. for simplicity). Of course this works in reverse...If the property drops by 20%, you have lost not only your original investment but have to come up with another 10% as well.....Ouch!
For someone begginning, here is what I would suggest:
- Look for an opportunity that will return at least 150% in 2 years or less;
- Be mentally and financially prepared if the investment does not work out;
- Have VERY good reasons why you don't think you will lose money....You may not make as much as expected, but you would rather not lose money at this stage.
- Be patient. This single result should not either make or break you, but is crucial to a longer term plan.
Now let's say after you did your analysis, looked at what had happened in the past, looked at why you thought more and more people would want this property, ect., you decided that you think this property will average 20%/Yr escalation over the next 2 years. MORE IMPORTANTLY, you decide that barring a major meltdown in the market, you think there is little chance that you can't at least break even after 2 years.
So if you end up being right about growth, then you might make a tidy $43,000 (before taxes) or so after everything is considered. After long term capital gains at 15% let's say, then you just picked up about $36,000 of the "market's money". That is money that if you take a loss on the next investment will not be nearly as painful as if you lost your original money. When you combine this with your original investment amount, you now have around $55,000 of operating capital for step 2.
Realistically, you cannot predict how much you will make from the investment. When I invest, I try to establish in my mind what is reasonable. Frequently, I have been surprised to the positive and made much more than expected. Sometimes I have made less. The key being to put yourself at low risk situation where you have a strong reason to believe the market will go in your favor.
To accomplish this first step, let's look at what you really had to do:
- Had to be willing to put $'s in harm's way;
- Had to educate yourself enough to evaluate the risk and opportunity;
- Had to find the opportunity or be in a position to have the opportunity presented to tem;
- Had to act.
To me, this is a recipe for disaster. By the time we finish this series, you will see that with very few simple steps, implimented over time, many people will put 100's of thousands of dollars at risk but know almost nothing about what they are doing. If you chose the path of making your investment dollars grow steadily with time, I hope this does not end up describing you.
** Footnote: If you are not yet at that level, here is what I suggest. First, read michael Masterson's book called "Automatic Wealth". This is an excellent book on how to rapidly change your financial position while staying employed. Next, I would read Van Tharp's new book called "Safe Paths to Financial Freedom". Van uses a very differnt thought process from may and so adds a great deal of rounding. Like anything else, you will not agree with everything written in these books but they provide some great thought processes. When you have some capital and are cash flow positive, them come back and revisit this article.
