The gross value
Previously I asked the question of how much it takes to retire early. This same question also is how much it takes to become financially independent.
There were a range of answers all the way from a retirement pension that only provides $24,268.40 per year, through to a real case where the money target was $384,000 per year.
Using average figures along with a multiplier of 2.5 I rounded up to come up with a number of $150,000 per year net.
So what does $150,000 look like?
$150,000 net is within the highest tax bracket so neglecting any money ‘tricks’ or ‘hacks’ the simplistic before tax number is about $225,000 gross per year. Once again this represents a significant number and the most significant factor around it is that it’s (For most people) beyond what you can earn by trading time for it.
When we break it down to a weekly value, spread across a range of 52 weeks it becomes $4,330 per week. So how is this achievable?
Related: Why Money for time is a poor trade
Option 1 – Property
It’s plenty safe to say that Australians love their property, or at the very least they love the idea of it. Property in the long term represents one of the safest investments that anyone can make – after all land always goes up.
But being in property is not all about financial independence.
For the regular younger punter, Property represents an investment vehicle that is out of reach. More so residential property is a strategy that requires education, because the real value in residential property is in equity, and when the value of property rises at about 8-12% per annum, equity is the buying power you can gain to acquire more property.
However it’s not all about cash flow – in fact cash flow can actually be one of the last things that one achieves in [residential] property. In Addition to this, Property is illiquid, so if you need cash quickly in the future, it’s not like you can simply sell a room, or a garage and keep the rest of the asset. Not to mention that the conversion of asset to cash in property is not exactly a quick process.
All these issues aside when it comes to generating $4,330 per week through property, you would need 10 properties generating $430 per week. On its own this is an immense task to generate that sort of asset wealth. Diversification into Commercial property and a total diversified strategy is where the cash flow comes from.
Option 2 – Stocks
A slightly riskier but more powerful cash flow strategy is in the stock market.
Once again there are numerous strategies that can be used in the market place and the most important factor is that before you do anything in the market is that you get educated on the strategy you’re going to use to understand the risks that are associated with it and the potential rewards that can be gained.
Unlike property the markets are highly liquid, but do require some management either on a daily or a weekly basis.
In one particular strategy the returns can be in the order of 1% per trade and positions can be held for as little as a week.
When it comes to gaining $4,330 per week, this 1% return would require $433,000 invested at any time. However despite there being some extremely safe strategies out there, including some educations that effectively ensure realized losses cannot happen, a downward market can either leave you holding assets with little opportunity to produce income from them or can leave you on the side lines while you wait for the right market opportunity to invest.
Related: Why you should not trade crypto
The current position
So with property being ‘illiquid’ and the stock market potentially having only small opportunities to invest at specific times, why bother?
The answer is remarkably simple. With record low reserve cash rates, the banks are the worst place to keep your left over cash.
Why bother? Because you need to make your money work!
Here is why! (Simplified)
A $500,000 property with a $400,000 mortgage, will grow by about 10%.
In 5 years’ time that property will be worth about $886,000. Removing the value of the mortgage and using 80% for the calculation you would be left with about $388,000 in equity. This is the coarse value you would come away with if you chose to sell the property. That’s $388,000 that you didn’t need to work for!
In Stocks if you had $100,000 in a trading fund, and managed to collect 1.5% per trade on $90,000 invested, 20 times per year for 5 years (100 x 1.5%) then you would see a $135,000 earned in 5 years. This does not take into account reinvestment and subsequent compounding. All this in as little as 30 minutes per week!
Whereas if you trade time for 48 weeks per year, the sum of your ‘organic’ investment will be your mandatory employer super contribution (which you cannot access until your preservation age) and your savings sitting in the bank which effectively at the current interest rates earn nothing.
Why would you let your money take a vacation when you can’t?
Simply put, you cannot work your way to financial independence. There is a need to invest and that means a better way of generating cash flow!