Which Financial Strategy is best for you?

When it comes to gaining your financial independence, every educator swears by their own systems, but is one truly better than the other?

Like many topics this does not have a quick answer, but the right one is the one that not only works for you, but most importantly the strategy that you can support, not only today but also into the future.

So here we’re going to look at 5 strategic options that you have and what they can give you.

The Job

If you’ve read any of my articles you will already know that a job is more than likely going to fail you in the future. But let’s take a quick look at it anyway.

Regardless of the job itself, a job is where you provide a service to your employer and then you are compensated for the service through a pay check.

This ‘Money for Time’ arrangement is relatively stable and yields a predictive outcome on a fortnightly or monthly basis but will more often than not, not support your personal and future goals. The only way to support your future goals is through the contributions that are made to your superannuation or through savings which we will go through below.

Related: How Superannuation wont help you retire early

Perhaps the biggest flaw in the ‘job’ strategy is the job itself is not scalable, meaning that irrespective of the value you provide to an employer your financial result is fixed.

Budgeting and Saving

Managing poverty is the first and earliest way that most people tend to invest.

How so?

Most financial journeys all begin with a job. As seen above, a job is a money for time trade. Once you have that money the mission you have is to hold onto as much as possible while adding to it as often as possible, so that it is available in future.

However adding to your savings particularly whilst in the job market where income is relatively fixed means cutting back on expenses. The more you can cut back, the more you can add to savings. The more you cut back today, the less you can do.

However today with bank interest at such low rates, saving money does not lead to financial growth. More than anything it simply means having access to funds when required – not having funds grow for you.

Related: Why a bank is the worst place to have your money

This will leave you locked into a job until you have an amount large enough to invest and begin to earn passive income. If you begin to use that saved money for anything other than investing then you are effectively locking yourself into the job market.

So let’s look at some other strategies.

Property

Regardless of your values, property is one of the biggest investment vehicles that investors make use of when it comes to getting rich and reaching financial independence.

The first thing to understand is that there are many strategies that you can resort to when it comes to investing into property.

However regardless of the strategy that you chose to use, the hardest aspect of investing into property is ‘buying in’ or making your first purchase into property.

Typically speaking to get into property you will need a deposit; normally about 20% and to be able to prove to the banks that you can service the mortgage, and that means having income; usually a job!

The deposit is the hardest part and this can mean having over $100,000 ready to drop on the property that you look to buy.

For the rare few

For a limited few (10,000 first home buyers) this deposit can be as low as 5% but this does come with conditions. Firstly to be eligible a Single must earn up to $125,000 or a couple will need to earn up to $200,000 per annum. Secondly the repayments will need to service the remaining 95% of the loan, and over the lifetime of the loan itself this makes a massive difference.

However all of the cash flow issues aside, property (over the long term) usually goes up. And this means that property is one of the safety investments you can make.

Depending on the strategy in place, property will lead to capital gain (equity), cash flow or both.

The downside (if there is one) is that property does come with added and recurring costs. Particularly with investments the property must be occupied in order to service the mortgage, and you need to be prepared to cover other costs such as rates, up front replacements and repairs as well as other emergencies when they come up.

That being said the majority of costs that come with property are known up front and the capital gain on residential property far outweighs the expenses. This makes property relatively low effort, for very stables gains usually in the region of 8-12% per annum. (Long term)

Most importantly to know is that there are numerous property strategies out there, and getting educated is the first ‘must do’ thing you need to do before you jump in.

Stocks

Depending on how aggressive you want to be with your financial growth and investments the Stock market is another strong option to consider.

One thing to be aware of from the outset is that unlike the property market where strategies take years to execute and come together, the stock market can provide yields on much shorter timescales albeit with short term risks.

These risks are clearly visible when the value of a stock that you are holding drop in value and this means that losses are possible. However these risks can be managed, but when it comes to stocks there are a few ways that you can generate income from stocks.

Stock market strategies

Firstly there are dividends. Depending on the stocks you may own, you may receive dividends, but these can be quarterly and will usually only pay out a fraction of the stock value.

There is also speculation where stocks can be purchased and when the value of the underlying stock rises, the stocks can then be sold for a profit. However if the value of the stock drops then there will be a need to either take losses and move into a new position or hold until the value rises again.

The use of options can generate income which can vary by 1% to 4% (per position) depending on the term of the options contract, but like every strategy the stock market does require the education to know what strategy you will use, and how to manage your funds whilst you are invested and also when not to be invested.

In Comparison to property the stock market is ‘high maintenance’ typically requiring about 5-10 minutes of maintenance per day, which pushes the time cost far beyond what property demands, but comparatively recovering massive amounts of time when compared to the time expense of a job.

In addition stocks don’t have a client with the exception of yourself. Stocks don’t break and don’t need fixing which means that you can focus on what your next action is going to be rather than preparing for another expense, which may or may not eventuate.

Over time, the Stock market can provide a higher yield than property, with a far lower initial investment at the expense of your time for managing the investment itself.

Your own Business.

Every strategic option comes with risks. You may lose your job. Your budget may not be workable. Properties may get damaged or may lose value. Stocks may fall.

Nothing is fool proof and the safest strategies are the poorest performers.

Property can yield 8-12% per year, and stocks may yield 1-4% per position, multiple times per year. However the final option we will look at is a business, that you run or own.

Like property and stock there are many business models and strategies that can be used, however if your goal is to achieve high incomes with low time investment, a business centred around soft products (Develop once, sell more than once) are the highest yield option possible and the potential has no upper limit.

This means that the income that can be derived per time unit is scalable. The market size is scalable.

However this does not mean that running a business is easy. Continued effort needs to be maintained for the promotion and selling of your product in order to keep the cash rolling in.

Summary

Like it or not, Money is a tool, and cash-flow is king.

Everyone will tell you that a job will fail you and saving is a just a way to manage poverty.

Related: The Mindset shift to being your own boss

There are those who will tell you running a business is just too time intensive.

There are those that say property is too slow.

There are also those who say the stock market is too risky.

Today’s rich and financially independent did not achieve their independence by trading money for time at a job or by saving up for 30 years and then living cheap.

The strategy that you use has to be something that you are comfortable with and that means you need to be able to invest. You need to be comfortable with the returns and also the risk associated with it as well as the time you need to manage it.

All things being equal investment requires the money to buy into the market in the first place and this means cash flow is at the core of ‘Any’ strategy you employ. And when cash-flow is the king of any strategy, every journey starts with the money you earn now.

And this means that running your own business is where it all starts.

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