The following is a guest post from FI Fighter. FI Fighter is an early financial independence seeker who aims to get there by 30. This day will arrive when the passive income and semi-passive income streams bring in more each month than is needed to pay bills. Let the journey continue! Let me know if you would like to guest post on RFI!
I will be over at Make Money Your Way talking about how I made over $1,500 in the past few months renting my house to travelers. Click to read more…
A lot of people play the lottery because they want to get rich quick without having to do any work. Those who do win are considered lucky because the odds of winning are one in a few million. Chances are great that if you went out tonight and bought a handful of lottery tickets, you wouldn’t win anything. Surely, there must be a better way to build financial wealth…
There does exist a better path to financial freedom, and it’s through the accumulation of assets. What are assets? Quite simply stated, assets are things that put money in your pocket without you having to do any work. To acquire an asset usually requires capital upfront (just like with buying a lotto ticket). And just like with a winning ticket, the right assets can make you instantly rich overnight!
Just how are assets better? Unlike the lottery, yours odds of getting rich off assets actually improves with time, as they become more valuable. The lottery is completely random, and your chances of winning at any instance are independent of previous results.
So, how does one get started in building wealth through assets? Well, Rome wasn’t built in a day and the journey of a thousand miles begins with that first step. Very cliché, and I’m sure you’ve heard those statements a billion times before. But that doesn’t make them any less true.
When starting out, the most important thing is to get started! If you have debt, do everything you can to eliminate it as fast as possible. You want to start a marathon at the starting line, not 10 miles behind everyone else, right? It’s the same with investing. It’s hard to make progress when you’re fighting an uphill battle. Curb the bad consumer debt and avoid adding any more. Treat it like the plague!
The First Move
Investing shouldn’t be nerve racking. Do your research first and get educated. When you’re ready to get started, well, get started! I’m not going to tell you what to do (there are a million options), but I can share my own personal experience to give you some data points. The following example will show you how one fortuitous event may be all you need to expedite your progress to financial freedom.
I started investing in December 2011. I had $1500. I knew that the 9-5 rat race wasn’t the life for me, so I knew I had to build a passive income stream to replace my earned income. Dividend investing seemed like a logical first step. The beautiful thing with buying dividend stocks is that they are accessible to everyone. You don’t need good credit, you don’t need a sizable downpayment, and you don’t need much capital.
I bought 25 shares of Walmart (WMT) for $59.58/share. This was the beginning of my financial journey!
Progress is Slow At First…
My first Walmart (WMT) dividend posted on June 04, 2012. I earned a whopping $10.00. When first starting out, don’t get caught up in the amount of money your investments are generating. Instead, focus on the neat idea that your money is now working for you! For many investors, seeing that first bit of passive income being deposited into your account is a signal from the universe that you’ve “arrived” as an investor. Let that great feeling motivate you even further!
After receiving my first taste of unearned income, I was hooked! I kept right on investing throughout 2012, making periodic investments like clockwork. I didn’t pay attention to the fluctuations in the market. I didn’t care for the headlines. I just kept right on investing my money, knowing that the more I put in, the more would be returned to me in the form of passive income.
It didn’t take too long before the portfolio increased from $1500 to $60,000. This progress was made over the course of about one year, and building a portfolio valued at $60,000 was one of my original goals set in 2012.
Opportunity Comes Knocking
How does one get lucky when investing? If you invest in stocks long enough, eventually there will be a bull market that arrives which can help elevate your portfolio gains by 30% or more (see 2013). Almost everyone who invested in stocks prior to 2013 is sitting pretty now. The market has been on fire this year!
However, there are also other ways one can get lucky. Towards the end of 2012, I started looking into real estate property. I knew that prices were still very low compared to historical norms for my location. Thanks to my diligence in investing with dividend stocks, I was sitting on a portfolio worth $60,000.
Around November 2012, I got a phone call from my real estate agent letting me know about a great deal. A beautiful townhouse in a fabulous neighborhood was available through short-sale. He said it was an absolute gem and an opportunity I shouldn’t miss. I saw how fast the real estate market was rebounding (open houses were always packed), so I didn’t hesitate and put in an offer the next day. One year later, I’ve rented it out for positive cash flow, and the property has now appreciated close to $100,000.
There are tons of opportunities floating out there each and every day. But you can only get lucky if you’re in a position to make a move. What good is there in knowing about a deal if you can’t come up with the capital to secure it?
The good news is, if you invest long enough, you’ll eventually come across some killer deals (and be in position to do something about it). That’s almost unavoidable, thanks to the powers of compounding and asset appreciation.
Also, please note, there’s nothing written in any rulebook that says you can’t mix up your investments as the market dynamic changes. Going back to the previous example, I was completely focused on building up my dividend portfolio at the time the rental property hit the MLS. I wasn’t looking to acquire a rental at all, but when the opportunity arose, I reconsidered my options.
Fast Track to Riches
Anyone who wants to secure financial freedom early in life MUST invest in assets. Putting your money under a mattress (or savings account) will never lead you to any riches. However, a single lucky outcome in an investment venture may be the difference that allows you to retire at 30, instead of 50.
In the case of the rental property example, I could simply sell the property tomorrow, pocket most of the $100,000 appreciation, and perform a 1031 exchange to shelter the capital gains from any taxes. The proceeds of the sale would be used to purchase more rental properties in better cash-flowing markets across the country. This would also help provide a tremendous boost in passive income.
Using real numbers, I have about $60,000 in equity with the rental. The current cash flow is about $300/month. If I sold the property and retained $160,000 (equity + appreciation), I might still have $144,000 remaining after agent expenses/fees. By rolling the equity into a cash flowing market that returns 15% (e.g. single family homes in the Midwest), I would generate $21,600/year, or $1800/month.
A single stroke of luck could potentially increase my passive income from $300/month to $1800/month (and potentially make early retirement possible).
It Pays to Invest
To put things in perspective, just think about how many long hours (or years) of labor you would need from your employer to generate $100,000 of net income…
When it comes to investing and getting lucky, it’s not always about having skills or smarts. Often times, you just need to be in the right place at the right time. After all, luck is when opportunity meets preparation! The most important thing to do is to keep investing, rain or shine. If you stick to a gameplan and work diligently on acquiring more assets, eventually lady luck will choose to side with you and let you know how it feels to be rich.
Unlike with the lottery, your odds of winning with assets will keep improving over time. Just keep on playing!