There is a theory, which I have not tested out by the way, that says that if you drop a frog into a pot of boiling water, it will immediately jump out. However, if you place that same frog into a pot of water and slowly, incrementally turn up the heat, it will remain in the pot even after the water has begun to boil. And, as an additional disclaimer, no frogs were harmed in the writing of this post. That being said, there are some interesting things we can learn about our own reactions to our surroundings...including when it comes to money.
Lately my wife and I have been talking through various ideas on our quest for financial independence. We've explored everything from rental properties to P2P Lending and lots in between. But, being the highly analytical over thinker that I am, I found that my decision every time was indecision. Huh, let me read that again you say? Nope, read it right the first time. Everyone makes decisions multiple times throughout each and every day. The most under recognized decision is the inability to make one. But, every time that you decide not to think, act, say, etc. it's just that...a decision. Ok, back to the point. My dad has said many, many things over the years that have stuck with me and several of those continue to ring more and more true as I encounter various life situations. One of the things that I remember him saying when I was very young was, 'Make a decision and stick with it...the best thing you can do is make a decision and be right. The second best thing you can do is make a decision and be wrong. The absolute worst thing you can do is not make a decision.' The point is, just do something. So, here we are, waffling about what to do when this reminder came back to me. I don't have to have all the answers now. I don't have to find the perfect thing now. But, what I do need to do now is something. Anything really. In our quest for financial independence there is about a 99.9% chance that we will fail by sitting around doing nothing. So, even if what we choose to do is waaay wrong, we're still likely improving our odds of success. And, what if the decisions that we make are actually decent ones? Wouldn't that change our financial fate exponentially? I know, you're waiting for the punchline that's going to be the golden ticket that we'll all invest in and be gajillionaires by this time next week. Well, that ain't going to happen. No golden ticket here. Just a friendly reminder to do something now. There is a Chinese proverb that says, "The best time to plant a tree is twenty years ago. The second best time is now." And Warren Buffett, who knows a little something about financial success, said it differently: "Someone is sitting in the shade today because someone planted a tree a long time ago." With all of these catchy phrases and sayings, who wouldn't be prompted to action? Turns out, most people. In a study published in December 2015 by marketwatch.com, 62% of Americans have less than $1,000 in their savings accounts. And, even more terrifying, 21% don't even have a savings account!
Lately my wife and I have been talking through various ideas on our quest for financial independence. We've explored everything from rental properties to P2P Lending and lots in between. But, being the highly analytical over thinker that I am, I found that my decision every time was indecision. Huh, let me read that again you say? Nope, read it right the first time. Everyone makes decisions multiple times throughout each and every day. The most under recognized decision is the inability to make one. But, every time that you decide not to think, act, say, etc. it's just that...a decision. Ok, back to the point. My dad has said many, many things over the years that have stuck with me and several of those continue to ring more and more true as I encounter various life situations. One of the things that I remember him saying when I was very young was, 'Make a decision and stick with it...the best thing you can do is make a decision and be right. The second best thing you can do is make a decision and be wrong. The absolute worst thing you can do is not make a decision.' The point is, just do something. So, here we are, waffling about what to do when this reminder came back to me. I don't have to have all the answers now. I don't have to find the perfect thing now. But, what I do need to do now is something. Anything really. In our quest for financial independence there is about a 99.9% chance that we will fail by sitting around doing nothing. So, even if what we choose to do is waaay wrong, we're still likely improving our odds of success. And, what if the decisions that we make are actually decent ones? Wouldn't that change our financial fate exponentially? I know, you're waiting for the punchline that's going to be the golden ticket that we'll all invest in and be gajillionaires by this time next week. Well, that ain't going to happen. No golden ticket here. Just a friendly reminder to do something now. There is a Chinese proverb that says, "The best time to plant a tree is twenty years ago. The second best time is now." And Warren Buffett, who knows a little something about financial success, said it differently: "Someone is sitting in the shade today because someone planted a tree a long time ago." With all of these catchy phrases and sayings, who wouldn't be prompted to action? Turns out, most people. In a study published in December 2015 by marketwatch.com, 62% of Americans have less than $1,000 in their savings accounts. And, even more terrifying, 21% don't even have a savings account!
So what are we doing? We decided we would go the route of rental property. So, we jump through all the hoops at the bank...tax returns, W2s, bank statements, kidneys, first born, and a vile of Himalayan tiger blood...and got our approval. Seriously, getting money from a bank is about as invasive as outpatient surgery. But hey, this is the American Dream we're talking about here! Everything is good to go and then the house we were looking at went under contract and sold before we were able to make an offer. So did the next one. We're really feeling lucky now. Nothing left fitting our criteria at the moment so we decide to wait for another opportunity rather than buying something we didn't necessarily want just for the sake of buying something. In the interim I decide to take a harder look at our passive income streams and see what's working and what's not to see if there were opportunities to capitalize on what we were already doing. And our P2P Lending account with Prosper finished 2015 averaging 8.12% for the year...not too shabby in the midst of a relatively volatile market at the moment. So I decided to feed the machine a little more and set up recurring deposits every month in order to automate both our savings rate as well as increase that passive income stream. We decided that the best way for our family to move closer towards financial independence was to dial up the heat in small increments over time. It would sting a bit to dump a significant amount of money into a rental property with a break even point many years down the road. But, making small, incremental investments each month with the opportunity to watch the return every single month is an encouraging way to grow savings and generate income at the same time. Not only is it fun to track (for those of us who like to spend quality time with our spreadsheets at least) but it's motivating and helps us want to save even more since the growth seems almost tangible.
What about you? What are some of the ways that you've found to boost your own savings and investments? Have you had any experiences, good, bad, or indifferent, with other strategies along the way? Send me a message or comment below to keep the conversation going.
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Jefferson
If you really want financial freedom, buy rental property debt free. Rental property is a great investment, but not when it is encumbered by debt.
ReplyDeleteThink about it, if you buy a rental property with a mortgage and you have to pay $400 per month and you can rent it out for $500 per month, you are only making $1,200 per year, which is not enough to move the needle.
It is also not enough to replace the heat pump when it goes bad, or replace the roof, or fix the plumbing, though it might be enough after a year to replace the hot water heater. But even then,you have to survive the first year to have that much. And you have to have renters that pay their rent. Then you should calculate attorney's fees and costs for your unlawful detainer actions and then you have to clean up the complete wreck that the renters caused because they were being evicted. You should also calculate the time it takes you to manage this property. All of this is just theory if your renters default, refuse to leave, and when they do leave, they leave a mess.
On the other hand, if you had no debt, an emergency fund in place, and you can rent out the same house for $500 per month, you are earring $6,000 per year. Now you are starting to move the needle.
This all revolves around your debt tolerance. If you think debt is good and a tool that rich people use to build wealth, then you might do this. You might succeed, or you might crash and burn. There is a reason 75% of millionaires say that to become a millionaire you should get out of debt and stay out of debt. Maybe you can make it to that 25%, but the odds are better making it to the 75%. You know my position: the borrower is slave to the lender and I have decided to not owe anything to anyone but to love my neighbor, as Paul writes in Romans 12:8. Why else do you think the bank wants your kidneys, your firstborn, and a vile of Himalayan tiger blood?
I hope to own rental property someday too, but I'm going to wait until I can afford it debt free.
As always, you bring up some great points. And, while I know it won't change your position I'll shed a little more light on what our plan was going into the rental investment for others reading. We were planning to put half down so that the principal, interest, taxes, insurance, management fee, additional principal, and our own self-insuring contingency fund would be more than covered by the potential rental income. Also, as someone who likes to plan for the unexpected, we would also have set aside an entire year's worth of mortgage payments should any of the scenarios you mentioned actually occur. Thanks for the feedback too!
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