When Did Financial Freedom Become So Expensive? Part II
First things first.
Let's forget about the financial part of financial freedom for a moment and delve further into what actual freedom is, or what it feels like.
I am sure that many of you think you know, but I guarantee you have forgotten the feeling.
I realized this for myself when I was watching my son play at the park and I couldn't help but feeling enamored not only by the joy he was experiencing, but more because he was experiencing it in such an undistracted way.
It's probably been a long time for many of us since we've been able to go out to dinner during the week and not think about work, or go on vacation and not think about our financial lives; probably because we are thinking about how we can have the money to make our lives more like the vacation.
So, in a nutshell the concept I am trying to propose is "joy without distraction".
When is the last time you felt this for longer than a few hours at a time? This single concept made me think from a financial perspective how a successful, active adult of any age could experience a life full of joy without distraction.
One of the main conclusions is that having enough predictable passive income to take care of your day to day life, extracurricular activities you desire, and the ability to add to your principal to keep up with inflation gets us to financial freedom and the ability to maintain it on an ongoing basis.
If this is starting to sound like joy without distraction then the next step is finding out how to get it? (Assuming that an individual must be responsible enough to know how much it costs them to maintain their lifestyle) The following rules are a good start to making this happen: 1.
Double digit returns 2.
Capital preservation through diversification and asset backed investing 3.
Having every available dollar working for you - something I call the "Hotel Theory" The 1 rule is pretty straight forward, but to illustrate more clearly let's go back to the same million dollars we were discussing in Part I and put it through the rigors of the three rules.
If you had $1million earning 10% instead of 6.
6%, the annual result would be $100,000 or $33,000 more than a 6.
6% annual return would yield.
Take a federal tax rate of 25% and a low state income tax rate of 3% and now you have $72,000.
If you take the true rate of inflation at 9.
5 % this leaves you with a net $65,880.
So far, does a net $5,450 per month compared with $3,620, which is an extra $1,830 each month, sound a little closer to financial freedom? All of this income sounds great, but again we only get the "joy without distraction" if that income is predictably constant.
To keep it constant we need to follow the 2nd rule very closely.
We could really get excessive with the double digit returns and want to make investments that promise upwards of a 15% to 20% return, but many times capital preservation is compromised.
Investing in asset backed investments that are diversified is one of the better ways to help ensure your capital is not lost.
Most investors realize the importance of not putting all your eggs in one basket, and diversification should be part of any plan.
In addition, if an investment is asset backed, in the long run there is something tangible behind the investment to liquidate for principal recoupment.
In short, big returns are great, but not at the cost of our principal investment.
The 3rd rule is something I call the "Hotel Theory".
In the hotel industry, it is common knowledge that if the rooms aren't rented for a night you can never get that night back again, and hence you can never recover the lost revenue.
Time can be a hotel's worst enemy, and the hotel sales model is not like a normal product model where you always have another day to sell; every night of vacancy is lost income.
Much like a hotel, if your money is not always in something that is producing a return, then that time is not recoverable.
So, to follow the hotel theory, all cash should be sitting in something that is earning returns at all times.
It sounds simple but perform a quick litmus test on all of your accounts and see if every dollar you have is earning a return at this moment.
As elementary as this test might be, I'm willing to bet you'll be surprised by how much idle cash is sitting around.
If you have worked your whole life to come up with the nest egg to provide the passive income necessary for financial freedom, then you need to protect it.
Creating plenty of predictable passive income that doesn't affect financial freedom negatively, but has all of your nest egg constantly working for you is the solution.
The factors affecting There are many alternative investments out in the world today that provide all of the rules above, and they are becoming more and more accessible.
In fact, alternative investments are seeing unprecedented inflows of investment dollars, probably due to a rough first half of the year for the stock market and the unpredictability going forward.
An investment plan that is based on the hope that inflation will cease and the world will not continue to change is not a plan at all.
Prudent planning with a healthy degree of caution is the path to finding the type of freedom that will provide the ever important joy without distraction.
Let's forget about the financial part of financial freedom for a moment and delve further into what actual freedom is, or what it feels like.
I am sure that many of you think you know, but I guarantee you have forgotten the feeling.
I realized this for myself when I was watching my son play at the park and I couldn't help but feeling enamored not only by the joy he was experiencing, but more because he was experiencing it in such an undistracted way.
It's probably been a long time for many of us since we've been able to go out to dinner during the week and not think about work, or go on vacation and not think about our financial lives; probably because we are thinking about how we can have the money to make our lives more like the vacation.
So, in a nutshell the concept I am trying to propose is "joy without distraction".
When is the last time you felt this for longer than a few hours at a time? This single concept made me think from a financial perspective how a successful, active adult of any age could experience a life full of joy without distraction.
One of the main conclusions is that having enough predictable passive income to take care of your day to day life, extracurricular activities you desire, and the ability to add to your principal to keep up with inflation gets us to financial freedom and the ability to maintain it on an ongoing basis.
If this is starting to sound like joy without distraction then the next step is finding out how to get it? (Assuming that an individual must be responsible enough to know how much it costs them to maintain their lifestyle) The following rules are a good start to making this happen: 1.
Double digit returns 2.
Capital preservation through diversification and asset backed investing 3.
Having every available dollar working for you - something I call the "Hotel Theory" The 1 rule is pretty straight forward, but to illustrate more clearly let's go back to the same million dollars we were discussing in Part I and put it through the rigors of the three rules.
If you had $1million earning 10% instead of 6.
6%, the annual result would be $100,000 or $33,000 more than a 6.
6% annual return would yield.
Take a federal tax rate of 25% and a low state income tax rate of 3% and now you have $72,000.
If you take the true rate of inflation at 9.
5 % this leaves you with a net $65,880.
So far, does a net $5,450 per month compared with $3,620, which is an extra $1,830 each month, sound a little closer to financial freedom? All of this income sounds great, but again we only get the "joy without distraction" if that income is predictably constant.
To keep it constant we need to follow the 2nd rule very closely.
We could really get excessive with the double digit returns and want to make investments that promise upwards of a 15% to 20% return, but many times capital preservation is compromised.
Investing in asset backed investments that are diversified is one of the better ways to help ensure your capital is not lost.
Most investors realize the importance of not putting all your eggs in one basket, and diversification should be part of any plan.
In addition, if an investment is asset backed, in the long run there is something tangible behind the investment to liquidate for principal recoupment.
In short, big returns are great, but not at the cost of our principal investment.
The 3rd rule is something I call the "Hotel Theory".
In the hotel industry, it is common knowledge that if the rooms aren't rented for a night you can never get that night back again, and hence you can never recover the lost revenue.
Time can be a hotel's worst enemy, and the hotel sales model is not like a normal product model where you always have another day to sell; every night of vacancy is lost income.
Much like a hotel, if your money is not always in something that is producing a return, then that time is not recoverable.
So, to follow the hotel theory, all cash should be sitting in something that is earning returns at all times.
It sounds simple but perform a quick litmus test on all of your accounts and see if every dollar you have is earning a return at this moment.
As elementary as this test might be, I'm willing to bet you'll be surprised by how much idle cash is sitting around.
If you have worked your whole life to come up with the nest egg to provide the passive income necessary for financial freedom, then you need to protect it.
Creating plenty of predictable passive income that doesn't affect financial freedom negatively, but has all of your nest egg constantly working for you is the solution.
The factors affecting There are many alternative investments out in the world today that provide all of the rules above, and they are becoming more and more accessible.
In fact, alternative investments are seeing unprecedented inflows of investment dollars, probably due to a rough first half of the year for the stock market and the unpredictability going forward.
An investment plan that is based on the hope that inflation will cease and the world will not continue to change is not a plan at all.
Prudent planning with a healthy degree of caution is the path to finding the type of freedom that will provide the ever important joy without distraction.
Source...