There are so many investment options available that it can be difficult to work out what to invest in. There are many ways you can achieve financial freedom and become rich, but as each person is different it is important to find the investment strategy that works best for you.
In this post I am going to walk you through some initial questions so we can get 100% clear in your mind the outcome you want to achieve and secondly I am going to review some different investment options and analyse the pros and cons of each of them.
First, Exactly What is Your End Goal
Take me for example. My end goal is financial freedom. To me this means EXACTLY $75,000/year in passive income. This level of income will replace my wage completely and me and my family will be able to live comfortable lives without ever having to work again. That is the big milestone.
Little milestones exist along the way. Starting small is always best.
– $100/month – To prove that it can be done
– $1,000/month – Now providing me with $12,000/year to reinvest
– $1,500/month – Enough income that I could move to part time work if I wanted to
– $3,000/month – If I lost my job we could survive off this income. It would be extremely tight but we could do it
– $5,000/month – Not quite my goal but still a good income that me and my family would be fairly comfortable
– $6,250/month – My end goal. When I reach this goal I will happy quit my day job and live off my investments
What exactly is your end goal? It can be a monthly income target or it can be a set amount in cash of equity. Eg. I want to have $1,000,000 in equity. Write down your end goal now on a piece of paper and also write down your milestones.
Creating A Deadline
I was going to write creating a ‘timeline’ but it is often to hard to predict when you will achieve each individual milestone. Instead, you should set a ‘deadline’ for when you want to have achieved your end goal.
For me I would like to be financially free by the time I am 30. My children would still only be 8 and 6 (plus maybe some more little ones) and this will give me a lot of time to spend with them growing up.
What To Invest In – Weighing Up Your Options
Now it is time to weigh up your options. With a goal in place and a deadline for achieving that goal it is now simply a case of choosing the option that will help you achieve your goal within your time frame. Each option has it’s risks and rewards. So let’s delve a little more deeply into the different investment options.
Now I LOVE property so this is going to be a little bias. But I believe property (and more specifically positive cash flow property) can be one of the absolute best investment options available. However, property rewards the savvy investor and destroys the uneducated investor. When I decided what to invest in I chose property and business…just like Robert Kiyosaki recommends in his book “The CashFlow Quadrant” which I recommend everyone reads.
Pros – Ability to leverage the asset by borrowing money from the bank, capital gains can generate you huge returns, it is fairly secure as they aren’t making any more land and nationally demand tends to be outstripping supply.
Cons – You generally need a good amount of capital to get started, can be risky if you don’t know what you are doing. You have to get into a lot of debt to get started, a vacancy or increase in mortgage rates can send you cash flow negative quickly. Difficult to get your money out quickly.
For more on property check out this post
Shares can be another great investment option. If you know what you are doing you can make a killing.
Pros – Extremely liquid, you can get your money in and out of the stock market fairly quickly. A wealth of information out there about shares. You can start with as little as $500. Many different ways to invest, buy and hold, invest for dividends, short your stock, options trading, futures etc.
Cons – Can be extremely volatile, you can lose your money as fast as you make it, more difficult to leverage, less control over increasing the value of the asset.
I put this in here as investing in cash is a popular strategy, however it is unlikely to get you to financial freedom as quickly as you might like. To put it simply, getting a 4-5% return on your investment means you need to save up A LOT of money in order to achieve financial freedom.
Pros – Extremely safe as far as investments go, almost guaranteed rates of returns
Cons – Very low rate of return, due to inflation the value of money becomes less each year…thus you aren’t truly making 4% as your total pool of money is now worth less ($100 in 1912 could buy you a lot more than $100 in 2012).
Of the 4 options business by far has the most potential in terms of fast growth and achieving financial freedom quickly. However, it also involves the most amount of time and effort. Business can be a lot more complicated and you need to know exactly what to invest in to get the best return for your time and money (eg. Should you invest in marketing, product development, staffing etc)
Pros – Can get extravagant rates of return. Can become financially free extremely quickly. Can be extremely cheap to start (when starting online).
Cons – Very risky – 1/10 businesses fail in the first 5 years, Can take a lot of money to start up (brick and mortar business), takes a lot of your time (you will likely need to quit your job).
Lastly, Always Have An Exit Plan
When deciding what to invest in you should always have an exit plan. By that I mean you should have a way out. For example, your exit plan may be to buy 10 properties and then sell 5 to pay off debt and keep the remaining 5 for income. Or it could be to make money on the stock market, then sell a portion of your stocks and hold the money in the bank.
The idea of an exit plan is to have a way out, a way to ‘finish’ and then go on and enjoy the fruits of your labor. It is also a form of protection against disaster. If worst case scenario X happens here is my exit plan.
The investment option you choose is completely up to you. I have chosen to choose 2 out of the 4 investment options and even though I know there is a lot of money to be made in the share market I have decided not to invest my money there. This focus allows me to become better at investing in property and business and gives me a better return on investment. I know what to invest in, but even more importantly I know what not to invest in.