Today’s post comes from Dominic, the Gen Y Finance Guy. Gen Y is one of the blogger who I’ve been fortunate enough to meet in person. At the end of 2015 in San Diego, Gen Y and I discussed plans to take over the world. Not really. Well, maybe…
Gen Y won’t need my help in his world domination plans. He’s a sharp guy who works his ass off. He has multi-million dollar dreams that I’m confident he’ll easily pull off.
I agree with almost everything Gen Y has to say. One thing I’d nitpick just a little is his statement that you need passive income to be FI. I may be in the minority, but I have no issue selling small amounts of assets very slowly to support my post-work days. In any case, this is a small nuance and if that is one of the only things that we disagree on, life is good. I’m on your side Gen Y. Please remember that when you do in fact, take over the world.
And don’t worry about the dinosaur collection (or lack of it). I’ll hook you up next time I’m in town…
Who wants to be a millionaire? Come on…don’t be shy, raise your hand.
Mr. 1500…please put your hands down (yes both of them), you’ve already been inducted to the all coveted double comma club more times than some people can count. And yes, we know…You get to put $55,000/year into your Solo 401K, and we’re all a little bit jealous (of your dinosaur collection?), or at least I am.
Look folks, reaching Financial Independence and Building Wealth is not that hard (or at least it doesn’t have to be). You don’t even have to be that smart. These days that most people would feel pretty wealthy and financially independent with $1M bucks (at least that’s the way it seems). Of course everyone has a number that’s unique to them. However, the mechanics of getting to your NUMBER remain constant. This post won’t spend much time figuring out what the right number is for you, instead it will cover 10 solid principals that if followed will help you reach your number, and thus FI in much less time than the “get rich slow” guys preach.
That’s not to say that there is anything wrong with the “get rich slow” approach, rather this is just the other side of the coin that isn’t talked about enough.
Before we get knee deep into the main content, we should probably agree on a few definitions and assumptions.
Financial Independence (FI): is reached when your wealth can generate enough passive income to support your lifestyle. Some would distinguish Financial Freedom as the point at which your wealth is generating more income than you spend. I will let you draw the line. I tend to think and use them synonymously (as you will read below).
Building Wealth: goes hand in hand with reaching FI. Unless you win the lottery or inherit your wealth you really can’t separate the two. Which if your plan is based on winning the lottery or inheriting your great uncle Scrooges fortune, this post probably isn’t for you.
From my vantage point there are two ways to become wealthy:
1 – The Slow Way = “Get Rich Slow”
OR
2 – The Fast Way = “Get Rich Fast” (not to be mistaken with “Get Rich Quick.”
Notice I didn’t say “Get Rich Quick.” It’s a subtle change in words, but there’s a big difference. No, this is not another “Get Rich Quick” scam. I love a good scam as much as the next person, but we have some real solid material to cover on building wealth and reaching FI.
Most people don’t want to live below their means in order to reach FINANCIAL FREEDOM because that’s painful. They think it involves cutting out all the joy in life.
You know what I’m talking about, those financial gurus that tell you that in order to get rich you need to cut out the $4 lattes and stop eating out. Then after 40 years of diligent and above average savings and super low spending, you will be a millionaire. Basically, you have to live like a college student and suppress all the things you want to do in life and then, when you’re old, you will be rich (MAYBE).
Okay, that doesn’t sound like the plan for me either!!!
The good news is there is another way.
Which one do you prefer? This kind of seems like a no brainier question right? Our natural unfiltered response is likely “The Fast Way.” As my grandfather would say “we want to get there immediately, if not sooner.” There is no right or wrong answer and you may come to find out that “The Slow Way” is the right choice for you, and there is nothing wrong with that.
Before you answer, you need to know that “The Fast Way” is going to require more HUSTLE, DISCIPLINE, and FOCUS.
YOU need to ask yourself if you are willing to pay the price to ACHIEVE substantial wealth in 10-20 years instead of 40 years plus. Are you willing to be a non-conformist and go against the crowd?
Are you willing to live your life like most won’t for a couple years, so that you can live the rest of your life like most can’t?
If your answer is YES, here are the 10 guidelines that will allow you to reach financial freedom in 10-20 years:
When you start with nothing, or something much closer to nothing than that of a million bucks, things get pretty daunting. Don’t be intimidated, I truly believe that anyone can reach financial freedom, but only if you’re willing to do things differently (10 things specifically).
Whether you want to build a $1M Freedom Fund or a $10M Freedom Fund (like my $10M goal), below are the 10 principals that will ensure you arrive at your ultimate destination in 20 years or less. Rest assured, I practice what I preach, as these are the same guiding principles I am using to build my own wealth and ultimately reach FI.
The Tenacious Ten
1 – Spend Less Than You Earn and Invest the Difference Wisely
The reality is that if you want to build wealth and ultimately reach FI, you will need to create a gap between what you earn and what you spend. This is the most fundamental of fundamental truths. But it doesn’t stop there, you then need to invest the difference wisely. A little common sense will go a long way (see #10 below).
This is where most financial gurus would jump in and tell you to live below your means by living like a college student. Not me! Yes, you have to live below your means, but you have two ways to do it. Extreme frugality is one way. However, the way I am an advocate for is living below your means by expanding them. One way to live below your means by expanding them is to buy a house in a lower cost of living area and spending half of what the bank says you can afford like number 5 advocates below. Another way is to spend more effort on increasing your income than you do on reducing your expenses like number 7 advocates below.
The reality is that there is a natural floor to the amount you can save from cutting expenses, yet no limit on the amount of money you can earn.
2 – Avoid Consumer Debt at All Costs. Never Carry a Credit Card Balance
Don’t fall into the trap of spending future earnings. It will be impossible for you to create a surplus and be compliant with #1 above if you allow yourself to rack up credit card debt. This is not to say you should not have or use a credit card. I personally use a credit card to pay for almost every single purchase in my life. However, I never spend more than I can afford to pay in full every month. This method allows you to take advantage of rewards (i.e. get paid to spend what you were already going to spend anyways) and also provides additional protection on purchases.
Learn the difference between good debt and bad debt. Good debt is productive debt that either makes you money or saves you money. Bad debt not only takes money out of your pocket but buys things that depreciate in value (think cars, boats, cloths, electronics, etc).
3 – Maximize Tax Deferral to Pay the Least Amount of Taxes Legally Permitted
Don’t underestimate the power of tax deferral. Your goal should be to defer taxes on as much of your income as you can.
The first way to do this is to max out tax advantaged accounts like the 410K, IRA, HSA, etc. This one is a bit harder to demonstrate in an already lengthy post due to vastly different variables for each individual (maybe a future guest post). However, the other way that can defer taxes is by holding investments for the long term (or at least longer than a year). Below is a comparison of 3 different scenarios to convey the power of tax deferral:
Looking at the table above you can see over just a 1 year holding period tax deferral makes a huge difference when it comes to your compounded return (12.8% vs. 9.6%). It’s mostly due to the fact that investments held for a year or longer are taxed at more favorable capital gains rates vs. ordinary income. In all 3 scenarios above there was $500,000 invested. Over a 1 year period the gap is more than $400K. And over 10 years that gap grows to over $540K with a return of 13.6% vs. 9.6%.
Another way to defer taxes is talked about specifically in number 8 below, taking advantage of depreciation on real estate investments.
4 – Aim to Save 50% or More of Your After Tax Income
It is really amazing how applicable math is in almost any endeavor. It is especially applicable when it comes to building wealth. I am very fond of the following quote:
“The path is all math.” – Ryan Blair, Nothing to Lose Everything to Gain
Here is a summary of the simple math as related to your savings rate and translated into terms of FREEDOM:
If you save 5% of your income, you can take 1 year off every time you work 19 years. [That is a lot of time to put in to bank 1 year of freedom]
If you save 10% of your income, you can take 1 year off every time you work 9 years.
If you save 20% of your income, you can take 1 year off every time you work 4 years.
If you save 30% of your income, you can take 1 year off every time you work 2 years and 4 months.
If you save 40% of your income, you can take 1 year off every time you work 1 years and 6 months.
If you save 50% of your income, you can take 1 year off every time you work 1 year. [Where the GYFG house is currently at. I could see us between 50-60% long-term]
If you save 60% of your income, you can take 1 year and 6 months off every time you work 1 year.
If you save 70% of your income, you can take 2 years and 4 months off every time you work 1 year.
If you save 80% of your income, you can take 4 years off every time you work 1 year.
If you save 90% of your income, you can take 9 years off every time you work 1 year. [This seems pretty out of reach and extreme to me. I want to be able to have $200K/year of living/travel/fun expenses. This would imply a $2M after tax income and likely a $4M gross income assuming a 50% tax rate]
Now keep in mind that this doesn’t take into account any investment returns, but instead is to simply show you how powerful your savings rate can become in achieving FI. I have even touted your savings rate as the most important variable when it comes to rapid wealth building.
5 – Buy a House that is Half the Price the Bank Says You Can Afford
Most people make the mistake of buying as much house as the bank says they can afford. However, the last thing you want is to have all your money going to service a huge mortgage, a big lifestyle, and little if any left for saving and investing. Actually, this is an area where you can strategically live a bigger lifestyle, and save a significant amount of money if you get a mortgage that is way less than you can afford.
This also allows you the ability to pay off your mortgage much sooner than the typical 30 year term. The reality is that debt is the biggest dream killer for most people. You get the big mortgage and then you’re stuck, you can’t leave the job you hate. I won’t get into the argument of whether it makes financial sense to pay off your mortgage or not (which I am a big fan of), but I ask you to imagine life and the choices you could make without a mortgage hanging over your head?
Personally, my wife and I were approved for a $750,000 mortgage, but ended up taking one that was less than half ($355,000). Today the mortgage payment accounts for less than 15% of our gross income, and we are actually in year 2 of a 7 year plan to pay it off completely.
6 – Learn Two Basic Investment Strategies with Options
The covered call and short put. Use these strategies to invest in index ETF’s and Dividend paying stocks. They are a great vehicle to invest at significant discounts to market prices (i.e think Warren Buffett margin of safety). They can actually be used to reduce your risk, contrary to what the financial media would have you believe. My favorite feature is that they give you more than one way to profit!
If you want to read more about these strategies and how you might use them in your own portfolio, I have created a PDF of a guest post I wrote for Financial Samurai that you can download here.
7 – Focus 80% of your efforts on increasing your income.
Start a business, even if it is just a side hustle. I believe everyone should have a side hustle at all times, if only for the tax benefits. But there are also some awesome ways to earn extra money. In 2014 after learning about digital analytics and digital marketing for a job I was trying to get with the company I was working for at the time, I moonlighted by offering consulting services in this area and earned $100/hour (to learn and gain experience), and earned an extra $18,000 all in my spare time.
Rent out a room in your house. If you follow principal number 5 and buy a house that is less than you can afford and you happen to do it in an area where the cost of living is very cheap, you could strategically over buy in size (not price), in order to create excess capacity you could then rent out. That is exactly what my wife and I did. We have been consistently collecting $400 – $600 a month since we bought our 3,300 sqft house (which is way more house than any two people need).
Learn new skill sets that will make you more valuable in your career. I witness way too many people that stop learning once they are done with school (thus # 9 below), you always need to be refining and retooling. Don’t ever become content with your skill set. The reality is that the ladder to the top is never crowded because most people are never willing to pay the price (do the work) to climb the latter in the first place. The mistake I see most people make, even if they do learn new skill sets, is they never ask for what they have earned. Don’t ever rely on someone else to take care of you and your future. No one cares about your future more than you do. Ask for the raise!
Remember that you will never get what you don’t ask for. Sometimes you may find yourself in fortunate circumstances where you are taken care of without asking. Don’t settle for annual 2-3% cost of living adjustments. I would rather get a kick in the nuts. People that ask for more money, MAKE MORE MONEY!
The internet and the times we live in have made it easier than any other time in history to make money. You really have no excuse.
8 – Invest in Cash Flow Positive Real Estate. Take Advantage of Depreciation (people tend to miss this aspect of rental real estate)
Rental real estate is a great vehicle to build wealth. It is actually a much more dynamic asset class than most people realize and another great vehicle for deferring taxes due to the ability to depreciate the value of the property. You can actually have a scenario where most if not all of your positive cash flow is tax free. And you get the added benefit of being able to sell properties via a 1031 exchange without paying any taxes on profits due to appreciation as well. My buddy Brian over at Rental Mindset has actually already done a fantastic job describing the 5 dynamics of rental real estate (check it out if you have time).
9 – Never Stop Learning
The day you stop learning is the day you stop moving forward. The perpetual student will always have the knowledge edge.
Enough said!
10 – Run from Investments that Sound Too Good to Be True
If I have learned anything from the blunder of financial mistakes that I have made, it’s that if it sounds too good to be true….it is! Turn around and run the other way!!!
Summary
Remember, these are principals that you can grow into and work towards. It doesn’t matter where you are financially in your life right now. We all have to start somewhere.
I hope this post inspires and motivates you to action. Don’t take a passive role in your finances and hope for the best. Hope is not a strategy.
“If you don’t plan your future, somebody else will. And you know what they have planned for you? NOT MUCH!” – Jim Rohn
You have to be intentional with your finances if you ever want a fighting chance to make it to financial freedom. It doesn’t have to take 40-50 years of slaving away for the man before you have the option to retire. I personally think that 10-20 years is really all you need, and for the folks that are more aggressive (i.e. extremely frugal, not me) or very high earners you can probably reach financial independence in 10 years or less (maybe me, it’s yet to be seen but income is my focus vs. expenses).
I am looking forward to chatting with you all in the comments below.
Cheers!
Thanks Dominic for the guest post today!
Be sure to follow him over at:
- Blog: Gen Y Finance Guy
- Twitter: @GetYFinanceGuy
In the meantime, I’ll be trying to stay ahead of Gen Y in the net worth column for as long as possible. Here is the current score:
- Gen Y: $363,000
- Me: $1,350,000
He’ll blow past me some day and that’s OK, as long as I get an invite to the vacation home on Maui. I wouldn’t turn down a ride in Gen Y 1 either (this is like Air Force 1, only Gen Y’s ride).
Join the 10s who have signed up already!
Subscribing will improve your life in incredible ways*.
*Only if your life is pretty bad to begin with.
Thanks for all these great tips. I’m a personal fan of 3-5, 7, 9 & 10…so basically all of them.
One of the disadvantages from talking with people about frugality is the focus on ONLY frugality. When frugality is used in combination with a vigorous work ethic to finding ways to expand income (shifting again from get rich slowly to ‘get rich fast,’ and not ‘quick,’ as you put it), the results can be incredible.
Another advantage to the path you recommend is that it still takes years so it naturally tests patience. I am just now starting on this path and I’m optimistic that the reason it is possible is because many people don’t have the patience to stick with something that isn’t producing immediate results.
Distilled Dollar recently posted…Health and Taxes: What’s an HSA Anyway?
Spot on Distilled Dollar.
I like to liken the FI path to that of an exponential curve. In the beginning (first couple of years) progress seems very slow and arduous. There appears to be little difference between progress and no progress.
That is until you hit the elbow of the curve and then results seem like the came overnight. Compound effort (like compound interest) is a magical force in the universe.
Income + Consistency + Time + Discipline = Financial Independence
Gen Y Finance Guy recently posted…Net Worth Conversion Ratio – A Measure of Wealth Building Efficiency
BTW, if you haven’t read it yet, I highly recommend the book “The Slight Edge,” by Jeff Olson.
http://www.amzn.to/1Mm6i8p
Gen Y Finance Guy recently posted…Net Worth Conversion Ratio – A Measure of Wealth Building Efficiency
Thanks for the recommendation. I’ve added it to my list.
I couldn’t agree more that once you get the momentum going you start to see big returns overnight. It reminds me of a quote, “it took you ten years to become an overnight success”.
I actually expanded a bit on this principle in my latest post about the four phases of FI. Consistency & Discipline over time defiantly lead to great things.
Distilled Dollar recently posted…Four Phases of Financial Independence
Another awesome blogger! These are great tips and I like GYFG’s writing style. Happy to see I am doing most of these (I’m an old lady compared to you guys…I’m a Gen X Finance Chick ;)… I could beef up on #s 6 and 8.
Bookmarked this site. TY, Mr 1500 & GenY FG 🙂
Lady FruFru recently posted…Are you making this essential investment?
Hi Lady FruFru – Glad you enjoyed the piece. I don’t tend to think of myself as a writer, and am always surprised when people say they like my writing style.
But I am never shy to accept a compliment…so thank you very much!
Thanks for taking the time to read and comment. Hope to see you around!
Gen Y Finance Guy recently posted…Net Worth Conversion Ratio – A Measure of Wealth Building Efficiency
I haven’t really gotten into side income. I do get decent raises at my work, I gave them an income goal 3 years ago($60k I think) that I just about passed a little while ago($66k after expected bonus’s this year). During a review with the owners(tiny company) I slid into conversation $80k+ being my new goal. The company is changing directions a bit, but if this year goes as well as we all hope, there should be some sweet bonus’s and a nice raise next year.
Businesses likely don’t want to lose you, they play these games where they want to pay you as little as they can get away with. If you’re shy about asking for a raise it often doesn’t take long before you end up with opportunities to make a lot more money at another company.
Paying off the mortgage has been something I’ve thought about back and forth. On the one hand I need maybe $600k to retire on my current expenses, on the other hand my mortgage is decently small and I could knock it out pretty quick(with a massive mental win a expense drop) and realistically need maybe half($300k) to retire(cheap living expenses over here). At 3.75% I’ve been taking the tax benefit and investing the extra cash for now.
Kyle recently posted…Theory of Savers and Spenders: Why Your Financial Advice is Ignored
Hey Kyle – kudos be taking an active role in increasing your compensation. Most people make the mistake of letting their bosses and the companies they work for determine how much they are paid.
Those that ask for more money…make more money.
I recently coached a friend who was being paid 30-40% below market. She is a wicked smart chick. During her last review she got a small 3% raise and was very unhappy…her plan was going to be to ask for half of what she was worth with respect to an increase.
After speaking and prepping her she went in and asked for the full 40% increase…and she got the entire raise.
Your get 0% of the things you don’t ask for.
Don’t get me wrong, she had earned and was worth every penny. You need to be justified and realistic in your request. But as long as you can prove the value, you need to ask.
Gen Y Finance Guy recently posted…Net Worth Conversion Ratio – A Measure of Wealth Building Efficiency
Someone once told me “FI is simple, but not easy.” If it were easy, everyone would be doing it. Only those of us with gumption and grit stick it out and win the prize!
Gwen recently posted…Ding Dong the Duplex Deal is Dead
Love it “only those of us with gumption and grit stick it out and win the prize!”
And the prize?
A lifetime full of options. To live life the way it was meant…intentionally!
Jim Rohn was famous for saying “If you don’t design your own life plan, chances are you’ll fall into someone else’s plan. And guess what they have planned for you? Not much.”
The pursuit of FI is really one big course in lifestyle design!!!
Gen Y Finance Guy recently posted…Net Worth Conversion Ratio – A Measure of Wealth Building Efficiency
Great list! I like to keep things simple as possible. I’m just happier that way when I know I don’t have to keep an eye on things. That’s why 6 and 8 aren’t really for me (at least yet). I am a big advocate of increasing your income though, while concentrating on being at least decently frugal 🙂
Fervent Finance recently posted…I’m Tired of Hearing How Bad Millennials Have It
FF – You know Leonardo da Vinci said “simplification is the ultimate sohpistication,” so you are probably on to something.
Then Albert Einstein said “everything should be made as simple as possible, but not simpler.”
I like the way you roll.
Gen Y Finance Guy recently posted…Net Worth Conversion Ratio – A Measure of Wealth Building Efficiency
Leonardo also knew how to spell better than me…
Sohpistication should be SOPHISTICATION!
Never said I was the sharpest tool in the shed.
Gen Y Finance Guy recently posted…Net Worth Conversion Ratio – A Measure of Wealth Building Efficiency
Is it just me? Item #3 references a table I can’t see. Am I missing it?
I can’t see the table either. I thought it was the browser so I switched from Chrome to IE, but alas no.
Mattattack recently posted…A late review of 2015: Spending
Mr. 1500 – When you are done playing with your dinosaurs (come on, don’t deny it), maybe you can upload the table above?
Gen Y Finance Guy recently posted…Net Worth Conversion Ratio – A Measure of Wealth Building Efficiency
Mr. 1500 – thank your for the opportunity to steal the spotlight on your blog on this glorious Wednesday!
I really like how you integrated some of the catoons from my site…and the captions too.
What do you mean when you say you don’t agree with everything I say??? As the wise Yoda would say “Agree with me you will!”
All joking aside, that is what makes this space so awesome, is the diversity of each PF blogger. You get some overlap and then you get some unique beliefs and views.
If there is one thing I have learned in PF, it’s that there are few absolutes…the best answer is almost always “it depends.”
Think of the PF space as an all you can eat buffett where you get to pick and choose the different elements that works for you as an individual. None of us are here to say that it’s our way or the highway. We are hear to get you thinking…to get you motivated…to move you to action.
Again, I really appreciate the opportunity to connect with your awesome community.
Cheers,
Dom
Gen Y Finance Guy recently posted…Net Worth Conversion Ratio – A Measure of Wealth Building Efficiency
Dom thanks for the shout out!
I dabbled in the stock market ~8 years ago, learning about options, but haven’t touched it in a long time. You might motivate me to get back into it…
Do you self-direct your retirement accounts to do option investing? Or is it more of a discretionary separate account you have?
Brian – Rental Mindset recently posted…Is Effort Your Advantage in Investing?
Hey Brian – Love that I could give you a shout out!
I only use options in all of my brokerage accounts. In my opinion, investing in equities without options, is a lot like buying a rental with no income (ignoring the dividend).
With options I have the ability to collect rent on my investments 🙂
Dom
Now you’re speaking my language!
Brian – Rental Mindset recently posted…Is Effort Your Advantage in Investing?
Sweet article genY…. I took every category and scored myself on a scale of 0-10 (10 being the best). I also wrote out strengths and weaknesses in each area to help myself improve. I only got a 60%…but I now know what I need to work on! I recommend everyone do it….only took me 1/2 hour and gave me a solid plan to improve my financial state.
Glad you liked it Clint!
Remember that 60% is only a baseline…now you have something to improve from. I am a big fan of measurement. I always tell people that they manage what gets measured and you can’t optimize what you don’t measure.
Cheers!
Gen Y Finance Guy recently posted…Net Worth Conversion Ratio – A Measure of Wealth Building Efficiency
A big shout out for pointing out that one needs to invest the difference between earning and expenditures wisely. And the example you have come up with also sounds doable.. 🙂
“Maximize Tax Deferral to Pay the Least Amount of Taxes Legally Permitted” — is by far my favorite. The more I learn about taxes, especially from FI/RE folks, it keeps changing my strategy. What are your thoughts about bucking estimated quarterly taxes and paying the (paltry) penalty at the end of the year so that you can be investing and earning all year?
Broke Millennial recently posted…Should You Tell Your Friends Your Financial Picture?
Broke Millennial – I would not recommend that strategy. I believe the penalty is 10%, which is a pretty large hurdle rate.
Instead try to get more exact on your tax calculations so that you don’t overpay and maybe slightly underpay, but pay enough to avoid penalty.
You can consult the IRS rules to figure out the boundaries on this. I think it says that to avoid penalty you need to pay 90% of your current tax year liability or 100% of your prior year’s liability to be in the clear. There may even be a freebie the first time you underpay.
But you should find out for sure and avoid the penalty.
Gen Y Finance Guy recently posted…Net Worth Conversion Ratio – A Measure of Wealth Building Efficiency
Unfortunately, I have debt which is impeding my journey to FI. Because of the low-interest rate I am focused more on saving for retirement, although if the debt was gone I could save even more. It is hard to give up those tax-advantaged savings even for a little while. So I might have to be a hybrid between get rich slow and fast.
Jason recently posted…Home Refinancing Update
Great list. I need a pep talk on #7 – thanks!
Our investment property is in that sweet spot where it is cash flow positive but because of the depreciation schedule we don’t pay tax on that income, but this will change soon.
These are great tips. I would like to apply them someday and get my big target. thanks for sharing this useful post, i’d love it. hope you will always give us next brilliant post.
A great post and some really useful tips – thanks!
We’re about 2 years off achieving FIRE. Many talk about how to increase passive income at this point. But we also plan to make our passive income stretch further by doing a couple of things:
Housesitting – we get to stay in great places for free, so our only outgoings are food and fun!
Workaway – bartering our time and labour in exchange for food and accommodation. In our case we’re interested in helping those who are creating organic farms or eco-communities. We get to meet loads of different people, learn new languages and share ideas.
So I thought it worth mentioning that making your passive income stretch further is also a useful strategy.
Paul
Thanks for adding to the conversation Paul!
And congrats on being so close to FIRE!!!
Gen Y Finance Guy recently posted…Rant #7 – You Can’t Force a Horse to Drink
Thanks for an interesting post. Great ideas! The one I’m missing is selling options.
Problem I have is that none of my ETFs have options available – I’m based in Switzerland and prefer CHF traded products to avoid exchange rate risk.
This raises two questions for me (that I intend to answer with some research):
1. Which CHF traded ETFs have option chains?
2. What’s the downside of trading in USD when my cash is in CHF – what does FX exposure really mean here?
Bowthy – let us know what you find out in your research. I am not very knowledgeable in the CHF financial markets. Kind of have a home turf bias 🙂
Gen Y Finance Guy recently posted…Rant #7 – You Can’t Force a Horse to Drink
This interview was brilliant! I definitely joining the ‘double comma’ club. As a fellow real estate investor, I agree that parlaying cash into cash flowing real estate is key. Thanks again for the insightful comments.
Nice name “Life, Liberty, n’ Property”
Glad you enjoyed the post.
Gen Y Finance Guy recently posted…Rant #7 – You Can’t Force a Horse to Drink
This article is so right. I’m doing most of these point but for the moment the 50% saving is impossible to do. With a new born and my wife on parental leave, the salary took a drop.
Thanks for this interview 🙂
The Financial Tech – Remember these are all things you can build into over time. Sometimes life happens and you just work around it.
Congrats on the new born!!!
Gen Y Finance Guy recently posted…Rant #7 – You Can’t Force a Horse to Drink
Right now I get the measly 2-3% raise, but I do take those funds and invest them instead of spending it on something stupid like shoes or manicures. Also, working on blogging and other side-hustles like selling on eBay, Etsy and other freelance gigs. Plus, bank bonuses. My problem is a little bit of consumer debt. Paying off a car (next month) and then I’m holding a credit card balance (I know, I know). After that is paying of a rental property…do you consider that savings? It’ll be at 50% of my income.
Thanks for this post…it’s inspiring!
Glad you liked it Catherine!
Keep working those side-hustles!!!
Congrats on paying off the car next month. Now just tackle that consumer debt and you are well on your way to making forward progress.
Re – paying off the rental property and whether it counts as savings…Yes, I do include the amortization portion (i.e. the payments that reduce principle as savings in my calculation).
Onward & Upward!
Gen Y Finance Guy recently posted…Rant #7 – You Can’t Force a Horse to Drink
These are great, though I feel a bit queasy about #6, option investing. Not sure most laypeople should be getting into that, but to each his or her own! I really like the advice to spend half what the bank says you can afford on a house. This could be extended to lots of purchases, but for sure the house is most important. People are taught by sales people today that what they can afford = whatever room they have in their budget for a monthly payment. Sooooo wrong! and dooms one to saving little or nothing.
Hey Kurt- I’m not sure about this either. Most of the folks in my personal sphere who mess with options would have been much better off with a buy and hold strategy. In the most extreme example, a long term investor close to me who is an older guy has lost out on millions (yes with an s) with options. One example is he bragged about how he made a couple $1,000 on options with a stock. A couple decades later, if he had just bought and held, he’d be up hundreds of thousands. Trying to predict short term movements isn’t much different than gambling.
I think that GenY’s strategy with them may be a little different though. Perhaps he’ll explain or direct us to a post.
Most people use options to speculate and for the leverage that is possible. Buying options is where most people get themselves in trouble, because you have this financial instrument that decays in value ever day you own it and it doesn’t do what you want it too.
But options were originally created to reduce risk not to speculate with.
I am an advocate of selling puts and covered calls as it is a way to reduce cost basis and get long an underlying at below market prices.
Warren Buffett has even been known to sell puts as well.
Think of it this way, you would only sell a put on a stock you would not mind owning at a price that is attractive to you.
Take a look at the PDF I linked to above for some full blown examples that compares selling puts, covered calls, and outright stock purchases.
Gen Y Finance Guy recently posted…Rant #7 – You Can’t Force a Horse to Drink
So, this is interesting and I think we’re on mostly the same page:
“I am an advocate of selling puts and covered calls as it is a way to reduce cost basis and get long an underlying at below market prices.”
Covered calls though? How would you get long with that since if you’re called out, you’ve sold your investment?
Again, I need to do some research and hear more of what you have to say on the topic…
Good tips. I have to nitpick on the idea of “living below your means” though. You say you’re not interested in doing that, but rather expanding your means. However, if you’re saving 50%, for the vast majority of Americans that’s what they define as extreme frugality. So many people spend right up to or more than every dollar they get, so they’re either barely living within their means or living above their means. By definition, if you’re saving money for the future or emergencies — and certainly when you get into the savings/investing rates of 20%+ — you’re living below your means to make that happen.
What you’re saying is you would not want to live below the threshold of what you’ve determined to be your comfort zone for daily living in order to achieve financial freedom. That makes total sense. Your threshold just happens to be well below your means. The bank tells you that you can afford twice as much house as you bought. The house you got is at or above your ideal for what kind of home you should have, which is awesome. It’s also picking a house “below your means,” because you COULD afford a much pricier home.
Multimillionaire athletes and musicians go broke all the time because they don’t save and invest and live below their means. Their means are extremely high compared to most of us. Expanding your means doesn’t make you FI unless you live below them.
All this rambling is basically agreeing with your approach, but disagreeing with the idea that “living below your means” is antithetical to it. To be FI, you HAVE to live below your means, but you don’t necessarily have to live below your ideal comfort zone while you do it.
Hey Scott – Nitpicking is totally allowed my friend.
If you actually read closely I said:
“Yes, you have to live below your means, but you have two ways to do it. Extreme frugality is one way. However, the way I am an advocate for, is living below your means by expanding them.”
I totally agree with you Scott, there is no way around it, you have to live below your means (end of story). But I think were saying the same thing but with different words 🙂
If you focus on expanding your means (i.e. increasing your income, or geo arbitrage, etc.) then yes you can define what living below your means looks like in terms of lifestyle.
My point was that extreme frugality was not the only way to achieve a high savings rate.
Sorry if that wasn’t clear, but thank you for helping clarify it.
Thanks for reading!
Dom
Gen Y Finance Guy recently posted…Rant #7 – You Can’t Force a Horse to Drink
Fantastic post guys! Very clear and succinct advice to joining the double comma club sooner than later. 🙂
As you know, I agree with #7 strongly – increase your income as much and as quickly as possible.
Dom, there will come a day when I’ll be like… “I knew that guy before he was a multi-millionaire!!” Keep fightin’ the good fight my friend.
Michael @ Financially Alert recently posted…Are There Really Shortcuts to Wealth?
Thanks Michael!
You and me both on #7 🙂
To $10M & Beyond!
Gen Y Finance Guy recently posted…Rant #7 – You Can’t Force a Horse to Drink
Excellent post! Very well written and I had a great time reading it. I’m sharing this on FNM Facebook later this week:)
Financial Nirvana Mama recently posted…How to Use the Smith Manoeuvre as a Powerful Wealth Strategy in Launching your Real Estate Empire
Glad you liked it Tracy!
Thanks for sharing it with your community.
Gen Y Finance Guy recently posted…March 2016 – Detailed Financial Report #15 – Net Worth $368,985 [+16.1% for 2016 YTD]
Mr 1500 thanks for sharing GYFG guest post
Simple and straight forward info. I have missed visiting your site for awhile and glad I popped back today (You can thank Rockstar Finance for that) I’m working my hardest to increase my savings rate and the biggest thing I keep thinking about lately is selling our house and downsizing substantially. I keep dreaming that there is $100K of tied of cash sitting in our home to put into by FIRE savings.
All the above points sound very basic but often missed out. For me there is no bigger combination than savings rate + growing income to secure the future. My focus is on my primary income and try to increase it as much as possible. Alternate income plans would take time to setup but it’s good to have multiple streams. I paid off my car loan in January, hence there is additional surplus for investing.