Have you seen the commercials (below) where individuals are walking around town with “Their Number” (tucked under their arm)? The numbers are intended to be financial security and ranged from $1.0M – $2.0M. The basic meaning of the commercial is once you achieve “Your Number” you are good to go because you are financially secure.
I think this commercial is extremely effective at getting individuals to think about their finances. However, I believe it is logically flawed in many ways, and it annoys me that people fall for this hocus-pocus financial planning.
My first issue is with the basic premise of the commercial, which focuses on “Net Worth“. Your goal as a buy and hold real estate investor is not some “Magic Net Worth Calculation”. In fact, as a buy-and-hold investor, I believe the net worth calculation is worthless except at cocktail parties or while bragging to friends and family.
If you are a buy-and-hold real estate investor, you need to ignore net worth calculations and simply focus on monthly cash flow. Note: I am not talking about spreadsheet cash flow, but real cash flow with which you can pay bills, take expensive trips, and buy toys if you choose to. In other words, spreadsheet cash flow doesn’t count; it has to be real money produced in the real world.
Summary: Focus on Cash Flow NOT Net Worth
My next issue with this commercial is the concept that you need north of a million dollars. Most people see a million dollars and think, “wow, that would be so cool,” or, “maybe if I had a million dollars I would be set.” Unfortunately, the next thought tends to be, “I will never get there and thus I will live for today and not plan for the future.”
Instead of targeting a goal that seems so far out of reach, real estate investors would be much better off focusing on calculating their monthly spending to maintain or exceed their current standard of living. Depending on the person, this could be anywhere from $2K to $20K a month.
Your number is your number and there are no wrong answers.
Ask yourself, “Is it easier to think about $1,000,000 or $5,000?” I suspect that if most people sat down and really looked at the minimum number of monthly cash flow required to maintain their lifestyles, they would be shocked. The number you calculate may either exceed or fail to meet your expectations, but one way or another you will be shocked, and I propose that knowing is better than not knowing.
I suggest you sit down somewhere quiet and really think about the minimum number you need from cash flow real estate (or other investments) to survive month-to-month without working for someone else. Remember, if you rely on real estate income/ cash flow rather than a steady job, your expenses will drop in some areas and you will spend money in other areas.
If you are in a relationship, I suggest you share this exercise with your significant other to ensure you are working together and agree on the math behind the minimum number.
Once you have the minimum number, you are good to go. It is up to you where you want to take this number. For example, if you take your minimum number and multiply by two or three, your life will be pretty sweet.
Summary: Think about Monthly Cash Flow Needs and Not a $1,000,000-$2,000,000 as it is easier to focus on and achieve.
My final issue with the commercial goes back to the unstated subtext, which went something like this: “Give us your money and we will take care of you.” Seriously, that is what they want you to do. In retrospect, this actually might be good advice for the average investor, but I don’t like being average.
I suggest focusing on activities that you can control and that you can decide are good ideas, instead of hoping some third party you have never met, has your back.
Both active and passive real estate investing takes work and it is your job to learn the market, establish relationships, and ensure you are producing monthly cash flow off which to live.
In closing, I want to ask each of you one question:
What is the monthly minimum number you need your cash flow real estate to produce in order to live financially free?
I look forward to your responses.
Good InvestingFinancial Planning & Real Estate Investing: What is your Number? by Michael Zuber