How to Achieve Financial Freedom By Calculating Your “Rat Race Number”
Do you dream of quitting your job with real estate and escaping the rate race?
If so, you’re not alone. It’s probably the main reason we’re all in real estate.
But have you ever sat down to calculate your “Rat Race Number”? This is the number that would allow you to be financially free so you can do whatever you want.
That’s what this post is about. And it has two parts:
- How to calculate your Rate Race Number, and
- How to best get there with real estate (and in your lifetime).
What is the “Rate Race Number”?
If you’re already familiar with Robert Kiyosaki’s CASHFLOW board game, then you know that the Rate Race Number is the amount of passive income you need to cover your fixed monthly expenses. Once you’ve achieved that, you are financially free and can do whatever you want (like quit your job, travel more, spend time with family, pursue non-profit aspirations, whatever).
There are two ways to achieve your Rate Race Number:
- Increase your passive income, and
- Decrease your expenses.
How to Calculate Your Rate Race Number
The process of determining your Rate Race Number is to figure out what you’re CURRENTLY spending and what you could do to decrease those expenses.
Step #1: How Much Are You Spending Currently?
The first step is to determine how much you’re currently spending.
If you’re not doing this, then start doing this right now. It’s at the core of sound personal financial management. I’ve been doing this every single month for at least seven years.
A great tool to use is Mint.com. It’s an online and mobile app that makes it extremely easy to track what you’re actually spending and prevent you from spending more than your budget allows.
If you’ve been using an app like Mint or Quicken to track your expenses, then create a monthly report that shows you how much you’re spending in each area.
If you haven’t been using a tool like that, then create a spreadsheet from ALL of your expenses in the last 6 months and assign categories to each expense.
I’m not going to describe this process in this post since I want to talk about GETTING to your number with real estate, so I’m going to assume you’re able to figure the rest of this step out yourself.
Step #2: How Can You Spend Less?
Next, look at each category and figure out what you could do without.
This is a really painful step, I know.
We love the way our life is! We’re used to the french vanilla caramel macchiato each day. We love our 1,800+ cable channels. We love our brand new cars and houses. I get it. I love ’em, too.
But think about this: How badly do you really want to be financially free? If you really want that, then could you do without some of these things you’ve grown accustomed to?
Think about this: A reasonable rental property should put at least $100 per month in your pocket after all expenses. So for every $100 you save per month, it’s about the same as purchasing one rental property.
So don’t skip this step. Really ask yourself what expenses you can do without and what changes you could make (and tolerate!) to save money.
I’ve been through this myself, from tweaking my spending to actually down-sizing my house. I’ve been through the pain. I can tell you it’s not pleasant, and I didn’t want to do it. But once I did, I was happier because it got me closer to my real goal: financial freedom.
What are you prepared to do?
What’s Your Number?
Let’s assume you recorded your ACTUAL spending and made some changes to reduce your monthly expenses by 20 percent each month.
And let’s say you determined that you could live with $5,000 per month if you really tightened your belt. That’s $60,000 per year.
Now, let’s not forget about taxes!
If your fixed costs are $60K per year, then you need to make MORE to pay your taxes.
Assuming that you’re paying 30 percent in taxes, then divide your net Rate Race Number by 70 percent to get your gross Rate Race Number:
$60,000 / 0.70 = $85,714 = $7,142 per month
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This means your passive income would need to be about $7,000 per month for you to be financially free.
How Will You Get There?
For many of you, this may be the first time you’re doing this exercise.
Once you have your Rate Race Number, the next question is how will you get there?
You now know that you need $7,000 in passive income each month.
What real estate strategy will get you there the quickest?
If you’re flipping houses right now, then you know that there’s very little passive about that (I flipped over 30 houses, so I know a little bit about this!). So flipping houses is NOT going to be the kind of activity that generates passive income.
What about building a rental portfolio? This certainly qualifies as a passive income activity, so put a check mark there.
How many houses would you need to get to $7,000 in monthly income? This depends on your market and how good of an investor you are. Let’s say you’re consistently able to get $200 per month in cash flow (after expenses, including vacancies and repairs!) from your rental houses.
But at $200 per month in passive income, you would need 35 houses to retire. That’s a lot of houses. Do you have the capital for that? How long would it take for you to build such a portfolio? Do you even want that many houses? Have you ever thought about this?
A Better Way?
I think there’s a better way to achieve your Rate Race Number, and that is by investing in multifamily properties. Here’s why I like multifamily properties better than single-family houses:
- They’re easier to scale. You can acquire multiple units with just ONE transaction. Then you can add multiple units again with just a SECOND transaction.
- They’re easier to finance. Multifamily properties are the easiest business in the world to get financing for. It’s also the cheapest. And many times you don’t have personally guarantee those loans.
- They make it easier to outsource the management. The multi-family business model INCLUDES a professional management company. With SFH investing, it really only makes sense to outsource the management once you have several units. Otherwise, it can really eat into your cash flow.
But How Do I Get Started with Multifamily Investing (Even If I Don’t Have the Capital)?
I’m not going to answer this question directly in this post. Instead, I’m going to point you at all of my blog articles I have published on the Bigger Pockets since early 2014. That’s all I write about, and I answer questions like these:
- How to get started with multifamily investing,
- How to raise money from others to buy your first apartment building,
- How to analyze deals and make offers more quickly, and
- Other aspects of buying apartment buildings.
So if you’re interested in exploring this strategy further, then check out all of my articles, as well as from others.
The More Important Question
Rather than figuring out how to get into apartment building investing, the more important question to ask yourself right now is this:
How will you achieve your Rat Race Number with real estate?
If your Rate Race Number is $7,000, then will you get there with wholesaling? Flipping houses? SFH rentals?
Or will you need to take a closer look at another strategy (like apartment building investing)?
If the answer is “no” and “yes” and you decide that you should take a closer look at commercial real estate, then you can create a plan.
My goal in this article is NOT to tell you how to do it, but to compel you to ask the right questions.
Make sure that your ACTIONS line up with your GOALS.
For most people, they don’t. Most people say that want something (like $7,000 of passive income), but their actions will never get them there.
Don’t be one of those people.
Sit down and figure out your Rat Race Number. Then figure out how you’re going to get there. Change any current behavior or course of action that will NOT get you there. Start new behaviors or a course of action that will.
Be more intentional in your life.
Now It’s Your Turn
I’d love to hear from you. If you’re comfortable, post a comment below and answer these questions:
- What is Your Rat Race Number?
- What can you do (or have you done) to decrease your expenses?
- What have you done to achieve your Rate Race Number?
- What changes do you think you would need to make to get there?
Thanks for your time to read this post, and I would love to hear from you!