The next 12 months represent the year you shift your wealth-building into high gear.
No more “business as usual.” No more “I’ll get around to planning for my future when the time is right.”
You will never have a perfect moment when all the stars align and you magically find yourself in wonderful financial shape. You need to make that happen yourself, based on grit and will.
As the Chinese say, the best time to plant a tree was 20 years ago. The second-best time is now.
So quit with the excuses already, pull out a notepad or spreadsheet, and get ready to make this next year a turning point in your personal history.
7 Ways to Get Wealthier in 2020
1. Create a Plan for Financial Independence
Regardless of whether you want to reach financial independence next year or 30 years from now, you need a plan, a roadmap to get there.
If you’re new to the term, “financial independence” and “financial freedom” typically mean the same thing in personal finance circles: the ability to cover your living expenses on passive investment income alone. At that point, working becomes optional. It’s why financial independence often gets combined with the notion of retiring early—hence the acronym “FIRE.”
In the old days, most people only reached financial independence in their 60s, and with the help of Social Security and Medicare. Today, more people are reaching financial freedom by 40.
Everyone’s financial independence plan is different, but I’d like to propose three FIRE concepts I’ve found to be true:
- You should have multiple sources of post-FIRE income, including a portfolio of paper assets (I recommend passive index funds), a portfolio of income-producing real estate assets (direct or indirect), and some flexible income from doing work you love.
- By continuing to flexibly earn some money doing work you love, after reaching financial independence, you can minimize your sequence of returns risk and keep all (or most) of your paper assets in higher-yield stocks, rather than low-yield-but-more-stable bonds.
- Rental properties help you get there faster, through a combination of advantages. These include leverage, predictable returns, tax advantages, and ongoing income with no loss of underlying assets and no fretting about safe withdrawal rates.
Oh, and it probably goes without saying that the lower your living expenses, the easier it is to cover them with investment income. And the easier it is to save more money to invest.
Sit down and write out a plan for how you might cobble together enough investment income to reach financial freedom. And don’t be afraid to include some active income, doing meaningful work that you love.
2. Start Measuring 3 Key Numbers Every Month
As they say in business, that which gets measured gets done. After all, it’s hard to make progress toward a goal if you don’t measure that progress.
Toward that end, start keeping a simple spreadsheet each month that measures three numbers:
- Savings Rate: The percent of your after-tax income that goes toward savings and investments. (More on this shortly.)
- Investable Net Worth: The sum of your investments, not including your home or car, minus your debts.
- FIRE Ratio: The percentage of your monthly living expenses that you can cover with investment income alone. For example, if your total living expenses come to $4,000 per month, and you currently bring in $1,000 in passive investment income, then you have a FIRE ratio of 25%. When this reaches 100%, congratulations! You’re financially independent.
And remember, you’ll probably continue to earn some money even after reaching FIRE, if you retire young. Sitting on the beach sipping pina coladas all day sounds great when you’re working in a cubicle, but in reality you’d get bored quickly. You’ll want to return to contributing to society through some kind of work, even if it’s charitable work that doesn’t pay well.
In other words, you don’t actually need a FIRE ratio of 100 percent to reach independence. You just need to get close enough that you can cover the rest with your post-FIRE gig(s).
3. Increase Your Savings Rate
The more of your income that you put toward investments, the faster you build wealth. Period.
As a general rule, I’ve found that people who save around 15 percent of their income reach financial freedom in 30 to 40 years. Those who save 30 percent of their income can reach financial freedom in 20 to 25 years, those who save 50 percent can reach it in 15 years, and those who save 65 percent can reach it in 10 years, often less.
It depends on factors like your returns on investment, so these number aren’t written in stone. But if you want to become a prodigious accumulator of wealth, start making lifestyle changes and funneling your money into income-producing investments.
Want a challenge? Try rearranging your lifestyle to live on half your income. My wife and I structured our lifestyle to allow us a 60 percent savings rate, while still traveling frequently (we average around 10 countries each year). And no, we don’t have a massive income, either.
4. Automate Your Savings
Once you make those lifestyle changes, you need to automate the “good behavior” of actually saving the money each month. Don’t rely on your willpower alone; that will fail you, and usually sooner rather than later.
The easiest way to automate your savings is to have your employer split your direct deposit, with your savings going directly into a savings account. If they can’t do that, set up automated recurring transfers to take place every time you get paid. Not every month–every payday!
Alternatively, you can try automated savings apps like Acorns or Chime Bank. Regardless, the important point is that it happens automatically, in the background, without any effort on your part.
5. Automate Your Stock Investments
Real estate comes with a series of barriers to entry, including (but not limited to) knowledge, skill, and effort required to do it right.
Stocks don’t come with any of those challenges. Take advantage of that fact by forgetting all the fancy-schmancy stock picking strategies and research. Save your efforts for learning about real estate investing and implementing it.
I recommend creating an account with a robo-advisor service, and letting them invest for you. Personally, I use Schwab’s Intelligent Portfolio service—it’s free if you invest at least $5,000, and they’ll invest based on your personal needs and parameters.
Related: 12 Reasons You’re Poor
For anyone under 50 and pursuing FIRE, I’d get aggressive with your asset allocation, buying stock funds from all over the world, not just the U.S.
If you’d prefer to go it alone, buy a mix of low-cost index funds that expose you to small-, mid-, and large-cap stocks in all sectors of the economy. I’d buy 50 percent U.S., 30 percent international developed countries, and 20 percent emerging markets. But you invest how you like.
6. Define (and Expand) Your Competitive Advantages in Real Estate Investing
You need some advantages if you want to succeed in real estate investing. Those could include experience and knowledge, funds available for investing, an investor-friendly market, a strong network of bird dogs and other contacts, the ability to do renovations yourself, strong relationships with contractors, or any number of other advantages.
But you should know what they are, and you should actively build on those advantages.
Take it from someone who lost a lot of money in real estate early in my career, and learn from the real estate lessons I wish I’d learned earlier.
As a final thought, master the science of forecasting rental property cash flow. It’s not “rent minus mortgage,” and until you know exactly how to do it, you have no business investing in rental properties.
7. Create Diverse Streams of Passive Income
I like a combination of rental properties, dividend-paying index funds, private notes, and private REITs for streams of passive income.
A bear market hits your stock portfolio? No problem, lean more heavily on your rental income by deferring maintenance and incentivizing tenants to renew rather than turn over. Get hit with lots of rental expenses at once? Sell off a few stocks.
You need multiple streams of income, which don’t affect one another. My income from private notes comes in regardless of what’s going on in the stock market.
Diversify your investments. Rental properties can be particularly effective for creating retirement income, but don’t invest exclusively in them. You don’t want all your nest eggs in one basket.
With every extra dollar of passive income that you build through investments, you snowball your income and can keep rolling the money back into more and more income-producing investments. At a certain point, your portfolio takes on a life of its own, generating income faster and faster with every month that goes by.
It’s never too late or too early to start investing for financial independence. I’ve known and worked with plenty of students who started in their 60s and 70s, and others who started in their early 20s. Both age extremes come with their own advantages and disadvantages; if you’re older, read up on some of the perks of starting to invest in rental properties later in life.
Financial freedom isn’t about age. It’s part mindset, part strategy, and part relentless execution. Embracing a frugal lifestyle, saving aggressively, building diverse streams of passive income.
With enough will, you can reach a seven-figure nest egg in a few short years. But it starts with committing to your financial goals, resolving to make the next 12 months different than the last.
What are you doing to build wealth faster over the next year? What lifestyle changes will you make to realize those plans?
Hold yourself accountable by sharing in a comment below!