As we close out the decade and move into the 2020s, it seems appropriate to talk a little about goals and the goal setting process. I am seeing lots of social media posts from people announcing their goals for the next year and swearing that "next year will be way better than this year". Some of their goals are well written and well intentioned while others seem to be vague statements about "making things better". Any goal setting efforts are noble and a great start to getting where you want to go, but it seems that by the end of January, most people have fallen back into their daily grind and abandoned the goals that were so important to them only 30 days ago.
In my early twenties, I started taking the goal setting process seriously and actually wrote down goals that I wanted to accomplish over the next 25 years, dividing them into categories based on time horizons. I am proud to say that I have either accomplished or am well on the way to accomplishing every one of those goals. Of course, the completion of each goal has led to new, loftier goals that keep me reaching for new heights and levels of success (and failure). Here is a quick break down of the process that has worked for me. Each person may have to tweak and change until they find exactly what works for them but you have to start somewhere.
Step #1 - Your Big Why
I think that this is the most important step but find that it is the step that is most often skipped. This has to be done first. Without a Big Why, there is no purpose to your goals and no reason(s) strong enough to keep you on track if you start to wander. Your Big Why is the underlying reason that these goals are important to you, in other words - what are you ultimately trying to accomplish?. Opinions on this vary, but I think that it is OK to have a couple of Big Whys, just not more than two or three. Your Big Why has to be something very meaningful to you and something that doesn't change on a whim as circumstances change. "To make a million dollars" or "sell more widgets" are not strong enough or specific enough. I will give you a personal example: Most of the men in my ancestral lineage have not lived to very old ages due to various health complications. I most certainly don't live every day of my life in fear of the same thing happening to me, but do have a heightened awareness of our time limitations. Because of this, one of the Big Whys that drives me is: "To be financially free in order to spend my limited time traveling and riding bikes with my family and friends".
Step #2 - Where Do You Want to Go?
Now that you have the ultimate destination in the form of our Big Why, you can start to map out the path to get there. I start with the higher level, longer term goals that I know need to happen to achieve the Big Why. These may have time horizons of 5+ years and seem almost impossible at the time of inception, but don't worry, we're going to break these down into more manageable steps. Since these are the highest level goals, you should only have a few. It is fine to have a couple of goals in different categories but my experience has been that if you have more than five or six, you will get lost and not accomplish any of them. If your head is full of dozens of ideas that you think are goals, take a closer look and see if you can lump some of them together into one larger, overaching goal and then use those smaller tasks later in the process. Back to my personal example: One of my high level goals is to - "be financially independent through passive investment income". These don't always have to be financial or business goals. Another one of my high level goals is to - "ride my bike on six of the seven continents".
Step #3 - How Do You You Get There?
You have your high level goals and your reason for working toward them. The next step is going to be to break these lofty goals in to more manageable chunks and turn those into easier goals with shorter time horizons. I think of this as being like building a pyramid with the big goal as the peak of the pyramid and all of the steps to get there being the base. What are the two or three big steps that have to happen to achieve your ultimate goal? What are the two or three things that have to happen to make those steps happen? Work down the pyramid and assign each of those things a goal with a time horizon. Items closer to the top of the pyramid generally have longer time horizons while the very bottom of the pyramid are things that you will be working on now. Write these out as your 3 month goals, 6 month goals, 1 year goals, 3 year goals, whatever makes sense for you. The accomplishment of each of these goals should take you a step closer to your ultimate goal.
Step #4 - Stay the Course
You should have a nice road map in front of you now, listing your major goals and the smaller step goals you need to accomplish to them. The next step is to make sure that you keep these goals front and center in everything you do and continually work toward achievement. Here are a few tips that work for me to remain focused on my goals:
Everyone knows that real estate investing has been a favorite tool of the wealthy for protecting and growing their riches. Billionaire industrialist Andrew Carnegie once said, "Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” But what is it that makes real estate so special? With the ongoing bull market in stocks and all of the constant media hype from Wall Street, why would someone choose to invest their hard earned dollars in real estate these days? A closer look at a solid real estate investment reveals some pretty amazing revelations that your stock broker may not want you to know. The common mindset around real estate investing is - buy a property in an upcoming market for $X, hold it for a bit, and then sell for $Y, profiting from the spread between Y and X that was created by appreciation in real estate prices. While this often happens and results in sizable profits, it turns out that there is much more going on behind the scenes of a good real estate investment. Here are five ways that apartment complex on Shady Lane can make you rich, along with a hypothetical (but realistic example of returns):
1) Cash Flow -- In simple terms your cash flow is the difference between the income from the property (rent) and it's expenses (mortgage, taxes, insurance, etc.). This is the actual cash that you put in your pocket every month.
2) Leveraged Appreciation -- Appreciation is the one that most people think about when it comes to real estate investing. This is simply the long term growth in the value of a property as market prices go up. The real benefit in real estate investing is that you can own the asset and benefit from 100% of the appreciation with only a small down payment. The bank loans you the rest, but they don't participate or benefit from any of the appreciation. I'll show how this really juices up your returns in the example below.
3) Amortization -- As long as you don't have an interest only loan, each month a portion of the loan payment goes toward pay down of the principal due. On an investment property, the tenants are technically paying down that loan with the portion of their rent payments being used to cover the mortgage. This means that each month, your equity in the property is increasing and the spread between the properties value and your loan payoff is growing (in a stable or growing market).
4) Tax Savings -- This one is a little trickier to put an exact measure on because everyone's tax situation varies, but in almost all cases, you will pay significantly less income tax on dollars earned through real estate than dollars earned from your W2 job. The US government encourages real estate investment through the tax code with benefits like; depreciation, expense deductions, and reduced capital gains taxes.
5) Hedge Against Inflation -- Inflation is actually a benefit to real estate investors with long term debt. As more dollars circulate, the pay down of your fixed mortgage becomes easier. Think of it this way; did a $50,000 loan seem like a really big deal 30 years ago? What about today? With long term fixed debt, the loan gets easier to pay back as inflation raises prices, wages, etc..
Here is a hypothetical (but realistic) example of how these five components add up to really increase your wealth. To make the numbers simple, we will use a single family home here, but imagine this same example on steroids in a 200 unit apartment complex!
You purchased an investment property for $100,000 using a $20,000 down payment, leaving a loan of $80,000 at 5% interest.
1) Cash Flow:
Rental income is $650 and expenses are $500 (mortgage, taxes, insurance, management, etc.) This leaves $150 per month or $1800/yr. Divide that by your $20,000 down payment to get a:
9% annual Cash on Cash return.
2) Leveraged Appreciation:
If the property appreciates in value by 5% (from $100,000 to $105,000), divide $5000 by your $20,000 down payment to get a:
Some quick math will bring us to the conclusion that with 5% interest on our $80,000 loan, we (our tenants actually) pay down $1176/yr in principal. Again, divide that by our $20,000 down payment and we get another:
4) Tax savings:
As I mentioned earlier, everyone will have a different tax situation but it is safe to assume that we will realize at least another:
The Federal Reserve is mandated to try to maintain 2% inflation over the long term so we will use that number to add an additional:
Wow!! Added together, we just got a 45% return on our investment! Of course, this is a simplified example and there will be unforeseen complications, additional expenses, and the occasional headache but even with some deductions from our 45% return, we're looking pretty good for a passive investment that we don't have to go to the office for 50 hours a week to earn.
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