Financial Freedom—Determining your approach to investing

 

(In our previous post we gave you a little exercise on  what it would be like if you were financially free—what your ideal day would be like. We also highlighted how property investing can be your means to achieve financial freedom. In this post, we will discuss the goals, strategies and the factors that determine your approach to investing.)

 

The first thing that needs to happen is that you need to set a goal. Intellectually you may know this. You may read articles and books and listen to experts tell you this. Even still, you need to actually sit down, have a think about it and actually write down your goal. No really, stop reading for a second! Have you really set a goal? Is it in writing? Is it a measurable and time based goal? If not – now’s the time!

Once you have a goal in mind, you need to work out how you’re going to get there. What are the strategies you intend to employ to achieve your goal?

goal-setting.001Influencing factors for choosing your path

When determining your approach to investing and deciding upon the method you are going to employ, there are a some key influencing factors that will impact upon this decision. These include:

  • Working capital – it’s all good and well to decide that you are going to buy 3 ‘blue chip’ investments and sit on them for capital growth, but do you have the up front capital investment to get started and potentially the cashflow to support them? You may need to work on just getting one deposit together for such a property and then, if the property is negatively geared, you may need to determine how can you support that cash shortfall or maybe even create a situation where you can increase the cashflow from the property. You may even decide that you need to implement other investing strategies that generate lump sum profits that can contribute to your deposit or reduce the debt on your negatively geared properties or try strategies that enable you to get started in investing without using any or very minimal cash input from your own pocket.
  • Timeframe – are you in a hurry? For some people, they are happy to work for a salary for many more years yet, whilst they build up their property portfolio slowly, until they reach retirement age or have built enough income or equity to consider retiring early. For other people, getting out of employment fast is their main game and so their investing strategy must look for ways of generating income or lump sum profits regularly to be able to sustain them.Time frame
  • Interest – Ever watched the popular TV show ‘The Block’ and thought, ‘Wow, that looks like awesome fun, I could do that all day!’. Or did you think ‘Oh my, I would never want to do that!’. This may give you an indication of your interest in renovating as a potential investment strategy. It’s the same for other investing approaches also. Can you see yourself developing? Do you want to have tenanted rental properties and can you handle the issues that come along with it?
  • Planned Exit Strategy – are you planning on selling out of all of your property and living off the proceeds? Are you planning on holding properties to generate cashflow for the long term? It pays to give some thought to how you plan to ‘retire’. The investment properties that you end up with may look very different depending on your exit strategy, so give some time to thinking this through.
  • Risk – There is a relationship between time that an investment strategy will take to get you to financial freedom and risk. This is a relationship that you need to give a little time and thought to in your preparation. There’s no right or wrong answer here when it comes to risk as it’s a personal choice, but remember, the choice here doesn’t need to be ‘Will I take a risk by implementing strategy A’, the choice here is deciding to put some time into assessing the risk and developing a risk mitigation strategy and then understanding the level of risk that you are comfortable once you’ve determined how you can best mitigate risk. Most people simply look at a strategy and decide that it’s too risky for them without taking the time to properly assess and develop a plan. Having a better understanding of risk and what you can do to minimise and manage risk will open up your mind to choices that you would otherwise have dismissed.

One or more of these influencing factors may resonate with you. It may be your main driving influence over your chosen strategy. Perhaps it’s timeframe. Maybe you’ve had it with work and you don’t care how you get out of it, but you just have to get out! Perhaps it’s capital. You don’t have a deposit and so your focus is on being able to get started…with anything!

Bumpy roadThe bumpy road

So you’ve thought through your goals, your exit strategy, your investing strategy and you’re ready to jump on into it. Firstly, congratulations! You are certainly about 4 steps ahead of the majority of people!

Wouldn’t be great if everything just unfolded the way you wanted and we all got to our goals and lived happily ever after? Now before you think I’m cynical and doubt that most people will get there (I’m not, and I truly believe that we can all reach our goals), I just wanted to provide a bit of a reality check and to let you know that the path to financial freedom isn’t necessarily linear and it isn’t always headed in the direction you thought!

I am certainly a personal example of this. Just recently in fact, after investing for several years now and having accumulated quite a few properties I had to stop and take stock. Life was getting bumpy – we’d just had our second child, we had to drop to one wage, we’d moved house and I was about to be made redundant from my job – the one that was sustaining us as a family. Looking at the properties we had accumulated over the previous few years it was apparent that quite a few of the property decisions we’d made were not really aligned with our overall goal of achieving financial freedom within a relatively short period of time. Couple that with the changes in our life that we were experiencing and we decided to take some radical action. We decided to sell out of a number of the properties we had, cut our losses on some, realise some gain on others, regroup and refocus our strategy. Although that felt like ‘one step forward, two steps back’, I knew we had to do it to get back on track.

The path to your financial success through property investing may, in fact, be a potentially long one (well, longer than you planned) and it may be a bit bumpy on the way. That is life. Life is bumpy. There can be times when you are full steam ahead and then there can be times where you feel as though you’re taking a step back for every two forward.

SailingJust as a little bit of trivia that you may not know. I used to do quite a bit of sailing (mostly before kids!). In fact I’ve done quite a few of the big offshort sailing events, such as the Melbourne to Hobart yacht race and I once even sailed in a yacht race from Melbourne to Vanuatu! Anyway, there’s a concept in sailing called ‘Velocity made good’ (VMG). You see a yacht can’t always sail the most direct point to a mark on the course, sometimes it just can’t sail in that direction or that direction is not always optimal for speed. The helmsperson tries to choose the right point of sail for the boat that optimizes its velocity toward the right direction, or VMG. This can mean sailing slightly off course or even changing tack completely in order to get you to the desired point.

In terms of property investing, your path may not always be what looks like the most direct route and you may from time to time even take a backwards step or change your approach, but as long as you momentum and overall direction is the right way, you will get there.

In our next post, we will conclude this three-part series with tips to ‘fast track’ your path to financial freedom.

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