Your NEW Five Year Plan
If you knew you’d be out of work in five years, what would you do today?
A recent survey by ING showed that 27% of Americans admitted to having no savings—that’s zero dollars set aside for medical emergencies, car repairs, and life’s other unexpected expenses. And 29% of Americans have less than $1,000 in savings.
When the unexpected happens—like a job layoff, an illness, an accident or a divorce—so many people are not financially prepared. Unfortunately, it’s precisely at the time of the unexpected event that most people, for the first time, experience the reality of where they are and how long they can survive financially. And that’s the exact moment where you will be faced with the cold hard truth of your situation.
It really doesn’t matter how much you have in savings today. You can’t go back in time and fix it. But you can take action and change it if you choose.
So take a look at your finances. If you are unhappy, or even upset and sad, about that number in front of you—good. That just means it’s time to take some action.
Set Your Investing Goals
Rich dad used to say, “People who cannot find an investment today gamble on the promise of tomorrow. They count on hope rather than intelligence. They have dreams, so they buy lies.”
This is a big problem with hope. Hoping can often turn people into victims.
In order to prosper financially, it is imperative that you learn how to invest. Unfortunately, many don’t know where to start. The good news is it’s not that hard.
The following are three simple steps to creating a winning investment plan that can change your financial future, today.
- Determine how much you can invest.
A lot of people make the excuse that they don’t have any money to start investing. For most people, this is simply not true. Rather, they spend their money on any number of things that they don’t really need and then have no money left over.
When Kim and I were younger, we treated our investing as an expense in our budget. We determined how much we wanted to spend each month in investments, and we made sure that we paid that “expense” each and every month.
This, of course, meant we had to take a look at other expenses in our budget and cut some of them in order to pay the “expense” of investing. Do the same. How much do you want to invest each month? What can you cut back on in order to make investing a priority? Make it a priority today, and it will become a habit tomorrow.
- Find out what you want to invest in.
Another reason many people are intimated by investing is that they don’t understand the variety of things they can invest in. For most people, investing means a 401(k) or the stock market. But the reality is there are so many other areas where you can invest.
For starters, take a look at the four main asset classes: paper, real estate, commodities, and business. Find out which asset class excites you most, and then drill down on the type of investments in that class that you want to learn the most about and put your time, money, and energy into.
- Make long-term goals.
Once you know how much you can invest and where you want to invest, make long term goals.
Write them down and revisit them often.
For instance, if you invest in residential real estate as I did, maybe you make a goal of buying one rental house in your first year. Then maybe you make a goal of buying two in the second year. Then you could have a goal to purchase a small apartment building by year five. Whatever it is you choose to invest in, have a plan to go big in the long-term and stick to it.
4 Fundamentals First
Let’s pretend you’re building a house. You want the strongest foundation possible, right? In order to make your foundation strong, you need to know what makes up the foundation you have, get rid of anything that makes the foundation weaker, and build and add what will make your foundation stronger. If you build your house out of sticks and straw, just like the fairy tale, your foundation will be weak and the house will eventually come tumbling down.
The same is true when it comes to investments: You want to start with the fundamentals—build your strong foundation—in order to decrease your risk. Let’s examine why.
Most people think of investing as any situation where you put down money with the expectation of getting a return on your money. Unfortunately, what many people think of as investing is actually gambling. This is why so many people were burned by those events nearly a decade ago. Many so-called “investors” bought into the real estate market when it was hot, prices were soaring, and they invested in the hope that home values would keep going up and up. They even took on properties that cost more to buy and maintain than they could be rented for. Then, pop! The bubble burst and their gamble left them in financial ruins.
Becoming a Savvy Investor
When it comes to investing, what sets the “gamblers” apart from the true investors is having an understanding of the fundamentals. Knowing and following the fundamentals takes much of the risk out of investing. Again, there’s always some level of risk, but by sticking to sound investment strategies and planning for ways to cover the downside, the risk can be greatly reduced.
Essentially, the largest risk you face is not actively improving your financial intelligence—and thereby not building your foundation or following the fundamentals. You must educate yourself and continue learning every day.
So if you’re new to investing, start with these four fundamentals that I always abide by:
- The investment must put money in my pocket. First, I look for cash flow. Second, I look for appreciation. A successful investor is in the business of building her asset column. So any investment that doesn’t put money in your wallet is a liability, not an asset.
- The investment must stand alone. An investment cannot survive off the cash flow or funding of another investment—meaning you cannot use the wealth of one business to keep a subsidiary business afloat. Each business must be profitable on its own. The same is true for investing.
- I want to control the investment whenever possible. In real estate and my businesses, I control the income, expenses, and debt. I’m always looking for ways to improve the investment and increase its value or the value it returns to me. This is where ongoing education comes in handy.
4. Every investment must have an exit strategy or exit options. This is a hard and fast rule: Always know when you will sell before you buy. This decision could be based on any number of factors: price, date, market events, or even personal events. Kim and I tend to hold onto our real estate investments as opposed to selling them. However, we always know what it would take to sell. In 2006 during the peak real estate market, we were offered a generous price for one of our apartment buildings—one that was operating at maximum cash flow. What did we do? We sold that property and moved the profit into a grander apartment building that gave us a much higher return on investment.
Editor, Rich Dad Poor Dad Daily