…What is the Makeup of Your Budget?
What does it cost you today to run your household per month? Is it $5k, or $8k, or $10k+? What are you actually paying for, and are they fixed expenses or random costs? What kind of choices have you decided to spend those dollars on? Is it a car payment, a house payment, school debt, or your kids’ sports and activities? Or that pesky credit card you keep having to pay off, but aren’t so sure what you really are paying for? What other items are you paying for that you shouldn’t be? Over the course of a few years, what can you pay off?
Save More Now
Right now, it costs you $6k a month to run your household, and you are trying to replace that income with passive income. What if you have $6k in monthly income in retirement, but you are able to make decisions to get your fixed expenses down to, say, $4k a month? For instance, you pay off your car, and your $400 car payment goes away. Your mortgage payment is $1,500, and if you have 10 or 15 years left on the mortgage, could you have your home paid off at retirement? Or if you just bought your house, do a 15-year note on it, or pay down extra principal every month to pay it off faster.
In Tony Robbins’ book MONEY Master the Game: 7 Simple Steps to Financial Freedom, he talked about the “Money Power Principle 3.” Tony makes an example of a 30-year mortgage on a $270k house with 6% interest, equaling a monthly payment of $1,618. He says, “With this technique, you would also write a second check for an extra $270 — next month’s principal balance — a very small number, relatively speaking. That second check of $270 is money you’ll never pay interest on.” You literarily just cut the amount of money you would pay over the lifetime of the loan in HALF.
This is an incredible amount of money you now have the choice to pay to the bank with interest — or pay to yourself with interest. Apply the $242k and begin investing it in buy and hold properties for the next 15 years (with 20% down and leveraged with a mortgage). Let’s say you average 8% cash on cash return over those 15 years. You have now turned that $242k into $615k (and don’t forget all the wonderful tax advantages and someone else paying down the principal).
Stop Saying You Can’t
Taking action is key here. You can’t save money? Spend less. Make more. Get a second job. Don’t buy a new car — keep the one you have (and pay it off). Stop spending $200 a month at Starbucks. Whatever it is, stop it! Even if you are saving a few hundred dollars a month towards buying your first investment property, you are actively visualizing and seeing where your future is going. An average investment property here in the Midwest can be purchased for $80k-$120k. You will need roughly $16k-24k to acquire this first property.
If you are just getting into the earning years, you might have a different approach than someone within a few years of retirement. If you are just getting started, you can buy your first home as a rental in a few years. Use the benefit of whatever financing and purchasing you can and live in it; maybe even do some work yourself. After 2-3 years, you can buy a second property and keep the first one as a rental. Do this again in 2-3 years.
you bought your first house at age 25 and then bought a new house every 3 years using this idea (and you would need to work with your mortgage person to make sure you were following all the rules of that lender/mortgage), at age 49, you would be up to 8 properties! If they were all on 30-year mortgages, the 8th house would be paid off at age 79. But the first house you bought would have been paid off at age 55! If they were on 15-year mortgages, they would be paid off at age 64.
Let’s say at age 65 you retire and review where your real estate investments are. For the sake of the example, you decided to run 15-year mortgages to have them all paid off at that point…
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