A Path to Financial Independence: From Broke to Financially Free

Tatiana Hart/ July 15, 2018/ FINANCIAL FREEDOM, MONEY/ 0 comments

Never Talk to Strangers

One sunlit afternoon in Mykonos I encountered an inevitable question: “Can I ever amass enough money to make it work for me for the rest of my life so I have the luxury of working whenever I want, wherever I want?” 

I did not actually encounter the question: it was invoked by a stranger sitting next to me poolside.

The quiet afternoon by the pool in the pleasant spring sun was over.

The man happened to be someone who essentially controls his time, dictates when, where, and how much he wants to work.

He has been able to make his money work for him so he no longer has to work for money

The man by the Myconian pool was a private banker. 

He declared that real estate investing always seemed to him excessively risky and that he prefers to simply lend money and to live off the interest full time.

Grand Hotel Mykonos, Greece

The Burning Question

I was fascinated,  ‘How was he able to accumulate enough money and made it work for him so he does not have to?’

The banker mentioned that he never invested in the stock market and that his current gig is a lot more profitable than investing in gold.

I was scrambling to identify the correct clues with respect to the origins of his personal capital.

The private lender actually was looking for clients and was trying to identify whether I qualified to invest with him: essentially, the eligibility to invest with him implied having around $600,000 minimum to borrow another $800,00 so i can buy rental real estate.

As I mentioned, he chose private lending to real estate investors because “it was less risky” comparing to real estate investing itself.

I contended that real estate investing was more cumbersome than money lending with respect to convenience but the risk involved is most likely the same.

If somebody defaults on a loan due to a questionable real estate deal, the risk gets transferred to the lender.

Undeniably, lending is less time consuming than real estate investing (although real estate investing can be automated), geographically flexible (although real estate can be managed remotely), and involves fewer business components.

He boasted that his capital enables him and his partner to work 4 months out of the year whenever he wants from any location on the planet.

This flexibility allowed him to visit 140 countries and provided a comfortable living in sunny Southern California.

The question that was burning in the back of my mind was “How did you get the initial capital?”

Despite I understood that the path he followed to amass his wealth will be different from that of mine, I was still fascinated. I knew I did not want to invest with him, I wanted to be able to have the freedom money afforded him to have.

The Takeaway

I have to make something clear: despite I came from humble beginnings, I was well on the way to an early retirement at the age of 30.

I was financially smart and lucky but my ego got in the way and everything turned upside down.

I managed to turn my net worth into negative.

That spring afternoon my opponent pointed out a very important dichotomy: despite most people desire wealth, they refuse to live below their means to achieve it.

That is why his lending business has been so profitable: people do not want to pay off loans so they indefinitely extend them and get to accrue lifetime interest off the loans.

Get off the Nail

Do you remember the whimpering dog sitting on a nail? He whines because it hurts. But why would he not get up? Because it does not hurt bad enough.

I understand that my conversation with the private banker was not a coincidence: I have been learning about money with fervor since I was not taught that – in fact, the subject of money for some reason is not taught in school.

The relationship with money seems to be one of the most important subjects and yet it is omitted.

Money relationships tie into our self-esteem and happiness.

Sometime ago I read two sincere documentaries “The Millionaire Fast lane: Crack the Code to Wealth and Live Rich for a Lifetime!  andUnscripted: Life, Liberty, and the Pursuit of Entrepreneurship .

The author, MJ DeMarco, shared a questions from one of his readers: Why is my 19-year old son does not even want to contemplate about not having a boss and about becoming financially free let alone make the choice to become financially free?

The answer was strikingly simple:

It has to hurt bad enough.

In order to get a burning desire to become financially free, one must go through the pain of working for somebody else, not being in control of their time,  and doing soul crushing work. It has to hurt bad enough for us to get up and change things.

It did hurt. That is exactly when I woke up, went against what most people in my present environment do, and began to hustle to get myself to financial freedom.

How Can I Reach Financial Independence  within a Reasonable Time?

Remember the clue the private banker gave me about living beyond your means? That’s the main premise of becoming financially free.

I wish there were a magic answer but there is not. If you have ever achieved financial independence, you understand that you must income producing assets and you need time to accumulate them.

In The Millionaire Fastlane MJ DeMarco suggests that the only sure way to financial freedom is to build and sell a profitable business.

 Another school of thought suggests that  the most effective way to free yourself financially at an accelerated speed is to save a high percentage of income and to invest it. The longer you do it, the higher your savings compound.

The true path to never working for money again is perhaps somewhere in between: you may have to have a business and than save in invest. In my case, I have to own a business as a side hustle

My Financial Freedom Strategy

Retirement Plans

I no longer contribute to a 401k. I decided to allocate my investments differently.  

The premise of pre-tax investment vehicles such as the 401k lies that you may pay less tax when you retire after 59 and ½.

The drawback of this “parked” investment that it does not produce cash flow now when you probably need it most. Early withdraws with some exceptions get penalized with an extra 10% on top of the owed tax.

Your tax bracket in the future may not be lower than now.

Index Funds

Deferred taxes appeal to your emotion and may not necessarily be beneficial.

Cash flow, on the other hand, will buy me freedom.

So I decided against adding to my existing 401k.

I personally prefer index funds and have benefited from investing in index funds. One of the main consideration for choosing an index funds is the expense ratio.

The expense ratio reflects management involvement in market activity and distinguishes actively and passively managed index funds.

I have invested in passively managed funds because of the low expense ratio; gains, however,  always surpass those of actively managed funds.

My favorite is the Vanguard 500 Index Fund Admiral (VFIAX )which tracks the Standard & Poor 500 Index (SPX) performance and has a low expense ratio of 0.04%.

Equities: Stocks, Bonds, Exchange Traded Funds

If you want to invest in the stock market which is presently  highly overpriced, you may want to look at undervalued stocks.

The simplest way to explain the concept of the stock market is to draw a pyramid of investors who buy at the very bottom and those who buy closer to the top.

The one at the bottom will have a nice appreciation of their investment no matter what. However, the closer to the top you buy, the lower your profits will be.

Presume, you had bought a thousand shares of Amazon stock in 1998 for $1.73 per share and had kept them until 2018. Your investment would have been roughly worth $1,710,000 with a whopping return on investment of 98,743%! (a profit of $1,708,270).

However, your ROI would have been a lot lower, had you bought it last year at $808 a share. It would have appreciated only 200%.

We are assuming you invested the same amount of money as in 1998.

You probably should not buy a thousand shares of Amazon stock at $808 a share. You can find superior long-term investment options for $8,080,000 such as rental real estate.

Stock investing, as a path to  financial freedom, requires  patience, strategic thinking, and emotional intelligence. Also, since the stock market is highly cyclical, timing  has extreme significance.

You have no control investing in stocks because market timing requires a lot of luck or insider insights.

You may consider building a business or buying rental real estate (once you have a downpayment) if you want to exert more control over your investments.

Most undervalued stocks rely on your ability to speculate about the future.

For example, artificial intelligence companies have a lot of potential for growth, therefore, we may speculate that their stock may be a sound investment similar to Amazon.

Another good example is mining stocks.

Many investors perceive precious metals a great hedge against, the declining dollar, economic instability, and a highly-anticipated stock and bond market crash.

Thus, physical precious metals along with mining stocks provide an great investment growth opportunity I have capitalized on.

Real Estate

Buying  physical rental real estate to generate cash flow is the most common and well-known investment strategy.

You can also invest in real estate indirectly by buying real estate securities, or Real Estate Investment Trusts, or lending money via platform such as PeerStreet or Lending tree.

Both approaches generate cash flow by way of dividends and interest respectively.

Real Estate Investment Trusts typically specialize on a specific real estate market sector such as healthcare or commercial office.

A real estate investment trust must purchase properties as part of its portfolio, lease them out and pass collected rent in the form of dividends to its shareholders.

You will be collect interest by lending as little as $1,000 to real estate investors via PeerStreet.

Before you invest  PeerStreet allows you to view and access property reports for your chosen investment properties.

My personal preference is physical rental real estate, multi-unit properties are ideal.

Single-unit properties work when you purchase real estate in the areas with a  low cost of living and substantial economic and job growth such as Montgomery Alabama.

In this instance you may be purchase properties outright.

If you can get properties for $30,000-$40,000, the bank will not be able to offer a real estate loan for such a small amount.

Money Affords Freedom

Money affords freedom and the luxury to choose to work.

I love creating but despise work for the sake of work.

Money gives me the freedom to avoid pointless work and buys me time to have experiences and relationships.

Buying objects in the name of instant gratification robs us off time, energy, and precious experiences.

My philosophy can be summarized in the bullet points below:

  • Invest in yourself first;
  • Earn more than you spend and gradually increase the gap between income and expenses which will grow your savings;
  • Practice patience and emotional intelligence while investing: it helps to see the end goal clearly;.
  • Lastly, money buys freedom and time, not shiny objects.

I do not expect myself to eat beans and wear pre-owned clothes.

I value natural sustainable health by way of lifestyle.

I  optimize my budget to eat delicious unprocessed foods, to sleep well, and to use movement, yoga and weightlifting to stay in excellent shape. Health, as wealth, is very simple – as long as you follow through.

I also understand how to look elegant with a minimalist wardrobe.

The secret of elegance lies in thoughtfully selected quality pieces that can be infinitely combined.

Do yourself a favor and do not buy clothes and shoes because they are on sale.

Instead select several items that go well with each other – they will last longer, protect your budget, and get you faster to financial freedom.

Final Thoughts

I appreciate the honesty and abrasiveness of the private banker- he helped me turn the corner and make the decision to become financially free.

The point of getting out of debt and saving money is not having the money sit in a savings account but to invest it and having lifetime positive cashflow. Savers are losers (thank you, Mr. Kiyosaki) only when they do not make their money work for them.  

Despite I still have some student  debt at a very low interest rate, I choose to create positive cash flow and invest while I am paying it off.

I have paid off $32,000 in the past 18 months and have slightly more to go.

I will update on my pay off progress if you choose to follow my journey. 

I will explain my compressed pay off strategy in a later post.

My fast track financial freedom strategies are very simple.

I will elaborate on them as we go along, feel free to ask.

If you find this information useful, follow my progress to financial independence.

I  will share my experience and knowledge as I ascend toward the goal.

Until next time.

Cheers,

-Tatiana Hart.

 

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