Cash flow for financial independence
Cash flow for financial independence
I've recently be going through a financial course put together by an internet financial coach (Todd Tresidder, https://financialmentor.com/). He's teaches things a little differently than standard financial advice. He believes the 'spend less, save more' philosophy is reliable but ultra-inefficient. Dumping money into paper assets for 20-30 yrs and then living off of that is not what he considers the best path to financial independence. It's the safest, just not the best way in his opinion. To best summarize his philosophy, he encourages people to think of financial independence in terms of "cash flow". So, if you need $60,000/year to live on, your standard financial advice would be to save 25x this ($1,500,000 via paper asset investing) and then live off of the 4% withdrawal indefinitely. Alternatively, per his philosophy, you would look at the money needed in terms of cash flow. So, $60,000/yr turns into a need of $5000/month. Your goal would not be to accumulate the 25x annual expenditures, but to create $5000/month in cash flow. This is either through business, real estate, or paper asset dividends. Therefore, you're not as tied to the ups-downs of the stock markets, you're not trying to build this insanely large retirement account, and you're not living with a 'scarcity' mindset once you are living off of your nest egg.
It sounds simple, but it really is a way to look at things that is different than your standard advice of invest in index funds with as much money as possible and then live off that hoping it never runs out. I'm still a Boglehead investor with nothing but paper assets allocated to index funds, but I am starting to look at my financial life through a different lens. I now see local commercial property and homes/apartments for sale as an opportunity to create "cash flow" that would lower my total nest egg amount to achieve FI, but I just haven't acted on it yet. I also have started a list of simple business ideas that would create monthly cash flow with very little continual time commitment (car wash, laundry mat, storage unit building, etc...)
Thoughts?
It sounds simple, but it really is a way to look at things that is different than your standard advice of invest in index funds with as much money as possible and then live off that hoping it never runs out. I'm still a Boglehead investor with nothing but paper assets allocated to index funds, but I am starting to look at my financial life through a different lens. I now see local commercial property and homes/apartments for sale as an opportunity to create "cash flow" that would lower my total nest egg amount to achieve FI, but I just haven't acted on it yet. I also have started a list of simple business ideas that would create monthly cash flow with very little continual time commitment (car wash, laundry mat, storage unit building, etc...)
Thoughts?
Re: Cash flow for financial independence
My thoughts--
Yes, he is on the right track. But, be careful with some of these ideas for cash flow---I know of two physicians who thought they could buy and rent large apartment complexes. They both lost out---tenants stole from them, refused to pay rent, and damaged property. I know that one of these physicians was about 55-56 when he did this. The bank almost took his home. He is now 66 and has just paid off his part of the loan. He could have retired earlier and with more financial wealth had this not happened. Real estate is good if "you know what you are doing"....... you know how to choose properties and what to do with them, including fixing and attending to them. I think it would be a full time job, not just an avenue for passive income. Also, if you plan on opening a business, you might need a loan. Same concepts apply to opening your own business..... do you know what you are doing?
My thoughts are that some people may have to work longer for a more secure retirement or work part-time in retirement. Keeping things as simple as possible would be my advice!
Yes, he is on the right track. But, be careful with some of these ideas for cash flow---I know of two physicians who thought they could buy and rent large apartment complexes. They both lost out---tenants stole from them, refused to pay rent, and damaged property. I know that one of these physicians was about 55-56 when he did this. The bank almost took his home. He is now 66 and has just paid off his part of the loan. He could have retired earlier and with more financial wealth had this not happened. Real estate is good if "you know what you are doing"....... you know how to choose properties and what to do with them, including fixing and attending to them. I think it would be a full time job, not just an avenue for passive income. Also, if you plan on opening a business, you might need a loan. Same concepts apply to opening your own business..... do you know what you are doing?
My thoughts are that some people may have to work longer for a more secure retirement or work part-time in retirement. Keeping things as simple as possible would be my advice!
Re: Cash flow for financial independence
While what he says is true, for many of us, the entire point of FI is to stop having to work. If I have to manage real estate or other businesses that I've built to create this cash flow, then it's counter to my FI goal. Doing this is certainly not wrong - and for many people it's the right option - real estate or other businesses can pay back better than paper investments - especially if you are willing to put your human capital into making them pay - but for me at least, I have a job that I like and pays well. I would rather put my energy into making that pay as well as it can for as long as I need to and then be able to check out of the workforce entirely.
Re: Cash flow for financial independence
well said onourway. Aligns with what I am thinking.onourway wrote:While what he says is true, for many of us, the entire point of FI is to stop having to work. If I have to manage real estate or other businesses that I've built to create this cash flow, then it's counter to my FI goal. Doing this is certainly not wrong - and for many people it's the right option - real estate or other businesses can pay back better than paper investments - especially if you are willing to put your human capital into making them pay - but for me at least, I have a job that I like and pays well. I would rather put my energy into making that pay as well as it can for as long as I need to and then be able to check out of the workforce entirely.
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Re: Cash flow for financial independence
If you think the stock market is volatile, just wait until one of your tenant's toilets is clogged on a holiday weekend. Or when two of your five tenants give notice between Christmas and New Years. Or when you have to evict someone. Or when your commercial space sits vacant for two years during a downturn. Or when the cost of water/labor/soap/electricity doubles at your car wash.llessac15 wrote:I now see local commercial property and homes/apartments for sale as an opportunity to create "cash flow"...
... create monthly cash flow with very little continual time commitment (car wash, laundry mat, storage unit building, etc...)
Thoughts?
There's a reason we're here on Bogleheads.org, not Bigger Pockets.
Re: Cash flow for financial independence
If you have to keep working (by managing properties or other businesses) to achieve the cash flow, then you're not really financially independent, now, are you? It's a different perspective, as well as a different definition of financial independence.
Steve
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Re: Cash flow for financial independence
An additional consideration you may wish to think about is which side of the stock debate you want to come down on - dividends or total return. Some folks on the board favor total return. That is, I think, instead of living off the dividends, reinvest the dividends and then sell stock as needed. Seems to work better in tax deferred accounts with appropriately balanced asset allocations. Others disagree. YMMV.llessac15 wrote: create ... cash flow. ... through ... paper asset dividends.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
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Re: Cash flow for financial independence
He's right that the goal the end goal is to produce enough income to cover your expenses.
I find his label of "paper assets" interesting. It seems like a way to disparage conventional investments like stocks and bonds. In the case of stocks, this "paper" represents an ownership share of the company. You can view buying an index fund as giving you a fractional ownership of a lot of companies.
It sounds like he is advocating starting small businesses to generate at least part of that income. Small businesses can be high risk and require time to manage. Years ago, I owned some rental property but was forced out in a market downturn. I've thought about getting back in but have decided I really don't want a part-time job. Your decision is really whether you want to become a small business owner/entrepreneur and devote a significant amount of time and energy to running your business. Some people are great at this and do really well. Others fail big time like I did. I suspect most end up somewhere in the middle.
I have a friend who bought a bunch of cheap rentals that were bank foreclosures. Over time, he learned why these properties were foreclosed. He also bought a car wash which turned out to be more work and less profitable than he thought going in. He's had some other rentals that have done well. YMMV. There's no easy path to wealth, all markets are efficient to a large degree. If someone is selling an existing business, I would really look into why they are selling and whether you are getting an accurate version of reality.
I find his label of "paper assets" interesting. It seems like a way to disparage conventional investments like stocks and bonds. In the case of stocks, this "paper" represents an ownership share of the company. You can view buying an index fund as giving you a fractional ownership of a lot of companies.
It sounds like he is advocating starting small businesses to generate at least part of that income. Small businesses can be high risk and require time to manage. Years ago, I owned some rental property but was forced out in a market downturn. I've thought about getting back in but have decided I really don't want a part-time job. Your decision is really whether you want to become a small business owner/entrepreneur and devote a significant amount of time and energy to running your business. Some people are great at this and do really well. Others fail big time like I did. I suspect most end up somewhere in the middle.
I have a friend who bought a bunch of cheap rentals that were bank foreclosures. Over time, he learned why these properties were foreclosed. He also bought a car wash which turned out to be more work and less profitable than he thought going in. He's had some other rentals that have done well. YMMV. There's no easy path to wealth, all markets are efficient to a large degree. If someone is selling an existing business, I would really look into why they are selling and whether you are getting an accurate version of reality.
Last edited by IowaFarmBoy on Sun Jan 22, 2017 8:02 am, edited 1 time in total.
Re: Cash flow for financial independence
How much real estate do you have to buy to generate $5,000 a month in rent. Where I live that works out to be around $1.5 million of property. Which, um, amazingly is exactly the portfolio that would be required to generate $5,000 a month in safe withdrawals.llessac15 wrote:$60,000/yr turns into a need of $5000/month. Your goal would not be to accumulate the 25x annual expenditures, but to create $5000/month in cash flow. This is either through business, real estate, or paper asset dividends. Therefore, you're not as tied to the ups-downs of the stock markets, you're not trying to build this insanely large retirement account, and you're not living with a 'scarcity' mindset once you are living off of your nest egg.
The only difference is you can use leverage to buy property. Except you can also use leverage to buy a portfolio. Though the leverage in property is usually in much more favorable terms. Though I think with Interactive Brokers you can get 1-2% right now, which is way better than any mortgage.
Re: Cash flow for financial independence
The cash flow from real estate is every bit as susceptible to changes as the flow from "paper" assets. Imagine another recession causing many of your renters to lose their jobs at once. Or rents drop while the locality delays revaluation for property taxes.
For me this method would not be FI because I would still have to work to manage the properties, or the relationship with the management company (which would be eating a lot of my profit). At least "paper" assets don't require periodic remodeling.
For me this method would not be FI because I would still have to work to manage the properties, or the relationship with the management company (which would be eating a lot of my profit). At least "paper" assets don't require periodic remodeling.
Re: Cash flow for financial independence
OP here. Thanks for all the replies thus far. Let me add to my post above that I did contact him a few months ago about my financial situation asking for his advice on what approach I should take to FI. He stated that since I have such a high income as a physician, he would recommend that I just live below my means and save as much as I can inside sometime of well balance investment portfolio. He didn't think it would be worth my while going out and taking on extra properties or businesses unless I just wanted to be done with medicine sooner than passive investing would get me there.
I'm very much in favor of keeping things simple. My current passive approach is about as easy as it gets and I don't see me complicating things anytime soon unless I have to.
Keep the comments coming. I love reading this blog cause it gives me real life words of wisdom from people that are further along in life and wiser than me. Thanks!
I'm very much in favor of keeping things simple. My current passive approach is about as easy as it gets and I don't see me complicating things anytime soon unless I have to.
Keep the comments coming. I love reading this blog cause it gives me real life words of wisdom from people that are further along in life and wiser than me. Thanks!
Re: Cash flow for financial independence
"I also have started a list of simple business ideas that would create monthly cash flow with very little continual time commitment (car wash, laundry mat, storage unit building, etc...)"
All of those are businesses that require work by the principal, even if they have a manager. Payroll, insurance, theft, accounting, rent, rent collections and so forth. That may be for you it certainly isn't for me. I'm quite happy with my pension (you can duplicate with an annuity) and my SS which together pay the bills. The portfolio is for the fun things in life.
All of those are businesses that require work by the principal, even if they have a manager. Payroll, insurance, theft, accounting, rent, rent collections and so forth. That may be for you it certainly isn't for me. I'm quite happy with my pension (you can duplicate with an annuity) and my SS which together pay the bills. The portfolio is for the fun things in life.
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Re: Cash flow for financial independence
If you feel the need to own property - buy a REIT inside a tax-deferred vehicle. Buying individual properties can be quite lucrative for the right individual, however, if you are not "handy", don't have time to go down to court every now and then, do mind spending $10-$20K on attorneys to evict problem tenants, then I would pass........
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Cash flow for financial independence
This is a distinction without a difference. The safe withdrawal rate is your cash flow - doesn't matter whether you are withdrawing from your portfolio through earnings or asset sales.llessac15 wrote: So, if you need $60,000/year to live on, your standard financial advice would be to save 25x this ($1,500,000 via paper asset investing) and then live off of the 4% withdrawal indefinitely. Alternatively, per his philosophy, you would look at the money needed in terms of cash flow. So, $60,000/yr turns into a need of $5000/month.
All he is recommending is taking riskier, less diversified bets in real estate or small business ventures to get to a portfolio large enough to safely support that cash flow. If you have a safety net behind you if you fail (like social security to cover your required expenses) then it isn't the most dangerous lottery ticket to play but I wouldn't call it better in anyway then accumulating a diversified portfolio of passive ownership in businesses, real estate, fixed income instruments etc. that any standard portfolio discussed here would contain.
This is why he didn't double down on the hard sell on you - you don't need the lottery ticket and thus aren't a good mark for him.
If he thinks local real estate and small businesses aren't susceptible to as wild (really more wild) ups and down as that of the stock market then he has never actually been involved in either.Therefore, you're not as tied to the ups-downs of the stock markets
It sounds simple because it is selling a rather common dream of 'turnkey businesses' and 'real estate cash flow' - it isn't a new pitch and is best served to make the one pitching it wealthy.It sounds simple, but it really is a way to look at things that is different than your standard advice of invest in index funds with as much money as possible and then live off that hoping it never runs out.
Re: Cash flow for financial independence
I'm confused what he means by "paper assets". If this is investment income, one of the weaknesses of this approach is if the majority of your assets are tax-deferred, you'll pay income tax on taking out dividends and capital gains from your IRA or 401k/a. If you had say 1M in taxable and use 2% as distribution yield, that's only $20K or so per year. A 3M taxable asset portfolio could meet the $60k/yr. cash flow needs in the example.Alternatively, per his philosophy, you would look at the money needed in terms of cash flow. So, $60,000/yr turns into a need of $5000/month. Your goal would not be to accumulate the 25x annual expenditures, but to create $5000/month in cash flow. This is either through business, real estate, or paper asset dividends.
I agree with the above posts, when I retire, I don't want to mess with real estate or part time jobs. When the job is done, walk away (one of Gibb's rules). http://www.ncisfanwiki.com/page/NCIS%3A+Gibbs'+Rules
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Re: Cash flow for financial independence
No matter what you do, you need to be frugal and spend less than you make and "invest" the rest. The Boglehead and most straightforward way -- and the way that uses up the least time -- is to invest in low cost, diversified index funds.
Whether you want to instead invest some of it in some sort of "business opportunity," like rental properties, commercial real estate, or some other business, is really a function of (1) do you have an expertise in those areas, (2) does doing that excite you, (3) do you have the *time* to do it on top of your existing work and family commitments (I would think a physician with a family might find it tricky to balance a plethora of side businesses), and (4) is it something you actually enjoy doing? There are more questions, but if you can't answer yes to those four -- and if you don't appreciate that all of these business ventures include the substantial risk that you will lose all of your invested capital -- it's just not a good idea or worth it.
Whether you want to instead invest some of it in some sort of "business opportunity," like rental properties, commercial real estate, or some other business, is really a function of (1) do you have an expertise in those areas, (2) does doing that excite you, (3) do you have the *time* to do it on top of your existing work and family commitments (I would think a physician with a family might find it tricky to balance a plethora of side businesses), and (4) is it something you actually enjoy doing? There are more questions, but if you can't answer yes to those four -- and if you don't appreciate that all of these business ventures include the substantial risk that you will lose all of your invested capital -- it's just not a good idea or worth it.
Re: Cash flow for financial independence
Yes, I had read an excellent little blog written by someone who is getting into the coin-operated laundromat business. Very enlightening information with the details of the work involved and risks encountered and agree with you that it isn't as passive as it seems.midareff wrote:"I also have started a list of simple business ideas that would create monthly cash flow with very little continual time commitment (car wash, laundry mat, storage unit building, etc...)"
All of those are businesses that require work by the principal, even if they have a manager. Payroll, insurance, theft, accounting, rent, rent collections and so forth. That may be for you it certainly isn't for me. I'm quite happy with my pension (you can duplicate with an annuity) and my SS which together pay the bills. The portfolio is for the fun things in life.
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Re: Cash flow for financial independence
I can't imagine a better "business" than medicine. At least right now in the US.
I know a few people who rent properties. It sounds like it can be a nightmare. Personally, I love doing construction, maintenance, and generally working with my hands. So it seems like I might like owning rental properties. Unfortunately, I really don't like dealing with unpleasant, uncooperative people. And from what I've heard, sooner or later that's going to happen in rentals. Owning rental properties doesn't take a degree in medicine so there's probably going to be more competition in that business than the one you're in. I'd say it will be a lot lower margin. You've already made the investment (in terms of education) but you can't sell out of that investment.
I know a few people who rent properties. It sounds like it can be a nightmare. Personally, I love doing construction, maintenance, and generally working with my hands. So it seems like I might like owning rental properties. Unfortunately, I really don't like dealing with unpleasant, uncooperative people. And from what I've heard, sooner or later that's going to happen in rentals. Owning rental properties doesn't take a degree in medicine so there's probably going to be more competition in that business than the one you're in. I'd say it will be a lot lower margin. You've already made the investment (in terms of education) but you can't sell out of that investment.
Re: Cash flow for financial independence
My wife and I barely make more than the average family practice doctor (combined). Of course we wished to accelerate our path to Financial Independence.
I must have spent about 1000hrs studying real estate with books, blogs, youtube videos, podcasts, attending real estate investor meetups, reading forums, etc. What I found was that the really good deals that get you returns worthy of boasting about take a lot of leg work or intimate knowledge of your city and real estate or a bit of luck.
In contrast, I can take extra hours at work (as can my wife) instead. That extra 1000hrs devoted to work could have been a 50% boost in my pay, though I don't love my work that much to devote that much time to it.
We did hit upon the "luck" component with our one rental property though. We converted our brand new construction home into a rental property, hooked up with our favorite property managers and earn quite a large return on invested capital. Not sure if we'll get lucky again, but it really doesn't cost me much time at all as long as I'm willing to pay out 10% of my rents each month. I've so far spent less than 1hr / month averaged out on our investment property.
I must have spent about 1000hrs studying real estate with books, blogs, youtube videos, podcasts, attending real estate investor meetups, reading forums, etc. What I found was that the really good deals that get you returns worthy of boasting about take a lot of leg work or intimate knowledge of your city and real estate or a bit of luck.
In contrast, I can take extra hours at work (as can my wife) instead. That extra 1000hrs devoted to work could have been a 50% boost in my pay, though I don't love my work that much to devote that much time to it.
We did hit upon the "luck" component with our one rental property though. We converted our brand new construction home into a rental property, hooked up with our favorite property managers and earn quite a large return on invested capital. Not sure if we'll get lucky again, but it really doesn't cost me much time at all as long as I'm willing to pay out 10% of my rents each month. I've so far spent less than 1hr / month averaged out on our investment property.