How to build a freedom fund…the first salvo

“Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down”

Warren Buffet

I’m not a financial adviser. Perhaps I should be.

Anyway be warned that is my disclaimer. If you follow my advice and lose all your money so be it (some kind of adviser eh!).

First and foremost rule of financial management is do it all yourself. Don’t pay a brokerage, a money manager or a financial adviser. They do not work for you. My father found out the hard way that these people are in sales not education. The second rule is of course learn how to do it yourself. The third rule is that we never talk about financial fight club…but that is another post altogether.

The first point that I’d like to make is that you actually don’t need a huge fund to stop working and start living. This point is singularly responsible for my current work ethic and continued tolerance for the droll perturbance that is trivial paid work. It might also be worth noting that up until 5? years ago I was always a dollar each way on where to direct ‘spare’ money. I would sprinkle a bit on my mortgage, a bit on our rental property, put some aside for a business startup and a little extra into our investment account. Now I  am resolutely focused on using my income to buy an income.  I’ve realised that to be free all you need is regular cash flow that is equal or greater than your living costs. With that income you can buy your house, a rental, your clothes, hot water and all the lentils, beans and barley you need for sustenance.  If your living costs are very low then generating the required cashflow becomes very easy. In my opinion it is premature to leave work entirely until your alternate incomes not only meet but exceed your living costs so that you can continue to save just as you should be doing when you are earning a salary. To put a ball park figure on it the cost of freedom from the mcjob…as little as $300,000 and much less for any folks that have really embraced simple living. With two adults working full-time a committed couple could put this fund to bed in a little over 3 and a half years. Longer if you are in menial labour, but not that much longer, but overall a far better plan than working all your life to retire destitute!

Getting to your magic number (or thereabouts) is not a race. We are getting there by working part-time, maximising our passive income and creating other ways to earn a crust (note blogging is not one of our endeavours. Blogging is never going to become a significant and stable income source for most people. We blog for the fun of it and because we feel that we have something worth saying – but you are the judge of that. Still I see on the interwebs an illusion out there there that people can make a hell of a descent living off adwords. Those who do are in my opinion are the exception not the rule.)

Anyway to get back to guts and eyeballs – Here are my suggestions on how to invest your money to accelerate the accumulation of your freedom fund. Buyer beware!

Property

Buy an affordable rental property that is cash neutral or as close to cash neutral as possible. That means that the rental income that you receive from your tenants has to be equal to or greater than any loans that you need to borrow to buy the property. Expected return 6-12 % p.a from friendly tenants. The benefit of this investment is that you can provide very nice housing for a very nice family in a way that delivers mutual benefits. We give good tenants gifts, thank you notes (if we notice something). In return they pay a fair rent and translate this goodwill into caring for our property, fixing minor things themselves and generally treating our home as their own home.

Business

A solid business partnership that treats people so well (employees and customers) that they will do all of your marketing for you is one of the best investments. If you’ve done your homework the business should be able to deliver the value that creates such a loyal fan base that it can survive almost any economic environment. The ideal business has enough margin and is uncomplicated enough that you can become a director, which beats being a worker or a manager. Expected return 50-100%+ return on capital p.a. We don’t have any business interest now, but stay tuned. We are investigating business 2.0. Business beyond profit.

Exchange Traded Funds

These are available in every market. They are computer managed weighted funds that generally out perform the most impressive (and expensive fund managers). A well known provider is called Vanguard. Expected return 8-15%. Extremely easy to understand. Perfect for starters (until you really know where to put your money). Easy to manage.

Equities

Don’t diversify too much. Diversification is the overalls of the wrong strategy at work. Pick a strategy that is sound (1-5 companies). Go deep. Know everything about your stock. Buy large when they go on sale. Good businesses thrive during a recession. Just look at Coca cola in 1987.  That was a buyers time to spend. Fearful sellers unloaded a very good company at a stupid price that had nothing to do with Coco Cola’s performance.

The two primary strategies that I use are Dogs of the Dow and value investing.  Expected return 10- 20%. We have much more money in a value portfolio than the Dogs strategy.

A word on returns. Make sure you know exactly how to calculate your return and actively watch your performance (but not too actively. Once a quarter is frequent enough). Further on the subject of returns – Warren Buffet used to make 100%+ year on year from value investing. Now that he has such a large market position these types of returns are unlikely due to his visibility to the market, but his comment is that if you are financially smart and starting out with a smaller portfolio you should get 50% p.a. as a minimum. I think what Warren discounts is that his financial IQ is a lot higher than the rest of us and we are going to make some mistakes. For me if I can’t make a better return than the interest costs of a property mortgage then there is no point investing in either EFTs or Equities. I should save up and buy another house. Usually I can make more  from stock than a cash account (currently 3%) and more than the cost of mortgage interest (currently 5%), but if I can’t I will quickly redirect my money to find the best return available at the time.

The final point and probably the most important is to protect your investments and stay on plan. Don’t get greedy and chase deals that are too good to be true. It is better not to lose money by being over aggressive or inflexible to the point that you are ignoring the signs that your portfolio is in trouble.  Also every dollar that you spend or lose requires that you work to earn $2 to replace it. $1 to the tax man and $1 for your pocket so it’s easier if you just keep (save and protect) the dollars you already have rather than spend it or gamble it on a risky investment.

If you are new to investing read, meet, learn, talk, watch, listen before you leap. Paper trading is a good idea, but be careful. There is no emotion playing with pretend money and things will be very different once you put your hard earned dollars into the market.  A nice tool to start paper trading is here.

Best advice from my father: Build your fund when others run for the fire door!

Let the sound of the firebell become music to your ears…

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