JF2627: 5 Ways to Align Your Investments to Achieve Your Goals | Actively Passive Investing Show 67

In today’s episode of the Actively Passive Investing Show, Travis discusses how to identify your goals and actually reach them through your investments in five steps. He talks about identifying lifestyle vs. financial goals, honing in on a strategy specific to those goals, and how to know which form of investing fits best with your ideal lifestyle. 

 

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TRANSCRIPTION

Travis Watts: Hey, everybody, and welcome back. This is Travis Watts with the Actively Passive Show. First and foremost, you might hear a little bit of an echo on this particular episode, I apologize. I’ve switched a couple of different things around with the studio, I’m still trying to tweak those out, and I don’t have any furniture right now in front of me where you can’t see. So it sounds a little bit more echoey. So, apologies for that, I will get that wrapped up here shortly.

So what we’re talking about in today’s episode is basically this—there’s five things that I want to share with you that will help you ultimately align your investments up to your goals. Said another way, we’re going to identify what goal or what goals you have, and I’m going to show you, in five steps, how to align your investing to actually be able to achieve those goals. So this is not any kind of BS hype, there’s no upsells and programs. I actually just want to give you value for value right here, in probably as short as 15 minutes, we’ll say.

So that’s what we’re talking about. As always, the disclaimer is that I’m not a financial advisor, I’m not a legal professional, I’m not a tax professional. So please always seek licensed advice. I’m just sharing with you what’s worked for me, what’s worked for a lot of other people that I’ve seen first-hand. And my goal, as always, you guys is just to make things easy. It’s a complex world out, there’s a lot of noise, there’s a lot going on. Let’s just get right to the point, though; let’s eliminate the 99% of the distractions, let’s focus on the 1% of things that actually work. That’s what we’re talking about today. Thanks for tuning in. Without further ado, I’m going to dive right in.

So first and foremost, step number one of all five steps is simply to write down and identify what your goal or what your goals are. Now, there’s two general types of categories here; you have lifestyle goals, that would be like, “In 10-20 years, I want to have a beach house and a secondary home, and be able to travel, and have two cars, and have 3.5 kids,” this kind of stuff. So it’s identifying, it’s visualizing rather, what you want your optimal lifestyle to look like and be like; that’s one type of category to look at goals.

The other is just financial goals, which are super straightforward and obvious. It’s just, “I want to have a million bucks in the bank”, “I want to have $5 million in the bank”, “I want to have $10 million in the bank”, whatever it is, or, “I want to have $5 million allocated to real estate investments”, or something like that.

So I would say the latter goal of financial goal is not as strong. And the reason I say that is when you hit setbacks or hurdles or the economy shifts, you’re more inclined to give up on that goal and just say, “Well, I thought I wanted $10 million, and it turns out, I only got $5 million.” And then settling for less. It’s a lot harder, emotionally speaking, to settle for less of a lifestyle, to go from that example of, “I want a beach home and a second house and a couple cars”, to saying, “Whatever, I’ll just live in a 600 square foot apartment and not have any cars and not have kids and not have a marriage.” That’s a little bit tougher emotionally.

So I would say set the lifestyle goals if you can, and just identify as clearly as possible what you anticipate trying to achieve. The more clear you get, the more you can think and visualize on that, the stronger those goals become, the more likely you are to achieve them. That’s kind of how that goes in a nutshell. So that’s step number one. If you want to take a note of that, a physical note; if you’re not driving or whatever, do that. And I highly recommend that you write it down. You can go through this episode right now audibly, and then maybe re-listen later and write down your goals, but I always recommend writing them down.

Okay, now, number two, diving into the investment portion here, is to identify whether a cash flow or a passive income strategy is the right kind of strategy to get you to that goal, or if it’s more equity-based. So let’s start with the financial goal example, if that’s the kind of goal that you set for yourself. So obviously, if you said, “I want $20,000 a month passive income.” That’s obviously a cash flow or a passive income goal. If you said, “Hey, I want $5 million in the bank.” That’s an equity-focused goal. That’s the easiest, simplified version.

Now to talk about lifestyle goals, it’s a little more complex, because it depends, right? You might say, “I want my home paid off,” or, “My homes paid off. I want my cars paid off. I want zero debt.” Well, that portion is going to be an equity goal. So your house on the beach is – just making up numbers – $500,000. Your second home is $400,000, your cars are $200,000. Just throw in round numbers. So maybe you need $1.1 million as far as equity is concerned to purchase those items.

Now, the rest is probably going to be a cash flow goal, because you’re still going to have, on those homes, insurance and property tax and maintenance and upkeep, and rehabbing them, your cars are going to get old over time, you’re going to have to replenish those… So you’re probably going to need a little cash flow to live on, additionally. So it might be a hybrid between the two, and I think for most people, that would be the case; you need kind of an equity and a passive income goal.

On the flip side, my wife and I, for years, did the rental thing where we basically rented everything. So that was kind of interesting, because we found out how to create a completely passive income-focused lifestyle by just leasing and/or renting where we lived, and maybe even vehicles in your case; in our case, we paid our vehicles off, but you could definitely lease them. So in regard to that, you just want to figure out. So maybe that beach house rents for $4,000 a month, and the second home for $2,000 a month, and then your cars for another $2,000 per month. So maybe a goal of $10,000 per month in passive income could be your financial goal. But the point is, for step number two, identify passive income or cash flow, income or equity, or a combination of the two. All you’ve got to do on that is simply circle one, or decide.

Break: [06:42] to [08:15]

Travis Watts: Alright, moving on to step number three… So this one is identifying whether or not you want to be an active or a passive investor. So simply put, if you’re a passive investor like I am, you are not materially participating in the business of what you’re investing in. So a passive investor could be as simple as using an example that you invest in a publicly-traded stock; Tesla, Facebook, Amazon, blue-chip stocks, whatever it is, index funds. That’s an example of being a passive investor. You don’t work for those companies, you don’t have any active involvement, you don’t really have much in terms of decision-making ability, you’re just passive. I’m passive in real estate syndications, where I let general partners run the show, find the deals, manage the business as I passively invest with them.

The cons to being a passive investor are lower return on investment potential, as compared to being active, which I’ll talk about here in a minute, lack of control, and I would say lack of ever making it huge as far as financially speaking. Most people who are $100 million-plus, billionaires, all this kind of stuff, were active in businesses that they started or investments that they made. So it’s kind of higher risk, higher reward, but also your time commitment, something to consider.

So to that point, let’s talk about active a little bit more. So active could be flipping homes, trading stocks, starting a business and running it yourself, being the CEO of a company, that kind of thing. As I mentioned, you certainly have more control, you certainly have more decision-making ability. And what you’re really doing at the end of the day is you’re paying yourself for your time, effort and energy.

So just to recognize that, I’ll share with you, which I’ve shared a few times on the show, my story of when I got started in real estate investing, I chose to be active. And I did that because the higher return on investment. I was making pretty great annualized returns, but I was also doing a tremendous amount of work. And as I started scaling that out bigger and bigger, I ran into some scalability issues with that business plan. I’m not saying that you will, just saying that’s what happened in my story. I later decided, once I had built up some equity, I could actually be a passive investor, a hands-off investor, and have enough cash flow to support my goals and the kind of lifestyle I wanted to live.

So I guess put in a general sense, if you’re starting from nothing, you’re starting from scratch, you have very little capital to work with, perhaps active is something to consider and look into. Once you start building a nest egg, once you have a little bit of net worth, now it’s time to maybe think passive or a combination between the two, perhaps. Again, not giving anybody advice, just recommending a thought or an idea that you might consider.

Okay, now that we know active, passive, or a combination, or a hybrid between the two, step number four is identify what kind of assets can potentially get you to your goals. There’s so many different assets to choose from. There’s real estate, which we talk about all the time on the show. And even within real estate, there’s single-family and multifamily and office and hospitality and mobile home parks and self-storage; the list goes on and on. And then there’s stocks, bonds, mutual funds, there’s notes, there’s ATM machines, there’s private businesses, there’s insurance products, like annuities, or whole life insurance. There’s a world of investments out there. So start to identify which ones make the most sense.

For example, with real estate, let’s say in the sense of buy-and-hold real estate, you have a couple different ways that you make money; you could have cash flow, as your tenants pay you every month, you might have equity appreciation as the property goes up in value over time and keeps up with inflation… Whereas let’s say you did note lending where you’re lending money out for an interest rate in return – you may not have any equity upside in a deal like that, but you might perhaps have stronger cash flow out of the gate. So again, we’re tying this back to the initial things that we talked about in steps one and two – are your goals cash flow or equity-focused?

Using the same example in the real estate space, maybe you’re interested in investing in development real estate; that’s more of an equity play, where you invest 100k and hopefully, in a few years, they actually build the apartment or whatever it is, the apartment building, and then they sell it for a higher cost than what it obviously took to produce that building.

So the world is your oyster, but the point is, get some books, get some education, get some mentors. Start identifying which of these asset types can help get you to your ultimate goal.

I speak a lot about the F.I.R.E Movement, Financial Independence Retire Early, and a lot of people who are in that movement, they invest passively in index funds, which are publicly-traded in the stock market; it’s kind of like a pool or an index that owns a bunch of different stocks. And then what they do is, when they’re ready to retire, quote unquote, they withdraw about 4% of their portfolio balance to live on. So that’s a whole different topic, different conversation, but just saying that might be right for someone in the F.I.R.E. Movement, looking to do that specific strategy. Other people may find that these other asset types are a better fit.

Alright, look at that. We’re already on number five. Step number five is do the math. This is the funniest thing. First of all, I’ve said this before, I’ve said this so many times. I hate doing math, math was the worst subject I ever had in school. I specifically chose a college degree to pursue that didn’t require a math class, and a huge part of my decision was solely based on that. As crazy as that may sound, I hated math that much where it was either I’m not going to college or I’m going to pursue a degree that doesn’t require it. So I chose to go into this lighting design and live show production, and I was going to go tour with bands and all this kind of stuff. So kind of funny side note on that.

But seriously, you guys, it’s not that complex. I do this kind of math all the time. And I guess, to be frank with you, I’ve always enjoyed practical math, like what’s a 20% discount on buying a TV? I just never liked the advanced algebra, the X plus Y divided by the Z, with the question mark here, and then see what’s missing from that equation.

So let’s do the math. It’s as simple as this – when we go back to steps one, two, and three, and we think, “Okay, I’ve got this lifestyle in my head and whether I’m going to rent, lease or whether I’m going to own and pay everything off, I either have this equity or this cash flow go” — let’s go with the cash flow example.

So running the math could be as simple as this. I need made $100,000 per year in passive income. Okay. Well, if I start looking at real estate as an asset class, and I say, “Yeah, that’s probably a type of asset that might get me to my goals,” and I find a piece of real estate that cash flows at 8% a year, then I just plug in the numbers, you guys, it’s that simple. $1.25 million invested at 8% annually equals $100,000.

Now, you may not do it in one deal like that, where you’re dumping a million bucks into one piece of real estate that does 8%; you might be diversified, but I at least would know, I want to pursue real estate, I need a number like 8% a year in cash flow. And then I would go seeking these deals, whether that means actively or passively, so that I could piece that into the puzzle and pursue towards my goal of having $100,000 a year in passive income.

Or here’s the equity side of that. It’s the rule of 72. I think I briefly talked about that with Theo months and months ago. But the rule of 72, if you’re not familiar, is this simple, you guys. Go on a calculator, 72 divided by the anticipated annualized return that you think you’re going to get out of the investment, or that you did get out of the investment. So 72 divided by 10% a year on an investment means you will effectively double your money in 7.2 years. Now, of course, a lot of assumptions are built into that, that all your investments are going to do exactly 10%, and nothing’s ever going to go wrong, but things could also exceed 10% depending on what you’re investing in. So the simple math is that.

Break: [16:47] to [19:40]

Travis Watts: You could plug in a lower number. So 72 divided by eight is nine years. So every nine years you would double your money. If your financial goal, going back to the previous steps, was “I want to have a million dollars in the bank, and today I’m starting with $100,000 to invest” and you think the investments that you’re going to go chase after might do 8% passive income per year, or total return, however you want to look at that… I think 8% is kind of the historic stock market return going back about 100 years or so, something like that. But for example, purposes, we’ll just roll with the 8%.

So your $100,000 that you’re starting with could potentially turn into $200,000 over the course of nine years if you’re getting an 8% averaged out annualized return, and then the $200,000 could potentially turn into $400,000. And then the 400k could turn into 800k in another nine years, which is a total of 27 years, give or take. And then your 800k could turn into $1.6 million over the next nine years, because again, we’re still doubling money every nine years with an 8% return. So that’s a total 36-year timeframe, you went from 100k to $1.6 million. But what was our goal? Our goal was just $1 million in that example. So to get to $1 million, it’d be 30 years, give or take, 31 years, something like that.

So again, all I’m trying to say here is run the numbers, run the math, guys. This can take five minutes, and you will get a perspective on what your goals are, how long that might take

I think there’s just a lot of delusion. There’s a lot of delusion, unfortunately, through marketing, through sales courses, the bad reputations of get-rich-quick, all these things that exist for financial products are obscure. That’s what I mean, there’s so much noise out there. If you just look at reality, if you just take literally, a time out of your year, take one week, take seven days, it doesn’t have to be consecutive, take a day here, take a day there, take one day a week for the next couple months, you can figure all this stuff out on your own. You don’t need any special anything; you don’t need to go spend a bunch of money. If you feel you need a financial advisor or something like that, of course, always seek licensed advice. But in general, I believe you right now listening to this podcast can do this. And I recommend that you at least go through it… Just humor me, try it out; just take 10-15 minutes, write this stuff on a piece of paper and just start brainstorming, and I promise that will have a huge return on investment for you in the sense of just pushing you forward towards your goals, helping you clarify and identify what you’re moving towards.

A lot of people, unfortunately, I think get stuck in a career where maybe they work years that they didn’t have to even work had they just sat down initially and gone over some of this stuff that, like I said, could take seven days to identify, on average. Think how much you could do in 20 years if you had no work obligations of any type. If you could just travel, spend time with friends, family, do whatever you do. That’s huge, guys. We can always get money back in life, we cannot get back our time, that’s been one of my underlying messages to the world, is passive income can help you free up what I call time freedom. That just means freedom over your time. Maybe that means retiring early. Maybe it means working part-time; whatever it means to you, I think you’d agree with me it’s one of the most important things in life, is not to squander our time and what limited time we have. And who knows, we might all—hopefully, not all—some of us may pass away tomorrow, unfortunately. So it’s never a guarantee that we have any time left. So I really try to look at maximizing time. That’s why I’m making this simple episode for you. That’s why I said, I’m going to cut the noise out I’m going to take 15 minutes, I’m going to get right to the point, I’m going to give you five practical steps to identify your goals and figure out how to get there through investing.

So in the spirit of valuing your time, as well as my own, I’m going to cut this episode short right here. Thank you guys so much as always for tuning in. This is Travis Watts. This is the Actively Passive Show, once-a-week episodes. Thank you guys so much. I’ve got a bunch of you that reached out last week thanking me for that episode. Quite frankly, I don’t even remember what that episode was. I have to go back and look, but apparently a good one. So if you didn’t see the episode before this, go check it out.

Thank you, guys, for tuning in. Have a best ever week. We’ll see you next time.

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