As I’ve mentioned previously, goals are extremely important. What would football be without an end zone? How about baseball with no home plate? How would a business function with no bottom line? Goals help you to focus. They tell you where you’re going and keep you on track as you work towards the goal. Steven Covey, in his book “Seven Habits of Highly Effective People”, advocated starting with the end in mind (Habit #2).
Too often, people ignore the simple fact that you NEED to have a goal in order to be successful. No one is going to hand you the keys to a 10-unit rental property with 20% margins. Do you think Steve Jobs only wanted to create cool devices? Don’t you think his GOAL was to bring classy design to mundane objects (Walkman = iPOD; Extreme lightweight computing = iPad; rabbit ear TV = iTV)?
People say that they want money. That is all well and good, but ‘wanting money’ is not a goal. Having money usually happens when you define your goals and take actual steps in pursuing those goals.
These goals, your goals, need to be documented and defined.
My goal is to have the financial stability to live my current lifestyle while having the ability to work any job I choose or to create any business I desire. I do not want to have to continue to work longer hours while looking for higher paying jobs in order to have a good retirement.
Sounds great, but what exactly does that mean? On simple terms, I want my investments to drop enough cash to my bottom line (take home pay) that any job I do take is extra cash, effectively a monthly bonus that would allow me to actually live better than I do now. So, what does my current lifestyle cost? Well, here we go:
Monthly budget (all numbers rounded up to the nearest tens)
– Housing: $850
– Food: $600
– Pet food: $200
– Electricity: $50
– Water: $40
– Sewer: $40
– Phone: $150
– Internet: $70 (Need to see about reducing costs here)
– Entertainment (Netflix): $10 (single DVD out at a time, no streaming)
– Investments: $90 (Two DRIP plans)
– Employer 401k Match: $80
– Vehicle (insurance, gas, maintenance): $225
– Eating out (Generally Starbucks, twice a week): $80
– HELOC: $150
– Heating system loan: $150
– Savings/Misc: $240
Total post-tax cash needed: $3,025 monthly
Assuming an effective tax rate of 25%, my gross take home would have to be $3,025 / 75% = $4,033 ($48,400 annualy; please note: health insurance is taken out pre-tax, so I lump the health care payment into the ‘effective tax’ rate of 25%; I am actually in the 15% tax bracket).
Therefore, my goal is to receive at least $3,025 monthly, after taxes and health insurance through some sort of investment. For me, these investments are real estate. In addition to knowing how much I need to receive, I also want to set a time frame for this goal. In football, there are a total of 60 minutes of play in which to outscore your opponent. My time frame is five years, a total of 1826 days (my clock started counting in July, 2012, so there is only one leap year). Five years has no actual significance, simply a reasonable time frame in my mind.
Maybe five years sounds like a lot. To me, it doesn’t sound like a very long time to meet my goal. If we break down the financial goal ($4,033) by the time to deliver (1,826 days), I will need to increase my monthly take home pay, through these investments, by $2.21 per day for all 1,826 days. $2.21 per day may not sound like much, but that is an increase of $66.30 monthly or $795.60 annually (let’s use $800 for ease of math).
If we assume a linear trajectory, during my first year of investment, I will need to bring home an additional $800 monthly. At the end of my second year (after I’ve held my first year’s investment for 12 months), my gross income will have increased by $9,600 (12 months x $800 per month). Obviously, that will not happen with one single property. You may not receive $800 per month with two properties. It may take four properties to reach the $800 per month target.
I am going to assume (hope) that the growth of my investments will not be linear, but rather some sort of curve, increasing at a faster rate each year.
Without a goal (a touchdown), I would not know how much I need to increase my annual take home (how may yards per carry/pass). I would be hard pressed to develop a strategy to increase that take home in a sustainable manner (four downs to get a first down and get closer to the touchdown). I could throw a hail mary in year five, and try to achieve the $4,033 all in one year, but that is not sustainable.
What have I achieved so far?
As of this writing, my wife and I own a small real estate investment business, HBS Real Estate, LLC. The business has been ‘active’ for one year as of early August, 2013. Our business is a Limited Liability Company (LLC) which I deliberately chose in order to protect our personal assets (see: Business Types). Through the business, we own: one single family home and two duplexes for a total of five rentable units with approximately $710 monthly cash flow with a roughly 12.5% margin of error (see: Losses and Safety Factor). Removing the margin of error, my monthly cash flow would be approximately $810, right in line with my rough calculations to make my goal of $4,033 monthly cash flow within five years.
What is your goal? When you have your goal in mind, break it down into simple, measurable steps. What is your first step? The goal may seem insurmountable, but the first step is always easy; the trick is taking that first step.