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Home  Articles The Why - How Much Do you Really Need?
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The Why - How Much Do you Really Need? |
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***In
response to the many comments I received since its publication, this is
a repeat of the July 2003 newsletter. It would benefit all of us to
think through these topics each year.***
July, 2003--I am writing this newsletter sitting on the porch overlooking a sound on the Outer Banks in North Carolina.
Each
summer when I come here, I reflect on why we build cash flows and
assets. It is fun to accumulate, but we must enjoy it as well. So, WHY
are YOU building your net worth?
THE WHY
Why are you investing in real estate? Do you have a plan?
Every
business that seeks to grow and achieve success has a detailed business
plan. Any real estate entrepreneur that expects cash flow and asset
growth in any reasonable time period should have a detailed plan as
well.
The first question is where do you want to be in 5 or 10
years? Just saying you want to be rich is not an acceptable answer.
"Rich" is a nebulous word and one we will remove from our vocabulary
for this discussion.
We will replace it with two concepts that
we can define, Cash Flow and Asset Building. Cash flow generates
current dollars available to spend now. While cash flow is required to
put food on the table and a roof over your head, it is also taxed in
the year you receive it. Even with the new tax laws, it can be taxed up
to 60% between federal, state and self-employment taxes. Once you think
about it, it makes no sense to earn any more than you need to live comfortably,
not spartanly or exorbitantly.
This is true since the next dollar you
don't need can be taxed up to 60 cents. And after paying the taxes, you must find a good
investment for the remaining 40 cents. You would need to more than
double your return on the after-taxed money to generate the same
dollars as you would on before-taxed dollars. That should debunk the old "Cash Flow is King" thinking.
A
popular way for real estate entrepreneurs to generate cash is with
quick-turn property. But this is just a business where you are the
boss. You may generate high income, but you will never be truly wealthy
doing this. See if you can name just one person you know that retired
wealthy from this business alone.
"Assets are King," is a much truer
statement. Asset values grow without current taxation. Rental property
can provide both current cash flow and asset growth. You decide when
that asset growth is taxed. Growing assets is the true path to wealth.
So,
how much do you need? We answered the cash flow part of this question
above. That was pretty easy to determine. Asset accumulation is much
more subjective. After about 4 million between spouses, estate planning
becomes complex. For the vast majority of you, 4 million in today's
dollars in investment net worth will carry you through the rest of your
lives.
INHERITANCE
One of the biggest
disservices done to children is to leave them large inheritances. A
study was done of lottery winners in Massachusetts in the 1980's. Any
winner of $5,000 or more was tracked for 5 years. After 5 years it was
found that 85% of them were in the same OR WORSE financial condition
than they were 5 years earlier. This directly relates to
inheritances--windfall money given to someone who has not earned it. You
probably have your own stories of wasted inheritances. Bottom
line--human nature is that people value what they earn themselves more
than what is given them for free.
If you really want to make a
difference in the lives of those you love, teach them to invest rather
than just leaving an inheritance. The self-esteem you will be giving
them is greater than any inheritance. And knowledge is not taxed!
Put some thought into these concepts when you are on vacation. To be truly successful, you must have a plan.
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