March 07, 2009

On Your Journey To Financial Freedom



If you are really interested in succeeding, you must have a specific goal.   Goals are funny things, because they often actually cause failure.  For example, many people have the goal "I want to be rich", or the even more creative - my own personal favourite because of the words ("I want to attain financial freedom.").  Although we should all be aspiring to the latter, the words are lofty in nature and broad in scope.  

To be workable and focus-oriented, goals should not be lofty and vague, but instead be attainable, realistic and measureable.  The following goal is an excellent one: "By January, 2010, I want to increase my monthly cash flow by $5000 through the generation of positive cash flow and the reduction of expenses."   This particular goal gives you a specific scope, tells you how to do it, then expects itself to be completed by a specific date.    
Marking your achievements on a desk chart, a wall chart, a computer tracking program, or a graph of some sort, will help you along the way.  Charting your progress on a specific day of each week helps continue to make yourself accountable.    One friend of mine had a creative spin on the charting/graphing idea.  She has purchased a slightly upscale (read:  attractive) key holder.   You know those ones I mean:  the ones that are like a little cabinet, using being in the property manager's office, or the janitor's office.   The cabinet opens up to a gazillion hooks upon which you hang your keys.  My friend's version is a slightly upgraded (non-metal) version of this idea:   each time she buys another property, she hangs a copy of a set of keys!  Way cool!   

Recessionary Blues Suddenly Look Pink!

This for sure is a time to reflect on the changes in the market over the last year.   We have gone from boom time to a serious recession.  To be sure, this year has been an interesting and challenging one for investors, with all the wild fluctuations in the market and the global economic crisis threatening to strangle virtually every economy on the globe.  

For many years, (since approximately 1992, in fact), the western world has enjoyed an exuberance of value, an oppulence of spending and a carefree attitude towards credit and fiscal responsibility.   There was what can be described almost as a buyer's frenzy or buyer's mania, where we thought nothing about the impact of such 'freedom buying'.   Things have clearly changed.
Many of you might recall the many months ago, I issued a warning with respect to the upcoming and imminent corrections (through the newsletter) citing beginning and slight agitation in the market, the warnings of financial gurus and a variety of other factors.   Let's review for a moment what's happened since then.  
There has been a dangerous plunge in housing value not only in the United States, but also in western Europe.   There's been a credit freeze almost worldwide, which the Innisfil group can attest to has filtered down to the little guy.   There's been drastic plummets in the values of commodities and stocks.  There have been massive governmental bank and auto bailouts (and outright failures) across the broad chest of our important trading partner to the south.  I know it sounds a little petty, but even I was shocked into reality (although I had seen and recognized these symptons long since) when I heard our very own Conservative PM encourage the idea of 'deficit spending'.  
Well, we all know the basic facts now.   If we haven't protected ourselves in the past few months, then we ought to learn a lesson - and remember these signs the next time they occur.   In the meantime, as my grandmother used to say, "there is no use crying over spilled milk - just clean it up on your own, then get on with your day".  What are we to do now?
I guess the big question to ponder is this:   is real estate still the best option for investors?   My answer is unequivicably:  YES!   In my personal situation for example, my home will likely drop in value, my income from school will drop even to a more serious negative cash flow position (with two families who've lost jobs as of early January, and likely few new prospects given the economy) and any equity property I have will siphon badly needed cash from my pocket, unless I can figure out how to make the equity properties into cashflow properties.  Actually, almost all of my equity properties also cash flow (at least to some degree - and some to exceptional degrees).   But what about my land purchases?  
They're still sitting there and will likely drop in value, but it doesn't matter because the maintenance on them (financially) is very low.   The big clincher though, is what about my cashflow properties?    THEY ARE STILL CASHFLOWING!   This is the best thing about cashflow real estate: even in a crisis market, you can still find a way to make it work.   And, if you have any cash base at this time and going forward, it is definitely the time to buy!   With prices dropping by the minute it seems, and the Bank of Canada doing its best to protect the economy by dropping interest rates, this is the time to buy if you are buying for cashflow.  Consider this:   the money from my cashflow properties still came in this month!   That's what RichDad's Robert Kiyosaki is talking about....( 
Let's look at this market as opportunity 'cause that's what it is.

Economic Update


If you believe we all have something to learn from one another, you will surely respect the opinion of Warren Buffet, one of the leaders in investments and money.   In mid August, he was quoted as saying that "ripples in the industry will continue to cause larger and larger problems in the financial sector and the economy as a whole".   He correctly predicted more huge companies folding under Chapter 11 bankruptcy protection and widespread damage in the US economy.   A few weeks later, Fannie Mae and Freddie Mac (the largest source of funding for the US) required a federal bailout, Lehman collapses (stocks which were worth $66 in February a few short months ago are now worth 21 cents!), Merrill Lynch (the third largest investment bank) is saved at the last minute by the Bank of America after it posts huge losses, and the US government bails out huge insurance giant American International Group (better known as AIG)....are you insured with them?   Yesterday (Tuesday, September 16th), US stocks had the biggest drop in seven years....
The situation in Europe is not much better.   The recent pound's fall against the Euro is the latest sign that Britain is on the brink of recession.   Apparently, this is the worst economic crisis in 60 years, according to Britian's treasury chief.   He continued to say that he believes that "the economic situation is going to be more profound and long-lasting than people thought."
Are you getting scared?    Well, I am - just a little bit.  
But, if we keep our head on our shoulders, and stay rational, we will think logically - not emotionally.    The world has gone through these kinds of times before, and we have come out the other end the better off for it.    If you think back to the Great Depression, or even the stock market crash of Black Monday, (and if you do your homework and check the stats like I did), you'll find that we're WAY higher stock-market wise than we were before those times.   No matter what, it always finds a way to creep back up.....
We just have to ride through the storm
But, it's also a time to be smarter than we were are a few suggestions:
  • If you've never gotten into the stock market, and you have some savings, this is what they're talking about when they say "buy low, sell high" - this is the time to BUY!
  • Hide out in cash flow positive real estate purchases.
  • Don't do anything 'high equity, low cashflow' - it's even a bigger gamble than it was before, and more dangerous economically than it was a year ago.  
  • Don't waste your money on empty purchases (like 'I want purchases') - instead go into debt ONLY for cash flow positive purchases, or if you're totally secure in your job (who is these days?), go for cash flow equal if the other option is to do nothing.
  • Be more cautious than you would have been last year.
  • Before you buy, do your numbers!
  • Do your homework (I'm a teacher at heart, what can I say?) - Or as they say in the real estate circles..."do your DD - due diligence".   Don't we understand 'homework' better?   It's what we hate to do, but what we know will save us later on?


A Past Newsletter Tidbit


Have you found that you just can't get going in real estate?   If you're in a little bit of a rut, and you need a kickstart, have you considered a Daily Mantra?   Before you laugh this off and think that perhaps a New Age Guru has taken over this blog, let me assure you that it's still me - Paola, writing to you from cottage country enjoying this week's supply of rain!    When I first started, I repeated this sentence each morning as I started my day:  "I am now a real estate investor.   What will I do today to that end?"   During the time that I used the Daily Mantra, my equity wealth and some cash flow stuff improved my overall financial wealth picture by 67%.   In mid March or so, I stopped repeating this sentence (things got hectic for me and serious family illness added to the commotion) and my wealth over that period did not increase at all!  I restarted the Daily Mantra routine in mid June, and since then I have decreased my expenses by $225/monthly (to add to my next purchase investment accrual high interest savings account), as well as increased my overall wealth picture by 22% (in two months).   Have I convinced you yet?    Try creating a sign and sticking it up beside your bathroom mirror to read everyday.  You can use my sentence or create your own one.   If you can't be bothered to make the sign, feel free to use the one I am now using, by downloading from our website.

The R-Word: Recession!

Recession Definition
None of us has been living in a cave for the past few months, so we all know that the economic crisis in the US is in full swing.   Most of us also know, believe, respect the opinion of economists, or at minimum, recognize that history repeats with respect to most things; the translation advises us that we are about to be affected by the economic crisis faced by the US and a recession is either already occuring or imminent.
What exactly is a recession?   According to economic definitions, a recession is a downturn in the business cycle that occurs when the real gross national product (GNP)—the total output of goods and services produced population declines for two consecutive quarters, (1/4 year = 3 months, so 2 consecutive quarters is six months). Recessions are usually characterized by a general decrease in output, income, employment, and trade lasting from six months to a year. A more severe and long-lasting economic crisis is known as a depression.   Mostly because we are living in North America, our government somewhat protects us from dropping into an economic depression, which hasn't happened for decades - mostly due to government interventions and strategies. 
Recession History
A quick review of the history of the recession indicators from the turn of century start with a 1907 drop in the Dow Jones Industrial Average to the tune of 35% over a period of nine months!   If we remember anything from high school history, we know about the Stock Market Crash of 1929, when stock markets dipped 85% over three years, but made a dramatic drop over a few short months and for the first time affected global markets.   Then there was the 10 month recession in 1960-61.  Then the Iranian Revolution and the associated oil crisis and energy crisis of 1969-1970.   Some of us might remember the oil stock crash of 1973, when the evening news showed us line ups for gasoline in the US, oil prices quadrupling (due to OPEC changes) and heavy financial losses from Vietnam, with economists and financial analysts described the 40% drop in the two year period post 1973.   In the early 1980s, there was the recession of 1982 and 1983, caused by tight monetary policy in the US to control inflation and sharp correction to overproduction of the previous decade, which effectively was masked by inflation.  The national exuberance of the 80s (real estate in Canada as well as the S & L (Savings & Loan) exuberance) period probably led to the recession of the late 1980s.    Most of us can't help but forget the 'Black Monday' of  October 8th 1987, when stocks abruptly fell in one morning, but continued to fall over three weeks to an almost 82 points.   Then, spurred on by the tech stocks, the collapse of junnk bonds and a credit crunch, as well as the internet revolution, there was the serious 1990 recession that lasted from July 1990 through to March of 1991, but had after effects for some time after that; fortunately, government spending and other initiatives helped to stall the advent of an actual depression, although interest rates for residential mortgages climbed dramatically during this period.   The next recession began in March of 2001 and ended in November, with after effects until 2003 with the collapse of the Dot com Bubble.    Of course, we all remember the minor correction/contraction caused by the September 11th attacks and the accounting scandals.  However, since about 2002-2003, there has been no recession, with the economy in an upward swing that seemed everlasting - until now.
Update - July 2008

Another war and another credit crunch brings us to 2008.   Here we are, with a brooding economy south of the border (should we have known when our dollar crept up for the first time in three decades?).   As the real estate bubble continued to gain momentum, and more and more people were encouraged by the social morals of this day and age (purchase on credit and worry later - laden with debt) affected the judgement of the mortgage industry, and we continued to buy, buy, buy, and spend, spend, spend, we should have known it would end.   And now, it has.  

What are we to do?   That's the million dollar question.  If you're in real estate, you might now be reducing your risk and playing the RichDad "Where can I really find hard core cash flow properties?" routine....whatever your choice, you've surely reviewed your goals and modified your real estate decisions over the last six months, to accommodate for the changing financial arenas.
Update - March 2009
Well, here we are:  in a full out recession, which people are likening to the Great Depression of the Dirty Thirties!   With AIG needing a further bailout, with auto companies failing, and European banks at the brink of disaster, what are we to do?     I continue to say that this is likely one of the best times to buy we've seen in the last couple decades.  You could argue that we should wait a few more months to a year to make sure that we've hit the low, but regardless, moving forward, we should look at the situation as a situation of hope!   Why?   Because this is the type of situation they are talking about when they say "Buy Low, Sell High."   Don't run for cover or let the media and the economic uncertainty rule your decision making.   Break free!  

Ten Rules for Creating Wealth

A few rules I've learned about creating wealth:

Go to fullsize image

Rule # 1:   Decide what you need the money for and designate it as your goal.  (If you're working for something you want, you'll be more dedicated to it.)

Rule # 2:   It's never too late to start.  

Rule # 3:   You can always start fresh every day.  (If you didn't succeed in a venture, it was because you did something wrong.   Determine what that was and don't repeat it in your new venture - which you should force yourself to complete, without allowing your failure/poor performance to dictate your future.)
Rule # 4:  Spend less than you earn.   (It's surprsing how many of us do not do this.)
Rule # 5:  Borrow only for good debt - which means don't borrow for bad debt, unless you can profit from it anyways somehow.
Rule # 6:   Don't pay a lot to learn something from someone.   If you're taking a course, make sure the fee is reasonable or even inexpensive (<$1000 for example   If you're paying anything more than that for a course or mentoring, then you are subsidizing someone else's great business idea.)
Rule # 7:   Have a set time of day or week to work on 'getting wealthy' and stick to it.   (If you consider it a part-time job you've committed to, say every Saturday from 1:00 to 4:00 pm, then you will grow wealthy more quickly.)
Rule # 8:   Create to income streams to generate more money, then allocate that money to your investment goals.  
Rule # 9:  Understand that there are no secrets and that it doesn't work overnight.   You have to fine-tune your thinking constantly over time until it's right and until it affects your decision making all the time.  Building wealth takes time and learning how to build wealth is a process.
Rule # 10:  Remember the best advice is free!   If someone is telling you something, you only have to question their motives and understand if they are legitimate.   (If you are paying some top dollar for a course, their motive may be to help you get rich, but it also may be the $4000 you just paid them to tell you stuff you can learn from each other for free, or for small amounts.  I also once met someone who spends a lot of time counselling other investors in real estate investment, but doesn't actually own any property!   So remember to ensure legitimacy.)
Follow the rules and financial freedom will come!

Cashflow, Cashflow, Cashflow!


I'd like to re-iterate the importance of doing the numbers on your prospective property purchase, as I've heard a few people saying they know it cashflows, but can't produce a spreadsheet to prove it.   In my opinion, and believe me, I've learned my lesson in this area, properties that seem like they would cashflow don't necessarily cashflow.  And that's fine, provided you're buying for equity (and that's your strategy) AND you can support the negative cash flow in your overall picture.  Notice that I've attempted to make an impact on readers by dramatically highlighting the key phrases.  


It's also important to consider the "BIG PICTURE".   To do that, the best suggestion I have is to buy a large piece of bristol board, (like you did in Grade six when you had to do that project on the Native Peoples of Canada) and plot it all out in boxes.   What do you have?   Colour code the cash flow properties one colour (blue - solid/boring, but cashflow productive) and the equity properties another colour (red - to signify hot/lucrative, but dangerous).   Make the bristoal board total picture match your goal.  If your goal is to purchase three cashflow properties by December, then you should include three empty boxes, which should 'bug you" as you look at them sitting empty every day - right beside your desk or hanging by your bedroom lamp, where you'll see it all the time.    This simple exercise will help you: identify your goals, write them down (in visual format), see what's missing visually, and constantly try to fill in the missing pieces.   It will keep you on track when you're looking at investments, because it'll make you think (while you're hearing people talk about great deals) - "does it fill in my empty box bugging me on the bristol board beside my desk?"

Investment Resolutions!

Have you made any Investment Resolutions?   If you haven't yet done that, why not consider these?
  1. Wake up every morning and write out the sentence:  "I am an investor.   What will I do today to confirm that fact? 
  2. Attend a meeting each WEEK to further your investment network, connections, and most important - your knowledge base. 
  3. Play Cashflow at least once a week: it trains your mind to think about collecting assets instead of spending money to acquire doodads.
  4. Purchase at least X number of properties by X Time Frame.   (Create your goal and work towards it.)
  5. Buy, or at least offer to purchase, at least one property per month this calendar year.
  6. Travel to another town or city outside of your comfort zone and meet with a new agent at least once a month. 
  7. Read one new investment book at least once a month.


February 12, 2009

CFF's Personal Income Statement for Financial Freedom

Download file


January 03, 2009

We Always Forget The Goal!

It seems incredible to me that I often forget the 'main goal'.  

Have you ever done a mountain of work and then realized you still didn't finish the main job?   Have you ever thought you were working towards a goal, only to find that you were constantly getting redirected to unnecessary tangents - which seemed so necessary at the time?  Why must we all be SO tangental?

With respect to financial freedom, there is only one goal and here it is:

Monthly non-working income/cashflow MUST be    >   Monthly Expenses +

If you're a specialist doctor for example make $500k per year, are you financial free?   NO.  Because you still NEED to work to make money to pay your bills.  If you stop working, your income will stop in this case - no matter how much money you are making!

The key really is:  income that is not dependant on you working to get it.   What type of income is that?   - Cashflow income for rental properties that are taken care of by a property management company.  I have a few of these properties and over time, I have come to realize that RichDad's teachings (Robert Kiyosaki) are integral to financial freedom.   Because if you have to WORK for your money, they even if you make a lot of it, you are not financially free  (you are still tied to working to get the cash).   This can only occur if the money you make is not dependent on you working daily.  

Now that it has been put this way, be truthful to yourself.   How much of your income is not dependent on you working daily?   If you can truly say that your non-working income is greater than your monthly expenses, then you are financially free.  If no matter how much money you make, you can't say that, you are NOT financially free in your day job!  There are many people, who, even though they make A LOT of money are NOT financially free.

Don't forget the goal:   financial freedom comes from work-independent income which is greater than your expenses.