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4 Main Data Points On How to Be Financially Free

HuffPost logo HuffPost 7/03/2016 Tom Ayling
WEALTH © David M. Elmore via Getty Images WEALTH

What does financial freedom look like for you and your family? Does it mean a fully funded college fund for your children? Do you own your own home? Are you able to decide how you want to spend your time while receiving regular disbursements from an annuity or retirement account, completely covering your living expenses for the rest of your life?
The investment vehicles outlined below, if executed after doing due diligence and research, will place you and your family onto a path towards financial freedom in your life. Are you ready to learn about the tools and strategies that have worked for others, and do you have the discipline to follow in their footsteps?

1. The Lucrative Rewards for Angel Investors and Venture Capital Firms

To expedite your journey towards financial independence, allow your money to actively work for you as part of a cause or project you're passionate about. Investing in a startup is an opportunity to give resources to a struggling small business owner who's looking to grow and expand their enterprise. Our first strategy is the most aggressive, and carries one of the highest risks, but it can be incredibly fulfilling, both financially and personally.
Imagine if you had been one of the early investors in Apple (AAPL). The Initial Public Offering (IPO) of stock in Apple Computers made 300 of its original stock-holders millionaires on December 12, 1980. The stock has continued to reward investors, with examples like the Wang family becoming Apple millionaires after their stock purchases in the 90's appreciated to a current market value of over $1 million.
Take heed that the vast majority of startups and venture capital funding rounds fail. Forbes puts the statistics between an 80-90% failure rate. That's dangerous for conservative investors, but aggressive money can really make phenomenal returns if it backs the right company at an early stage.
May the odds be ever in your favor.

2. Real Estate Can Mean Real Investment Returns

The beauty of investing in land is that they aren't making any more of it. Well, that is unless you count China's activities in the South China Sea. But for 99.9% of the world, the areas where people want to live aren't really growing in acreage. Instead, cities like San Francisco and the Big Apple are focusing on building upwards. I call them human filing cabinets, but you can look at them as incredibly hot investment opportunities.
Real Estate Investment Trust (REIT): The easiest way to get started investing in real estate is by pooling your money with other real estate investors in a REIT. Many REITs are traded publicly on major stock exchanges. As REIT investor Brad Thomas points out, research and due-diligence is key to success in investing using REITs.
You'll want to carefully consider the following when analyzing a REIT:
  • How experienced is the management team?
  • How do the REIT's dividend yields compared to other dividend-earning investments available on the market?
  • What's the fair market value of the assets currently held within the REIT?

While a REIT is low-maintenance, many real-estate investors make a larger return on capital by going in on their own projects; flipping houses, renting out investment property and establishing their own private REIT (potentially with friends and family).
The American Dream: While we're on the topic of investments, let's take a closer look at one of the most popular real-estate investments: purchasing your own home. The cost of purchasing a home for you and your family includes:
  • Down Payment to Secure the Mortgage
  • Financing Charges from the Bank
  • Monthly Mortgage Payments
  • Homeowner's Insurance
  • Closing Costs (charged by a Realtor and Escrow Service)
  • City, State and Federal Property Taxes
  • Maintenance Costs for the Property
  • Changes in Valuation Based on Surrounding Properties (Real Estate Comps)

If you're serious about owning your own home, then you should start by using a mortgage calculator to understand how much home your family can afford. In addition, there are excellent books available online that will help walk you through the process of becoming a first-time homebuyer.
While these tools give you a starting point, there are other factors to consider. Is your family going to be living in the area for a long time, or will you need to move for work or school in the near future? If you're going to be moving in the next 2-3 years, then you'll want to be sure to analyze the property as a short-term investment. When you sell the home, will you be able to come out ahead after all closing costs, estimated maintenance costs and depreciation or appreciation in value?
Qualifying for a home loan (mortgage) can definitely be a challenge. Some reports show that banks are looking for a personal credit score higher than 760 if you want their best rates. Carefully consider whether waiting until you've improved your credit score will save you significantly on interest rates over the life of the loan. A 1% difference in your interest rate on a $100,000 mortgage can mean more than $20,000 in savings over the life of a 30-year mortgage.
Responsible home ownership is an excellent way to help solidify a solid credit history, although irresponsible home ownership will lower your credit score. Most homebuyers report an initial drop in their credit score, but this bounces back with on-time payment of your mortgage, in addition to maintaining all other credit accounts in good standing.
The main goal in purchasing a home is in having the ability to apply your monthly housing expenses towards building equity in a property. Renting an apartment, condo or home is simply watching money fly out the window, never to return; although you do get the peace of mind knowing that maintenance and property taxes are the responsibility of the landlord.

3. Creating a Diverse Retirement Portfolio with a Variety of Investment Products

Diversity is a key component to long-term financial success according to Van Tharp's book, Definitive Guide to Position Sizing. It's important to understand that different segments of the market struggle during different periods, and spreading your investments over a wide variety of funds and assets will better position you to weather the financial storms that roll through the markets every few years.
Mutual Funds: One of the best ways to diversify your investments is with a mutual fund. A mutual fund is an investment vehicle where investors place their money with a management team that actively manages the investments and positions in multiple stocks across a variety of markets. This provides the diversity of multiple stock positions across the market, without the investor having to actively pick winners and losers in the market. The management team takes on all the headaches of managing the investments.
When purchasing a mutual fund, it's important to find out whether it's a load fund or a no-load fund. Load mutual funds involve a commission as high as 8% upon purchase or sale of the shares in the fund. A no-load fund sells shares directly from the managing company, avoiding the middle-man and their associated commissions. Studies have shown that load and no-load funds generally perform the same, which is why I recommend purchasing no-load funds whenever possible.
Index Funds Outperformed Donald Trump: Anyone following the current election cycle knows that Donald Trump loves to tout his financial genius. He's accomplished amazing things, although if he had simply parked his networth in an index fund, like an S&P 500 based fund, his money would have grown at a rate of far more than 400% since 1987 according to Fortune Magazine.
An index fund is a passively managed investment that simply mirrors the entire market. Therefore, if the overall market plummets, your shares will be hit hard, but market-wide gains are also yours for the taking.

4. The Millionaire Lifestyle is an Absolute Possibility for the Financially Disciplined

If you want to seriously change your financial outlook, most reports will tell you that you have to become financially disciplined. You need to understand your personal budget and how your money is being spent. Tweak your budget so that you pay yourself first, putting aside a set amount of money into savings and investments from each paycheck. Actively learn about the market and the various opportunities let your money work for you. Understand your risk-tolerance and build an investment strategy that gives you the maximum returns within your risk tolerance.

Final Thoughts

If you apply the lessons discussed above, there's no reason you can't be a millionaire one day. Compound-interest means that as your investments grow, they'll grow faster year over year (assuming the market cooperates). Today is the day to take action and take a first-step towards financial independence. Is 2016 your year?

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