There are 3 main asset classes that can be used as vehicles for wealth.
1) Real Estate 2) Businesses 3) Paper assets
At this stage of the game, I am experimenting with numbers 2 & 3, and so far I have successfully generated additional income.
When it comes to business, I am trading used musical instruments. This has been going reasonably well and I have generated several thousand dollars in 12 months. However this is really a Self-Employed level of business. That means that it only generates income when I am working at it. What I need to do is step it up to the next level. Robert Kiyosaki makes a good point in several of his books when he writes that your business needs to make you money even ewhen you are not there. In other words you have to have good systems in place for people to follow in order to generate passive income from a business.
I am not very experienced in business. I have run several self-employed enterprises over the years and both went well for me. BUT, the majority of money was only made if I was putting in time. Now I have to figure out a way to change that.
For my musical instrument business I have a few ideas. I’ll keep you posted as I try some of these things out!
Paper Assets relate to shares, mutual funds and other financial investment vehicles. I have begun dabbling in shares. To date I have made a few hundred dollars on a small initial investment. However the market is incredibly unstable these days, and my share prices are going up and down very haphazzardly.
I need to develop a good way of cashflowing shares. Right now I am looking at buying shares with a decent dividend yield. It looks like there are several which will cashflow around 10% of their value. If I utilize a DRIP (Dividend Re-Investment Program) I can use the cashflow to buy more shares at a discount. Once they have been building up over a period of time I would then cancel the DRIP and use the dividend payments as monthly passive income. Thats the plan. First I have to pick some shares in a company I think will do well over the next few years. Watch this space…..
This is an exciting asset. The potential for returns is quite high, but I see several barriers to entry. First and foremostly, you need downpayments. If I was looking to buy a home to rent, and 20% downpayment is going to sting me $50,000. Unfortunately I do not have that kind of cash around.
It is also very difficult to find cashflowing properties by the time you have paid your mortgage, taxes, insurances and the other fees associated with owning property.
There are ways to get around this, but I need to learn some of them first. I am trying to organize another lunch meeting with my real estate investor friend to find out some more information about how to get started.
A few days I wrote a post about Derek Foster who retired at the age of 34. His books contain decent information, especially for Canadians.
The main principle he teaches is to buy shares or unit trusts that pay good dividends / distributions. Then hold, use the Dividend Re-Investment Plan (DRIP) and keep adding shares. In the books he clearly states that a person should buy and hold indefinitely.
Using regular dividend payments to become financially independent
Of course the markets in the last few months have been somewhat different from normal. As I read 2 of Derek’s books, written in 2007 & 2008, I could not help but wonder how this strategy would work in the current financial crisis. The idea of living of dividends is good, but what happens when so many of the companies you are relying on for income slash their dividends by 75% or simply stoppaying them altogether?
Well it seems that Mr. Foster has shown what needs to be done. It transpires that he liquidated his assets in February 2009.
Click the link to read the Globe & Mail interview with Derek Foster in March 2009.
To view / purchase Derek’s books, visit his website www.stopworking.ca
Many people view their home as their largest asset. I am coming to learn that it may not necessarily be the case.
According to Rich Dad Poor Dad author, Robert Kiyosaki, an asset is defined as an item that puts money into your pocket each month. Now that is quite a simple definition, and is certainly different from what the banks would have you believe! In many ways it is true that your house is an asset – but whose asset is it really?
I currently pay in the region of $1350 per month for my mortgage. That is $1350 that leaves my account and goes to the bank. So basically, my house is the bank’s asset – and a very nice one indeed. Yes, they have loaned me the money for it, but the interest they make back is incredible. Over a 40 year period, I will pay over double the cost of the home. Ouch!
Many argue that real estate values increase over time. While this is generally true, it still does not make my home an asset for me. It costs me a considerable amount of my salary each month and is my largest monthly expense. If I am to follow the thinking of people like Robert Kiyosaki then I must concede that my home is the bank’s asset and my liability.
Will this change in 30-40 years my mortgage is paid off? NO! At that point it will no longer be my greatest expense, but it will still be costing me money in repairs & maintenance. Therefore it will be taking money out of my pocket and remain a liability!
I don’t like liabilities. I want to acquire assets that produce cashflow every month. In other words I want to learn the technique of buying things that generate money. Kind of like what I do with the musical instruments, but that involves even less of my direct time.
Currently I think that a company that is making a good profit and is well run might be a good asset. There is one or sale in my area. Its monthly profit is currently $5000, and it is being offered for sale for just $56,000. There are 2 employees.
Borrowing $56000 would cost me around $1150 per month (over 5 years). I already work full time, so I would need to employ a manager. If I was paying $45,000 a year for someone to manage the business, that would cost me another $3750 per month. I would only be cashflowing $100 per month. Would it be worth it?
Personally I would prefer a better deal than that. I am going to keep looking. But please tell me about any cashflowing businesses you have been involved in. Have you found a system for generating income that works well? Leave a comment below and let us know!
I have just finished reading 2 books by a chap named Derek Foster. It turns out that I did not read them in sequence, but they both did make a lot of sense.
So far in my share dealings, I have been looking for capital growth. In other words I have been attempting to buy the shares at a price which I believe is lower than what they are worth. With the markets being as crazy as they are right now I figured “I’ll buy when the prices drop, and sell when they shoot up again.”
Basically I have the mindset of a share trader.
Investing in shares for financial independence
Sometimes trading in shares is a good thing. For example I made over 20% return in under 2 weeks with one of my stock picks. Unfortunately I did not sell at the peak, and now I am sitting at a 13% return. That said, I fully expect the price to go up again in the next few weeks.
Derek Foster in his book, The Lazy Investor, puts forward a strong case for handling share dealings differently. Rather than looking for capital growth (the increas in share price), you concentrate on receiving dividends and using DRIP programs.
I will explain more of his ideas soon once I have re-read these 2 books.
The reason I am prepared to listen to this guy is that he retired at the age of 34 using the cashflow from his shares. He has done what he is talking about – so that desreves my attention!
This is a review of Robert Kiyosaki’s second book in the Rich Dad series entitled Cashflow Quadrant : Rich Dad’s guide to financial freedom.
The main focus of the book is a small diagram that Robert’s Rich Dad came up with as seen below. He goes through the process of describing what each part of the diagram means for the person who is in that quadrant (see below).
E (Employee). This is where most people reside. Those who are employed typically place a high value in job security.
S (Self-employed / small business). Self employed people who work for themselves typically work very long hours and believe they can do something better than the next person.
Robert Kiyosaki states that it is very hard to become wealthy if your sole means of generating income is derived from the E or S quadrants.
B (Business Owner). The objective is to put systems in place so that you own businesses that other people run and manage. You leverage their time in order to accomplish more for more people. When businesses become bigger, are cashflowing well and managed by a good team, the owner simply sits back while the business generates money for him / her. The key is setting up a good system.
I (Investor). This quadrant is for utilizing some of the more advanced investment tools. Those who operate in this quadrant have learned how to use money to generate more money, or even how to make money with investments with no money down!
Throughout this Rich Dad series book, Kiyosaki explains why it is important to operate in more than one quadrant if you are seeking financial independence. His case is strong, and backed by real life examples.
I certainly enjoyed reading the book, and now I am trying to figure out what I can do with my own musical instrument business (S quadrant, although I am also employed and primary income is derived from E quadrant). I am asking myself the following question.
“How can I move from the S quadrant to the B quadrant through the buying & selling of musical instruments?”
The idea of moving to the B quadrant would be that I could serve more people who are looking to get rid of their instruments, while leveraging other people’s time. Right now I do all the work. It is me who looks through the classifieds for deals. It is me that contacts the seller, negotiates a price, then finally drives to the seller’s home to purchase the instrument.
How can I use other people to do this? Who do I know that can negotiate as well (or better) than I can? Is there someone I can train?
As yet the answers are unknown! If you have some ideas for me, please comment below.
Over the last 6 months as I have been considering different methods of escaping the rat race I have realized that in the current economic downturn some people are going to get richer.
As the price of most shares tumbled, I thought about the principle I use when buying & selling instruments. Buy low, sell high.
I know a few financial advisors, but I actually do not really trust them. None of them are financially free, so the questions I asked them were how the basics of shares trading works.
I was afraid of losing money in the stock market, then I received a letter from my pension fund managers saying they had lost 10% of my money. I figured I could do a better job than that and withdrew the money in that account (paid in by my employer, so free money basically).
I then started to research. I finally picked Seagate Technologies (STX) who make hard drives for computer systems. They operate in the data storage market and are one of the largest companies. Their share price had plummeted from $28 last Summer, to about $3! I figured if ever there was a time to buy low and sell high, this would be it!
The next thing I had to do was open a shre trading account. I picked an online brokerage, and transfered money in. By the time I had the account fully set up and ready to trade with, the share price had already doubled to over $6. I waited for it to drop, but it continued to climb. I ended up buying 100 shares at $7.02.
The shares did go up in value as planned. I wanted to make at least 10% on them for my 1st trade, but as the price continued to rise I held on. It got to $8.40 or so, then started to slide. I decided to sell if the price fell to $8.27 and set up an automatic order to sell if it got to that price. It did.
I had an afternoon nap, and when I woke up I discovered I had sold my 100 shares of STX at $8.27. So I had made a profit of $125 on & $702 investment in under 2 weeks. I was pleased enough with that!!!
Now I am in the process of learning various techniques of trading. I have since bought 2 other shares, one of which has increased over 20% in 2 weeks.
It feels like the road to becoming financially independet has some steep learning curves along the way. I am looking forward to learning more every day. Robert Kiyosaki is right when he says that you learn quicker when you put your money into a deal. I am donig that now, and learning more every day!
Selling for 5 times the purchase price - a good route to becoming financially independent!
Like I have said before, I have a small business on the side. I am basically a trader of used instruments.
So last weekend I managed to pick up what I think was a pretty good deal.
I found a used clarinet that is about 10 years old, but has been well looked after and regularly played. The pads were in good condition, and I managed to pick it up for just $50.
Servicing will only cost around $25 since it is already in good shape. Now if I was to sell it privately I could easily get $250 for it. However I have submitted it to the music store who will sell it on consignment.
Selling on consignment has both benefits & drawbacks. At first I felt that the drawbacks outweighed the benefits. After a year of selling some instruments privately, and now some through the music store, I have a different view. Here are the advantages & disadvantages as I see them.
Advantages
Disadvantages
An interesting experience I had was with a saxophone. I had bought it for $450 and was willing to sell privately for $800. Although a few people came to look, no one made the purchase. This was very surprising as the horn was in fabulous condition. After 8 months of not being able to sell, I put it in the music store. They advised I sell it for $1250. Within 3 months they had sold the sax. After their commission was paid along with the preparatino fee, I ended up receiving a cheque for $979 – that is $179 more than I was attempting to sell for on my own!
I have now decided to place most of my instruments in the shop. The clarinet that I would sell for $250 will be sold at $350 through the store. Less the 20% commission and the prep / repair fee, I should be receiving $255. So this deal should work in my favour.
By using the store to handle the sales, my time is freed up to look for the deals. I can live with that!
OK, I am not asking a technical question about the process of thinking. I am asking you the question. How do you think, specifically about money?
Most of us pick up our attitude about money from our parents, and from what we are taught in school or higher education. But what if that way of thinking isn’t the best way?
In many of the Rich Dad books that have been so instrumental to me, Robert Kiyosaki explains that the rich think differently about money than the poor & middle class. They also teach their children to think very differently about money.
So what are some of the differences?
When it comes to the 4th point, people often disagree. Yet it is all about how you think!
I know that money can be created and generated. I have been doing it myself through my own 1st business venture. Now I am trying to figure out the next steps. Once I take further action, I am expecting to see a change in our financial situation. There are some exciting days ahead!
A lot of the time our thoughts are self-fulfilling prophecies. If we believe something, we experience it. If you have a negative attitude to money, you are likely to remain poor. If you begin to see money in another way, then your brain will start to come up with creative ideas for making it.
The book Think & Grow Rich is all about this. I just uploaded the 1st inspiring chapter today. Why not go straight to it and begin learning how your thoughts can be turned into riches!
