Yesterday we talked about some common financial mistakes. I made them all.
The root cause of my problem came from chasing “piecemeal” investments. These are investment ideas I came across that certainly sounded good… but I had no rhyme, reason, or strategy guiding my decisions.
That experience forced me to develop a comprehensive investment system and stick to it. This is critical if our goal is financial independence.
For me, it all started with an honest and thorough assessment of the monetary system and the macroeconomic climate. This sounds like a simple thing… but the current monetary system is rather insidious. That’s because our money loses purchasing power year after year.
As Tom Dyson pointed out in our membership call last month, this makes it very difficult to plan. This is why Tom’s philosophy centers around owning energy.
So understanding the monetary system and the macroeconomic climate is critical. And we can use that knowledge to construct a strategic asset allocation model.
Asset allocation is all about financial security. It’s about strategically allocating capital to a wide range of assets. Cash, gold, stocks, bonds, Bitcoin, real estate, private notes, and early stage investments are the main assets on my radar.
This is how we achieve true diversification. The key here is that our asset allocation model becomes our reserve. We can instantly turn most of these assets into cash in the event of an emergency. They are our safety net.
However, to my way of thinking, our asset portfolio is not our retirement savings. In fact, I reject the idea of retirement entirely.
Think about it this way: the traditional approach to retirement promotes the “nest egg” model, the idea that we need to pour our savings into financial assets to work up to this mythical retirement number. “What’s Your Number?” I remember old commercials promoting that slogan.
The idea was that we build financial assets and hope our returns get us up to a big enough number that we can live comfortably in retirement. Then, we draw down our assets to create income for ourselves after we quit working. That is to say, we sell off our stocks and funds and use that money to live on.
Notice how it’s always a choice between assets and income?
When our assets are going up, we don’t have the income. Then when we want the income, our assets have to come down.
And it gets worse.
This approach pits us against the tax code. It doesn’t matter if our financial assets are in 401(k)s, IRAs, or regular brokerage accounts—they are going to get taxed in the end, and tax rates could very well go up in the coming years. That’s not a bad bet.
So the traditional approach puts us on an unstable see-saw. We constantly have to choose between having assets or having income.
Personally, I would rather have assets and income. And I would like my income to go up when my assets go up. I want the two on the same team.
To accomplish this, I use my asset allocation model as a jump-off point to build passive income. That is to say, once I’ve built my asset base up to a reasonable level, I shift my focus to building passive income.
The key here is to acquire assets that throw off cash flow. This way we put assets and income on the same team. When our assets go up, so does our income. And when we want more income… we just buy more assets. It’s a far more robust approach.
And guess what? We’re no longer talking about traditional retirement here.
If we can work up to having monthly income that supports all our needs and wants… Well, we can retire any time we want. It doesn’t matter if we are 65 or 45. All we have to do is build up the income.
So what about taxes?
This is why I see real estate – old fashioned rental real estate – as the best vehicle for building income.
Real estate is an incredibly tax-advantaged asset. By default, we shouldn’t owe any taxes on our rental income. And that’s 100% by the book. It’s all baked right into the tax code.
I’ll leave it there for today. Next week we’ll talk about how to real estate can help us achieve financial independence much faster than we might think possible.
-Joe Withrow
P.S. Don’t forget that we’ll be opening the doors of our investment membership The Phoenician League very soon. This will be just the third time we’ve accepted new members since we launched last year.
Our program within The Phoenician League walks members through the steps of implementing everything that we’ve been discussing in these pages. And we have a great support system in place. We’re all walking the same journey together.
If you’re interested to learn more about what we’re doing, you can do so right here: The Phoenician League Waiting List