What is financial independence?
Okay, so I have been following several blogs and podcasts about personal finances for the last year. While this makes me no expert on specific areas of personal finance, I have learned a lot.
Recently, there's been a discussion on a forum that highlights the methods of achieving financial independence via real estate investing. The idea is simple, take care of your business first and then use as much leverage as possible to increase your income potential. The main point I get out of this is that your day-to-day job won't make you as much money as real estate. Real estate can generate a greater income with less work and time thereby making you financially independent. Although I hope to do some investing in this area, I disagree with the basic premise of leverage and how it contradicts independence.
Let's start with this idea of financial independence. According to dictionary.com, independence is defined as:
Now, let's take a look at the definition of leverage: "The use of credit or borrowed funds to improve one's speculative capacity and increase the rate of return from an investment, as in buying securities on margin." In real estate, leveraging would require brokers or lenders. You can take $20,000 and buy two properties, at $10,000 each, that are worth $100,000 each. As a result, you would be taking out two-$100,000 mortgages with only $20,000. The income generated from those properties can either make money, or lose money. I hope the first.
There are risks involved, of course, as with any other type of investment. The property can depreciate, rent is paid late or not at all, and so on. This has great income potential, and the idea is to make so much money as to make your day job obsolete. When you no longer require this job, you have become financially independent. Or, have you?
See, this is where I disagree with most people. I don't believe this is truly financial independence. According to our definitions above, leverage requires brokers/lenders. How can one be independent with this need? Sure, you can make more money, but are you independent? No. You have two mortgages, so you owe money to a borker or a lender.
So, then, what do I think financial independence is? It's simple, no longer requiring any services from outside sources to generate income. How can that be? Everyone requires some type of service don't they? Sure. Most people use 401ks and IRAs to generate income at retirement. The main thing to look at is what does it cost you? 401ks and IRAs cost you only what you contribute, and you don't owe anymore than that. If you have paid for real estate, you don't owe a broker or a lender a dime. If you sell it, you can keep every penny of that (if you've lived in for at least two years). What an idea?
Recently, there's been a discussion on a forum that highlights the methods of achieving financial independence via real estate investing. The idea is simple, take care of your business first and then use as much leverage as possible to increase your income potential. The main point I get out of this is that your day-to-day job won't make you as much money as real estate. Real estate can generate a greater income with less work and time thereby making you financially independent. Although I hope to do some investing in this area, I disagree with the basic premise of leverage and how it contradicts independence.
Let's start with this idea of financial independence. According to dictionary.com, independence is defined as:
- The state or quality of being independent.
- Sufficient income for comfortable self-support; a competence.
Now, let's take a look at the definition of leverage: "The use of credit or borrowed funds to improve one's speculative capacity and increase the rate of return from an investment, as in buying securities on margin." In real estate, leveraging would require brokers or lenders. You can take $20,000 and buy two properties, at $10,000 each, that are worth $100,000 each. As a result, you would be taking out two-$100,000 mortgages with only $20,000. The income generated from those properties can either make money, or lose money. I hope the first.
There are risks involved, of course, as with any other type of investment. The property can depreciate, rent is paid late or not at all, and so on. This has great income potential, and the idea is to make so much money as to make your day job obsolete. When you no longer require this job, you have become financially independent. Or, have you?
See, this is where I disagree with most people. I don't believe this is truly financial independence. According to our definitions above, leverage requires brokers/lenders. How can one be independent with this need? Sure, you can make more money, but are you independent? No. You have two mortgages, so you owe money to a borker or a lender.
So, then, what do I think financial independence is? It's simple, no longer requiring any services from outside sources to generate income. How can that be? Everyone requires some type of service don't they? Sure. Most people use 401ks and IRAs to generate income at retirement. The main thing to look at is what does it cost you? 401ks and IRAs cost you only what you contribute, and you don't owe anymore than that. If you have paid for real estate, you don't owe a broker or a lender a dime. If you sell it, you can keep every penny of that (if you've lived in for at least two years). What an idea?
posted by Emma at 4:17 PM
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