Financial Freedom – Wealth Methods
Financial freedom is a fantastic future fiscal goal that many of us share. In one form or another, we want our wealth and assets to meet or surpass our monthly expenses. To this end, this article will explore three proven systems that can deliver on this goal. While each can do so on their own very easily, it could be wise to combine some or all of them. You decide!
Budget Required First
Budgeting will always be the first and most important principle for personal wealth building and achieving your goals. Why? Because when you know what your monthly incomes and expenses are, you will know how much you have left over for investing. Additionally, if you can better manage and reduce your expenses, you can then increase your monthly investing amounts.
Financial Freedom Requires It
If your goal is financial freedom, then you 100% require a monthly budget so you know exactly how much income you require from your investments to reach this goal. In this way, you know your “number”, and begin lining up your investments to match this requirement.
Rental Properties
A small to medium sized portfolio of rental properties is capable of delivering financial freedom for nearly any individual. Besides the obvious monthly cash flow that comes through rent payments, they also provide the following benefits that enable you to grow your wealth.
- Capital appreciation of the property and land
- Leveraged returns through the secured mortgage
- Inflation resistant returns through ownership of a income producing physical asset
- Tenants management (screening new renters, complaints, collecting rent)
- Real physical problems with the structure (furnace, water heater, plumbing, roof replacement, foundation repair)
- Accounting and financial management
Dividend Growth Stocks
Financial freedom can also be obtained by investing in dividend growth stocks. In other words, by owning shares or stock in companies that have a solid history of regularly increasing their dividend you can build the wealth and monthly cash flow required to achieve financial freedom.
Budget Sets the Mark
By setting a clear monthly budget which includes our income streams and expenses, we can see a few important things right off the bat. Firstly, when we include the income from the dividend stocks, we see how much they are contributing to our overall income. Secondly, when we itemize our expenses and sum them up we know exactly how much dividend income we require for financial freedom. Because once that dividend income surpasses our expenses, we are set!
Dividend Growth Plus Regular Investments
We will achieve this level of income through two means. Firstly, the ever increasing dividend inches us closer each year just through the regular and predictable dividend increases. Search for companies that have a history of increasing their dividends each year for the last 10 years. Secondly, by investing on a regular basis and picking up shares in these companies we greatly increase our ownership and thereby the monthly or quarterly dividend check.
Passive on Passive
Above, we listed out some headaches that happen with real estate rental properties. The beauty of dividend paying stocks is these are non-existent. The built in management teams, board of directors, and C-level executives take care of all this for us. On top of this, the dividend payments occur regularly and are deposited into our brokerage accounts with no effort on our part. If you’re looking for an effective, completely passive income stream, you really need to give dividend stocks a look.
Screening for Dividend Growth Stocks
Canada 10 year growers with 10% annual increases
Ticker | Company | Industry | Mkt Cap | Yield |
ENB | Enbridge | Oil & Gas Midstream | 74.26 | 7.22 |
MIC | Genworth MI Canada Inc. | Insurance – Specialty | 3.76 | 4.97 |
CNQ | Canadian Natural Resources | Oil & Gas E & P | 37.54 | 4.75 |
ACO.X | Atco | Utilities – Diversified | 4.80 | 4.29 |
TCL.A | Transcontinental Inc | Specialty Business Services | 1.65 | 4.00 |
BIP.UN | Brookfield Infrastructure Partners | Utilities – Diversified | 22.69 | 3.76 |
XTC | Exco Technologies Limited | Auto Parts | 0.42 | 3.55 |
BIPC | Brookfield Infrastructure Partners | Asset Management | 3.47 | 2.65 |
CGO | Cogeco | Telecommunication Services | 1.40 | 2.24 |
CCA | Cogeco Cable Inc | Telecommunication Services | 5.66 | 2.16 |
USA 10 year growers with 10% annual increases
Ticker | Company | Industry | Mkt Cap | Yield |
PRU | Prudential Financial | Insurance – Life | 36.66 | 4.96 |
IBM | International Business Machines Corp. | Information Technology Services | 119.05 | 4.89 |
MMM | 3M | Specialty Industrial Machinery | 111.65 | 3.07 |
LMT | Lockheed Martin Corporation | Aerospace & Defense | 103.41 | 2.80 |
BLK | BlackRock | Asset Management | 117.74 | 2.15 |
HD | Home Depot Inc. | Home Improvement Retail | 331.47 | 2.14 |
TXN | Texas Instrument | Semiconductors | 176.74 | 2.12 |
QCOM | QUALCOMM Incorporated | Semiconductors | 157.28 | 1.89 |
UNH | UnitedHealth Group Incorporated | Healthcare Plans | 347.00 | 1.36 |
WBA | Walgreens Boots Alliance, Inc. | Pharmaceutical Retailers | 47.33 | 3.42 |
Diversified Index Fund Portfolio (4% Method)
This is one of my favorite methods because of the tremendous level of control along with diversification and in some cases, tax efficiency. On top of this, this solution helps chart a clear path to financial freedom and teaches many important personal finance principles.
Robo First
What you do first, is setup a tax efficient investment account with a Robo-advisor. We are after an account that will allow us to make monthly withdrawals. In Canada, the best solution will be the popular TFSA or tax free savings account mixed with WealthSimple. This allows you to make tax free withdrawals on a scheduled basis
Diversified Index Funds
After you have some capital invested through the service, it will make investments into a portfolio of index funds appropriate to your level of risk and time horizon. After this, you configure a monthly withdrawal to hit your bank account. This amount should be no more than 4% of your invested capital as any higher and you will erode the asset base. The beauty of this solution is your 4% “dividend”, payout, or withdrawal is comprised of capital gains, dividends, and interest earnings.
On top of the diversification this solution provides, it also provides a level of control that you will not see with other solutions. If you don’t require the payments, you can just as easily turn it off and let the account value grow faster. If you run into trouble with work, you can switch this on to help make ends meet.
Finance Principles
Lastly, you have an acute sense of how much capital you require to fully retire and have financial freedom. This approach and strategy will teach you a lot about personal finance, investing, and how much is required to achieve your financial goals.
If you’re curious to learn more about this method, I have a more detailed write up here in this article I wrote last year.
Bonus: Crypto
Few areas of personal finance are as controversial, volatile, and exciting as cryptocurrencies. Born in late 2008, early 2009 with Bitcoin, the growth to date has been exponential. In fact, labelling it as exponential may still be an understatement. There are now advocates that promote the idea that you can fully fund your retirement through Bitcoin or Ethereum. Of course, retirement is another label or financial freedom, so view these ideas as such. Now, careful when you watch the videos, they are not financial advice and are just for entertainment purposes or to give you some ideas.
Passive Income
A side from nominal price appreciation of the crypto asset, there are some incredible ways to generate passive income. Here are some of the more popular ones. Again, please treat these as just ideas and not anything similar to advice. In my opinion, its incredible how versatile and powerful the asset class has become as they slowly decentralize the financial services industry.
Lending Crypto
Lend your crypto assets on an exchange to receive monthly or weekly interest payments of the same asset back. Popular service providers for this include BlockFi.com, Crypto.com, Nexo.io. Yes, think of this as a short term deposit which is due after one or three months. In turn they lend out your crypto to others who wish to short sell the asset or invest on margin.
Staking Crypto
In addition to lending, certain crypto assets can be staked while you provide a validation service to the blockchain. This is called proof of stake, and is the leading alternative to the energy intensive mining, or proof of work mechanism. Instead of deploying trustless consensus proof of work, the block chain trusts you because you have a sizeable stake, or skin in the game. This is a powerful alternative and much less energy intensive. However, it can require a sizeable financial capital investment to fund your initial stake. To learn more and the potential rewards, go to stakingrewards.com and see which coins and be staked, how much is require and what returns you can expect.
Decentralized Service Provider
After staking, you can also look into providing a decentralized service that others will pay you for. Examples such as Tornado Cash and Mysterium come to mind. These ideas center around providing anonymity services that users of crypto will pay you for. Tornado provides increased security and anonymity for transactions, which essentially obfuscates the public ledger so transactions cannot be traced. Mysterium provides anonymous peer to peer VPN access so your connection to the internet cannot be traced. Many, including myself, will have ethical issues with such services, but the idea is out there. It also points to a growing space and to keep an eye out for terrific projects that will pay you for providing decentralized services.
Liquidity Provider
As cryptocurrencies grow in popularity the need for increased liquidity grows to further narrow the bid/ask spreads and ensure efficient trades can happen at any time 24 / 7. If you’re willing to deposit your crypto into a liquidity pool, they will pay you a portion of the transaction fees. If you’re interested in learning more, visit Uniswap.org
Mining
Lastly, you can become a miner and provide the essential blockchain validation services that many cryptocurrencies require in order to live. This is the proof of work consensus service we spoke about above. Check out Cudo Miner as a great place to start. Just be aware that many blockchains are moving away from proof of work to the more energy efficient proof of stake. If you’re interested in mining Bitcoin, you’re already too late. The intense hardware requirements are reserved now for industrial level operations and investments.
Conclusion
We started this article talking about financial freedom and a budget, and that’s where we will circle back to now. Once we have that budget, and we know our monthly expenses, we know our freedom number. We just need the assets and cash flow to fully cover this and we’re set. In the end, it should matter little how we get this number covered. Honestly, we will likely need a bit of help from a variety of investments and we’ve covered some of the most popular ones here today:
- Rental Properties
- Dividend Growth Stocks
- Index Portfolio
Then we finished with the controversial crypto currency opportunities for passive income that can accompany your price appreciation bets.
Financial freedom is likely the biggest financial goal of our lives. Once achieved, a whole new host of options spring to life: retire? travel more? spend more? I hope this article has give you some actionable ideas on how to get one step closer to a richer, wealthier you.
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