A rule of thumb is defined as a broadly accurate guide or principle. They are easy to understand and simple to apply. Because of this, a rule of thumb makes you more efficient in decision making, which is key to building wealth.
Let's look at a few 'rule of thumb' examples:
In financial independence circles there are 2 "rules of thumb" that rule them all. The 25X Rule & the Four Percent Rule.
The 25X rule, like others, is quite simple. It's simply this...once your investment portfolio is 25 times your annual expenses, you can say peace out to 9-to-5 and leave cubicle hell forever -- you're financially independent!
For example, if you plan to spend $50,000 per year in retirement, you should have a minimum of $1.25 million in investments. $50,000 is 4% of $1.25 million.
With any rule of thumb, you need to determine if it is right for you. Because the 25X Rule doesn't take age into account, it may not be as applicable to younger retirees. If you plan to retire in your 30s, your money needs to last much longer than someone retiring in their 60s. Therefore, you may need to play it safe by saving more than 25X. For many, that means following the 33X Rule, which requires investments equal to 33 times planned annual expenses in retirement.
What do we do? Because we are in our 30s, and because we want to avoid even the slightest possibility of going broke, we follow the 33X rule.
Here's a quick guide for the amount needed to retire. Keep in mind that while your home should be counted as part of your net worth, it does not count toward the 25X or 33X.
Investments at 25X
Investments at 33X
The 4 Percent Rule is used to determine how much a retiree can safely withdrawal from their investment portfolio each year without running out of money.
The 4 Percent Rule states that a retiree can safely withdrawal 4% of their investment portfolio's value (at time of retirement) plus inflation every year going forward. Hence, why it is recommended to save at least 25X our planned annual expenses.
If you want to be more conservative like us, we changed the 4 Percent Rule to the 3 Percent Rule, requiring an investment portfolio at 33X our planned annual expenses.
There is much debate surrounding the 4 Percent Rule. Many financial professionals feel that 4% is too aggressive considering we're living longer, healthcare costs are increasing, etc. However, almost all agree that a 3% withdrawal rate is near bulletproof.
The moment your investments reach $1 million, the 4 Percent Rule states that you can withdrawal $40,000 in year 1, $40,000 + inflation in year 2, year 2 withdrawal amount + inflation in year 3, and so on. At 2% inflation, a retirement on a $1 million investment portfolio would look like this.
4% Withdrawal Rate
3% Withdrawal Rate
A 4% withdrawal rate is designed to provide steady & consistent income stream to the retiree. It also does so in a way that maintains an account balance large enough to keep income flowing for as long as needed.
Keep in mind that a side hustle is a great way to reduce your withdrawal rate in early retirement. Assuming a 4% withdrawal rate, every $1,000 earned in retirement is equivalent to an additional $25,000 in investments. At a 3% withdrawal rate, every $1,000 is equivalent to an additional $33,333.
I know you're probably thinking, that's great, but how can I be sure? How can I have confidence that once I hit "my number" I'm safe to retire forever? There have been multiple studies done that have backtested and simulated all conceivable outcomes, and they have all landed on 4% as a safe withdrawal rate. The most famous of all studies is the Trinity Study.
I won't attempt to go into the technicals, but if you'd like to read more, there are additional articles below.
In the comments below please let me know what safe withdrawal rate you plan to use in retirement and why.
Think about the things in your life that are either partially or fully automated...
and on and on!!!
Once you've enjoyed any one of these luxuries, you question how you ever got by without them.
How would you feel about going back to washing your clothes by hand, and air drying them? Or, writing and mailing a check for every single bill? Or, driving to the store only to find that the item you want is out of stock? Hell no! Never. Not in a million years.
Ignore the plethora of negative news headlines. We should all feel lucky and blessed to be alive in such amazing time. Life has never been better for the majority of earth's inhabitants.
We as humans love automation. Automation frees up our time to spend on activities that are more important, more enjoyable, and more productive!
But there is one automation that trumps them all. Automated Investing, and paying yourself first.
If the automation examples above prove anything, it's that humans are lazy. We'll happily take the path of least resistance to the same outcome, so why not do the same with your investments?
The path of least resistance
Automating your investments is the simplest way to millionaire status and financial independence. It's not a get rich quick scheme, but a process that happens over time with little risk of failure.
Did you know that with a 10% annual return, investing $10/day into the stock market will make you a millionaire in just over 33 years. $20/day = 27 years. $30/day = 24 years.
Automated investing is like bill pay in reverse. It's boring, but if your goal is to make money, it is effective. It takes an hour at most to setup. It's as simple as selecting your brokerage, selecting the low cost index or mutual funds to invest in, determining the amount to invest.
It is setting up your investments once, and then forgetting about them. Following the initial setup, a pre-defined amount of money is invested on your behalf. You don't have to lift a finger. It happens like clockwork on a pre-defined schedule. There is no analysis, contemplation, emotions or manual pull of a trigger to make the investments. It's all automatic.
Yes, you'll have less disposable income, but you won't know the difference. It's money that never made it to your primary checking account so you won't know what you're missing. You will adapt and learn to live within your means, while the invested money works for you behind the scenes, setting you up for a very bright future.
Whenever investing, whether 401k, IRA or a taxable account, make sure you're investing in low-cost index funds. Expensive investment funds will eat your returns alive, and they are completely unnecessary. We recommend Vanguard for their low-cost index funds.
For most Bloggers, a blog is a time consuming and unprofitable hobby. That's ok, as most people start a blog to enjoy the therapeutic effects of writing and creating.
The truth is that at some point the majority of bloggers, whether blogging for fun or business, grow tired and frustrated of blogging and give up, leaving the blog to rot away to the digital graveyard.
But, some of us (myself included) don't need another hobby. 😉 We want to run a successful business. A business that feels less like work and more like a hobby. A business that can make us a full-time income with part-time effort.
The good news is that blogging can be a very lucrative business when treated like a business. In any successful business, the business owner knows how the business makes money (hopefully lots of it!).
In this post I'll cover the 5 primary ways successful bloggers make money. I'll provide an overview of each tactic, real-world examples, and the pros and cons or each.
Now, let's cover each tactic in a little more depth.
A quick way to monetize a site is to place advertisements on it. The eyeballs reading your articles are worth money. Businesses seeking to get their product or service in front of the right audience are willing to pay for it.
For example, if a woman views a specific handbag at an online store, but does not buy, it is possible to follow her across the internet targeting her with an ad for the exact same bag, enticing her to come back and buy. She has already shown an interest in the bag, so to that online retailer, delivering an ad to this woman is valuable.
Did you know that website owners make $2-$4 for every 1,000 ad impressions? Place 2-5 ads on each page and make $4-$20 per 1,000 ad impressions.
Young House Love is a successful home renovation blog for people that want to create a beautiful home. They have 5 total ads on their pages, with 3 "above the fold" (can see on a desktop computer without scrolling) and 2 "below the fold" (require scrolling).
Affiliate marketing is earning a commission for promoting another person's (or company's) product. As a blog owner, you send your visitors to another site, and when the referred visitor takes a specific action (buy, apply, start a free trial, etc.), you earn an agreed upon commission. The commission is typically a % of a sale or a flat rate fee.
Amazon, the 1,000 pound ecommerce gorilla, has a famous affiliate program paying affiliates up to 10% for referred sales.
Personal Capital, our favorite tool for tracking our net worth, pays affiliates $50 to $100 per qualified sign up.
Thrive Themes, the WordPress theme provider we use, pays 35% commission on the initial purchase + 25% commission on any recurring revenue.
SiteGround, the company we use to host our site for less than $5 per month, pays affiliates $50-$100+ per sale.
Airbnb, our favorite for accomodations, does not have an affiliate program. However, they have a similar offering in a referral program, paying $25 for a new traveler.
Quick Math Exercise: If through your blog you get 1 reader per day to purchase/apply/sign up for a product earning a $150 commission, you've earned yourself $4,562.50/month, which is $54,750/year. Not bad!
An advertisement in the form of a blog post that promotes a specific company, brand or product. Whereas a banner ad is an obvious advertisement, a sponsored post is a "native ad." It feels much more like editorial content, and can be hard to distinguish as an ad.
The Roasted Root is a recipe blog run by a young woman named Julia, focused on healthy and tasty recipes. The Sangria Recipe above is sponsored by Nielsen-Massey, a company selling extracts. Why would Nielsen-Massey want to sponsor a Sangria Recipe?
It's simple. One of the main ingredients Julia calls for in the recipe is an Nielsen-Massey extract. Per the post....
"I used Nielsen-Massey’s Orange Blossom Water to bring even more citrusy flavor to this sangria. I love how authentic Nielsen-Massey’s extracts taste – they’re my main squeeze when it comes to extracts!"
In a world where people are bombarded with traditional advertising, sponsored posts is a very effective way to stand out from the crowd.
Services, helping companies or people do their work, are everywhere. Housekeeping, car maintenance, computer repair, life coaching, resume building, roofing, dry cleaning, pet sitting, staffing, Uber, etc. The list goes on and on.
Great Resumes Fast offers services such as Resume Writing ranging from $495-$2,295. LinkedIn Profile Writing for $495. Recruiter Distribution for $275. They are experts in their field, and solving real problems (helping people land a job) with their service offerings.
Creating & selling your own product is one of the, if not the very best tactic in monetizing a blog. This is especially true if you offer a digital product vs physical product. Digital products require no inventory, come with no shipping expense, they don't break, etc. Digital products are the ultimate product to sell.
Regardless of whether you sell digital or physical product, it is very difficult to sell another company's product. It's nearly impossible to compete with Amazon's low prices, Prime 2-day shipping, liberal return policy, and the trust that consumers have in Amazon and other large online retailers.
Did you know that 90% of the world's millionaire invested in real estate to create their wealth?
It's why headlines like the following are even possible:
Self-made millionaire went from janitor to real estate mogul.
Real estate is the fastest and easiest way for an "Average Joe" to become a millionaire. Yet, to succeed, Joe must understand the ways to make money with investment property.
In this article we'll walk you through the 5 primary ways to make money as a real estate investor.
The concepts below are simple to understand and put into place. By the end of this article you'll have a clear understanding of how how to make real money with property.
Buying a home for less than market value provides the buyer with 'instant equity'. The buyer "makes money" the very second they take ownership of the home.
Sarah and I had lived in our new home for 6 months when we learned about a foreclosure in my sister's neighborhood.
We loved the idea of living close to family, but hated the idea of moving again. It's such an energy suck.
After touring the home we decided we'd buy it, but only if we could get ourselves a smoking deal. Otherwise, as much as we love my sister and her family, it wasn't worth moving AGAIN!!!
The home's list price was at market value -- $375,000. But, it had a lot of cosmetic issues that made the home ugly. Thus, undesireable to most buyers looking for an updated property.
It needed about $5,000 of work -- interior paint, carpet cleaning, new shutters, some landscaping, refinishing of wood trim, etc.
We submitted a low-ball offer for $258,000 to see what would happen. We also directed the bank to keep our offer as a backup for as long as the home was available for sale.
The bank immediately countered back at $350,000. We weren't interested in purchasing the home at that price so we ignored the email and moved on.
A month later, out of the blue, we received an email from the bank accepting our original offer of $258,000. We immediately finalized the purchase agreement, and 6 weeks later moved into our brand new home.
In the example above, we purchased a $375,000 home for $258,000. That's $112,000 in instant equity after spending $5,000 on cosmetic improvements.
Think about this...it took us 3 hours to make $112,000. 1 hour to tour the home. 1 hour to write up the offer. 1 hour at the closing table. That's an hourly rate of $37,000+. 😉
Instant equity is 1 of 2 strict criteria we have when buying single-family rental properties. If we can't get instant equity, we will not buy the property.
Rule of Thumb: We will not purchase an investment property without a minimum of 10% instant equity. This gives us an immediate "risk cushion" if something were to go wrong in the future.
Cash flow is the other criteria we have when purchasing a property. If the property doesn't have a clear path to profit, we will not buy it.
In the real estate world they say cash (flow) is king. It is. Without cash flow your investment can't stand on its own. You'll need to subsidize it each month with your wallet. It is not a scalable business. Plus, do you like to lose money every month? We sure don't!
We calculate cash flow as follows:
- Operating Expenses
- Debt (Mortgage) Service
- Capital Expenses
Total annual rent possible. Not actual rent received.
Recurring expenses, including property taxes, insurance, utilities, landscaping, accounting, advertising, etc.
Debt (Mortgage) Service
The mortgage payment. The principal and interest paid to the bank.
Vacancies & Unpaids
Vacancies happen when homes are empty (vacant). Unpaids are rents that go uncollected due to non-paying tenants. We prefer a conservative approach so we calculate this as 8% of gross rents.
Capital Expenditures (CapEx)
Large one-time expenses, such as a new roof, appliances, air conditioner, boiler, plumbing, electrical, etc. We calculate this as 8% of gross rents.
Total Gross Rents: $30,000
The following expenses are the tenant's responsibility:
*We self manage our properties so there are no property management fees.
Total Operating Expenses: $5,720/year
Debt Service (the mortgage!)
Total Debt Service: $10,308/year
Vacancies & Unpaids
Total Vacancy & Unpaids: $1,920/year
Capital Expenditures (CapEx)
Total Capital Expenditures: $1,920/year
$30,000 Gross Rents
- $5,720 Operating Expenses
- $10,308 Debt Service
- $1,920 Vacancies
- $1,920 CapEx
$10,132 in annual cash flow. That's $844 in cash flow per month.
Rule of Thumb: We aim to cash flow at least $300/month for a single family home. Some investors target $100/month or less. Pick a number that makes you comfortable.
When making a mortgage payment to the bank, part of the payment applies toward the principal and part toward interest.
The bank -- because they exist to make money -- structures mortgages in their favor. Surprise, surprise!
At the beginning of a mortgage, the majority of the monthly payment applies to interest. As the loan ages, the majority of the monthly payment applies to the principal.
The banks like this structure because it ensures that they make most of their profit (the interest) at the beginning of a loan. Whether a homeowner stays in their home for 5 years or 30 years makes little difference to the bank. They've already turned a profit on the loan.
Regardless, with each mortgage payment, the amount owed to the bank (the principal) decreases. This results in increased equity every single month.
Let's continue looking at our rental property. We went with a $200,000 30-year mortgage at a 5% interest rate.
Over 30 years, a homeowner will pay a total of $386,511. $200,000 in principal payments, and $186,511 in interest payments.
Let's focus on the principal paydown by year. Remember, for a cash flowing property, the tenant is paying the mortgage for you.
Historically, property has increased in value (appreciated) somewhere between 3-5% per year.
Appreciation can be volatile in the short term, but over long periods of time it is safe to assume at least 3%. 3% is the number we use in our analysis.
To demonstrate the power of appreciation, let's use the same $200,000 property appreciating at 3% per year.
Uncle Sam & the IRS love real estate investors. This love results in tax laws allowing real estate investors to pay very little tax on their profits -- preferential treatment at its finest.
It's a lot to cover so we won't do it here. If you're interested in doing a deeper dive not only into tax benefits, but also real estate investing as a whole.I recommend you sign up for our free real estate course
Let's put everything we've learned together to demonstrate the power of real estate. We'll continue using our example investment property, looking at a 10-year window.
$30,000 Instant Equity
+ $101,310 Ten Years of Cash Flow
+ $37,311 Ten Years of Principle Paydown
+ $68,783 Appreciation
$237,404 (or $23,740 per year)!!!
Crazy, isn't it? It's not so difficult to believe that a savvy janitor can become a millionaire using real estate. And do so in a relatively short amount of time.
Things To Remember:
Did you know that Airbnb has more listings than the 5 largest hotel chains combined?
They span the globe with 400+ million listings in 190+ countries.
Our family is head-over heals in love with Airbnb. So much so that we use them for most of our accommodations while traveling.
One of the biggest reasons we're smitten with Airbnb is the fact that it's possible to stay at high-quality Airbnbs amazingly cheap. Much cheaper than far inferior hotel rooms.
Hotels.com is awesome -- if you know how to optimize the site.
We've optimized our Hotels.com stays so well that we consistently save 30, 40, 50% or more.
In this guide we'll walk you through exactly how we book every single one of our Hotels at Hotels.com for a discount.
Who knew Mallorca, Spain was so gorgeous and never told us!?! Well it’s not a secret anymore, because we are here to tell you…..GO!
“So where do you want to go?” I asked Brandon. “How about Portugal?” he replies. “Ok! Where exactly is Portugal?” I asked out loud.
Is Thailand on your bucket list? For many years we dreamed about the other side of the world. Exotic beaches, boats in Caribbean blue water, and of course the legendary street food put Thailand high on our wish list of “must see” places.