The Ultimate Challenge: Finding the Real “Value” of Money

the value of money

What’s the purpose of money?

That’s not a rhetorical question. I’m inviting you to sit with this question for a moment. Ponder it. Pray / meditate / reflect on it.

Why do you want to create wealth on your life? What’s the ultimate purpose?

I’ve thought about this on a near-daily basis for the past decade.

Here’s my response to this question – and how it’s influenced a HUGE, game-changing, turning-point decision that I made six months ago.

Level 1: Survival

I know, I know. “Survival” sounds soooo dramatic. Cue the violins.

But in all seriousness, I’ve spent a decent chunk of my life in third-world nations. And I’ve seen that only one quality separates us from malnourishment and disease: money.

You, me, the poorest-of-the-poor: We’re the same people. Money is the only reason we’re not squatting in Calcutta’s worst slums or selling our kidneys on the black market. (Our other difference is nationality, which is significant insofar as it reflects our opportunity to earn a living, and family, which is significant insofar as they can provide housing, food, and good advice.)

At the most primitive level, everyone is struggling for survival.

<< Sorry, I didn’t mean to become such a buzzkill. >>

Fortunately, in the U.S., survival is incredibly easy to achieve. Even college students making $6.45 per hour can rent a shabby apartment with five roommates, eat Ramen noodles, and wear thrift-store sweaters. << #BeenThereDoneThat >>

We’ve mastered survival. And we have the luxury of asking: What’s next?

Level 2: Safety Net

My next priority — after immediate survival — is ensuring the security of my Future Self.

So I built savings.

And then I built more savings.

I later discovered that there’s a name for this: an “emergency fund.” Even without this snippet of jargon, it just makes intuitive sense to keep a cushion, a safety net.

I mean, duh. Right?

People sometimes ask: “How can I save this?”

The answer is simple: Earn more and spend less. When you compare your life to third-world villagers, you won’t feel so bad about working overtime, wearing faded clothes, or eating pasta instead of organic steak. You may not realize it, but you’re living large.

If you can then create a “safety net,” you’re waayyyy ahead of the game.

Which affords you to step into the next level of luxury –

Level 3: Short-Term Goals

After survival and a safety net, you can relax and have a bit of fun.

But beware. In many narratives, this is where the protagonist falls off the rails.

“Then I blew tens of thousands, without realizing it, just by letting my lifestyle creep up …”

Before you start classifying new cars as “normal” (rather than a luxury), pause for a second.

Close your eyes. (Well, not now – you’re reading.)

Ask yourself: What’s on my 5-Year Bucket List? What goals or dreams do I want to achieve in the next 5 years?

Direct your money accordingly.

For example:

• Spend 6 months in Paris.
• Spend 6 more months in Bali.
• Buy a house.
• Launch a business.
• Scale back your working hours.
• Switch into a lower-paying but more-satisfying career.
• …. etc.

Notice what’s not on the list. For many people, “I want to drive a new car” isn’t anywhere on there. Neither is “I want to wear brand-name clothes” or “I want to upgrade my smartphone.”

By the way, there’s nothing wrong with those ambitions. If you are:

• A tech geek who dreams about the day you’ll upgrade your phone
• A car aficionado who reads about every vehicle on the planet
• A foodie who wants to experience fine restaurants across the nation

Awesomeness! You know your answer. You’ve pinpointed your dreams and created your 5-Year Bucket List. Embrace it.

The bottom line: Spend lavishly on your bucket list. Slash everything else.

Level 4: Freedom from Paycheck Dependence

Level Four is the ultimate level of financial-actualization: Freedom from paycheck dependence, also known as “financial freedom.”

Financial freedom, as many of you know, is the state in which your passive income covers your entire cost-of-living. You never need to work again.

You can choose to work (you can choose to do anything!), but you’ll never be forced to work.

Because this is such an Awesome & Audacious goal, I strongly recommend enjoying some Level Three Bucket List mini-victories along the way.

I’m a big advocate of living in both the present and also for the future. Pursuing freedom from paycheck dependence is awesome, but it’s going to take some time. Unless you’re exceptional (e.g. you sell a business, create royalties, etc.), freeing yourself from the shackles of paycheck dependence will take at least 10 years, maybe more.

You can’t defer your life during that journey. You’ll never again experience this current decade (your 20s, 30s, 40s, 50s). And, let’s face it, none of us are sure how long we’ll be around.

<< Wow, I’m a real buzzkill today. >>

So … How much money do you need in order to reach financial freedom?

That’s a tricky question, because “enough” is a moving target. It depends on the size of your family (child-free or eight children?), your location (Manhattan or Nebraska?), and your preferred lifestyle (canned spaghetti or caviar?)

I decided to peg my personal definition of “Financial Freedom” to an external benchmark: the median U.S. household income.

According to the U.S. Census Bureau, the median household in the U.S. earns $51,107 per year, as of 2012, the most recent year for which there’s complete data.

“That sounds low.”

Yeah, I agree. But half of all U.S. households earn less than this. If this figure sounds low, it highlights the fact that “enough” is a moving target – and therefore demands an external benchmark.

How I’m Following This 4-Step Path

As many longtime Afford Anything readers know, I’ve been chasing financial freedom for three years.

When I was 27, I got a mortgage. And then another. And then another.

I renovated the houses. I found tenants. I learned a sh**load about real estate investing by reading books, blogs and meeting hundreds of other investors.

By age 29, I created $35,000 annually in completely passive income. (That’s after paying for management, repairs, and all other active tasks.)

It’s awesome.

But it’s bothering me.

During the first year, I only made the minimum payments. I reinvested cash into buying and renovating more houses.

Then one day, I logged into my account … and nearly had a heart attack.

paying off the mortgage

Hold on a sec. The loan matures in 2041 … when I’ll be 57 years old?!

Ugh. I don’t think so.

The concept of a 30-year loan sounds fine, in theory. It’s abstract and distant. But the concept that I’ll be 57 and still making payments on a house that I bought when I was 27? That sounds tragic.

Like, Shakespearean-level tragic.

So on the same month I turned 30 (and traveled to my 30th country), I tossed an extra $4,000 towards the mortgage.

<< #WeirdestReactionToTurning30Ever >>

And I’ve been continuing nonstop ever since.

“Hold on. WTF? Where are you getting an extra $4,000 every month?”

Most of it (about $3,000/mo) comes from the passive income that the rental properties create. Another $1,000 or so comes from my day-to-day active income (I run a content marketing consulting business from my laptop).

“But why payoff the mortgage? Can’t you earn more money investing?”

Yes, in theory. I could invest that cash instead, and (potentially) create a higher return. There’s a lost opportunity cost.

But let’s turn back to our conversation about goals. In “Level Three,” I asked people to name their five-year bucket list.

My 5-Year Bucket List has three items:

  • Live overseas again. Move to Bali, backpack Europe, spend some time in Buenos Aires.
  • Scale back my hours (in my consulting practice) by handing more of my daily tasks to contractors and assistants. I’ll “quarterback” the process, but I want my business to run itself, via employees.
  • Achieve total financial freedom in the next five years. I define this as creating at least $51,000 (the U.S. median household income) in completely passive income.

If all of my mortgages are paid-in-full, I’d collect between $55,000 – $65,000 in passive income annually (depending on what assumptions you make for vacancy, repairs, etc.)

These goals point towards one clear conclusion: Pay off the mortgages. Now.

Yes, I could theoretically invest more, which means I’d have the potential to collect bigger cash flow in my 50’s. But that comes at the expense of my early 30’s.

There’s a tradeoff. Do I want financial freedom now? Or the possibility of more money later?

I’m shooting for now.

Here’s my personal plan:

  • Max out retirement accounts. Why? Yes, this runs contrary to the stated goal above. But the tax advantage is use-it-or-lose-it.
  • Buy one more house. (Just one more! Yes, I know that’s what addicts say. But I’ve been planning to buy ‘just one more’ for a long time, and I have the cash set aside.)
  • Direct all future money towards turbocharged mortgage payoff.

Is this the “right” choice? There’s no such thing.

People like to look at investments in a vacuum. We have complicated formulas. We add, multiply, divide, amortize. We express “values” through percentages and ratios and rates.

That’s necessary. But it’s not sufficient.

Cash is a tool; like a hammer, it’s used for building and creating and crafting our stories.

The size of the reward isn’t the happy ending; it’s the backdrop. The real story unfolds when our money aligns with our meaning.

Join The Rebellion
Get FREE Tips on Building Wealth and Living an Epic Life.




Related Posts Plugin for WordPress, Blogger...

19 Responses to “The Ultimate Challenge: Finding the Real “Value” of Money”

  1. Eden
    23. Apr, 2014 at 5:30 pm #

    Hi! long-time reader but first time commenter here. I just thought it’d be awesome if I’m the first one to comment on your insightful post today. As always, you have a way of making boring topics fun and inspiring. Thanks for posting regularly and generously sharing your thoughts and life experiences with your readers. You rock!

  2. hutchy
    23. Apr, 2014 at 7:31 pm #

    Really giving some good context to the question and practical advice to how to approach it.

    Have you read Maslows heirachy of needs? And any articles or advice on how that may apply to this question?

    Hutch

  3. Jill.
    23. Apr, 2014 at 10:00 pm #

    I like the way you explained all that Paula. It makes a lot of sense.
    I’m just curious, how many properties do you have now and what is the rent you charge? I have 15 rental units now and most of my rents are in the $500/month range. I’m still paying the mortgage on 4 of them and doing my best to pay them all off asap.
    I don’t know for sure if I could earn more by investing the money somewhere else, but for me there’s a great benefit emotionally being debt free. I really don’t like the feeling i get in the back of my mind with those mortgages hanging over my head.
    Also, I figure I am earning guaranteed mimimum 7% since that is the lowest rate of one of my mortgages. Better than I could do in the stock market probably.
    I am hoping to have an income of $5000/month once I get them all paid off. I think that will be enough for me to live a very nice lifestyle pretty much anywhere other than the USA.
    I am working now on finding some other country that will allow me to move there (oermanently) with only rental income to live on. Do you have any suggestions? I am leaning towards Panama.

  4. Dee @ Color Me Frugal
    23. Apr, 2014 at 10:04 pm #

    “Cash is a tool; like a hammer, it’s used for building and creating and crafting our stories.” — Love this! What a good quote. That’s totally true, and the cool thing about money is that you can make it do whatever you want it to do.

  5. Kelsie
    23. Apr, 2014 at 10:43 pm #

    Congrats on your decision. We’re working on paying off our primary mortgage. I think true FI is about finding a plan that works for you!

  6. LaTisha
    24. Apr, 2014 at 9:03 am #

    Loving this! It looks like we have similar income goals so I look forward to us motivating each other along the way. I have 3 years to pay off my 65k student loan balance, and 5 years total to get to my income goal of 6k per month in mostly passive income.

    5 years seems like a lot of time but it truly flies! Just 5 years ago the financial world was melting around our ears!

  7. test
    24. Apr, 2014 at 12:06 pm #

    I wouldn’t pay down the loan. Either invest “the extra” in the stock market, where you have two appreciating assets, or more rental properties.

    Also, you probably won’t have the loans for 30 years. You will probably sell/buy some of the property over those 30 years, due to demographic changes, normal age of the asset (unless you built new, the house will probably be unrepairable at 25-30 years…i.e. major renovation, or tear down), tire of dealing with tenants, repairs, etc.

    I think some RE investors think the properties they buy will last 30 years, which, in most cases, will not. They have been told to buy X properties, fix up, hire a PM, and your done. You still must keep up with market conditions, buy and sell appropriately. It is far from “passive.”

    I would look at the overall number (money) of where you want to be, and use the tools (stock and RE) to get there. Once you get to the number, actually retire.

  8. Janice
    24. Apr, 2014 at 12:59 pm #

    Thanks for the information. It’s obvious I have been asleep at the wheel.

  9. Neil
    24. Apr, 2014 at 12:59 pm #

    We are still in the property acquisition phase, getting more properties and more debt right now which we fund through our day jobs. Have you played the Cash Flow game? It sure emphasizes that the more your expenses, the more passive income you need to get to Level 4. We are on that journey from Level 3 to Level 4.

    Paula, this really shows your plan to move from “Paula the active real estate investor” to “Paula who uses her real estate assets to follow your passion”. That’s wonderful!

  10. ericka
    25. Apr, 2014 at 2:50 am #

    Why not buy more properties? Maybe 10 properties gets you to your $51,000 goal and pays off debt. I enjoy your posts, love that you take action to create your future.

  11. Rob
    25. Apr, 2014 at 10:57 am #

    Great post. I’m somewhere between #2 and #3. I really think I’d like to get into the rental properties game, but my debt-to-income ratio is probably a little high right now to get any decent financing. I would also like to get into freelance work (probably writing), but I haven’t jumped into that yet.

    My family used to go to Bali every summer. Some of my favorite memories are on Kuta Beach and in Denpasar.

  12. Even Steven
    25. Apr, 2014 at 12:37 pm #

    Our plans our almost identical, if I were a brother site from yours I would be Sustain Anything, a sister site from mine Even Stephanie.

    I’m further away from the goal and have a wrench or two that you do not, but I hope we each accomplish the same result, FI. Thanks for the post, always nice to read.

  13. Syed
    25. Apr, 2014 at 4:08 pm #

    Very insightful post. The idea of creating your life’s bucket list and then spending your money according to that is fantastic. Most people live according to the CEO’s of big companies bucket list (“Make as much money off everyone by any means necessary) instead of our own. You’re absolutely right money is simply a tool and a means to and end. What that end is, you decide yourself.

  14. Deia @ Nomad Wallet
    26. Apr, 2014 at 10:12 pm #

    Paula, I love this. My husband and I have just recently reassessed our goals, too. In the next 2 years, we want a certain number of rental properties (passive income), a certain amount of capital to flip houses X number of times a year (active income) and enough money to buy a nice used car — maybe in Bali. Hey, we could be neighbors in a few years! ;)

  15. Done by Forty
    28. Apr, 2014 at 12:04 pm #

    Awesome piece here, Paula! We personal finance folks need to be reminded to live in the present, too. We can miss a lot when we’re focused on the horizon.

  16. Dee @ Earn More Live Well
    29. Apr, 2014 at 10:05 am #

    Hi Paula,

    I’m intrigued by owning rental properties. Can you recommend some good books and blogs to get me started in learning about this? I know there’s a lot of scams out there where rental property is concerned, so I want to read reliable sources (like yours!).

    Thanks!

  17. Amy
    30. Apr, 2014 at 10:10 am #

    I think another way to achieve the pay down the mortgage goal is to take out shorter term loans. Obviously this will only work for that ‘last’ house you buy OR if you ever refinance any of your houses. I have a 20 year and a 15 year mortgage on my rentals. Any future rentals will be 15 or 10 year loans if I can swing it. In the case of my 15 year loan the interest was actually lower than the 30 year loan, so I feel like I’m ‘winning’ by comparison….however yes, it makes your cash flow pathetic while you’re paying down the mortgage – and makes keeping the house rented out imperative, because it’s much more out of your pocket each month if the house sits empty.

  18. Steve | Live Smart Not Hard
    01. May, 2014 at 10:37 pm #

    Paula this might be my favorite post of yours. You connected right with me, as this is also almost a daily passing thought I have. As someone with two properties, looking at a third, I remembered your quip, “If I had a million dollars I’d go into debt.”

    Other than the idea of wanting, “one more house.” You’re spot on, pick a goal and devote everything to that. I’m also 30 and the one thought is, “I can have 20 houses by the time I’m 60!” But then its, “oh but I’ll be paying them all off still.” It might just be wiser to set a goal of 5 or 6, and devote everything to paying those off. Loved the post Paula.

Leave a Reply