A New Year has started and so setting goals is top of mind...if not, it probably should be! Not enough of us take the time and trouble to set goals. However, for the ones that do set goals, the evidence suggests that they will most likely be more successful in life than those that do not.
Setting goals is one thing and there are lots of resources around to support that process. However, how do we work out our financial goals and then identify what is required to achieve those goals...what I refer to as the 'gap-to-goal'? The gap-to-goal is basically a way of breaking down goals into the component steps of what needs to be done to hit them in the desired time-frame.
Today's post has taken its inspiration from a post from a member of The Property Hub, which went as follows (abridged):
I currently own 13 houses. I live in one, 6 are standard residential properties and 6 are HMO's.
My main goal is long term and is basically just to have paid off all my mortgages by the age of 50 so I can enjoy myself and semi retire or possibly let my children run the portfolio for me....
The problem I have now is that I have managed to get to the point where I can make a living off my property and am now totally self employed but I am at the point where I want to have my first child and feel the need to earn more without milking every penny out of my business...
I'm struggling to figure out whether to figure out a way to buy more property or to maybe find something else to do part time so I have some extra money to live off and I think that if I made a proper plan I would be able to decide what to do next. I literally can not sit still and Im always looking to move forwards but one thing I am against is going backwards with my portfolio by re mortgaging loads to pull out more cash. This would affect my plan of being mortgage free by 50.
My response (edited):
What a nice dilemma to have
It would not be appropriate to set out an exact plan based on the info you share here but here are some general pointers that I can see that you could start with.
First, you don't give your current age but given you don't have any children yet and would consider them running the portfolio by age 50 I suspect you are around 30 now. That would give your long-term plan 20 years to play out. You also mention some short-term income goals...and trust me having a family lifts the cost of living substantially.
Long-term (wealth creation)
Determine what success looks like at age 50...paying off all your mortgages on those 13 properties may not be precise enough. One suggestion is to calculate what I call 'The Number', which put simply would be 25 x your annual lifestyle costs for a comfortable passive income forever. This defines your long-term goals financially
Use the Rule of 72 to calculate how much equity you will likely have by age 50. Add up the value of all your properties today (excl your home as you cannot call that an earning asset), then figure out a sensible average annual capital growth rate. Apply the formula: 72 / growth rate = # of years for the value to double.
For example, a growth rate of 5% takes 14.4 years for the value to double (so growing by around 140% after 20 years). Flipping the formula would suggest your portfolio would double in value over 20 years at 3.6%, or would double in around 10 years, or quadruple in around 20 at 7%. What feels most comfortable or realistic to you? Then deduct the value of any remaining mortgage balances (accounting for repayment or interest only) - this gives the net asset contribution to The Number from your property investments.
You may have shares and other investments and a pension to add into the equation. Given the capital growth rate do you hit or miss The Number mentioned above? If you hit or exceed, then as long as you hit the growth target you are done already If you miss then you can re-tweak your long-term strategy accordingly but don't be tempted to rely on 10% pa house price growth!
Near-term (income)
Looking at the short-term income goals - define the gap between current income and target income, especially after starting the family. Are you good or short? If short, yes you can flex your income generating strategies, if not...enjoy the family
Some common ways of generating additional income:
- You can earn income through your own time & knowledge (e.g. a job or self-employed)
- You can earn income through other people's time and knowledge (e.g. via a business).
- You can earn income through your cashflow (e.g. by lending it out at a higher rate than short-term deposit, assuming you have enough cash available to do this)
- You can earn income from your assets (e.g. by increasing returns/reducing your costs on your existing assets, by trading them for profit, or by reducing debt, again assuming you have enough free-cashflow to do this)
- You can look to create incremental value, for example by looking at ways to increase the value in existing properties (update, convert, extend, etc.). You can save money to reinvest, or by borrowing more as long, as these general rules apply in the latter case: ROI% > cost of debt %, Equity gain £ > increased debt £ & net cashflow £ (pre-debt payments) > debt repayments £.
In short - you have to weigh up the short-term against the long-term goals but there are plenty of options open to you...and I have no idea why I just spent 20 minutes writing all that...I just get carried away when something intrigues me lol
Hope it helps...
(Post exchange ends)
The reason that I chose to share this forum exchange is two-fold. First, as I suggested, I can get carried away (in a good way) when it comes to planning out a future scenario and strategy and that excites me; yes I know I really should get out more! Second, as I also mentioned earlier, not that many people actually go about setting any firm goals and if they do, they often don't appreciate the steps that need to be taken to achieve them or test them for realism.
My response was aimed at addressing this point - first by defining financial goals and then by breaking down a process of action steps that could be taken to address them. The exercise is not complete and is not detailed enough in reality but it is a great 'starter for ten' as they say.
The original poster has a general aim but not clearly defined financial goals. There is no problem in that and it is not an uncommon approach to setting goals. Statements like 'I want to be financially independent' or 'debt-free' or 'leave a legacy' are all worthy aims but they alone are not clear goals.
A goal should always be SMART, defined as:
S = Specific
M = Measureable
A = Achievable
R = Realistic
T = Time-based
An example might be something like this:
"I will be in a position where I have fully replaced my current annual income of £26,000 per year through passive-income generating assets within 20 years from 1st January 2015"
It is clearly specific (replace my income), measurable (£26,000 per year) & time-based (by 1/1/2035). The acievable and realistic aspects are clearly more down to interpretation. However, having a 20-year time span does suggest an element of realism and £26,000 per year in income also suggest it could be achievable through property investing, as many have managed to do this through property already. Had it said, earn a £1 million and year within 2 years from the same starting point would probably raise a few eyebrows on the realism and achievable fronts I would suggest.
So there we have it...a means to define ideal long-term wealth-creation goals (through income-generating assets), some ways to generate additional income to meet near-term income goals and a definition of what makes goals distinct from aims.
The real question is...do you have your goals set and will you stick to them longer than most New Year Resolutions...?