Mastering The Path To Financial Freedom
Unveiling The Key Variables For Successful Investing
In the chaotic world of investing, it's crucial to momentarily block out the noise and clear the smoke surrounding your financial decisions. Amidst the clutter, there exist three fundamental variables that serve as the bedrock of your journey to financial freedom. By mastering these three variables, you can position yourself ahead of most other investors.
In this article, we will delve into these three pivotal variables essential for attaining financial freedom. Prepare to unlock the secrets that will transform your investment approach and pave the way to lasting prosperity.
The Three Keys to Financial Success
When it comes to securing an investment portfolio that will secure your financial freedom, there are three primary variables that demand your attention.
Let's unravel these key factors:
#1: Amount of Capital
Capital refers to the financial resources, such as money or assets, that are available for investment purposes. It represents the funds that you allocate for investing in various assets, such as stocks, bonds, real estate, or mutual funds.
#2: Rate of Return
The rate of return is a financial metric that measures the profitability or performance of an investment over a specific period.
It represents the percentage increase or decrease in the value of an investment relative to its initial cost. It is often used to evaluate the efficiency of an investment and compare different investment opportunities.
The rate of return can be calculated using the following formula:
To use this formula, you need to know the beginning value (the initial investment amount) and the ending value (the final value of the investment, including any gains or losses).
Subtract the beginning value from the ending value, and then divide the result by the beginning value. Finally, express the rate of return as a percentage by multiplying the result by 100.
Time refers to the duration or period over which an investment is held or expected to generate returns. Time is closely linked to the concept of the investment horizon, which represents the length of time an investor intends to remain invested in a particular asset or portfolio.
Time is a priceless asset when it comes to investing. The longer you stay invested, the greater the potential for compounding returns. Patience and a long-term perspective can significantly amplify the growth of your wealth.
By understanding and utilizing these variables effectively, we can create a strategic plan to attain financial independence.
The First Key: Capital
The first variable we need to address is the amount of money available for investing.
Having a limited amount of capital can pose challenges, regardless of how high your rate of return is or how much time you have to achieve your goals.
Let's consider an example: if you currently have $100,000 and invest it for 20 years with an 8% return, you will amass slightly over $492,000 before taxes. However, this may not be sufficient for retirement. Additionally, factoring in an inflation rate of 5% over the same 20-year period, the cost of goods that used to be $100,000 would rise to approximately $271,000. This means your purchasing power would only increase by 1.8 times before taxes, equivalent to having $180,000 today and attempting to retire while maintaining your current lifestyle—still not enough for retirement.
Most people have limited funds to invest, but there are strategies that can help increase the amount of money at your disposal:
1. Financial Leverage:
Financial leverage involves using strategic debt to amplify your invested funds. For instance, when purchasing a rental property, you can use $100,000 as a down payment and acquire a $500,000 property. Now, you have $500,000 worth of assets working for you.
2. Ongoing Contributions:
Regularly investing a portion of your discretionary income is another effective way to increase your invested capital. Over time, these contributions, when subjected to compounding, can have a significant impact on the total amount invested.
3. Reinvesting Dividends and Other Income Sources:
Another effective method is reinvesting as much of your residual income as possible into a compounding environment. When done correctly, this can lead to relatively rapid growth of your invested capital.
It is important not to underestimate the power of these strategies. We have assisted our students in developing detailed plans to achieve their goals in under 10 years using these approaches, even with minimal initial capital. The key is to start as early as possible to maximize the benefits of these strategies.
The Second Key: Rate of Return
The rate of return you earn on your investments is an important factor. A low rate of return can delay your financial goals.
Let's say you have $100,000 today and you invest it for 20 years at a 4% return. After 20 years, your investment will grow to a little over $222,000 before taxes. However, this amount may not be sufficient for retirement.
Additionally, if we consider an inflation rate of 5% over the same 20-year period, the cost of living will increase. What used to cost $100,000 would now cost around $271,000. This means your purchasing power would decrease by 20% before taxes. Essentially, it's like having $80,000 today (from your initial investment of $100,000) and expecting to retire with it while maintaining your current lifestyle. Clearly, this is not enough to retire comfortably.
To overcome a lower rate of return, you have a few options. You can work harder and try to earn more money to supplement your investments and extend your path to financial freedom. Alternatively, you can choose to retire with a smaller amount of money.
Traditionally, increasing your rate of return involves taking on more risk. However, this doesn't have to be the case. At Fynanc, we work with our clients to develop a plan that utilizes aggressive compounding strategies and techniques to significantly boost their rate of return.
The Third Key: Time
Time is the third factor. You can adjust the time it takes to achieve your financial goals. If you have more time, it's easier to reach your goals, but it means working for many more years.
If you shorten the time to reach your goals, the other two factors, the amount of capital and the rate of return, need to be more aggressive.
Let's say you have $100,000 today and invest it at an 8% return. If you want to have $500,000 in the future, it will take a little over 20 years. However, if you want to achieve the same $500,000 goal in around 10 years, you'll need to generate roughly a 16% return. Alternatively, you could start with a little over $220,000 and an 8% annual return.
Your timeline is crucial in determining your financial outcomes.
Overcoming The Hurdles
When you consider the three keys to financial success, it becomes apparent that many face an uphill battle to reach their financial goals. And when you account for inflation, it’s even worse!
However, it does not need to be this way.
The greatest hurdle that you will need to overcome to achieve your financial goals is not amassing more capital, chasing assets with a high return (and high risk), or working until you are no longer able to enjoy your retirement.
The answer lies in recognizing that traditional investment strategies don’t work. And there is very little that you can do within traditional investing frameworks to get these three critical variables to work in your favour.
However, there is a different approach – a hidden world of finance, where you can achieve your financial goals faster, safer, and with more certainty.
If you are ready to harness the power of the hidden world of finance, download the BONUS chapter of George Antone’s Income Amplifier Blueprint and start on your journey TODAY.
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