- When aiming for retirement or financial independence, risk shouldn’t make up part of the equation.
- We’ll discuss a few investment strategies that bring passive income at minimum risk and can lead to financial independence.
- Your life can change with a few simple adjustments.
I recently received a message from a 28-year-old reader who asked me what I thought about his chances for financial independence with what he has saved so far. He has been working for the past 8 years at more than 2 jobs on average, and has managed to save $250k, which is something to praise.
The answer to his question could be of value to most investors, from those who want to quit their jobs to have more time, or those who just can’t wait to retire, so I decided to dig deeper and write an article about it.
What Can $250k Bring?
If you have $250k and base your financial independence on it, the key is to create passive income to live on and to protect your capital.
Given that capital protection doesn’t really depend much on you but rather on the markets, the thing to focus on is income protection. We all know yields are at historical lows, but let’s see where we can get and then look at the related risk.
If you invest in Treasuries, the 5-year Treasury yields 2.18% while the 30-year Treasury yields 2.8% which indicates that the yield curve is flattening, a signal that we are in the late part of the economic cycle.
So by investing in Treasuries, you can get a yield between 2% and 3% which is just slightly above inflation which means that your real returns would be close to zero, but the risk is the lowest there can be. Treasuries would give about $6,000 in income per year from the $250k, which I don’t think provides the possibility for financial independence.
Unlike Treasuries, REITs offer the potential for growth alongside relative safety, depending on the REIT, real estate investments and a strong yield. If we look at an REIT like Realty Income Corp. (NYSE: O) which has a very defensive industry-diversified portfolio and a 4.7% yield, it sounds like a much better deal than Treasuries.
However, unlike Treasuries, there is no guarantee that in 10 years the stock price of O will be higher than it is now. It’s possible that if interest rates and expected yields increase, O’s stock price may be just 50% of what it is now. The question here is, are you aiming for income or capital appreciation when investing? With some REITs, the income part is pretty safe while the capital appreciation part is definitely uncertain.
Nevertheless, if we invest the $250k in O, the yield would be $11,750 per year, which is almost $1,000 per month. Perhaps still a bit far from financial independence, but getting closer. In addition, you can expect some growth in the dividend as the dividend has indeed doubled in the last 15 years.
So 15 years from today, you could already have $24k per year and thus be more independent day-by-day.
Real Estate Investment – Owning Where It’s Expensive, Renting Where It’s Cheap
If you’re thinking about financial independence, one step that can get you there quicker is to rent where you live and own what you can rent. I’ve discussed in depth the financial side of how a real estate investment should work here, so read that if interested. The point is that if you work in some hot city and are dreaming of financial independence, buying an apartment in that city and renting it out, and then renting something to live in somewhere much cheaper, it could quickly bring you a step closer to independence.
For example, if you live in Boston, you can rent out what you own and move to Oklahoma, as an example. Just the cash flow from the Boston property would be enough to rent something similar in a less expensive market.
For our European readers, there are many countries and places across Europe where renting is extremely cheap while renting is getting extremely expensive in the hottest places.
Financial Independence Will Be Your Best Investment
I’ve dreamed about financial independence since I was a kid. Dreaming of passive income and not having to go to a job was really something that drove me. I was diligently saving and investing and I finally got there, I finally had time. I can tell you something, as soon as you get there, you will be happy and you will start doing more of the things you love.
You will develop yourself in what your passion is and that is something that will probably help you make even more money than you ever imagined possible. So financial independence isn’t about having enough passive income to quit your job, it’s more about having enough time to develop yourself into what you really want to be. There is no better return on investment.
So I hope the three ideas above help you to get a step closer to financial freedom. In many occasions, people could be free very quickly, just moving somewhere else would solve the issue, or switching from bonds to riskier REITs. Think about it, your life could miraculously change.