Think back on your life. What were the three times you were happiest and felt life was full?
Most likely you thought of some experience you had. Maybe it was getting married, a special moment on a vacation, or time spent with your family. Maybe it was standing atop a mountain after a challenging hike. Whatever it was you probably thought about events and experiences. Why is that important to realize? It’s important because you didn’t think about getting a newer big TV, purchasing a fancy watch, or any number of other material things. You thought about experiences. Everyone has had dreams of being rich. Many people think that if they had a multi million dollar mansion, vacation homes, flashy cars, baller watches, and a yacht that they would be happy. You may think the same thing. But it wasn’t material possessions and cash you thought of when thought about the times you were happiest.
It’s not the having of money and possessions that makes you happy and brings you fulfillment, it’s experiencing life.
I’m not saying that there is no correlation between money and happiness. There definitely is, but it’s not near as drastic as many people think. In fact, according to a 2010 academic study by psychologist Daniel Kahneman and economist Angus Deaton, there is a fairly direct correlation between income and happiness, but only up to a certain. Once people hit that benchmark there is little to no gain in happiness for every additional dollar earned. So what is that magic number? At the time of the study it was $75,000 per household. The data was collected in 2009, so adjusting for inflation that number would be $85,000 here and now in 2017.
WHAT MAKES $85,000 PER YEAR A MAGIC NUMBER FOR HAPPINESS?
Why is there no real gain in happiness and life contentment above that annual income? That’s a big answer. At it simplest, it is because at level you don’t have to stress about money and it affords you the ability to experience life. All of life’s necessities are easily covered. AND there is extra to take vacations, grab a drink with friends, and pursue other hobbies and interests you enjoy. Above that mark it doesn’t make a huge impact on your ability to enjoy life.
Do you think that a trip to New York would be 6 times more satisfying and provide 6 times the happiness if you were staying in a luxury suite at the Four Seasons for $1500 a night versus staying in a 4-star hotel just a few blocks away for $250? Of course not! You know that you would have just as good of time on vacation at the 4-star hotel.
That’s the basic principle behind why there is no real gain in happiness over that amount. It applies to all things. Having a nice set of clubs and golfing with your buddies at a decent local course will provide you just as much happiness for that round of golf as if you were a member at the highest end country club in the region with the most expensive clubs money can buy. The costs are drastically different, but the enjoyment of the experience doesn’t really change.
THE MAGIC NUMBER WITH TRADITIONAL INVESTING
First lets look at traditional investing methods. There is a general rule of thumb in the investment world that a fairly safe annual withdrawal amount is 4% for indefinite retirement. This is the amount should be able to weather the ups and downs of the market safely provided there isn’t a big downswing right away. That means you need to have 25X your annual spending in an investment account to retire. It doesn’t matter what age you reach that amount at, you’ll be covered. Ok, so 25X annual spending, that’s a lot! Read What Do you Really Want and then go here to calculate your exact number; Lifestyle and Numbers – Calculating Your Passive Income Goal. But for this article let’s assume your number is the magic number of $85,000 per year. If you are using traditional investing that means you would need $2,125,000 in your investment account to retire.
That’s a scary number right? How on earth do you get to $2,125,000?! If you adjust the S&P 500 for inflation and dividends the historical average is a 7% return. Let’s assume you are starting from zero. If you can put $2,000 per month, every month, away into index funds in a tax-deffered retirement account, it will take 29 years to reach that goal. So at $24,000 per year invested and it would still take 29 years! What if you want to get there in the same ten years that I believe anyone can with investment real estate? You would have to invest $12,500 PER MONTH!! That’s $150,000 PER YEAR for a total of $1,500,000 of your own money invested. WOW!
THE MAGIC NUMBER WITH RENTAL PROPERTIES
The interesting thing about the $85,000 per year number is that was almost the exact number we came up with when budgeted for our ideal life. My wife and I took the time to reflect and think about the life we would want to live if we were financially free. We figured out the life that would provide us the most happiness and fulfillment. Then we calculated what that would cost per year it was almost exactly the magic number of $85,000 per year. We made it in seven years. So the big question you’re probably now asking is how much cash did it take us to get there? First off, if we wanted to achieve financial freedom using the 25X rule, we would have had to invest $20,000 PER MONTH for a total of $1,680,000. What did it take us? About $150,000.
$150,000 TOTAL TO REACH OUR GOALS
That’s right, less than 1/10th what it would have taken to retire via traditional methods. By leveraging The Exponential Power of Real Estate Investing along with the methods to Create Infinite Cash on Cash Returns we were able to achieve the magic number with only $150,000 of our own money invested into properties. We were able to do a lot with the third principle of the exponential power which is the investor potential.
Even if hadn’t used investors, or created infinite returns on properties, it still wouldn’t have taken that much. I typically look for 20% cash on cash returns on my investments properties. That would mean it would only take $425,000 to reach the passive income goal. Even at 15% cash on cash return it would only take $567,000. And a lot of that cash would come from the cash flow of your rentals! No matter how you slice it, that is a hell of a lot less than any other scenario of traditional investing!