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Is capital growth the key to financial freedom?
Blogger: Cam McLellan, CEO, OpenCorp
Life lesson
The first question I asked myself when I wanted to build wealth was:"How much is enough?"
Here’s how I found the answer.
When I was 23, I scored a job that more than doubled my salary from $40,000 to $100,000. As a young man, I felt this was heaps of money. But after a whole year on my ‘huge’ salary, I realised I hadn’t saved an extra cent.
This is so common, I think it’s the Aussie way of life. However much we earn, we fund lifestyles rather than save. And that’s no way to build wealth.
Getting real
Once I realised I wasn’t saving enough to become wealthy, I started looking at ways to achieve financial freedom. Back then, I just wanted to supplement my $100,000 income. So I narrowed my options to:
- Saving
- Cash-flow-positive property
- Growth property
No saving me
The previous year had proven I couldn’t save my way to financial freedom, so the saving option was out.
I knew property was a good option for achieving financial freedom. But when I looked at cash-flow-positive property (where returns exceed expenses), I realised my poor saving record would also shoot me in the foot.
You see, even if I got a property to earn me $400/month clear, I knew I’d just blow it on a bigger lifestyle. I was never going to save it, duplicate my portfolio and substitute my $100,000 income.
And so, unless that property also experienced growth, I’d just be spinning my (ever more exotic) wheels. So cash-flow-positive property was out.
I realised then that growth property was the best option for me to achieve that $100,000.
Growing up
Let’s look at that in today’s figures, assuming an average $500,000 growth property price and a (conservative) annual price growth of eight per cent.
Remember, I earn $100,000 and want $100,000 per year coming in to replace that.
3 x $500,000 properties = $1,500,000 value.
8 per cent growth x $1,500,000 = $120,000 per year.
By buying three growth properties, I make $120,000 on average once growth occurs. That’s $20,000 more than my goal. But that money isn’t for me to spend on cars or lifestyle. That money is growing my equity base that I can use to duplicate my portfolio and get more and more growth on it.
Unlike the savings and cash-flow-positive property options, the growth property option gives me cake to eat. Great. So when do I eat?!
Well, once I exercise the patience to duplicate my growth property portfolio several times, I become wealthy enough to buy the cake factory. And have as much as I damn well want. That’s why growth property is the way to true wealth.
Once you get going with growth property, the sky isn’t the limit – the limit is up to you. And so, the answer to the great question: how much is enough?
As much as you want!
