Automatic Wealth – 6 Steps to Financial Independence

Based on Michael Masterson Automatic Wealth Book Review.

These are the Six Steps to Financial Independence for which i hope to implement for myself and also wish that the article would be of benefit to others.

Major Points:

  • To achieve financial independence, take these six steps over the next “seven to 15 years.”
  • The steps are: “Face the facts,” “plan to become wealthy,” build “wealthy habits,” “increase your income,” “get rich while you sleep” and “retire early.”
  • Establish short-term, mid-term and long-range goals in every area of your life, including finance, personal achievement, health and career.
  • To generate wealth, use patience and practice to establish new financial habits.
  • Diversify your pursuit of wealth through stocks, real estate and business ventures. Diversification also require knowledge on calculated risk, risk management and actual knowledge on the intended area of diversification.
  • Create a disciplined savings plan by paying your savings account first, spending less than you earn, living in a modest home and calculating your net worth each month.
  • Establish alternate income sources: consulting, sales, services and investments.
  • Get a raise. Enhance your corporate earnings by upgrading your skills and methods.
  • Build your reserve of passive income – money earned from investments.
  • Invest in familiar neighborhoods, stocks, companies and industries.

Objective: You will learn on how to

1) Create a long-term savings plan that actually works;

2) Why you should develop alternate sources of income;

3) How to calculate your financial freedom number; and

4) Why you need to pay yourself first.

Honest Review on the book

Michael Masterson’s book offer a blend of common-sense advice with investment strategies and a healthy does of reality. The chapters on wealth-producing habits and investment diversification are especially helpful in my opinion. This in general a lively book with helpful suggestions and examples about generating wealth and achieving financial independence.

So, here is the 6-steps to Financial Independence

Step One: “Face the Facts”

True wealth is not about money, cars or mansions. Real wealth equals financial freedom,  with liberation from boring jobs, bill collectors and lost sleep. Financial freedom means you have sufficient funds and an automatic flow of “passive income” to pay for the nuts and bolts of life (food, home, entertainment, education) and for retirement. “Passive income” is money you earn from real estate, bonds, equities, business ventures, royalties and other investments. It’s called “passive income” because you don’t have to clock in traditional nine-to-five hours to earn money. This kind of income is the key to wealth and a comfortable retirement.

Begin with a savings plan. A strategy for saving money provides the launch pad for your wealth-building journey. The formula is simple: Spend less than your paycheck. Too often people waste extra income on frills and toys. They may make you feel posh momentarily, but they sap your bank account.

Calculate how much money you need for retirement; tally your costs of shelter, food, utilities, entertainment, travel, taxes and other nuts-and-bolts items. Your goal is to accumulate a net worth of 10 to 13 times more than the amount you need each year, depending on what you believe your investments will earn. “If you think that you’ll live another 30 years and believe the market will average a mere 8% ROI, you’ll need a multiple of 13 to consider yourself comfortably well off.”

Step Two: “Plan to become Wealthy”

Launch your plans now. Dedicate an hour a day to a new venture or a money-generating idea that will create a steady stream of passive or extra income. Establish concrete financial and personal goals for your family, your career and even your social life. Effective goals include your core values, personal dreams of achievement, relationships, health and finances. Create a timeline by establishing annual, “medium-term” and longer-term goals.

For example:

  • Annual goals – Get a $15,000 salary hike; launch (for example) an Internet-based plumbing supply operation; develop more industry contacts in that business. In my case, i launched an online shop and made a decent profit on it. Hope to grow it bigger this year, but off course, venture like this involve a trial and error which ultimately lead to certain amount of losses or sunk cost but nonetheless, it could and would make a decent stream of profit at the end of the day. Just keep your eyes on the risk management, it is of high importance !
  • Seven-year target – Generate pre-tax income of $125,000 through a combination of rental property (income of $50,000), bonds/stocks (income stream of $35,000) and an equity stake in a business ($35,000 annually). Divide each annual objective into 12 goals. Create weekly and daily targets. The recommended schedule for planning includes this dedicated time:
    • The yearly map – One complete day of planning each year.
    • The monthly agenda – A couple of hours of planning every four weeks.
    • The weekly planner – A 60-minute planning session every seven days.
    • The daily strategy – Plan 10 to 15 minutes daily, preferably in the early morning.

Step Three: “Develop Specific Wealthy Habits”

Amass a financial base by acquiring the habits of the wealthy. The “Eight Habits of Highly

Successful Wealth Builders” are:

  1. “Work hard” – The typical millionaire clocks in about 59 hours of work per week. The agenda is usually challenging, but the time speeds by because many hard-working, successful millionaires enjoy their work. Enjoy the grind !
  2. Build strong skills – Wealth generators are accomplished in their fields. Their mastery of business skills gives them the poise and confidence to tackle new opportunities. There are things or areas which we are good, average and bad at. So, if you have 100 hours of personal development time allocated per month, please make sure that you allocation look like this; 100-0-0 or 80-10-10, meaning focus on mastering what you good at by becoming the best or expert at it. No point in focusing on what you average or bad at, since the best you could muster most likely being average or good level.
  3. Develop several sources of income – Diversified income streams build wealth. Some of the wealthiest individuals have more than 12 income sources.
  4. Buy a “relatively” modest house – Wealthy consumers typically live in relatively inexpensive homes. Average Americans with a net worth of $6.8 million paid $545,000 for their homes. Lower home prices translate into less expensive taxes, maintenance, utilities and other costs.
  5. Spend moderately – Wealth builders hold down spending even as their earnings continue to grow.
  6. Save your money – Save much more than you spend. Avoid costly lunches, trendy new clothes and the wasteful accumulation of junk.
  7. Pay the home team first – Set aside your savings before you pay bills.
  8. Count your dollars – Effective wealth generators take frequent and periodic inventory of their income, assets and possessions, and calculate monthly financial statements.

Forget about a budget; budgets are like trendy diets with an endless cycle of deprivation and over-indulgence. To reduce expenses, “pay yourself first,” by regularly stashing a preset amount of your salary into savings.

Traditional retirement accounts, including individual accounts and corporate-sponsored 401(k) plans or in Malaysia (EPF Plan), provide easy vehicles for paying yourself before you pay the bill collectors. If your are Malaysian, I would suggest to save aside the amount in Tabung Haji or PNB ASNB.

Keep your savings plan simple. Establish a renewable annual contract with yourself promising to save more this year than last year. Begin now!

Step Four: “Radically Increase Your Income”

The path to wealth requires a six-figure salary. Choose among several routes to boost your income, including one or more of these revenue generators:

1) a dramatic merit-driven  raise from your current employer;

2) freelance consulting;

3) launching a part-time second business; and

4) investing in income-generating property.

Don’t expect to get rich through standard raises. Over the past 10 years, salary increases have dropped sharply; they hit record lows in 2003. On an inflation-adjusted basis, total annual wages actually dropped from 2000 to 2002. It’s still possible to earn “above-average” raises and bonuses, but to do so you have to produce “above-average” results. Become an “invaluable” performer and quietly broadcast your results. Arrive earlier, work efficiently, be a team player, assist your boss and document your performance (Yes, i definitely should do this). Shift your career goals. Decide to meet the qualifications of the most lucrative positions in your company or industry. Update your skills to fill the demands of high-paid posts that start at $130,000 annually. Top-earning positions include management, technical jobs and profit-producing jobs inside companies. “Profit producers” – employees who tap into new ways to cut corporate expenses or locate new pockets of revenue – are especially valued because their labors have a direct impact on the bottom line.

Employ your other talents to launch a part-time venture, such as a consulting business, a direct-marketing company, or a sales and services firm. The universe of potential product sales is broad and includes audio/video recordings, diet products, office/craft supplies and Internet-based publishing.

Flipping in and out of real estate is also a potential source of income. The guidelines for successful transactions include:

1) Buy property for fair or below-market prices;

2) Target neighborhoods that you know;

3) Calculate and compare square-foot costs; and

4) Create a realistic investment plan based on your budget.

Step Five: “Get Rich While You Sleep”

Sweet dreams! It’s possible to accumulate a fortune even when you’re slumbering. That’s because equity investments – in a private business or on Wall Street esque – appreciate (or depreciate) on a continuous basis. But if you enter the stock market, step carefully. A variety of factors – revenue forecasts, “price-to-earnings ratios” and historical earning trends – affect the value of share prices and where expert opinion worth almost nothing. Follow these rules to avoid getting burned:

  • Target familiarity – Invest in companies and industries you know and understand.
  • Be wary of fables – The investment world is full of myths, hot hypes and other forms of corporate deceptions.
  • Create a “Plan B” – Keep your options open. Hope for the best, but plan for a worst-case scenario. Use “Stop-Loss” techniques to limit your risk. A “Stop-Loss order” enforces your pre-planned price for selling a stock. Basically, when a share price falls to that preset value, your broker activates your standing order to sell it. With such a plan, you’re less likely to fall prey to dangerous market emotions or risky Vegas-style investing.
  • Diversify – Purchase a wide range of shares from companies with large and small market capital levels. Investments in corporate bonds, Treasury bills, gold, real estate and foreign stocks also provide diversity and hedges against risk.
  • Contain risk – Establish guidelines for your investments in single stocks and in the overall stock market. A conservative investment portfolio typically has 5% to 20% of its assets in stock; a risky portfolio could lodge more than 80% percent of its assets in the stock market.

Similar rules apply for potential investments in small, privately-owned companies. Examine the customer retention and “customer acquisition” levels of the business you are considering. How much does it spend to create new customers? Examine its profit statements and long-term growth opportunities.

Apply those same benchmarks if you plan to start your own business. Use your own time for your business development activities; avoid using any of your current employer’s resources to launch it. Consider a “home-based” venture that taps into your existing knowledge, skills and contacts. Cultivate opportunities with lofty profit margins, growth potential and unique products or services. And this process could take some time to come out with, but better plan carefully before making any decision. Plan first, then execute. But don’t over-plan that you never execute.

Real estate is an investment that can pay for itself, with a few caveats. Consider this example: You purchase a property for $100,000, with a $10,000 down payment and about $2,000 in closing costs. If your property value spikes by 6.5% a year, then in 11 years, your compounded annual gain will be $12,200, earning far more each year than your initial down payment.

The investment looks even better if the property generates “net rents” or a profit from rent revenue after subtracting taxes, insurance and maintenance. This strategy does not work if you overpay for the property or make some related mistake due to lack of familiarity with the local rental market. Learn the territory.

Step Six: “Retire Early”

This strategy yields early retirement, within seven to 15 years, or sooner. A “side business” is likely to generate a surplus of capital. Your part-time business ventures can produce annual returns of 20% and can go as high as 100%. Likewise, prudent property investments can yield up to 25% annually. What’s more, real estate and “side businesses” represent less risk than the stock market. Regardless of your investment path, follow these four basic sign-posts:

  1. The $25,000 net-worth threshold – Avoid stocks and bonds at this level. Be an aggressive saver; improve your employment value and invest in a small piece of residential real estate. Launch a business that does not require huge capital investments. (Forget restaurants or pharmaceuticals.) Consider developing a hobby into a lucrative opportunity. Sell supplies or services that you know well.
  1. Net worth of $25,000 to $100,000 – Keep emergency cash on hand. Invest in revenue producing real estate. In the short term, buy, renovate and resell; for the long term, buy income rental properties. Purchase a $10,000 stake in a small business. Or use that sum to create your own venture. Invest in municipal bonds, Treasury bills or top-quality corporate bonds.
  1. Net worth of more than $100,000, but not quite independent – Reserve easy access emergency funds for three to six months of living expenses. Buy a small emergency stash of gold and a collection of hard assets: art, furniture, books, coins and dolls. Invest in equity-generating real estate, part-time businesses, stocks and bonds.

Financial independence – You are fiscally independent if your balance sheet totals a minimum “of 10 times the amount” of after-tax income you need. At this stage, aim for a diversified mix of stocks/equity funds, bonds, real estate, fun money and emergency gold and cash.

And finally, always continue to learn and grow. You never too old or too young to learn new things, because, that the way we grow and be fulfill.

Hope this articles be of benefit to you, and please share along !

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