Achieving financial independence in life is a dream for everyone. However, most people can’t understand how to achieve that. Investing smartly can help you to achieve financial independence in the long run like real estate investments, stocks, bonds, etc.
Most of us think savings and investments are similar and it is a fact that savings possess much lower risk than investments. This lower risk factor makes the majority of us to get inclined towards fixed deposits or other savings schemes as they are not affected by the market fluctuations.
But, although they are less risky, they provide much lesser interest rates which are even lower than the inflation rate. So, savings can’t let you be financially independent easily. Hence, the other option to gain financial independence is through investments.
If you follow 10 richest people in the world, they became big by investing in real-estate and stocks. Rich always follow certain tricks to become more and more rich.
There are three main investment asset classes – stocks, gold, or real-estate investments. Out of these, we will be discussing the real-estate investments over here and how to become financially independent by investing in real estate.
Let’s first analyze the other aspects before directly diving into the fact that whether real estate investing can make you financially independent.
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Table of Contents
What Is The 4% Rule? How Long Will The Money Last Using The 4% Rule?
Bill Bengen, a popular financial advisor from Southern California introduced the concept of the 4% rule in the mid-1990s. It is a kind of financial weapon used by various financial planners for the estimation of a comfortable income after retirement.
One of the important factors in this 4% rule is the life expectancy of an individual. For example, retired people who live longer need a portfolio that can provide them income for a longer time along with the fact that their medical expenses can grow.
Planning for retirement life is essential for every individual and that’s why creating a strong investment portfolio by controlling the expenses is of utmost importance. The 4% rule says that post-retirement, withdrawing 4% of your portfolio annually can help your money to last for nearly 30 years.
This rule was created by analyzing the historical data of bond and stock markets. Bengen concluded that one’s investment can last for at least 30 years if he/she withdraws 4% every year irrespective of market conditions.
As an example, let’s say you retire at an age of 60 years when you managed your portfolio to be 1 crore rupees. Now, as per the 4% rule, you will withdraw 4 lakh rupees every year. Hence, you can use your investment till the age of 90 years by doing so.
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Can Investing Make You Financially Independent?
We have discussed this in brief in the introduction section of this article. Let’s elaborate on that more. Almost everyone saves money to have a net corpus for their retirement lives. However, only a small percentage of them go for investments or more specifically speaking, smart investments.
But, smart investments are a bit riskier because you may need to face some unrealistic or even realistic loss of money sometimes. And, it is this fear that pulls most people behind from investments and plays in a safer mode, like fixed deposits.
However, investing your money smartly is the only way to reach financial independence in life. Historically, it has been seen that there is no other better way to make money from money without investments.
You will need proper planning, patience, and discipline to hit the goal of financial freedom; it’s not an overnight play. It’s the trick of compound interest that makes your money grow exponentially over time. So, at first, you need to be financially literate for investing your money in some best investing assets.
The two most proven asset classes for investments are stock market investing and real estate investing. Some may also say gold but that is mainly used for hedging your portfolio which implies protecting your portfolio losses during market downturns.
Out of the two asset classes, we will talk about whether the real estate can make you financially independent. And, if so how!
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Can Real Estate Make You Financially Free?
People may have different reasons for investing in real estate. Many leaders have created fortunes solely through real estate businesses. So, if one can make several crores of turnovers through the real estate business, how come it can’t make you financially free!
Some investors also want to have a solid retirement portfolio and so they choose real estate investments. Whatever be the reason, you can achieve financial freedom through real estate investments. It means the income from that investment can pay off all your monthly bills or other expenses.
According to me, an amazing way to reach financial independence in life is through real estate crowdfunding or REITs (real estate investment trusts). These are some of the best-proven methods that can help you to reach financial independence through real estate.
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How To Become Financially Independent By Investing In Real Estate?
The first and foremost step that you must take is deciding how much corpus you need to generate a regular income for reaching financial independence. So, there is nothing to do with real estate at all. For getting that, you need to quickly list out all your monthly expenses and multiply them by 1.1 to cover some extra or additional expenses.
Also, make sure to include taxes and inflation rates into consideration while calculating this number. Then subtract this number from your income and find out how much you are left with every month.
Post calculating that, you need to check the returns that the crowdfunding or REITs are providing. Generally, it’s around 6-7% yearly. Along with that, you may get annual hikes in your job that can play a role to enhance the amount of your monthly investments every year.
Taking all these into account, you can easily calculate how long it will take to accumulate the corpus you need for becoming financially free.
Let’s go through a simple example to understand this. Say, you have an initial sum of 20,000$ that you want to invest in real estate. Besides, you decided to invest 500$ monthly. With all this planning, you started investing in a deal with an annual yield of 6% and 3% annual capital appreciation. You have decided that for financial freedom through real estate, you want to get 2000$ every month. Taking all these into criteria, you will need 19 years to become financially free.
Plenty of online calculators is available through which you can calculate as per your requirements.
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Final Words !
Hope you have understood and got the idea about how to become financially independent through real estate. We have tried to discuss this concept in a very simple manner and also made it as interesting as possible.
If you are planning to achieve financial freedom through real estate, then don’t wait for it. Just start investing from today!