09 Jul Accumulate and Participate: 2 Steps to Financial Freedom
In chapter four of my upcoming book, Money Mastery, I frame my Triple X Factor in a new way. I call it Seven Steps to Financial Freedom. I developed these Seven Steps so that I could make the Triple X Factor a bit more accessible. Today, I’m giving you a glimpse of steps three and four: accumulate and participate. Check it out below and order “Money Mastery” here.
Now it’s time to move forward. It’s time to accumulate. This is the beginning of the Second X. At this step, you need to save for emergencies and start saving for a home. Create a savings account and stock it up for several months and then start saving for a home (if you don’t have one).
In the First X, you learn to live on 80% of your income. You have 10% going to tithes and another 10% going to investments. If you are able to and really want to escalate your wealth, then you can live off of 70%: 10 to tithe, 10 professionally invested, and 10 personally invested.
Here’s the point. Whether you’re living off of 70% or 80%, at this step one of the first things to do is take 10% and put it toward an emergency savings account. I suggest setting aside three to six months of your living expenses. Now, not everyone opts to have this emergency fund, but I strongly encourage you to have some source of cash besides your credit cards to operate with if necessary.
Once you’ve completed this emergency fund, you can roll that 10% over and start saving up for a home. A lot of people ask about renting vs. buying. As long as you are settling down in an area for a while and are able to not overpay, then I really suggest you buy. I’ll give you some tips for not overpaying at the end of this book. But remember that when you buy your first house, you’re buying an asset. It will appreciate in value.
With the FHA right now, you can buy a home for 3% down. There are some programs for brand new home buyers that will actually give you the down payment. Know what you’re doing when you buy. But at this accumulate step it’s important that you start saving for a home. Remember, you’re positioning yourself to build wealth.
Now that you’ve actively saved for a home, it’s time for step four: participate. You participate when you purchase your home and open a Roth IRA.
You need to buy your own house before you start buying investment property. Owning an asset and managing it so closely will really grow you before you move to build the Second X.
Plus, there are certain advantages in purchasing your own home. One advantage is that you still have a capital gains exemption. This means that if the home is your primary residence, you can make up to $500,000 profit on your house tax free. Not tax deferred, tax free! This is a wonderful thing.
And then, especially for young people, I encourage you to open a Roth IRA. We’ll talk about different types of IRA’s later. But the simple principle is this: you don’t get to take a tax deduction on the money you put into a Roth IRA each year. However, all of the earnings in that Roth IRA over the whole period are tax free. So instead of paying taxes when you retire, you pay now. This puts you in a healthy place come retirement.
Another benefit is that you can borrow against that IRA on the money you put in (not the earnings). You can borrow on the Roth IRA for no penalty or issue. So maybe you use it for a down payment on a house!
Now after I had gone through this process, I really accelerated. The most real estate transactions I’ve ever done in one year was about 200. But before I could accelerate I had to participate. So I bought myself a home and then borrowed against the equity in my home to start investing in real estate. Then when I really got big, I actually closed an IRA down. I took the penalty hit, which was substantial, and used that cash to invest in my real estate business.
Here’s the point: you have to start building some kind of asset base. And the most simple thing to do based on the tax laws in the U.S. is to open a Roth IRA and buy your own home. If you get those two things started, then you will have a solid asset base. This is how you build the green line to get to the Second X.
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