Can’t Seem To Focus On Financial Discipline, Consider a Forced Savings Plan

Forced Savings Plan

Cant keep a budget, not good at saving, find that you are paid on Friday, then by the following Monday your whole paycheck is spoken for?  Well, if so, you may need a Forced Savings Plan!  A 401K would be a great option because the contributions to the funds are typically withdrawn before you ever see a paycheck.  If you don’t see it, you are less likely to miss it.   Another option, one which I really like, is buying real estate to rent.  Yes there are cons; maintenance, taxes, utility costs, late paying tenants, evictions, but I believe the pro’s drastically outweigh the cons.  For starters, buying real estate to rent can provide a robust cash flow stream, plus it promises to put a smile on your face when you go see the tax man :-)…  I, for one, was able to save $8500 in taxes in 2012 because I owned one rental property.  This year will be even better because now I have two.  I think it is important to invest in things which people need.  Housing fits that category.  Ever heard of Maslow’s Hierarchy of needs, I think shelter is one of those.  Everyone needs housing, unless you choose to be homeless, which, I understand, some people do choose that route, so those people likely will not rent from you.  Everyone else though, is a viable prospect!   Rental property investing is a great investment if you have the stomach for dealing with tenants, a little knowledge of basic home maintenance, and a lot of patience.  This is why I chose to make rental property my forced savings plan.

I do not have a 401k, so I want to have my rental property to be paid off by the time I retire in about 15-18 years.  Along with my self-directed IRA, which was a 401k rollover from a previous employer, I plan on using rental property to supplement my retirement.  I believe owning rental property will pay off handsomely in the years to come.  You have a growing population, you have a sector of the population who have been burned by the housing market and these folks don’t want to or can’t buy.  The rental market is strong, lots of good applicants and rental rates are way up.  You could buy a duplex, get a 30 year mortgage at an insanely low interest rate, and probably pay back the loan by renting out the other side, and you could live for free.  Rental property is also a great hedge against inflation, because you will be paying back the loan with cheap dollars.  If you have a $1000 mortgage for the next 30 years, you can expect to see a historical yearly inflation rate of 3.4% (this is what the government says is the current rate, anyway).  This inflation rate means that, by the 30th year of making your $1000/month or $12000/year in mortgage payments, this amount will only have the buying power of $4268 per year.  Yes, inflation will continue its course of erosion, that is something you can count on!  The silver lining is, the rents you collect are certain to be higher in the next 30 years.  By then, milk could conceivably be $10 per gallon, bread $8 per loaf, but the rent you receive could go from $1000 month to $1500.  How is that for the perfect forced savings plan?

I have a friend who makes a handsome living, but has very little to show for it.  He brings home upwards of 10-12K per month, but has a very high level of spending. Actually, it is his wife who has such a penchant for spending and she doesn’t work, go figure!    I commend him though, because 5 years ago, he bought two single family homes in St. Louis.  He bought them at the top of the market before it crashed, so he paid top dollar, but as of now, they are producing some cash.  This investment for him is so key, because as of now he cannot save, but this is forcing him to do so.  Even if he spends all his dough for the next 25 years, at least he will have 2 rental properties paid for, which he could then sell or live off of the residual income.  Perfect!  This is totally necessary for him, even if he has to put his own money into the properties, he needs them.  You should look at rental properties if your spending habits are similar to my friends, may turn out to be one of the best financial decisions you ever make!