As the Managing Director for BMT Tax Depreciation, I have the privilege to travel around the country helping to build a community of smarter property investors and real estate professionals.
In the process of discussing depreciation with investors and real estate professionals and the hidden cash benefits tied up in the depreciation of investment properties, I often get the opportunity to talk to them about various investment strategies.
In the beginning, what was at first a surprise is now perhaps the most common mistake I hear and see investors make when purchasing a property. The mistake many investors make is that they have no overall strategy. The reason I think is because they have no clarity of what exactly it is they’re trying to achieve through investing.
So whether it’s investing or setting life goals, I want to share with you a 3 question strategy which I call the RNR formula. I use it to get a clear picture of which strategy I would need to use to achieve a particular result or goal.
- Real Deal
- Need To
- Results Focused
1. Real Deal
Having a reality check or taking stock and understanding where you are in terms of your wealth, health and relationships is the first step. As the proverbial saying goes “the truth will set you free”. It will also get you on your way to wealth creation or financial freedom. Here are some personal finance truths to get you started as an investor.
- What is my net wealth? Calculate my net wealth
- What is my lending capacity? Calculate my lending capacity
What income streams do I have available to me? View video on Cashflow Quadrant
Collate all of this information and you’ve got a good foundation to build on. Healthy or not, the main thing is you’ve got a starting point.
2. Results Focused
Now that you know what your personal balance sheet looks like, it’s time to take a good look at what you really want in life. I know “N” comes next in the formula but you have to know the result you want before you can determine what you “Need” to get you there. Most people can tell you what they don’t want, but find it hard to tell you what it is they actually want in life, mainly because they’ve never taken the time to define it with clarity for themselves. In determining the results you want in life. The big problem here is people often mistakenly define means goals as end goals.
By this I am referring to end goals as the results you want for your life. End goals are the experiences you want to have in life where time and money are not a factor. What do I want to experience in life, how do I want to grow as a person, how can I contribute in life and to the world? Means goals are the goals that get you there, so if financial freedom is an end goal or your desired result, the means goals could be; get an education, get a job, build a business, invest in shares or invest in property. This is a very important distinction to make.
Not knowing what results you want in your life can be a source of frustration for many. Knowing is the starting point for formulating your strategy for life, personal growth and investing.
In his book 7 habits of Highly Effective People, Dr Stephen Covey talks about the difference between means goals (working towards) and end goals (the actual goals or desired outcomes). To help his readers understand this point he introduces the second habit which is “Begin with the End in Mind” which focuses on choosing these goals.
In illustrating this second habit Dr Covey uses the analogy of a funeral. Imagine attending a funeral service, it’s an open casket funeral and as you look into it you see yourself. You also see your family, friends and co-workers grieving while giving a eulogy of your life, how would this make you feel? What would you want them to have said about you and the person you were, how do you want them to remember you?
If you look to the end of your life, what do you expect to have accomplished? What kind of life do you wish to have lived?
Most of us would want to be seen in a good light and be remembered as a loving, generous and successful person, who was rich in spirit and bank account and much loved by those people around us, or then again you might prefer to be a lying, cheating scumbag, though I doubt that very much.
Here’s an exercise to help you determine your end goals or what it is you really want from life. Take some time to answer the following questions, you can add other people or groups to the list.
What do you want the following people to say about your life?
The second part to this exercise is to evaluate your current goals in light of your newly discovered end goals, are they aligned?
Now look at your current life. Make a list of your current goals, this list along with your personal balance sheet should give you a clear picture as to where you are at in life. Now compare the two; are your present goals and desires in line with how you want to be remembered at the end of your life? If so then you are on the right path and you’ve aligned your means goals with your end goals. If not, then you might want to re-evaluate changing what you’re currently doing if it’s not taking you to your end goal.
By beginning with the end in mind, you can determine if your current direction and investment strategy is right for you. You can help reinforce this by writing a personal mission statement that aligns your means goals with your end goals. Habits are hard to change, because they’ve been ingrained through repetition and creating new habits will require the same kind of repetition and perseverance. If this whole process is new for you, remember you may not be able to change your destination in a moment, but you can change your direction.
3. Need To
“Needs” are the gap between resources and results. It’s what is needed in thoughts, action and resources. It’s how you need to think to achieve your goal, it’s what resources do you need to have that will enable you to get there, it’s the action you need to take to get you from where you are, to where you want to be while enjoying the process on a daily basis
Without truly understanding what it is that you want for your life, you are not going to have a strategy for your life or even an investment strategy. Your “Need To” analysis determines your strategy and means goals. An investment property is a means goal to enable you to experience certain things, help you grow personally and enable you to contribute.
There are many wealth creation strategies or means goals to get you to your end goals. Now that you’re clear about your end goals, part of your personal growth is to find the investment strategies that will bring you the results and experiences you want. Property investment can be a great way to build wealth but the acquisition of as many properties as possible or recklessly purchasing just any property can lead to financial head-ache. If you are interested in property, go for it, but you need to be clear about what it is that you want, so you can find the best strategy to close that gap. Once you have your strategy, the most important thing is to take action.