The New Five Legged Stool of Retirement

Rental

Rental is truly the traditional home of passive cash flow through assets. Robert Kiyosaki highly recommends this asset class in order to become financially independent. In order to excel at this asset class you must become proficient at developing pro forma profit and loss statements and calculating your rate of return.

The advantages of rental over stock investments include the following:

· Property is a physical asset

· You can depreciate the building for tax breaks

· You can leverage the investment

· Control – you can raise rents, evict tenants and make property improvements

· You can insure the property against catastrophic loss

If you are not going to employ property management then be prepared to deal with clogged toilets, tenant evictions and general repairs.

Traditionally, rental is seen as one of the only games to generate significant cash flow unless you are familiar with …

Covered Calls

If you want to get away from tenant complaints, evictions and clogged toilets and you like the world of stocks, then covered calls may be cash flow solution for you. In this technique you are literally renting out your stocks on a monthly basis for cash flow. You buy a stock (at least one hundred shares) and sell someone the right but not the obligation to purchase your stock at a set price otherwise known as the strike price. The money you receive is the premium and it is yours to keep. This is your rental check and you can transfer and spend it right away or you can reinvest it.

At the end of the month, your stock is either called out or you write another call against it. If you cannot profitably write another call against it then you can follow management techniques detailed by Hooper and Zalewski in Covered Calls and Leaps, A Wealth Option, in order to continue generating cash flow. The bottom line is that whether the stock is going up or down, you can still generate the same amount of cash flow each month.

Budget and Balance Sheet

According to Warren Buffett, accounting is the language of business. You need to have the capability to compile and read your own personal financial statements. You do not need a degree in accounting, just the basic skills to develop a monthly budget and balance sheet. You need to check your totals at the end of each month and review your balance sheet: is it getting better or worse? Are you building equity or merely taking on more and more debt?

401ks

Although Robert Kiyosaki despises mutual funds and does not make 401ks a part of his financial plan, I definitely include them in my financial plan. Who is to argue with having one if your employer provides a match? Even though Kiyosaki says that is money owed to you anyway, I argue that it is icing on the cake.

In many respects you want to end up with as many tiers as possible in order to build a solid stool for financial independence. Traditionally, the old stool involved three legs:

· Social Security

· Your Savings

· Pension Plans

Pension plans are long gone folks and social security soon will be. This means that you have a one-legged stool which is probably not going to be to comfy.

I recommend the following five legged stool:

· Rental

· Covered Calls

· 401 k

· A Business

· Buffett-style stock investments

This type of stool is very sturdy and should not topple anytime soon.

Buffettology

If you are going to stay with mutual funds then as Warren Buffett recommends, you should invest in an index fund. By doing so you will avoid the high fees that come along with most traditional funds which truly eat away at your overall return.

I would also recommend that you diversify international through an international fund.

If you are going to venture outside of the world of mutual funds then you need to take an in-depth look at Buffettololgy. In that book, Mary Buffett and David Clark detail the methodology that Warren Buffett uses to identify great companies. He looks for:

· A consumer monopoly or toll bridge

· Consistent, growing earnings

· High ROE

· The ability to reinvest

· The ability to keep up with inflation

· Low debt

· Good margins

Also, if you are going to build a business you need to study up on Buffettology since it will key you in as to what makes up a good, strong business.

You can also potentially look at dividend paying stocks or REITS, royalty trusts or ETFs when you venture away from traditional mutual funds. Just keep in mind that Warren has been able to generate consistent return of over 20% over the years which he considers his cash flow. So, I would tell that if you are looking for dividend paying stocks, meld dividend yielders with Buffettology and approach it from that direction.

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The above excerpt is from my upcoming third book My Happy Assets - Taking the Last

Steps to Financial Independence.

If you like what you read, check out my first book, My Happy Assets athttp://www.myhappyassets.com/only

$3.99 and the complete second book, Small Business Coffee Hour, Three Essential Ingredients for a Successful

Businessathttp://www.smallbizcoffee.com/, only $3.99. Or both are available at lulu.com. Happy Reading!

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