If you’ve been paying attention, I’m kind of anti-college around here. I believe that college should be path to get to a specific career. If you want to be a nurse, or a teacher, or an engineer, or a crap-ton of other things, then your path will need to go through a college. If you go to college just to read up on interesting things, that’s probably not the best use of your capital. Going to college to learn specific skills is (usually) a terrific investment. Going to college to get a degree in Women’s Studies isn’t going to get you much more than a job at Starbucks, which I’m pretty sure even you could get without going to college.
So you’re 18, and you haven’t a clue about what you want to do with the rest of your life, like a lot of 18 year old kids. You’ve heard that people who go to college get paid more than their
dumbass non-educated brethren, and you want some of that scratch. You can buy all sorts of stuff with extra money, even love. (although only temporarily) But what to do? Hopefully, you have some awesome relative who will forward you this post when you’re about 17.5. Maybe that awesome relative will also buy you booze.
The gist of the plan is simple – you take the capital you would have invested in your college education and plow it into investments. After 4 years your investment is hopefully churning out some serious passive income. If you reinvest those distributions, you can really kick some ass after a few years. Here’s how you do it.
You’d be living like some sort of cheap-ass in college anyway, so step 1 in my plan is to live as cheaply as possible.
Ideally, you’d take up residence in your parents’ basement, since they’re going to be nice and charge you sweet bugger all for rent. Thank them by cutting the lawn once in a while, you slacker. If your Mom makes you dinner, at least pretend it tastes good. You’re going to want to load up on the freebies, since you’re going to want every spare penny.
If you parents are bastards and kick you out of the house once you hit 18, it’s time to hit up Craigslist to find the cheapest place to live you can find. Unless you live somewhere ridiculously expensive, finding a bedroom for less than $500 a month is achievable. While you’re at it, find the cheapest transportation you can and try to avoid all the expenses that come with being 18 years old.
If you do all these things and work hard, saving $15,000 per year is an obtainable goal. Now, what to invest it in?
What To Invest It In?
I just asked that. Who writes this crap?
There are two routes you can take. Since we’re looking for perpetual income, we want to either invest in debt (or highly secure stocks that almost act like bonds) or real estate.
I think real estate is the ideal path for this strategy, providing you don’t live in the parts of Canada that have crazy expensive real estate prices. If you buy a rental property (or you mix up the investment in a few REITs) you’re looking for a 10% return on the total investment after expenses.
A real life example. Say you buy a $40,000 rental property that rents for $500 per month. There are $2,000 per year in expected expenses, mostly bribes to the mob for not burying squealers in your backyard. In the U.S., these types of properties are common. In Canada they exist, but not in the big markets.
If you buy your first rental property when you’ve saved up $10,000, that leaves you with a $30,000 mortgage, assuming my 5th grade math skills aren’t failing me. At the end of year one, your mortgage can be down to $25,000 without spending a dime of rent. After putting your $15k towards the mortgage during year 2, you’re mortgage is down to $10,000, and you’re on pace to own a rental house outright by the time you’re legally able to gamble in Vegas.
If you do it again at the beginning of the 4th year, you’ve got an extra $750 per month you can add to paying down the mortgage on a second property. If you continue to save $15,000 per year and add $8,000 per year of rent to the mortgage, it’ll take just over a year to pay off that second house.
By the time you hit 23, you can own two rental properties that should spin off $750 per month after expenses. Not bad for some moron who didn’t go to college.
If owning rental houses doesn’t get you aroused in the pants, you can basically do the same thing by buying conservative stocks or somewhat higher risk bonds that will get you to that magical 10% return.
These days, getting a 10% return isn’t easy, since it seems like low interest rates are here to stay, at least for a little while. You’ll certainly have to take your time to scour the markets for investments with a relatively safe 10% return, but they exist.
You guys know I love the sugar business. I’ve held Roger’s Sugar since about 2005, and that bad boy has given me a steady 10% return without anything close to a hiccup. I also hold the Dreyfus High Yield Bond Fund, which has consistently given me a 10% return since 2007. If you diversify your holdings a bit and keep an eye on the underlying earnings, maintaining that cash flow is very possible.
After year one, your $15,000 initial investment will be poised to return $1,500 per year, every year, plus it has the potential for capital gains. If you reinvest those dividends, you’re looking at $6500 per year in dividends by the time you’re 22 years old. If you want to supercharge these returns even more, use leverage. That adds risk though, so be careful. Do whatever the financial equivalent of putting on a condom is.
Yeah, It’s Hard. Stop Whining.
I’ll admit, most 18 year old kids don’t have the maturity to pull this off. Financially, this plan isn’t really that hard to pull off, it just takes commitment. It isn’t really much harder than going through college. Saving money can be pretty easy when you still live at home with few expenses. Instead of pissing away that money, maybe it’s time to encourage young people to get a head start investing. It’s better than spending it on beer, anyway.