Tuesday, January 26, 2010

Planning and evaluating feasibility

I have spent a lot of time this month meeting with my clients about their 2010 planning. A simple question starts all of these meetings "What do you want to achieve this year?"

I am amazed at how most people have no answer to this. They know they need to save, they know they need to plan, but there is no end goal in site. If you have an RRSP, what is the purpose of this money? Why are you saving it? How much will you need? How do you know when you are at the amount you need?

I have found, with ever investment I make, I ask a simple question first - "What will I get out of this investment and how does this help me achieve my goal?"

My goals are simple, I want to build a passive income that will fund my life, plus a significant portion more. Every time I buy property or stocks, I have to evaluate how these items get me closer to my goal.

I do not buy on the assumption that something will go up in value. I am not interested in value, I buy based upon the cash flow the asset produces. In todays economy, assets are the new wealth, creating net worth is great, but if you are net worth heavy and cash poor, you are still poor in the short term.

My number one evaluation tool is cash on cash return. I want to know what money I am making and when. My 32 properties were all bought on a cash flow basis, my stock investments are bought on a dividend return. I do not invest in RRSPs anymore as they cannot help my cash flow, at best, they defer my taxes.

The simple solution to investing and staying on point is to do the following - look at each investment whether mutual fund, stock, real estate or fine goods - then evaluate if it gets you closer to your goals. If not, even though it could be a great opportunity, walk away and wait for something that accomplishes your goals.

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