It is possible to accumulate wealth with a household income less than 6 figures. It would take discipline and a goal in mind to stay the course as they would be challenges but you can overcome them.
It is important to pay off debts first. Without debts and a mortgage, it is easier to live one income and save the other income if the couples earn income. In this practice, we will assume the couple work outside of the house. They paid off their debts and their mortgage. Their living expenses can fit within one income after trimming few unnecessary expenses. The second income is invested in strong stocks that generate 4% annual dividend or more.
Accumulate wealth through the stock market
Let’s assume the family of 5 living expenses are $20,000- $24,000 a year no mortgage or rent included. That is $1,667 to $2,000 a month. If one take home income is around that number the family could easily live within that income and still challenge themselves to save few dollars a month. Let’s assume the second income is a little higher $3,000/ month. If every month this couple invested their $3,000 in the stock market, how much the couple should invest in order to generate revenue enough at 4% to cover their living expenses without touching their principal? $1,667*12 months*25= $500,000. If you invest $500,000 in stocks that pay you 4% annual dividend or more, you could live off the dividend without touching your $500K. How long will you take to save that amount? You invest $3,000 a month or $36,000 a year. That would take you 13-14 years to save half million. If you don’t touch the dividend within that time frame, your investment would compound allowing you to reach half million in less than 14 years. It is a passive investment strategy that still gets you to financial freedom. Your net worth after 10 years will be $360,000. We didn’t even factor in salary increases in the calculation.
Accumulate wealth through Real Estates
It is good to diversify your portfolio. With the stocks it is your hard earned money you invested. In real estates you have the chance to borrow from the bank. You use other people’s money to make money. You pay them interest and you increase your net worth even faster. Let’s consider this approach.
With $36,000 of your income invested a year, you could save $360,000 in 10 years and $504,000 in 14 years. You can purchase single family homes and condos to rent. With $36,000 a year, you could purchase one rental property a year for the next 10 years for $150,000 each or less. You put down 20% and carry a mortgage. You set the rent at $1,000 or more and pay the mortgage with $1,000 a month. With 36,000 saved a year, you could pay the down payment of $30,000 (150,000*0.20) on the house. Â You would have a mortgage of $120,000 per house. At the end of the year 10, you would have 10 rental properties and your net worth would be more than $360,000 ($60,000 left from the $360,000 saved, and $300,000 spent on down payment and now as a form of equity.) Each time the house rent pays for the mortgage, the equity in the house increases increasing your net worth. Each year that the value of the house goes up, your net worth goes up.
House 1 purchased at the start of year 1 would pay its own mortgage ($120,000) with $1,000/month rent within 10 years (1,000*12*10). We didn’t take interest into consideration and we didn’t take rent increases into calculation either. Moreover, a $150,000 single family house rents for more than $1,000 a month. You should have enough cushion to pay insurance and be cautious with maintenance cost.
After house 1 is paid off, its rent would be added to house 2 to pay house 2 mortgage.
House 2 purchased in Year 2 would pay its own mortgage within 9 years from year 2 to end year 10. That would be $12,000*9 = $108,000 paid by house 2 on its own. The remaining mortgage $120,000-$108,000 = $12,000. Houses 1 and 2 would pay that mortgage in 6 months in year 11 ($2,000*6).
House 3 would pay its own mortgage for 8 years from start of year 3 to end year 10 and 6 months in year 11. That would be ($12,000*8) + ($1,000*6) =$90,000. House 3 would have $30,000 left to pay. Houses 1, 2, &3 would pay house 3 off through year 11 and 4 months in year 12.
Within 11 years and a quarter, you would have paid off 3 properties. Your net worth would increase by more than $150,000*3= $450,000.
House 4 pays its mortgage for 7 years from year 4 to year 10, one year in year 11, and 4 months in year 12. That is $12,000*7+12,000+4,000=$100,000. The mortgage remaining is $ $20,000. Houses 1,2,3,4 would pay it off in 5 ($4,000*5) months in year 12.
House 5 pays its own mortgage for 6 years from year 5 to year 10, 1 year in year 11 and 9 months in year 12. That is $93,000 ($12,000*6+$12,000+$9,000). Its remaining mortgage of $27,000 ($120,000-$93,000) would be paid off by houses 1, 2, 3, 4, &5 in 5.4 months. That would be year 12 and 1 month in year 13.
House 6 pays its mortgage for 5 years from year 6 to 10, 2 years from year 11 to year 12 and 1 month in year 13. House 6 would pay itself $12,000*8=$96,000+1,000=$97,000. The mortgage would be $23,000. Houses 1, 2, 3, 4, 5, 6 would pay it off in 4 months in year 13 (4*$6000=$24,000). You would have $1,000 extra.
House 7 would pay its own mortgage for 4 years from year 7 to year 10, 2 years from year 11 to 12, and 5 months in year 13. That is $12,000*6 +$ 5,000 =$77,000. The remaining mortgage would be $43,000 (120,000 – 77,000). Houses 1, 2, 3, 4, 5, 6, & 7 would pay it off in 6 months in year 13. That would be houses 5, 6, and 7 paid off within 11 months in year 13.
House 8 pays its mortgage for 3 years from year 8 to 10, 2 years from year 11 to 12 and 11 months in year 13. That is $12,000*3 +$12,000*2 + $11,000 = $71,000. The remaining mortgage is $49,000. Houses 1,2,3,4,5,6,7, & 8 would pay it off within 7 months (7*8,000 = $56,000) with a $7,000 cash left. That would be 6 months into year 14.
House 9 pays its mortgage for 2 years from year 9 to 10, 3 years from year 11 to 13, and 6 months in year 14. That would be $12,000*5 + $6,000 =$60,000. The remaining $60,000 would be paid by Houses 1, 2,3,4,5,6,7,8 & 9 within 7 months. That is up to one month in year 15.
House 10 pays its mortgage 1 year in year 10, 4 years from year 11 to 14 and 1 month in year 15. That is $12,000+ $12,000*4 + $1,000 = $61,000. The remaining mortgage of $ 59,000 will be paid by houses 1, 2, 3,4,5,6,7,8,9 & 10 within 6 months in year15. ($1,000*10*6=$60,000) there would be $1,000 extra.
By 7 months into year 15, all the rental properties would be paid off. You manage your own properties sa a part time jobs along with your spouse and later on with your teenage kids. By mid-year 15 you would have a net worth more than $1,500,000 ($150,000*10). The houses would increase in value which would increase your net worth also. The rent would go up as well. Every month, $10,000 from rent or more would be available for you to live on if you choose to retire from your employer or to be invested in the stock market more conservatively.
From year 11 to the first 7 months in year 15, if you continue to invest $3,000 a month, that would be $165,000($3,000*12 months*4 years + $3,000*7). Your $ 60,000 after paying the down payment of 10 houses, and the $165K would total to $225,000. Invested at 4%, that would give you a return of $9,000 a year.
Your net worth would be more than $1,725,000 ($60,000 + 1,500,000 + $165,000). Within 15 years of investing one income in stocks and rental properties without being too risky or carry on a lot of debts.
All this is achievable within 15 years of living on one income and saving the other, living frugally without missing out much. The income you leave on will increase living room for you to include some wants in your budget and still save for irregular expenses and maintenance of your main residence. It just takes discipline and a goal to target. This calculation may not work for you based on your income or situation. However, it gives you an idea to review your income and your expenses and start planning for your future. You should not wait for everything to be perfect before your start. They would be challenges along the way you would overcome them as you face them.
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