Unpacking the Freedom Formula with Tyrone Shum: Part One

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Tyrone and I are back at unpacking the world of alternative investing strategies. This time around, we delve deeper into my freedom formula model. It has context and relevance for all investors. 

So in part one of this three-part series that explores my five-year model, I want to give you a sense of why the plan around your wealth creation is fundamental to your investing trajectory and success.

Q: What is the Freedom Formula?

  • The five-year Freedom Formula is the words that I have put together to make sense of getting from where I am now to where I want to be in five years time. 
  • So, it’s the framework that I use to help people understand their major pitfalls and actions they have to take to achieve significant gains in a shorter period of time. 

Q: What do I need to do to put together an investment strategy that will guide me for the next few years?

  • People are in the investing game because they are, in my opinion, after three things: liquidity, leverage and legacy. 
  • In terms of liquidity, they want the capacity to have enough money coming in from their investments to live the lifestyle they desire. Regarding leverage, investors also want to be able to take a few dollars and amplify it in a way that allows them to free up time.
  • And lastly, a lot of people are super interested in this concept of a legacy – which is all about creating wealth that will endure so that you can have the influence that you want on your family, charities or causes that you care about. 
  • Investors want a combination of all of that. So the Freedom Formula is about establishing how to deliver those three things. And the only place to start is with a plan. 
  • I typically work with business owners, and they often come to me without a plan – they have no idea why they’re making the investment decision they’re making. And a lot of the time, those decisions have purely been based on FOMO – the fear of missing out – or because they abdicated the decision making to someone else.
  • Having a plan isn’t necessarily having a series of steps of when you are going to do X, Y and Z. From my perspective, a plan is about pulling back the curtain and analysing all the different possible permutations of opportunities that you can consider – if you take this course of action, where are you going to end up?
  • People often struggle to understand what a particular investment will mean to them in five years.  
  • I only have this understanding now because I stepped on all the landmines and made all the big mistakes. Now, I am super careful, and I always want to understand what the implications will be in three to five years if I take on a particular investment. 
  • And so, what we’re trying to achieve with the plan component of the Freedom Formula is opening up the possibilities. 
  • Suppose you came to me and told me your financial situation is X, Y and Z. In that case, I could show you a myriad of ways that you can play it and what the numerical implications are going to be in three to five years if you take a particular investment path.
  • This way, I don’t need to convince you which path is right – you’ll intuitively know. 
  • Your ability to map out possibilities and effectively decide how you’re going to deploy your heart and capital is what makes the difference between someone who possibly gets mediocre results and someone who achieves epic results. 
  • Planning involves identifying where you are now and where you want. And then having someone, like a wealth professional, shine light on all your options so that you can make informed choices.  

Q: You mentioned earlier that business owners are the ones that approach you to work on their Freedom Formula. I think they’re attracted to this type of plan because they’re so busy running their business, they don’t necessarily have time to sit down and plan out their property portfolio. What are your thoughts on this?

  • Many business owners fear the whole ‘wealth-building’ conversation because they don’t have the bandwidth. Running a business is stressful enough as it is, so they don’t necessarily feel like they have the energy to put towards wealth creation. 
  • However, I often encourage business owners to understand that the cadence around wealth building is completely different to the cadence required to run a business. 
  • When you run a business, there is a degree of hustle to it – you have to solve problems and nurture your business; otherwise, it won’t thrive. 
  • Wealth is a different beast because it’s slower moving – the cadence of energy and attention you need to give wealth-building is much less. 
  • So, for those business owners who are time-poor, I encourage them not to fear wealth building because essentially, it’s all about getting the minimum viable capital and putting in the minimum viable effort to get you the result you want. 
  • If you have the right information and the right plan, wealth-building does not require a heavy amount of time and energy. 

Q: Could you share a case study and talk a bit about how you would be able to help them apply the Freedom Formula?

  • The case study I want to share concerns a couple who ran a business in the events sphere. Until the pandemic hit, they had a strong business, so there was no Plan B in place.
  • Thankfully, their business is back up and running now, but it’s limping severely. 
  • When they approached me, they had a reasonable property portfolio with their gross assets totalling around $5.5 million and their debt totalling $1.8 million. 
  • Their investment properties were producing around $60,000 net income.
  • So by all accounts, people would say, “wow, that’s super successful.”
  • In terms of their overall financial situation, they had $450,000 sitting in their offset account, and they lived in a home worth $2 million with $325,000 outstanding debt on the mortgage. 
  • Their borrowing capacity in the Australian market was about $1.5 million, and they were saving on average about $100,000 cash every year. 
  • When they took a bit of a knock last year, they realised their investments weren’t very diversified. They also recognised that if something serious were to happen to their business, they would ultimately end up selling down their investments. 
  • When they approached me to try and gauge what their options were, it was clear that they needed $200,000 per annum to support their future lifestyle: $100,000 to live, $50,000 to donate and $50,000 towards their family savings account. 
  • In terms of a starting point of their Freedom Formula, when I look at their numbers, they have an average household age of 52 and the current combined average household income of about $330,000. Their net return on investments was 1.62%, which is quite typical. 
  • So they’re earning $60,000 from their investments, and they’re telling me that they want to earn $200,000 – that’s a $140,000 shortfall. 
  • The first part of building involves building capital, and there is no better vehicle to do that than traditional property – which this couple has done very well. 
  • But at some point in your investment journey, you’re going to need an income stream. Unfortunately, the Australian property market isn’t great for that. So what else can you do?
  • I was able to run this couple’s numbers through a simple calculator (which I’ve built) and showed them what they needed to do using a simple graph. 
  • They want $200,000 (which will increase each year with the CPI), and they’re currently earning $60,000.  I took that dividend that they have every year and didn’t do anything other than pay down debt on their property portfolio.  After allowing for the rising value of that property over time, I could see that they would hit their goal in roughly 24 years. 
  • Once I did that, we could start to play around with options. 
  • For example, suppose they took the $450,000 lump sum sitting in their offset account plus their dividends every year and put that into alternative investments that could earn them 10% net returns per annum cash flow. If that is the case, the calculator suggested that they could shave their timeline down to five and a half years. 
  • And that’s a fairly conservative approach because they’re not touching their property portfolio; they’re just using the cash they have sitting around. 
  • The purpose of this exercise isn’t to hang your hat on the calculator’s suggested timeline – it’s just meant to give you an idea of what could be if you played around with your numbers. How does your Freedom Formula change? How do you marry your risk profile with what is available in the market?

Q: What would happen next in that scenario? What comes after figuring out your freedom formula?

  • Once you understand what your formula roughly looks like, you need what I call the million-dollar mixing desk – you need to understand enough of what your options are when it comes to strategies to understand what strategies are a fit for you. 
  • Do you know what strategies are going to help you get to your goal? Do you have the knowledge and understanding of the strategies that fit your risk profile? Do you get what will help you get the best traction with your wealth-building up? Do you understand the implications of different paths, and are you making informed decisions about remaining in the driver seat? 
  • So having a mixing desk is just about taking all the strategies and permutations out there and setting it to the frequency and levels that suit you. 
  • The other part of the plan is about establishing how much capital you need to build the passive income stream that will give you the lifestyle you want. 
  • Maybe after playing around with the numbers, you’ll realise that you’re not quite at the capital level you need to be, and you need to give it a couple more years to grow. 
  • So, from my perspective, the plan is about education and a simple math equation. 

If you’re interested in understanding how to create wealth through alternative strategies,  please check out my programs, where I help you catapult your investment income and blend strategies to shave decades off your timeline to financial freedom.

Or, you’re welcome to get in touch today, book a call with me, and I would be happy to talk you through it – no obligation!

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