How to Allocate Your Assets for Financial Freedom

The following is a guest post from Millionaire Mob.

Allocating assets is very important. Actually, it’s likely the most important component for building sustained wealth over time. If you can master budgeting and saving, congrats! You are onto the next step of building wealth… Allocating your assets efficiently.

If you are seeking financial freedom, you must think about your asset allocation now. Not in the future. You must create a plan that works and most importantly, is realistic.

It’s okay to feel overwhelmed with where you should put your money, that’s natural. If you have a plan for success or an outline of how to invest your money, you will feel much less overwhelmed. Plus, you’ll feel a lot less guilty if you want to splurge on spending every once and awhile.

Why asset allocation is important?

Asset allocation is important. It’s as simple as that. But why? You need to mix you assets to allow your hard-earned savings to start working for you. Money is a tool that can help you create new opportunities and thus, more money. There are a few reasons why asset allocation is important:

1. Without proper asset allocation, you can lose out on significant value appreciation.
2. Financial decisions you make today will impact your future more than financial decisions you make 20 years from now.
3. There is no one-size-fits-all approach with asset allocation. It’s on you to create a plan that reflects your risk tolerance, financial goals and timeline for financial freedom.

How to Allocate Your Assets for Financial Freedom

Let’s dive into a few steps to help you start allocating your assets for financial freedom.

1. Determine Your Risk Tolerance

Where and how you invest is the most important part of allocating your assets. Before you invest, you should understand the capital stack. This is the biggest determinant of why lending can be less risky than being an equity owner. Also, the capital structure helps you understand that leverage (or low-cost debt) is not a bad thing with real asset ownership.

If you are an ordinary investor and young, I’d consider the following approach to start investing for financial freedom:

• 50% index investing 
• 10% bonds
• 40% direct real estate for income and capital appreciation
• 10% alternative investments such as peer-to-peer lending, real estate crowdfunding, etc.

When considering where to park your money, you need to think about these as part of the total pie collectively (both on a pre-tax and after-tax basis). You can gain significant exposure to indices and bonds through your retirement accounts including (401k, Roth IRA, IRA, etc.), but that’s not it.

You should think about your after-tax proceeds from work to allocate to index investments, direct real estate for income and alternative investments. You should have a sizeable nest egg of after-tax index contributions that you can start withdrawing once you achieve your optimal financial freedom target. Volatile stocks are a normal part of the market, so you need to stay invested over time. Make yourself aware that downcycles will happen.

I love real estate because it provides an opportunity to increase your income AND build wealth through the use of leverage. If you can find outstanding income properties, you can start building wealth immediately through compound interest.

2. Diversify

Diversification is paramount for any person aspiring for financial freedom. If you are an expert investor, you can make a case where diversification is a bad thing.

However, for personal finance, diversification needs to happen.

Diversification can happen on several levels, including:

• Types of securities (stocks, bonds, real estate ownership)
• Industry
• Geographic

Thus, you should hit on each of these levels of diversification when thinking about where to allocate your assets. Keep is high level when you think about diversification, no need to think about sub-industries, city specific, etc. If you think about diversification too much, you will run into overkill.

3. Keep It Simple Stupid (KISS)

If you want to allocate your assets for financial freedom, you should deploy the KISS method. Here’s how you can keep things simple:

• Avoid opening too many accounts. A handful of accounts will keep everything clean and consolidated into one place.
• Continue to learn, but don’t chase. You simply don’t need to divert away from your plan to achieve financial freedom. If you write a script upfront that has realistic assumptions, there’s no reason to change your methods.
• Use low-cost options. Surprise! The financial services industry loves making money for their clients, but also loves making money for themselves. Use low-cost options that will achieve the same goals, like index-funds.

Conclusion on Allocating You Assets

First, achieve the repetition of saving on a continually basis. Make your savings habitual. That should be the easy part due to many different automated tools tied with bank accounts. Set up automatic transfers from banking accounts to your investment accounts. From there, make a plan upfront of what number you need to achieve. Then, start deploying your capital into your various asset allocations. Don’t stray away from your plan. Stay focused and continue to invest.

Go out and enjoy life.