How To Be Financially Free In 2022.

What is Financial independence? In a well described definition based on financial principles. Financial freedom is the status of having enough income to pay one's living expenses for the rest of one's life without having to be employed or dependent on others. Income earned without having to work a job is commonly referred to as passive income. 

There are many strategies to achieve financial independence, each with their own benefits and drawbacks. Someone who wishes to achieve financial independence can find it helpful to have a financial plan and budget, so that they have a clear view of their current incomes and expenses, and can identify and choose appropriate strategies to move towards their financial goals. A financial plan addresses every aspect of a person's finances.

Contents

• 1Passive sources of income to achieve financial independence
  • 1.1Passive activities
  • 1.2Rental activities

2 Steps by step procedure to financial freedom

3

• • Approaches to financial independence
    
    
  • 3.2Expense reduction
• 4References
• 5Further reading

1.   Passive sources of income to achieve financial independence: Passive income is income that requires minimal labor to earn and maintain. It is called progressive passive income when the earner expends little effort to grow the income. Examples of passive income include rental income and any business activities in which the earner does not materially participate. Some jurisdictions' taxing authorities, such as the Internal Revenue Service in the United States of America, distinguish passive income from other forms of income, such as earnings from regular or contractual employment, and may tax it differently. 

The United States Internal Revenue Service categorizes income as active income, passive income, or portfolio income. It defines passive income as only coming from two sources, or "passive activities": rental activity or "trade or business activities in which you do not materially participate. Other financial and government institutions also recognize it as an income obtained as a result of capital growth or in relation to negative gearing. Passive income is usually taxable.

Active income is earned income including all taxable income and wages the earner receives for working. Active income includes wages, self-employment income, and material participation in an S corporation or partnership. Portfolio income is derived from investments such as dividends, interest, capital gains, and some royalties.

Passive activities

There are three kinds of passive activities:

• Cash flows from property income, including profits from ownership of capital, rent from ownership of resources such as rental income, cash flows from property or any piece of real estate, and interest from owning financial assets.
• Trade or business activities in which one does not materially participate during the year.
• Royalties, which are payments made by one company (the licensee) to another company or person (the licensor) for the right to use the latter's intellectual property (book, music, video) or patent. However, the Internal Revenue Service only considers royalties passive income when they are "not derived in the ordinary course of a trade or business. 

Some limited partnerships may be considered passive as long as the limited partner does not have any role in the company and exchanges their capital investment for a share of the activities profit.

Rental activities 

In order to be considered a rental activity, tangible property is used by customers and the income paid from the activity comes from the amount paid for the use of the property and is not considered a rental if:

The average period of customer use is:

• 7 days or less
• 30 days or less and significant personal services were provided

There are more types of passive income than is shown in this article. In any case, it is preferable to consult with financial advisor first.

• Bank deposit

It is one of the most popular and simplest ways to gain passive income. A person gives a certain amount of money to a bank and takes interest every month.

• Securities

The profit, created by security, is in general inversely proportional to the risk it holds.

• Bonds

Bonds are debt securities issued by the state or company for gaining investments. By purchasing a bond, a person is lending savings to the issuer for a specified period. In return, he receives income at the very end of the bond validity period, or he can also earn so-called coupon income.

• Dividend stocks

It is a reliable way to generate income passively. However, it is important to mention the research to find stocks with desirable risk/income ratio.

The following is a non-exhaustive list of sources of passive income that potentially yield financial independence.

• Bank fixed deposits and monthly income schemes
• Business ownership (if the business does not require active operation)
• Dividends from stocks, bonds and income trusts
• Interest earned from deposit accounts, money market accounts or loans
• Life annuity
• Notes, including stocks and bonds
• Oil leases
• Patent licensing
• Pensions
• Rental property
• Royalty from creative works, e.g. photographs, books, patents, music, etc.
• Trust deed (real estate)

1. Bank fixed deposits and monthly income schemes: Fixed Deposit (FD) monthly income schemes are an ideal option for those who want to earn a regular fixed income on a monthly basis. There are many monthly income schemes offered by banks and this will help the investor earn a supplementary income. This type of term deposit promises the investor guaranteed returns at a certain rate of interest, every month. This type of investment is a good option, especially for pensioners, who are looking to augment their income in some way.

   Interest Rates on Monthly Income FD Schemes

   The interest rates for different bank’s monthly income FD schemes are given below:

   Bank	Tenure	Interest Rates
   SBI Bank FD	7 days to 10 years	2.90% to 5.40%
   HDFC Bank FD	7 days to 10 years	2.50% to 5.50%
   Kotak Bank FD	7 days to 10 years	2.50% to 5.30%
   Axis Bank FD	7 days to 10 years	2.50% to 5.75%
   Bank of Baroda FD	7 days to 10 years	2.80% to 5.25%
   IDFC First Bank FD	7 days to 10 years	2.75% to 5.75%
   IDBI Bank FD	7 days to 20 years	2.70% to 5.40%
   Punjab National Bank FD	7 days to 10 years	2.90% to 5.25%

   *The interest rates can change as per banks rules and regulations.

   Monthly Income Scheme Interest Rates for Senior Citizens

   Bank	Tenure	Interest Rates
   SBI Bank	7 days to 10 years	3.40% to 6.20%
   HDFC Bank	7 days to 10 years	3.00% to 6.25%
   Kotak Bank	7 days to 10 years	3.00% to 5.80%
   Axis Bank	7 days to 10 years	2.50% to 6.25%
   Bank of Baroda	7 days to 10 years	3.30% to 5.75%
   IDFC First Bank	7 days to 10 years	3.25% to 6.25%
   IDBI Bank	7 days to 20 years	3.20% to 5.75%
   Punjab National Bank	7 days to 10 years	3.40% to 5.75%

   *The interest rates can change as per banks rules and regulations.

   Key Benefits and Features of Monthly Income FD Scheme

   The various key benefits and features of monthly income FD schemes are mentioned below:

   • This scheme is adaptable, with no upper limit on the amount of money that can be invested. It allows people to invest in the scheme according to their financial capabilities and needs.
   • When compared to most other schemes, a monthly income scheme is more liquid. Investors can opt to withdraw their cash at anytime to meet any unforseen emergency because this scheme has no lock-in period.
   • With the monthly income scheme, investors are not required to pay any processing fee to open an account. It also has a low exit-load of less than 1% of the total investment.
   • Monthly income scheme earnings are higher than typical fixed deposits and the post office monthly income scheme.
   • Investors are guaranted a monthly return despite the fact that the amount of the payment varies based on the financial market.

1. Rate of Interest on Monthly Income Scheme

   The interest rates on these accounts tend to follow the same rates as those prescribed for the regular term deposits. They also tend to offer senior citizens a higher interest rate which can be anything from 0.25% to 0.5% over the applicable rates. These rates are decided by the banks so it’s best to confirm the exact rate with the banks before investing. With some banks, current and past employees of that banks also get higher interest rates. If you are using a regular fixed deposit and withdrawing the interest every month to augment your income, you should know that sometimes banks will provide discounted interest rates.

   Eligibility Criteria

   The eligibiity criteria for opening a monthly income scheme is same as every other fixed deposit scheme. To open a monthly income scheme, you have to be:

   • An individual over the age of 18
   • Minors with their guardians can open a joint account
   • Company
   • Hindu United Family (HUF)
   • Any association or institute
   • NRIs

   Documents Required

   The documents that are needed to open a monthly income fixed deposit account are:

   • Application form
   • Depositor’s photograph (2 copies)
   • Identity proof
   • Address proof
   • PAN card
   • Aadhar card

   Monthly Income Scheme FD Calculator

   A monthly income fixed deposit calculator is used to calculate the monthly interest that will be earned out of an FD. To put it in simple words, an (Click here:FD interest calculator)FD interest calculator can be used to determine how much interest will be payable at the end of each month on your term deposit. The BankBazaar FD interest calculator is an easy-to-use tool that can be used to calculate the interest earned on an investment.
2. Business ownership (if the business does not require active operation):Passive ownership refers to any shareholder in a business who is not involved in the day-to-day decision making of the company's operations. ... It allows them to get out of the day-to-day operations of the business and make themselves operationally irrelevant to the daily running of the company. Business owner” is a term that refers to individuals who establish and operate an entity that is engaged in commercial, industrial or professional activities with the purpose of deriving profits from its successful operations.

   Business owners also own the assets of the firm or entity they formed which they earn passive or active income from. Business owners are the legal proprietors of a business. Business owners are usually in charge of making decisions significant to the existence of the business in regards to the products or services offered, the properties or infrastructures and the partnerships or working relationships that are formed among other choices that have to be made.

   What Legal Structure Is Best for Your Business?

   

   One of the first decisions you’ll need to make when you start a business is to determine the correct legal structure for your company.

   But how do you decide which business legal structure is right for your company?

   You will need professional legal guidance to make this decision, but the first step is learning what the different structures are, depending on your situation, your long-term goals, and your preferences.

   4 Types of Legal Structures for Business:

   We’ve outlined the four most common business legal structures with considerations for each below, including tax, liability, and formation of each. Ready?

   

   1. Sole Proprietorship

   A type of business entity that is owned and run by one individual – there is no legal distinction between the owner and the business. Sole Proprietorships are the most common form of legal structure for small businesses.

   Taxation: A sole Proprietorship has pass-through taxation. The business itself does not file a tax return. Instead, the income (or loss) passes through and is reported on the owner’s personal tax return through a Schedule C (Form 1040).

   Liability: The Owner of the sole proprietorship has unlimited personal liability for any liabilities the business incurs. You can mitigate this risk with insurance and sound contracts.

   Formation: The sole proprietorship is the simplest way of doing business. The costs to create a sole proprietorship are very low and very little formality is required.

   Pros of a Sole Proprietorship:
   • Easy and fairly cheap to establish.
   • Owner has absolute control over the business.

   Cons of a Sole Proprietorship:
   • Owner has unlimited personal exposure to risk, as the owner is responsible for all liabilities incurred by the business.
   • Investors typically would not invest in a business organized as a sole proprietorship.

    

   

   2. General Partnership

   An association between two or more people in business seeking a profit. Partnerships can be created with little formality, but because more than one person is involved, a partnership agreement should be created. A partnership agreement stipulates the terms of the partnership by formalizing rules for profit/loss sharing, ownership percentages, dissolution terms, and management rights among many other things.

   Taxation: A partnership is a tax-reporting entity, not a tax paying entity. A partnership must file an annual information return (Form 1065) with the IRS to report income and losses from operations, but it does not pay federal income tax. Profits and Losses are passed through to the owners based on their profit sharing percentages outlined in the Partnership Agreement. Each partner pays taxes on their share of the profit/loss.

   Liability: Owners typically have unlimited personal liability. Each partner is jointly liable for the partnerships obligations.

   Formation: Usually easy to create, but it is important to have an attorney create the partnership agreement. Partnership agreements establish the terms of the partnership and typically cover topics such as:

   • Capital Contributions
   • Distributions of profits/losses
   • Management Responsibilities
   • Bookkeeping
   • Banking
   • Dissolution

   Pros of General Partnerships:
   • Fairly easy to create and maintain.
   • Profits and losses are passed through to the owner’s personal tax returns.

   Cons of General Partnerships:
   • Partners are personally liable for business debt and liabilities.
   • Can lead to management and oversight issues absent a partnership agreement.

    

   

   3. Limited Liability Company (LLC)

   A hybrid between a corporation, general partnership, and sole proprietorship. Owners of an LLC are called members. Members may include individuals, corporations, other LLCs and foreign entities. Most states permit an LLC with only one owner, called a “single member LLC.”

   Taxation: An LLC is considered a “pass through entity” for tax purposes. This means, business income passes through the business to LLC members who report their share of profits or losses on their individual income tax returns. The LLC entity is only required to file an informational tax return, similar in character to the general partnership. Single member LLCs are allowed to report business expenses on Form 1040 Schedule C, E, or F. LLCs with more than one member usually file a partnership return Form 1065.

   Liability: LLC members are protected from personal liability for business debts and claims, a feature known as “limited liability.” If a business with limited liability owes money or faces a lawsuit, only the assets of the business itself are at risk. Creditors can’t reach personal assets of the LLC members, except in cases of fraud or illegality. LLC members should exercise caution so that they don’t “pierce the corporate veil,” which would expose members to personal liability. For example, LLC owners should not use a personal checking account for business purposes, and should always use the LLC business name (rather than owner’s individual names) when working with customers.

   Formation: To form an LLC, you must pay a filing fee ($100-$800) and must have articles of organization when at the time the entity is established. Operating agreements are highly recommended, but not required by all states. Much like a partnership agreement or corporate bylaws, the LLC operating agreement sets out rules for ownership and operation of business. A standard operating agreement includes:

   • Ownership interest for each member
   • Member rights and responsibilities
   • Member voting power
   • Profit & Loss allocation
   • Management Structure
   • Buy-Sell provision

   Pros of LLC Structure:
   • Owners have limited liability, meaning that the entity is responsible for all liabilities the company incurs.
   • Profits and losses of company are passed on to the member and are only taxed at the individual level.
   • Allows an unlimited number of members

   Cons of LLC Structure:
   • Often subject to additional taxes at the state level.
   • Each member’s share of profit represents taxable income, even if the profit wasn’t distributed.

    

   

   4. Corporations (C-Corp and S-Corp)

   Corporations are the most complex business structure. A corporation is a legal entity that is separate and independent from the people who own or run the corporation, namely shareholders. A corporation has the ability to enter into contracts separate from that of the shareholders, but it also has certain responsibilities such as the payment of taxes. Corporations are generally more appropriate for larger established companies with multiple employees or when other factors apply (i.e. corporation sells a product or provides a service that could expose the business to sizable liability). Ownership is designated by issuing shares of stock.

   The two types of corporations are C-Corps and S-Corps. The major difference among the two types of corporations is the tax treatment of the two entities:

   Taxation (C-Corp): For federal income tax purposes, a C-Corp is recognized as a separate taxpaying entity, thus the entity files its own tax return (Form 1120). A c-corporation is subject to corporate income tax on any corporate profits (entity pays taxes). Shareholders pay personal income tax on the corporate profits distributed by the corporation to the owners. As a result, C-corps are subject to “double taxation.”

   Taxation (S-corp): S-Corps elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. However, the entity is required to report income, losses, gains, deductions, credit, etc. on Form 1120S. Shareholders of S corporations report the corporation’s income and losses on their personal tax returns pay federal income tax at their individual tax rates. Thus, S- Corps avoid double taxation.

   Liability: A corporation is a legal entity that is “immortal,” meaning it does not terminate upon the shareholders death. Corporation shareholders have limited liability as they are not personally liable for debts and obligations incurred by the company. Shareholders cannot lose more money than the amount they invested in the corporation. Similar to the provisions of an LLC, shareholders should be careful not to “pierce the corporate veil.” Personal checking accounts should not be used for business purposes, and the corporate name should always be used when interacting with customers.

   Formation: Corporations are more complex entities to create, have more legal and accounting requirements and are more complex to operate than sole proprietorships, partnerships, or LLCs. One of the major disadvantages of a corporation is the high level of governance and oversight by the board of directors. Often times, this prolongs the decision making when multiple shareholders or investors are involved.

   Pros of Corporations:
   • Corporate shareholders have limited liability, meaning the entity is responsible for all liabilities the company incurs.
   • Usually a favorable formation for investors.

   Cons of Corporations:
   • The process to establish the business is more rigorous and costly.
   • Earnings are subject to “double taxation”, meaning that earnings are taxed at the entity level and the individual level upon distribution to shareholders.
   • High level of governance and oversight by the board of directors.

3. Dividends from stocks, bonds and income trusts:When a publicly traded company generates profits, it has three choices for using the cash. It can direct the funds into research and development, it can save the money, or it can return the profits to shareholders as dividend payments.

   Dividend income is a bit like earning interest from a bank in exchange for holding your money in a savings account. If you own one share of stock that’s valued at $100, a 5% annual dividend yield means the company will pay you $5 each year in dividend income.

   For many investors, regular dividend income is a solid, safe way to grow a nest egg. An investing strategy built on dividend income can be an important part of any saver’s portfolio, especially as a source of cash flow when it’s time to turn lifelong investments into a retirement paycheck.

   Just remember, there are advantages and disadvantages to understand before you set out to invest in pursuit of dividend income. First and foremost: Dividends are never guaranteed, and companies can and do change them at will. In addition, they’re more commonly paid out by larger, more mature companies that are growing more slowly. Smaller, less established companies are more likely to reinvest their earnings back into themselves and may experience more exponential stock growth, which is another way for you to grow your wealth.

   Dividend Investing in Long-Term Portfolios

   If you own stocks or index funds, it’s quite possible you’re already involved in some degree of dividend investing: About 77% of S&P 500 stocks pay a dividend, for instance. And while the current dividend yield of the S&P 500 doesn’t sound like much—1.70%—it’s a heck of a lot higher than average savings account APYs or even Treasury bond rates. Still, it’s low from a historical perspective.

   During most of the 20th century, the annual dividend yield of the S&P 500 ranged between 3% and 5%. More recently, dividend yields are lower as companies have been more cautious with their cash payouts.

   There are many reasons for this: Most obviously, low savings account rates and bond yields provide dividend stocks with little competition. If savings accounts paid 3%, a 1.79% dividend wouldn’t sound very tempting, but in the current interest rate environment, there’s less incentive to raise dividends. In addition, tech companies have become more important in the last few decades. And as an industry, tech companies generally prefer investing in new products for fast growth rather than sending cash to shareholders. There are several types of bonds, which are effectively loans, with the borrower usually being a government or corporation. Most bonds have specified maturity dates, at which time the loans are paid back in full. They also have guaranteed interest rates, and payments—called coupons—are paid out periodically during the term of the loan—usually semi-annually, but sometimes quarterly or annually. The various bond types bring with them different levels of risk and return. Start investing! www.qtrade.ca/apply

4. Interest earned from deposit accounts, money market accounts or loans: A money market account is an interest-bearing account at a bank or credit union—not to be confused with a money market mutual fund. Sometimes referred to as money market deposit accounts (MMDA), money market accounts (MMA) have some features not found in other types of accounts. Most money market accounts pay a higher interest rate than regular passbook savings accounts and often include checkwriting and debit card privileges. They also come with restrictions that make them less flexible than a regular checking account. They are important for calculating tangible net worth. Money market accounts pay a variable interest rate, allowing you to earn a return on your money. It's common for these accounts to have tiered rates, meaning higher balances are rewarded with a higher annual percentage yield (APY). Money market accounts tend to offer higher yields than typical savings accounts.Banks typically have three kinds of savings accounts: Regular savings account: earns interest and offers quick access to funds. Money market account: earns interest and may provide check-writing privileges and ATM access.Because the financial institution holds your money for a specific length of time, CDs typically offer higher interest rates compared to traditional savings accounts and some may offer higher interest than money market accounts. And the longer your CD term, the higher your interest rate is likely to be. 

   Understanding Money Market Accounts

   Money market accounts are offered at traditional and online banks and at credit unions. They have both advantages and disadvantages compared with other types of accounts. Their advantages include higher interest rates, insurance protection, and check writing and debit card privileges. Banks and credit unions generally require customers to deposit a certain amount of money to open an account and to keep their account balance above a certain level. Many will impose monthly fees if the balance falls below the minimum.

   Money market deposit accounts also provide federal insurance protection. Money market mutual funds generally do not. Money market accounts at a bank are insured by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the federal government. The FDIC covers certain types of accounts, including MMAs, up to $250,000 per depositor per bank. If the depositor has other insurable accounts at the same bank (checking, savings, certificate of deposit), they all count toward the $250,000 insurance limit.1

   Joint accounts are insured for $500,000.2 For credit union accounts, the National Credit Union Administration (NCUA) provides similar insurance coverage ($250,000 per member per credit union, and $500,000 for joint accounts).3 For depositors who want to insure more than $250,000, the easiest way to accomplish that is to open accounts at more than one bank or credit union.

   Potential disadvantages include limited transactions, fees, and minimum balance requirements. Here is an overview:

   Pros

   • Higher interest rates

   • Insurance protection

   • Checkwriting privileges

   • Debit cards

   Cons

   • Limited transactions

   • Fees

   • Minimum balance requirement

   Money Market Accounts vs. Savings Accounts

   One of the attractions of money market accounts is that they offer higher interest rates than savings accounts. For example, in December 2021, their average interest rate was 0.06% for a $25,000 money market account, while the average savings account paid 0.04%. The highest money market account rate (for $100,000) was 1.25%, while the highest savings account rate (for $2,500) was 1.01%.4

   When overall interest rates are higher, as they were during the 1980s, 1990s, and much of the 2000s, the gap between the two types of accounts will be wider. Money market accounts are able to offer higher interest rates because they're permitted to invest in certificates of deposit (CDs), government securities, and commercial paper, which savings accounts cannot do.

   The interest rates on money market accounts are variable, so they rise or fall with inflation. How that interest is compounded—yearly, monthly or daily, for example—can have a substantial impact on the depositor's return, especially if they maintain a high balance in their account.

   Unlike savings accounts, many money market accounts offer some check writing privileges and also provide a debit card with the account, much like a regular checking account.

    

   The lines between high-yield savings accounts and money market accounts are increasingly blurred, and you may want to compare both money market accounts and savings account rates to ensure you're picking the best product for you.

   Money Market Accounts vs. Checking Accounts

   One potential downside of money market accounts, compared with checking accounts, is that Federal Reserve Regulation D limits depositors to a total of six transfers and electronic payments per month. The types of transfers affected are: pre-authorized transfers (including overdraft protection), telephone transfers, electronic transfers, checks or debit card payments to third parties, ACH transactions, and wire transfers. Depositors who exceed the limits may be assessed a fine. If they continue, the bank is required to revoke their transfer privileges, move them into regular checking or close the account.5

   However, depositors can make an unlimited number of transfers in person (at the bank), by mail, by messenger, or at an ATM. They can also make as many deposits as they wish.5 

   Money Market Accounts vs. Mutual Funds

   Unlike the various bank and credit union accounts described above, money market mutual funds, offered by brokerage firms and mutual fund companies, are not FDIC- or NCUA-insured. (Banks may also offer mutual funds, but they aren't insured, either.) However, because they invest in safe short-term vehicles such as CDs, government securities, and commercial paper, they are considered to be very low risk.6

   Both money market accounts and money market mutual funds offer quick access to the depositor's cash. Money market accounts have the government-mandated six-transactions-per-month limitation mentioned earlier, which money market mutual funds do not. The companies that offer them, however, can place limits on how often depositors can redeem shares or require that any checks they write be for over a certain amount. The returns on money market mutual funds tend to be higher than those on money market accounts.

   The table below compares some of the common features found in money market accounts and other types of deposit accounts. Because interest rates and other provisions can vary from one financial institution to another, it's worth shopping around.

   Money Market Accounts vs. 4 Alternatives
   	Money Market Account	Savings	Checking	CD	Money Market Mutual Fund
   Interest type	Variable	Variable	Variable (or none)	Fixed	Variable
   Federally insured	Yes	Yes	Yes	Yes	No
   Checks	Limited	No	Unlimited	No	Limited
   Debit card	Yes	No	Yes	No	Sometimes
   Transactions per month	Six	Six	Unlimited	Zero	Unlimited

5. Life annuity: A life annuity is a financial product that features a predetermined periodic payout amount until the death of the annuitant. Annuitants pay premiums or make a lump-sum payment to secure a life annuity. Life annuities are commonly used to provide or supplement retirement income.

   How a Life Annuity Works

   Life annuities are insurance or investment products that provide the beneficiary with fixed payments at regular intervals—either monthly, quarterly, annually, or semi-annually. Life annuities, also known as lifetime annuities, are generally sold by insurance companies. They essentially act as longevity insurance, as the risk of outliving one's savings is passed on to the annuity issuer or provider.

   Life annuities come in two different phases. The first is the accumulation phase or deferral stage. This is the period when the buyer funds their annuity with premiums or with a lump-sum payment. The second stage is the distribution or the annuitization phase. During this period, the issuer or insurance company makes regular payments to the annuitant.

   Once funded and enacted, the annuity makes periodic payouts to the annuitant, thus providing a reliable source of income. The issuer normally stops making periodic payments if the annuitant dies or if another triggering event occurs to close the annuity. But these payments may continue to the annuitant's estate or beneficiary if the annuitant had purchased a rider or other option on the annuity.  

   Since most life annuity payouts stop after the death of an annuitant, you may need to purchase a rider if you want your beneficiary to continue receiving payments.

   The majority of annuities generally pay a benefit every month, but some make quarterly, annual, or semi-annual payments. Payment intervals depend on the specific needs of the annuitant or their tax circumstances. Many retirees fund a life annuity to match their recurring housing costs—mortgage or rent—as well as any other costs, including assisted living, health care, insurance premiums, and medical expenses.

   While a life annuity pays a guaranteed income, it is not indexed to inflation, which is the pace of price increases in an economy. As a result, purchasing power may erode over time. A life annuity, once enacted, is not revocable. 

   Types of Annuities

   There are several types of life annuities, each with its own benefits and purpose, and they include:

   Immediate Annuity

   An immediate annuity only has a distribution phase, as is also the case with a payout annuity, an income annuity, or a single-premium immediate annuity.

   Guaranteed Annuity

   A guaranteed annuity—also called a year's certain annuity or a period certain annuity—pays out for a certain period and continues to make payments to a beneficiary or estate after the annuitant's death.

   Fixed Annuity

   A fixed annuity pays out a fixed percentage or interest rate on the owner's contributions into the annuity.

   Variable Annuity

   A variable annuity pays out based on the performance of a basket of investments or an index. Variable annuities offer the potential for higher returns or payouts when markets are performing well. However, they also contain more risk than fixed annuities since the account could decline in value when the markets perform poorly.

   Joint Annuity

   A joint annuity makes payouts until both spouses die, sometimes at a reduced amount after the death of the first spouse.

   Qualified Longevity Annuity Contract (QLAC)

   A qualified longevity annuity contract (QLAC) is a type of deferred annuity that is purchased using funds from a qualified retirement plan or an individual retirement account (IRA). A QLAC annuity provides monthly payments until death and is exempt from the required minimum distribution (RMD) rules from the Internal Revenue Service (IRS). In 2020 and 2021, an individual can spend 25% or $135,000 (whichever is less) of their retirement savings account or IRA to buy a QLAC.2

6. Notes, including stocks and bonds:A note is a legal document that serves as an IOU from a borrower to a creditor or an investor. Notes have similar features to bonds in which investors receive interest payments for holding the note and are repaid the original amount invested—called the principal—at a future date.

   Notes can obligate issuers to repay creditors the principal amount of a loan, in addition to any interest payments, at a predetermined date. Notes have various applications, including informal loan agreements between family members, safe-haven investments, and complicated debt instruments issued by corporations. A note is a debt security obligating repayment of a loan, at a predetermined interest rate, within a defined time frame. Notes are similar to bonds but typically have an earlier maturity date than other debt securities, such as bonds. For example, a note might pay an interest rate of 2% per year and mature in one year or less. A bond might offer a higher rate of interest and mature several years from now. A debt security with a longer maturity date typically comes with a higher interest rate—all else being equal—since investors need to be compensated for tying up their money for a longer period.

   However, notes can have many other applications. A note can refer to a loan arrangement such as a demand note, which is a loan without a fixed repayment schedule. Payback of demand notes can be called in (or demanded) at any point by the borrower. Typically, demand notes are reserved for informal lending between family and friends or relatively small amounts. Notes can be used as currency. For example, Euro notes are the legal tender and paper banknotes used in the eurozone. Euro notes come in various denominations, including five, 10, 20, 50, and 100 euros.

   Notes as Investment Vehicles

   Some notes are used for investment purposes, such as a mortgage-backed note, which is an asset-backed security. For example, mortgage loans can be bundled into a fund and sold as an investment—called a mortgage-backed security. Investors are paid interest payments based on the rates on the loans.

   Notes used as investments can have add-on features that enhance the return of a typical bond. Structured notes are essentially a bond, but with an added derivative component, which is a financial contract that derives its value from an underlying asset such as an equity index. By combining the equity index element to the bond, investors can get their fixed interest payments from the bond and a possible enhanced return if the equity portion on the security performs well.

   It's important to remember that with any note or bond issued by a corporation, the principal amount invested may or may not be guaranteed. However, any guarantee is only as good as the financial viability of the corporation issuing the note.

   Notes with Tax Benefits

   Some notes are purchased by investors for their income and tax benefits. Municipal notes, for example, are issued by state and local governments and can be purchased by investors who want a fixed interest rate. Municipal notes are a way for governments to raise money to pay for infrastructure and construction projects. Typically, municipal notes mature in one year or less and can be exempt from taxes at the state and/or federal levels.

   Notes as Safe-Havens

   Treasury notes, commonly referred to as T-notes, are financial securities issued by the U.S. government. Treasury notes are popular investments for their fixed income but are also viewed as safe-haven investments in times of economic and financial difficulties. T-notes are guaranteed and backed by the U.S. Treasury, meaning investors are guaranteed their principal investment.

   T-notes can be used to generate funds to pay down debts, undertake new projects, improve infrastructure, and benefit the overall economy. The notes, which are sold in $100 increments, pay interest in six-month intervals and pay investors the note's full face value upon maturity. Treasury notes are offered with maturity dates of two, three, five, seven, and 10 years. As a result, T-notes generally have longer terms than Treasury bills but shorter terms than Treasury bonds.

    

   Issuers of unsecured notes are not subject to stock market requirements that force them to publicly avail information affecting the price or value of the investment.

   Other Types of Notes

   There are many other various types of notes that are issued by governments and companies, many of which have their own characteristics, risks, and features.

   Unsecured Note

   An unsecured note is a corporate debt instrument without any attached collateral, typically lasting three to 10 years. The interest rate, face value, maturity, and other terms vary from one unsecured note to another. For example, let's say Company A plans to buy Company B for a $20 million price tag. Let's further assume that Company A already has $2 million in cash; therefore, it issues the $18 million balance in unsecured notes to bond investors.

   However, since there is no collateral attached to the notes, if the acquisition fails to work out as planned, Company A may default on its payments. As a result, investors may receive little or no compensation if Company A is ultimately liquidated, meaning its assets are sold for cash to pay back investors.

   An unsecured note is merely backed by a promise to pay, making it more speculative and riskier than other types of bond investments. Consequently, unsecured notes offer higher interest rates than secured notes or debentures, which are backed by insurance policies, in case the borrower defaults on the loan.

   Promissory Note

   A promissory note is written documentation of money loaned or owed from one party to another. The loan’s terms, repayment schedule, interest rate, and payment information are included in the note. The borrower, or issuer, signs the note and gives it to the lender, or payee, as proof of the repayment agreement.

   The term "pay to the order of" is often used in promissory notes, designating the party to whom the loan shall be repaid. The lender may choose to have the payments go to them or to a third party to whom money is owed. For example, let's say Sarah borrows money from Paul in June, then lends money to Scott in July, along with a promissory note. Sarah designates that Scott’s payments go to Paul until Sarah’s loan from Paul is paid in full.

   Convertible Note

   A convertible note is typically used by angel investors funding a business that does not have a clear company valuation. An early-stage investor may choose to avoid placing a value on the company in order to affect the terms under which later investors buy into the business.

   Under the termed conditions of a convertible note, which is structured as a loan, the balance automatically converts to equity when an investor later buys shares in the company. For example, an angel investor may invest $100,000 in a company using a convertible note, and an equity investor may invest $1 million for 10% of the company’s shares.

   The angel investor’s note converts to one-tenth of the equity investor’s claim. The angel investor may receive additional shares to compensate for the added risk of being an earlier investor.
7. Oil leases: Leasing of minerals occurs in different ways, depending on whether the minerals are owned by private citizens, or federal or state governments. In both situations, the owner of the minerals may be different than the owner of the lands that lie above the minerals. This situation is known as “split estate,” i.e., the mineral and surface estates are owned by different parties.

   Leasing Public Minerals for Oil and Gas Development

   Landowner Notification
   The direct notification of individuals who own or lease land located above publicly owned minerals typically does not happen when the leasing of state or federal minerals occurs. Consequently, often surface owners do not realize that the mineral rights have been leased to a company that may use their land to access and produce the oil and gas underneath their property.

   Some states do have processes for posting notices about lease sales on state lands. For example, the state agency in Montana will post notices on its web site, in local newspapers and they will send information about leases to a mailing list.

   Federal Lease Sale Information and Maps
   The BLM posts federal lease sale information and more general maps here.

   Leasing Private Minerals for Oil and Gas Development

   When minerals are owned by a private citizen or entity, oil and gas companies must lease the minerals prior to drilling for oil and gas.

   A mineral lease is a contractual agreement between the owner of a mineral estate (known as the lessor), and another party such as an oil and gas company (the lessee). The lease gives an oil or gas company the right to explore for and develop the oil and gas deposits in the area described in the lease.

   When you (the lessor) sign a lease you essentially become a partner with that company (the lessee). When a company holds a lease to your mineral property, you cannot lease those mineral rights to another company until the lease term with the first company expires. When the lease terminates, all rights to the minerals revert back to the mineral owner.

   As with any partnership, open communication is necessary to maintain a successful relationship. A lease may be something that you may have to live with for many years – perhaps the rest of your life. Consequently, it is in your best interest to maintain a business-like relationship.

   • Get everything in writing, and keep the lease in a safe, but easily accessible place. In the event the lease is lost, you should be able to obtain a copy of the lease from the county recorder's office.
   • Do your research. Ask neighbors, government agency staff or other mineral owners and landowners about the company, your potential business partner. It is important to know who you are dealing with before entering into a lease.
8. Patent licensing: A patent license is an agreement that lets someone else commercially make, use, and sell your invention for a specified period. The owner of the invention (patent) is the 'licensor,' and the person who is receiving the license is the 'licensee. ' Licensing deals involve payment for the license.Obtaining a patent ought not be the last step in commercializing your invention. Unless you plan to hold on to your patent as a means of deterring industry competitors, you may choose one of several paths available to commercialize your patented invention or monetize your patent. The three most common methods available to patent owners are:
   1. to manufacture and market the patented invention independently;
   2. to sell the patent to another entity; or
   3. to license the patent to one or multiple entities.

   This article deals with licensing. As an initial point to clarify terminology, when should you use licence vs. license? In the United States, license is both a noun and a verb while in Canada and other English-speaking countries, licence is used as the noun and license as the verb.

   Is licensing a good option for me?

   The licensing approach is often taken by those who do not have access to enough capital to independently manufacture and market their patented invention or simply have no interest in doing so themselves. Licensees pay licensors for the rights to manufacture and market the invention themselves, however, the rights still ultimately belong to the licensor. This is what distinguishes licensing from sale. Royalties received in exchange for a licence are negotiable but are likely going to result in a return on the patent that is lower than that which would result from manufacturing and marketing the patent invention independently. Licensing, thus, is an avenue for monetization which mitigates risk but may simultaneously limit return.

   In considering whether to license your invention, you should be thinking about whether you have the capital, know-how and/or desire to bring your invention to market, and whether retaining the rights in the patent is important to you. Licensing provides a means of bringing your invention to market despite a lack of business know-how and capital. While the ultimate return is lower than that which might be attained by making and selling the product independently, the trade-off is that both your financial investment and the demand on your time and energy are substantially reduced. If retaining rights in the patent is not especially important to you, you may wish to consider selling your patent rights outright to see an immediate lump sum return and dispense with any ongoing obligations with respect to the product and patent.

   Other essential questions to ask yourself are what commercial role your patented invention fulfills. For example, is it an invention that improves products already available on the market, or is it entirely novel? The answers to these questions may help identify profitable licensing opportunities and business partnerships. For example, if your product improves and is intended to be used with an existing product, the manufacturer of that product may be a perfect partner. It is also important to ask yourself whether you are willing to work with multiple partners (non-exclusive licensing) or not (exclusive licensing or rights transfer), and which approach would best suit your vision for your invention.

   Exclusive licensing means licensing rights in the invention to a single licensee to the exclusion of everyone else including - most often – even you. Licensees like exclusive licensing because they obtain a monopoly in respect of the invention and can therefore, in the absence of competition, demand a higher price. The flipside of this is that you too can demand a higher price in exchange for the license as you are taking a risk on a single licensee and giving up, at least temporarily, a valuable asset.

   There is, however, also a place for non-exclusive licensing. This type of licensing is more common with products which don’t entail as high an investment to begin production and sale, or which can be profitably marketed and sold by multiple licensees simultaneously. An advantage of non-exclusive licensing is that your return doesn’t depend solely on the successful marketing of the product by a single licensee.

   Licensing can give your invention a competitive advantage. Sales of your product may be considerably higher when marketed by a dominant player in the market than they would be were you to bring the product to market yourself as a small and/or new company. Some licensing agreements include provisions that allow the licensor to terminate the agreement if licensees are not meeting certain targets set out therein. These provisions can help ensure that a licensor sees a certain degree of return on the license. To ensure a profitable and equitable licensing agreement, consider speaking with a member of our team.

   Determining the feasibility of getting a licence

   The next step in the licensing process is to determine whether your patented invention would be desirable to potential licensees. There are several criteria that should be considered to establish feasibility of licensing, with the most significant being patentability, marketability and profitability.

   The first consideration to be assessed is patentability. Owning a patent or pending patent application is usually a condition for licensing. Without legal ownership rights to an invention, you do not have the right to stop others from making, using or selling the invention, and therefore do not have a valuable asset for which others are likely to want to pay. You will likely find it difficult to persuade a potential licensee to pay you for a product which can be legally copied by any number of competitors as soon as it’s made public. Ideally, you have a patent and therefore exclusive right to make, use and sell your invention. Although a patent application, prior to issuing to a patent, does not come with any exclusive rights to the product, it can be a valuable card to play because it shows a potential licensee that you are serious about your invention, have invested in its protection, and may one day have exclusive rights to license.

   In order to obtain a patent for your invention, the invention must constitute patentable subject matter and be novel, non-obvious and useful. Not all subject matter is patentable, for example, section 27(8) of the Patent Act states that no patent can issue for any “mere scientific principle or abstract theorem”. Methods of medical treatment are also not patentable in Canada. An invention must also be new, meaning the same thing has not previously been publicly disclosed anywhere in the world, and non-obvious, meaning that even if the same thing does not exist, the invention cannot be an obvious improvement to something that does exist. Finally, the requirement that an invention be useful is almost always met and requires only that the invention work. Fulfilling these requirements is also important for creating a commercially feasible product. Further requirements include having kept your invention confidential or, in certain countries, applying for a patent within twelve months of the date of your earliest public disclosure of the invention.

   Secondly, the marketability of your invention needs to be evaluated. Ideally, your product will have unique features that will appeal to consumers and be directed at a demographic that would be willing and able to purchase it. Inventions that are not marketable risk being unappealing to consumers, which would result in low sales and thus low profits, making them a bad investment for potential licensees.

   It is key for your invention to be in some way different from similar offerings on the market to incentivize consumers to switch to or begin purchasing your product. Even if your invention is novel, there are likely substitutes available on the market that perform the function that it is intended to fulfil. Your invention, thus, must have a distinct feature, a better cost to benefit ratio, or another way of positively differentiating itself from market alternatives.

   Finally, the invention needs to be commercially feasible. In essence, revenue made from selling the patented invention must exceed the licensee's costs of producing and selling it, which includes royalties that are paid to you as the patent owner. If there is no profit for the licensee in selling your patented invention, it is unlikely that you will be able to find a licensee. The profit margin is also likely to be a key factor in the royalty rate you can negotiate.

   There are other factors that play a less significant role in deciding whether your invention is licensable. Among such factors is the composition of the industry market of your invention (i.e., how much market share companies hold on average, and whether there are dominant players that want to retain their advantage or smaller players that want to expand their market share) and the current demand for the need that your product fulfills. However, assessing whether your invention is patentable, marketable and profitable will largely enable you to determine whether there is potential for licensing.

   Seeking out potential licensees

   After you have determined whether your invention has licensing potential, you must seek licensees who are willing to purchase a licence and manufacture and market the invention. To find licensees for your invention, consider doing the following:

   • Assess the current market and the stakeholders within it, and ask yourself the following questions: Who is currently manufacturing competitive products or market alternatives? Are there any large entities looking for an avenue to enter this market? Are there existing players that want to strengthen their foothold?
   • Assess currently available market alternatives by reviewing publications of trade associations or trade shows, library databases, business directories, and patent databases.
   • Advertise your patent for sale or licensing.

   It may be helpful to create a prospective list with 40-50 potential targets to ensure that, despite some rejection, you will be able to secure a licensee or licensees. Triage your list of potential targets in order of likelihood of investment. Helpful criteria to rank your list may include geographical location, size of the company, company policy on entering into new licence agreements, whether the company is already producing similar products, and whether it is possible to contact the company's decision-makers.

   Approaching licensees

   As the patent application process is lengthy, it is beneficial to begin seeking a licence after your patent application has been filed rather than waiting until a patent issues. Before disclosing still confidential details of your invention at this stage, however, you may want to consider requiring that potential licensees sign a non-disclosure agreement. Although your disclosure won’t affect the patentability of your invention since you’ve filed a patent application, public disclosure of your invention may prompt others to produce your invention while your patent is pending, or innovate such that your invention is no longer the new and desirable product on the market.

   When approaching potential licensees, it is crucial to have a presentation strategy that will demonstrate to potential licensees how your invention will help improve their market standing. Your pitch should include the following:

   • The issues with currently available products and the methods by which your invention fixes those issues. This strategy, often referred to as addressing the "pain points" of a business or product, will immediately help investors visualize what function your invention can play in their operations.
   • How your invention differs from currently available products, and what unique and marketable features it possesses.
   • The cost vs. benefit analysis of your product that details the additional benefits of your invention, and an approximate cost matrix of production and distribution.
   • The legal status of your invention, such as whether you have a patent pending or an issued patent.
   • Information about yourself: who you are, why you think your values and future goals for the invention will be a good fit for the company, and why you have decided to contact this specific company for producing your invention.

   Once a licensee has agreed to purchase a licence to your invention, the payment scheme will need to be determined. In many cases, licensees pay the licensor an advance payment before the manufacturing and distribution of the product begins. The amount of royalties paid must also be determined. The typical range of royalties is between 2-5% although some industries, such as the pharmaceutical industry, often pay royalties of 1%. Finally, the type of licence, whether exclusive or non-exclusive, must also be discussed. Licensees will be willing to pay a higher licensing fee to obtain the exclusive rights to sell the patented invention.

   Presenting a clear and accurate conception of the benefits of your invention and its contribution to the current market will aid you in attracting a licensee. Equally important is having an accurate estimate of the value of your patent to both rely on in the course of negotiation and to obtain the most suitable payment scheme for your needs.

   After licensing

   After a licensing agreement has been secured, it is important to ensure that your patent is maintained in force by paying any required maintenance fees as they come due. Failure to maintain your patent could result in termination of your licensing agreement. It may also be necessary to monitor whether your patent is being infringed, as enforcing the patent against infringers may continue to be your responsibility as a condition of the licence. Ensuring that your patent is not being infringed protects the value of your patent rights to your licensees and ensures that the licensing relationship continues to result in ongoing profits for both sides.

9. Pensions: When you retire you'll need money to support you and to give you a decent standard of living. Most people get a State Pension but it's also a good idea to top this up if you can with your own pension, to make sure you'll have enough money to see you through your retirement.

   Find out about the different ways you can save for your pension, how to get started and what to think about when you're getting near to retirement. Throughout your working life you'll be building up your State Pension. But you may also be saving in a personal pension or workplace pension.

10. Rental property: Residential rental property refers to homes that are purchased by an investor and inhabited by tenants on a lease or other type of rental agreement.The two percent rule in real estate refers to what percentage of your home's total cost you should be asking for in rent. In other words, for a property worth $300,000, you should be asking for at least $6,000 per month to make it worth your while. Investing in rental properties provides a good cash flow since money will keep flowing into your account every month. ... It can be an excellent way to ensure financial security before you retire, or just have extra money in the bank. This is especially true if you plan to buy an apartment building as a rental investment.

    How Residential Rental Property Works

    Residential real estate can be single-family homes, condominium units, apartments, townhouses, duplexes, and so on. The term residential rental property distinguishes this class of rental real estate investment from commercial properties where the tenant will generally be a corporate entity rather than a person or family, as well as hotels and motels where a tenant does not live in the property long term.

    Residential rental property can be an attractive investment. Unlike stocks, futures, and other financial investments, many people have firsthand experience with both the rental market as tenants and the residential real estate market as homeowners. This familiarity with the process and the investment makes residential rental properties less intimidating than other investments. On top of the familiarity factor, residential rental properties can offer monthly cash flow, long-term appreciation, leverage using borrowed money, and the aforementioned tax advantages on the income the investment produces. Owning a residential rental property can come with tax advantages that other, more indirect real estate investments like a real estate investment trust (REIT) do not confer to the holder. Of course, direct ownership of residential rental property also comes with the responsibility to act as a landlord or engage a property management company along with the risks involved from vacant units to tenant disputes.

    The Risks of Residential Rental Property

    Of course, there are some corresponding downsides to residential rental property. The key one is that residential rental property is not a very liquid investment. Cash flow and appreciation are great, but if a property stops delivering one or both due to mismanagement or market conditions, actually cutting losses and getting out of it can be difficult. To sell a struggling rental property you need to find a buyer to find value in the investment that you no longer see or simply is not there.

    There are also considerable headaches that come with acting as a landlord, although engaging a property management company can help, and that cost eats further into the profit margin of the investment. Finally, there is the risk created by changing tax codes. The tax treatment of residential rental property can change, erasing some of the attractiveness of the investment.

    Tax Treatment of Residential Rental Property

    In the United States, the IRS considers residential real estate to be a property that derives more than 80% of its revenue from dwelling units. Residential rental property uses the 27.5-year modified accelerated cost recovery system (MACRS) schedule for depreciation. Income from residential property is treated as passive income, so there are rules around how losses are treated based on the active participation of the owner. The IRS Publication 527 Residential Rental Property provides an overview of the tax rules and is updated when rules or provisions change.

     

    Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).

11. Royalty from creative works, e.g. photographs, books, patents, music, etc: Royalties are a common feature of the creative industry. It is seen through YouTubers who get royalties from content views or nightclubs paying artists to play their music. Filmmakers, musicians and writers can have people use their work in return for royalty payments also known as royalties. There is not a fixed way to approach royalties as copyright laws have not set a standard. Instead, it will depend on the royalty agreement made between the two parties and the relevant industry standards. 

    Royalty Agreement 

    Royalty agreements are legal documents outlining the relationship between two parties and how royalties are going to be transferred. Some examples are record and publishing deals. Royalty agreements will be particular to each situation and the standards of drafting an agreement will differ from industry to industry. Therefore, a person getting into an agreement must undertake research in the scope of their relevant creative industry such as music or publishing to understand their entitlements and enhance the negotiation process. 

    Although this is not an exhaustive list, royalty agreements typically outline:

    •  the terms of the royalty payment,
    •  the creator’s intellectual property rights over the work, 
    • whether alternation of the work by the user is permitted by the creator,
    • the amount to be payed for using an item of work,
    • the agreement termination process.

    It can also detail how the royalties are calculated such as by having it as a fixed fee or a percentage of the proceeds. It can also include advance royalties which is when there is a fixed amount plus a percentage of any proceeds. The fixed amount will be the advance royalties and will be paid regardless of whether the work has profited the user.

    Collecting Societies

    Although royalty agreements allow for work and royalties to be exchanged between the agreeing parties, collecting societies allow for a broader audience to use a person’s work. Collecting societies help creators with the process of collecting royalties by doing it for them and then distributing the proceeds to the creator. They also help creators retrieve royalties from overseas users by connecting with international collecting societies. 

    There are a variety of collecting societies, each with its own focus. Such as the Australian Performing Rights Association and Australasian Mechanical Copyright Owners’ Society Ltd (APRA AMCOS) which focus on helping musicians, composers and songwriters collect their royalties. The Phonographic Performance Company of Australia (PPCA) focuses on collecting royalties from broadcasters for using recorded music and music videos. Collecting societies will also help with identifying unauthorised and unlicensed use of creative work through their own processes which help creatives monitor how their work is being used.  
    

    Tax and Royalties 

    Royalties are considered part of a person’s taxable income and are taxed as such. A person earning royalties should declare them in their tax return. The process of claiming royalties in a tax return will vary due to several factors. It will depend on whether the party entitled to royalties is a corporation or an individual and whether the creator is a non-resident selling work in Australia. If royalties are paid by an Australian resident living to a non-resident, royalties will be subject to a 30% withholding tax unless there is a tax treaty with the non-resident’s country. 
    

    Significance 

    Royalties and royalty agreements vary depending on the interests of the creator and the standards of their relevant creative industry. It is important that anyone seeking to ensure they are correctly compensated for having their work used by another person either has a royalty agreement or are part of a collecting society.

12. Trust deed (real estate): A trust deed—also known as a deed of trust—is a document sometimes used in real estate transactions in the U.S. It is a document that comes into play when one party has taken out a loan from another party to purchase a property. The trust deed represents an agreement between the borrower and a lender to have the property held in trust by a neutral and independent third party until the loan is paid off.

    Although trust deeds are less common than they once were, some 20 states still mandate the use of one, rather than a mortgage, when financing is involved in the purchase of real estate. Trust deeds are common in Alaska, Arizona, California, Colorado, Idaho, Illinois, Mississippi, Missouri, Montana, North Carolina, Tennessee, Texas, Virginia, and West Virginia. A few states—such as Kentucky, Maryland, and South Dakota—allow the use of both trust deeds and mortgages.1In a real estate transaction—the purchase of a home, say—a lender gives the borrower money in exchange for one or more promissory notes linked to a trust deed. This deed transfers legal title to the real property to an impartial trustee, typically a title company, escrow company, or bank, which holds it as collateral for the promissory notes. The equitable title—the right to obtain full ownership—remains with the borrower, as does full use of and responsibility for the property.

    This state of affairs continues throughout the repayment period of the loan. The trustee holds the legal title until the borrower pays the debt in full, at which point the title to the property becomes the borrower's. If the borrower defaults on the loan, the trustee takes full control of the property. 

    Trust Deed vs. Mortgage

    Trust deeds and mortgages are both used in bank and private loans for creating liens on real estate, and both are typically recorded as debt in the county where the property is located.

    However, a mortgage involves two parties: a borrower (or mortgagor) and a lender (or mortgagee). In contrast, a trust deed involves three parties: a borrower (or trustor), a lender (or beneficiary), and the trustee. The trustee holds title to the lien for the lender's benefit; if the borrower defaults, the trustee will initiate and complete the foreclosure process at the lender's request.

     

    Contrary to popular usage, a mortgage is not technically a loan to buy a property; it's an agreement that pledges the property as collateral for the loan.

    Foreclosures and Trust Deeds

    Mortgages and trust deeds have different foreclosure processes. A judicial foreclosure is a court-supervised process enforced when the lender files a lawsuit against the borrower for defaulting on a mortgage. The process is time-consuming and expensive.

    Also, if the foreclosed-property auction doesn't bring in enough money to pay off the promissory note, the lender may file a deficiency judgment against the borrower, suing for the balance. However, even after the property is sold, the borrower has the right of redemption: They may repay the lender within a set amount of time and acquire the property title.

    In contrast, a trust deed lets the lender commence a faster and less-expensive non-judicial foreclosure, bypassing the court system and adhering to the procedures outlined in the trust deed and state law. If the borrower does not make the loan current, the property is put up for auction through a trustee's sale.

    The title transfers from the trustee to the new owner through the trustee's deed after the sale. When there are no bidders at the trustee sale, the property reverts to the lender through a trustee's deed. Once the property is sold, the borrower has no right of redemption.

    Furthermore, a trustee has the responsibility of paying the proceeds from the sale to the borrower and lender after the sale is finalized. The trustee will pay the lender the amount left over on the debt and pay the borrower anything that surpasses that amount, thereby allowing the lender to purchase the property. 

    Pros and Cons of Investing in Trust Deeds

    Investors who are searching for juicy yields sometimes turn to the real estate sector—in particular, trust deeds.

    In trust deed investing, the investor lends money to a developer working on a real estate project. The investor's name goes on the deed of trust as the lender. The investor collects interest on his loan; when the project is finished his principal is returned to him in full. A trust deed broker usually facilitates the deal.

    Pros

    • High-yielding income stream

    • Portfolio diversification

    Cons

    • Illiquidity

    • No capital appreciation

    What sort of developer enters this arrangement? Banks are often reluctant to lend to certain types of developments, such as mid-size commercial projects—too small for the big lenders, too big for the small ones—or developers with poor track records or too many loans. Cautious lenders may also move too slowly for developers up against a tight deadline for commencing or completing a project.

    Developers like these are often in a bit of a crunch. For these reasons, trust deed investors may often expect high-interest rates on their money. They can reap the benefits of diversifying into a different asset class, without having to be experts in real-estate construction or management: This is a passive investment.

    Trust deed investing has certain risks and disadvantages. Unlike stocks, real estate investments are not liquid, meaning investors cannot retrieve their money on demand. Also, investors can expect only the interest the loan generates; any additional capital appreciation is unlikely.

    Invested parties may exploit any legal discrepancies in the trust deed, causing costly legal entanglements that may endanger the investment. The typical investor with little experience may have difficulty, as it takes specific expertise to find credible and trustworthy developers, projects, and brokers. 

    Real-World Example of a Trust Deed

    A short form deed of trust document used in Austin County, Texas, covers the requirements for most lenders. The form begins with a definition of terms and spaces for the borrower, lender, and trustee to fill in their names. The amount being borrowed and the address of the property are also required.

    After this section, the document goes on to specify the transfer of rights in the property and uniform covenants including:

    • Details about payment of principal and interest
    • Escrow funds
    • Liens
    • Property insurance and structure maintenance
    • Structure occupancy—stipulating the borrower must take up residency within 60 days

    The form also includes nonuniform covenants, which specify default or breach of any of the agreement terms. And it specifies that the loan the document deals with is not a home equity loan—that is, something the borrower will receive cash from—but one for purchasing the property.

    The deed of trust ends with a space for the borrower's signature, which must be done in the presence of a notary and two witnesses, who also sign.

Approaches to financial independence[edit]

If a person can generate enough income to meet their needs from sources other than their primary occupation, they have achieved financial independence, regardless of age, existing wealth, or current salary. For example, if a 25-year-old has $1000 in expenses per month, and assets that generate $1000 or more per month, they have achieved financial independence. They have no need to work a regular job to pay their bills.

On the other hand, if a 50-year-old has assets that generate $1,000,000 a month but has expenses that equal more than that per month, they are not financially independent, as they still have to earn the difference each month to make all their payments.

However, the effects of inflation must be considered. If a person needs $100/month for living expenses today, they will need $105/month next year and $110.25/month the following year to support the same lifestyle, assuming a 5% annual inflation rate. Therefore, if the person in the above example obtains their passive income from a perpetuity, there will be a time when they lose their financial independence because of inflation.

If someone receives $5000 in dividends from stocks they own, but their expenses total $4000, they can live on their dividend income because it pays for all their expenses to live (with some left over). Under these circumstances, a person is financially independent. A person's assets and liabilities are an important factor in determining if they have achieved financial independence. An asset is anything of value that can be readily turned into cash (liquidated) if a person has to pay debt, whereas a liability is a responsibility to provide compensation. (Homes and automobiles with no loans or mortgages are common assets.)

Since there are two sides to the assets and expenses equation, there are two main directions one can focus their energy: accumulating assets or reducing their expenses.

Asset accumulation[edit]

Accumulating assets can focus one or both of these approaches:

• Gather revenue-generating assets until the generated revenue surpasses living/liability expenses.
• Gather enough liquid assets to then sustain all future living/liability expenses.

Expense reduction[edit]

Another approach to financial independence is to reduce regular expenses while accumulating assets, to reduce the amount of assets required for financial independence. This can be done by focusing on simple living, or other strategies to reduce expenses.^[3][4]