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Everybody has an opinion about the most important financial lessons that you can learn about personal finance. Just look at how many personal finance blogs there are [Hint: over 7,000 are listed] … and, here I am adding one more blog to that long list.
What do these blogs suggest? What do they say are the most important lessons that their authors have learned along the way?
Is it to avoid debt? Probably [here are 50 blogs just focussed on debt reduction].
Perhaps, you need an emergency fund? Of course [Googling "emergency fund" brings up 1,050,000 results].
How about spending less than you earn? Naturally [Googling "spend less than you earn" brings up 844,000 results]!
Sure, each of these can be important …
… equally, each of these can actually hurt you!
It all depends on what your ultimate goal is. For me, it’s to live my Life’s Purpose, but let’s just wind that back a little to a more generic goal – one that doesn’t require a degree in philosophy to understand:
The most important financial goals are:
1. Satisfaction – having sufficient money on hand to satisfy your most important needs, and
2. Security – having sufficient surety that your most important financial needs will always be met.
Think about these carefully, as they appear to be similar … but, they are not the same:
One (satisfaction) points to understanding your true needs (physical, environmental, emotional, etc.) and ensuring that you have sufficient income to provide for them, whilst the other (security) points to forward planning of the cash-flow required now, whilst you are working, and in the future, when you are not.
And, financial satisfaction & security is only really achieved when you have:
1. Sufficient money invested to safely fund your required lifestyle (not to be confused with your current lifestyle) – by a date of your choosing and for the rest of your life – without needing to work, and
2. Sufficient cash buffer to ensure that you can maintain that lifestyle for a reasonable period should something go wrong (market corrections; real-estate vacancies; etc).
EVERYTHING else that you do (financially-speaking) has to take you closer to achieving the above.
To illustrate the importance of this, let me give you three examples:
1. If you are young (say 25), happy to work in your current profession for the next 40 years, and living a frugal lifestyle is sufficient to satisfy your needs for the rest of your life, then financial security can be easily achieved for you simply by saving the equivalent of half your current after-tax salary (indexed for inflation) until you retire.
Of course, it would help if you avoid piling up debt, and put in place the necessary insurance (incl. an emergency fund), in case of any glitches along the way; in any event, most such issues will likely be nothing that another 4 or 5 years of hard work can’t resolve.
2. If you are in your 30′s or 40′s, entrepreneurial, and have desires in life that only early retirement can satisfy (e.g. you want to be a full-time artist; writer; traveller; and, so on), then you simply won’t be able to save enough to maintain the security of your lifestyle when you stop work in 5, 10, or even 20 years (even if you somehow manage to save 25% – 50% of your salary, accumulate no debt, and build up a huge emergency fund).
So, you will need to take my path: focussing on growing income first, then saving second (e.g. simple math shows that investing 25% of $250k a year will get you much further than saving 50% of $50k a year). Starting a business and actively investing as much of the proceeds as possible into real-estate, stocks, and bonds (rather than in your own lifestyle) has a better chance of taking you to an early, self-sustainable retirement [a.k.a. Life After Work] than any amount of debt reduction, emergency fund building, and so on.
3. If you have retired early (or late; it doesn’t matter), you are pretty much stuck with whatever level of lifestyle you have been able to satisfy from the retirement nest egg that you have built up … now, the main financial goal you need to focus on is security.
My recommendation is to now focus purely on capital protection and income:
Purchase real-estate outright and live from 75% of the net proceeds, and keep 2 years cash as an emergency fund, or purchase inflation-protected federal treasuries. Forget stocks; you will put too much strain on your heart and psyche as you watch your net worth double and halve every 7 to 10 years. That’s pretty much it.
So, when people tell you their ‘Top 10 Strategies for Financial Health’, ignore them …
… any such set of strategies is meaningless unless you can first put them into context:
How do they help you achieve your desired level of financial satisfaction and security?
… we were, of course, delighted to be able to lend our house.
As he was supervising the erection of the marquee over our tennis court and false flooring over the pool, we were chatting about wealth.
During the course of discussion, the subject came up of how much do you really … and, ideally … need?
What is the Perfect Number?
If you’ve been following my blog for a while, you will know that I’ve said that you need as much passive income as you need to live your Life’s Purpose.
Even without knowing your Life’s Purpose, though, I can still tell you roughly what your Perfect Number should be:
You should aim to live no better than your closest group of friends.
Let me explain with a personal example …
We have a long-standing group of friends.
We eat often eat together. We party together. We travel together.
Not always. Not only. But, often enough.
Now, how would you feel if you travel coach, most of your other friends travel coach, but one of your friends is always at the front of the plane?
How would you feel if you like to eat out at a mid-priced restaurant once every couple of weeks with your friends, but one of your friends is always trying to arrange 5-star dining? And, 5-star hotel’ing?
I think your friend would eventually price herself out of your group of friends.
Well, I am in danger of becoming that friend.
Our friends are all quite well-off, because they are all professionals (both husbands and wives) drawing great incomes for many years. All of our children privately school together, and vacations are now flying coach (with kids) or business class (without kids), staying at international 4-star resorts at least once, and probably twice, most years.
But, our house is clearly the best in the group. Our cars are the best (and, could be better, but I’m starting to realize that I should hold back a little). And, we could be flying business class (sometimes even international first class), and easily stay in 5-star hotels.
In short, we have to be careful not to make the difference obvious.
That’s why I told my nephew (to be) – as I am telling you now: aim to live no better (but, no worse) than your closest group of friends, assuming that you wish them to remain your friends.
I can add a little more:
- Aim to be towards the top of your circle in terms of sustainable annual income.
- Aim to have a buffer, so that you can maintain that standard even if something goes wrong.
[AJC: This is not the same as an emergency fund: this means, for example living on the same $50k p.a. as your friends, but actually earning $70k p.a.]
- Aim to be able to maintain that standard of living (with buffer) when you begin to live Life After Work.
- Make sure that your Life After Work (i.e. very early retirement) makes you still ‘look’ busy
[AJC: Sitting on a beach all day while your friends still 9-to-5 it 50 weeks a year will just as quickly put you in the 'former friend' category as flashing your cash]
So, how much money do you really need?
Step 1: Take what your friends are earning and add 20% buffer
Step 2: Multiply that by 20
Step 3: Add the amount remaining on your mortgage (or, what your mortgage would be if you bought one of the better houses owned by your friends)
Step 4: Add any additional ‘crazy money’ that you need for some of your ‘keep busy’ Life’s Purpose activities.
Step 5: Double your final total for every 20 years until you expect to be able to accumulate that amount of money (or, add 50% for every 10 years), to account for inflation.
That should give you a very practical Number … you might even say your Perfect Number
Now, you just need to go out and get it.
Choose the wrong door and it seems you have changed the course of your life forever … but, will it change for the better or worse?
My son has finished high school and now has to choose from his top two college / course choices. What decision will he make?
Will it even matter?
I’m not stressed for him, even though he may be – facing such seemingly life-altering choices – because I remember that I made a few – and, really important – ‘wrong’ choices in my Life’s Journey, yet here I am today.
You see, I now believe that I would have arrived at roughly this point, no matter (within reason) what choices I would have made – or, decisions I would have taken – along the way …
… and, if you implement just one key change in your life, you will come to see that, too.
First, you need to understand that when you choose to go through Door A or Door B, as my son is now, that’s not the end!
There’s always another two doors behind Door A, and yet another two doors behind Door B
What are the correct choices to make, when presented with these two new doors? How will you know for sure?
The answer lies in knowing your overarching goal: if you know your Life’s Purpose, then you will have a compass that will guide you back to the right course, even if you choose Door A, when perhaps you later realize that you should have chosen Door B.
Life is really just a series of decisions and choices that we need to make – or, doors that we need to go through. Our choices can sometimes be difficult … as a result, our decisions can seem random or less than optimal. Sometimes, we make the out and out wrong choice.
But, when you have the compass that is your Life’s Purpose, then it will guide you back to the correct path through later and later choices.
With your Life’s Purpose to guide you, no matter whether you choose Door A or Door B, you can end up living your Life’s Purpose; your choices along the way may affect exactly how you get there and what you will be doing when you finally get there …
… but, it will be close enough.
For example, I now know that no matter what path I would have taken, I would ultimately be sitting here and writing this blog post for you.
How do I know this?
Simple. Because I would not have stopped choosing doors until I got here!
So, I’m not sweating my son’s choices … neither should he.
And, neither should you sweat the choices that you make this year.
May it be a good one!
If you left a review on Amazon for my new book, then your personal, signed copy is on it’s way!
[There's still time: if you downloaded the Kindle version, please leave an honest review at Amazon and I will send you a personally signed, printed version as my way of saying 'thanks']
Inside the front cover, along with my ‘AJC’ signature, you will find a scribbly hieroglyph much like the one above …
… hopefully, it’s not too difficult to translate; it simply means:
Your Money is not your Life!
Too many of us live our lives as though money was its sole purpose: we work more than 1/3 of our life away; we constantly argue with our spouses about it; and, we spend much of the remaining time simply worrying about it.
I haven’t been immune; this was me until a critical date in 1998, when I discovered my life’s true purpose. Without getting all New Age’y on you, I’ll give you a hint: it had nothing to do with money.
My Life’s Purpose was all about how I really wanted to live.
But, I quickly discovered that money does come into it …
… but, only as a means to an end.
My first book (co-written with Debbie Dragon) shows you how to separate your money from your life; but, it doesn’t shy away from the subject of money. Because, as I discovered, money is the key enabler of a fulfilling life for many of us – not all – but, certainly for me.
Probably, for you, too.
So, the real purpose of my book is to help you find out how much money you need in order to be happy. Simple!
If you want to understand a little more about my journey and how I think about money and its real (subordinate) place in life, check out my video interview; it’s with Jaime Tardy at Eventual Millionaire:
And, if you can, leave a comment to share how you think about your Life … and, your Money!
I was told that it’s because they need the employer health benefits.
But, soon (if not already) it will simply be because they need the money.
Right now, according to Wells Fargo, 1 in 3 Americans between the ages of 25 and 75 believe that they will be working until they are 80 years old. Not because they want to, but because they believe they will need to.
And, they are correct.
Unless you can live on just 50% of your current paycheck, so that you can save at least 50% of your income for the next 17 years (or, save at least 25% of your income, if you’re happy relying on Social Security for the rest of your life), you will simply not be able to afford to retire.
And, there’s yet another problem with these ‘save your way to wealth’ strategies: they all assume that you’re actually happy living on your current after-savings income. Well, are you?
I didn’t think so
That’s why I decided to fly in the face of commonly-accepted personal finance ‘wisdom’ and start blogging here …
I think that true personal financial planning starts with just two questions that you need to answer very, very honestly and carefully because they will set your whole Financial – indeed Life – Strategy from this point on:
1. How much income do you want when you begin life after work?
2. When do you want to begin life after work?
Together, these two answers will then direct you to everything else that you need to know:
How much do you need before you can retire?
This is called your Number, and is very easy to work out in two simple steps:
STEP 1 – Double your answer to the first question for every 20 years in your answer to the second question.
Let’s say that you decided that you want $25,000 a year income (in today’s dollars) in 30 years time. You would double that to account for the first 20 years ($50,000), and add another 50% for the next 10 years ($75,000).
This is simply to help you account for inflation …
If inflation averages just 4% for the next 30 years, you will need to earn $75,000 a year in retirement just to maintain the same spending power as $25,000 today!
[AJC: because everything will cost 3 times as much by 2032. Imagine: gas at $10.50 a gallon; $7.50 for a loaf of bread; etc.].
STEP 2 – Multiply by 20. Multiply your Step 1 answer by 20.
For example, if your inflated income goal was $75,000 p.a. in 30 years time, then your Number would be $1,500,000.
This is how much you would need to have saved up over 30 years, so that – in theory – you can retire on your own resources (for example, you would not need to rely on Social Security).
But, I’m guessing that even if you are earning $25,000 p.a. today, that this is not the amount you chose for Question 1.
I’m guessing that how much you really want to earn (i.e. the minimum amount that you feel would make you happy, healthy, and financially secure) is more … probably a lot more … than you are earning today.
Worse, you probably won’t want to wait 30 years to get there. I’m guessing that you want to stop needing to work (as opposed to having the financial flexibility to choose if/when you decide to work) sooner … probably a lot sooner.
[AJC: this is not true for everybody; there are plenty of people who enjoy what they're doing so much that they cannot imagine doing anything else. This was me ... until I did reach my Number and found out how much happier I could be choosing what I do - and don't - want to work on each day.]
Plug your numbers into the above two steps and let me know (via the comments) what you come up with?
How will you get your Number?
To give you an example, I decided that my Number was $5 million and my Date (i.e. when I wanted to get there) was 5 years.
This was fairly simple to calculate: I decided that I needed $250,000 p.a. passive income (i.e. without needing to work). Since it was in just 5 years time, I didn’t bother adjusting for inflation (I could have added ~25%). Instead, I just multiplied by 20 … $5 million.
It’s pretty clear that I couldn’t save $5 million in just 5 years (after all, at that time I was still $30,000 in debt). And, it’s likely that you won’t be able to either.
[Hint: You would need to be able to save the entire amount of your desired income (Question 1.) each year for 17 years, earning at least 8% (after tax), in order to replace it in retirement.]
So, if you can’t save your way to wealth, what can you do?
It’s simple: you do two things:
1. Increase your income
There are lots of ways to do this: get a promotion; send your spouse back to work; get a second job; and so on. Necessity is the mother of invention … if you are really motivated, you will find a way.
However, my current favorite method is to start a part-time business. Why?
Well, it can grow in an unlimited fashion; it could even replace your primary income; it can create strong cashflow; if you pick the right kind of business, it can be started on your kitchen table.
My current favorite kind of part-time business is one that you can start online. Why?
Well, you don’t need much money and you probably don’t need any staff (at least, to begin). And, an online business can be so cheap to start that if you fail (and, let’s face it, you probably will) you can quickly and easily start another, and another, and …
2. Invest it all
It’s all well and good to increase your income and save as much of it (and, your current income) as possible. But, if inflation is running at just 2% (the last time I checked, it was 1.99%), and all you can get on your CD’s is 1% (Bankrate points to rates around 1.05%), then you’ve lost the ‘inflation race’ even before you’ve started.
It should be clear that it’s not enough to earn more, and save more …
… you also need to earn more on the money you save.
How much more?
Well, that’s when you need to plug some numbers into an online ‘savings goal’ calculator:
Here’s how to make it work; plug in:
(i) How much money are you starting with?
Do you have any money in your current savings that you can tap into: CD’s; index funds; 401k; emergency fund; etc.)? In my example, even though I started $30,000 in debt, I plugged in $1,000 as the calculator doesn’t work very well with negative numbers. I could just as easily have plugged in $0, but I chose $1,000.
(ii) How much can you put aside to invest each month?
This is your current rate of savings outside of your 401k + the entire income from your side business.
This is difficult, because the amount that you might generate in monthly income will probably change over time. There’s not much you can do about this (without finding a much more sophisticated calculator or spreadsheet), so I just chose an average of $10,000 a month (or $120,000 a year) as a nice, round-figure estimate of my expected savings (driven largely by the expected profits of my part-time business).
(iii) What is your Date?
This is how long you have until you need to begin tapping into your money. I chose 5 years.
(iv) What is your Number?
This is how large your investment account needs to grow. So, I plugged in my Number of $5,000,000 and my Date of 5 years (as my end date).
Then, here’s where it gets fun: I started playing with Interest Rates to find the rough point where the calculator said that I could reach my goal (i.e. 70%). If I plugged in any figure less than 70% the calculator showed a message that said: “Oops. Your savings plan goes into the red.” … so, this was just trial and error to find the lowest number that didn’t produce this message. For me (in 5% increments) the answer came to an annual ‘interest rate’ of 70% .
How do I know that this works? Well, I have the benefit of hindsight
But, that’s not the point: the point is to show you:
a) Not only do you need to save (a lot) more than you ever thought reasonable, but
b) You also may need to earn (a lot) more on your investments than is possible with CD’s (<1% annual return, after tax) or index funds (<8% annual return, after tax).
So, this leads us to the last piece of the puzzle:
What should you invest in?
Most people invest in whatever gives them the greatest possible return (they are the risk-takers), whatever their family/friends/advisers recommend (they are the followers), or whatever they understand (they are people of habit).
Instead, I want you to consider a totally new way to choose your investments: invest in whatever investment produces the lowest rate of return that you require with the minimum risk.
This usually means comparing the ‘interest rate’ that you came up with when using the online calculator against this table:
[Source: 7 Years To 7 Figures by Michael Masterson]
So, at a 70% required interest rate, I had no choice but to start my own business (just as well, because I was already in one); but, I supplemented by heavily investing in real-estate and some stocks.
On the other hand, you may be lucky enough (because your Number is small enough; your date long enough; and/or the amount you can save monthly is large enough) to require a much lower interest rate …
… if that’s the case, you may be able to stick with your CD or Index Fund investing strategy. But, the chances are that you will need to push the envelope … a lot.
In this post, I showed you that the Number that means financial security is different for everybody, but I also showed you a very quick way to find yours.
That’s the starting point.
Then I showed you what kind of investment strategies you would need to follow, if you want to have any real chance of reaching your Number.
Now, it’s up to you to begin putting in place your plans to get there, starting with learning how to invest in stocks, real-estate, and/or small business.
For my part, I decided to start writing this blog (and, now my book) to help those whose required growth rate / interest rate is at the higher end of the spectrum, simply because most other blogs focus on those at the lower end.
If your required growth rate is high, as I suspect it may be, you have a huge job ahead of you …
… but, if you don’t make the effort now, go back and read these three posts and you’ll quickly realize that you’ll have an even bigger problem later.
So, keep reading, keep commenting, and keep e-mailing me with questions [ajc AT 7million7years DOT com], and I’ll do my very best to help!
Welcome Budgets Are Sexy readers!
Today’s post is a pretty good place to start, if you are interested in finding out a little more about how I like to think about personal finance …
And, for my regular readers, head on over to Budgets Are Sexy’s blog and read my provocatively titled guest post (“Why Most Personal Finance Blogs Are B.S.”). The blog’s editor asked me to write something “feisty” and, judging by the comments, I think I did just that
Don’t be afraid to leave a comment on that site (or here, if you prefer) to let me know what you think?
“How much interest can I earn on $1 million?”
This is the question, if I am to believe the google search statistics, that I am being asked more often than any other …
And, the answer is very simple: if you keep $1 million in the bank, earning about 1% on a CD, you’ll have $10,000 a year in interest. Given that inflation is running at two or three times that, you are running a (very) losing race.
So, the bigger question that you should be asking is: Why do you even care how much interest you can earn on $1 million?
$1 million today, if it’s to last your lifetime, probably only replaces a $35k income (in today’s dollars). It could produce more, but if you don’t know how to make more money than $1 million in your lifetime, you’ll never know how to actively invest it for higher returns.
So, I’m guessing that what you really want is to know how much interest you can earn on $3 mill. – $10 mill. today, or even more.
What you should be asking is:
1. How much income do I want to generate without working (I’m guessing $100k – $350k p.a.)?
2. Multiply 1. by 20 (my rough Rule of Thumb for an active investor) to get your Number (likely to be in the $2m – $10m range)
3. When do I need to reach my Number (probably 5 to 10 years. Any less and you’re dreaming; any longer and you don’t really have what it takes)?
4. Then you need to spend some time with an online annual compound growth rate calculator to work out what annual % return you need to be generating to get there, on time (3.) and on budget (2.).
Then, use this handy table to work out what sort of things you should be learning about and investing in to get that sort of return:
Now, these returns aren’t what you get ‘off the shelf’ … rather, they require hard work (plus the kind of education that you get from this blog), but they are achieveable (after all, that’s how I made $7 million in just 7 years, starting $30k in debt).
How much do you think you need to earn passively to be happy, and when do you think you need it?
How would you like not one, but two ways to retire in just 7 years?
But, I warn you, retiring in 7 years is not easy … or, everybody would be doing it. However, I promise you that it can be done, either my way or Jacob’s way [AJC: Jacob is the author of the controversial book Early Retirement Extreme and the blog of the same name].
I would suggest that Jacob is an outlier in the Personal Finance community because of the aptly named ‘extreme’ portion of his book’s/blog’s title. On the other hand, my method to early retirement is just as extreme … just the other extreme.
In fact, I’ve said before that Jacob and I pretty much book-end the spectrum of personal finance advice.
So, let’s take a look the two methods and find out why each method, in its own unique way, is so extreme:
Method 1 – Early Retirement Extreme
In his excellent review of Jacob’s book, Invest It Wisely summarizes Jacob’s reasoning for retiring early: so that you can explore “renaissance man” aspects of your life.
That is, ‘retire early’ so that you can become less job-specialized and explore wider, more varied options than you would if you were still tied to earning an income full-time.
In order to do that, Jacob advises taking drastic cost-cutting measures e.g. downsizing your home; lowering the thermostat in the winter and raising it in the summer; taking cold showers; downscaling to 1 car or even no car at all, and so on.
Now, that’s extreme!
There has to be a reason and a benefit to this … and, there is:
The reason for the extreme (there’s that word again) austerity plan is so that you can … Save at least 75% of your income.
The benefit of saving that super-sized chunk of your pay packet is that you may be able to effectively retire in just 7 years if you do. Here’s how it works:
Let’s say that you currently earn $50,000 after tax and want to retire in 7 years. Jacob suggests that you should save 75% of your income, this means in the first year you live off just $12,500 and save the rest.
Now, if your salary increases with inflation (let’s say 3% p.a.), and you can invest the money that you save (starting with $37,500 in the first year and increasing each year with inflation) at an 8% after-tax return (by no means easy in the current market), then you should be able to replace your then-current salary after just 7 years with your passive income from your $300k nest-egg’s investments.
There are two catches:
1. Your salary in the 7th year (hence, your starting retirement salary) will be just $14,700 a year (representing a 5% withdrawal rate on your $300k of savings). Given that you started by living on just $12,500 and can retire in 7 years, you should be able to live like a king (or queen) on nearly $15,000 p.a. And, if you find that you can’t survive on $15k a year, well, you’re probably still young enough to enjoy your extended holiday, go back to work, and start again!
2. Our numbers are quite bullish: there’s no investment that you should put your money into for only 7 years that will return 8% after tax. In fact, you would be extremely lucky to return more than 2% after tax, and really should be just keeping your money in CD’s or bonds which currently return just ~1% before tax.
Also, a 5% withdrawal rate is hardly safe; you have to make this money last much longer than normal retirees, since you are retiring so early. A Monte Carlo analysis shows that withdrawing just 3% of your now-required $600,000 nest-egg is probably already stretching it. The good/bad news is that you can still retire in a still-not-too-shabby 11 years, on just under $20,000 per year …
… but (because of inflation), that’s only worth $14k a year in today’s dollars when you retire.
Method 2 – Early Retirement Super-Extreme
Super-extreme early retirement means, to me, retiring in 7 years with $7 million. This means retiring on $350k a year.
Is it really needed, especially since Jacob has shown that it’s possible for a couple to live on $12,500 a year?!
Strictly speaking, no.
But, since you can retire with $350,000 a year to spend (because I did), I say … why not?!
With $350,000 a year, you can definitely live the relaxed, varied lifestyle that Jacob suggests we should aspire to … just at a slightly different level to his suggested $12,500 / year lifestyle.
Cars? Have 2 …. heck, have 3 and make them imported (with at least one exotic).
Vacations? Twice a year … travel business class and make at least one of them international 5-Star.
Upsize your home? Sure … and, pay off the mortgage with cash.
Raise the thermostat in the winter and lower it in the summer? Sure (as long as your ‘green conscience’ can stand it).
Take loooong hot showers? Absolutely [WARNING: see 'green conscience', above]!
… and, so on.
So, how does one do this?
Well, the key is this ‘specialization’ thing that Jacob says that we need to avoid long-term:
I agree, but for the next 7 years you absolutely must specialize in increasing your income, and increasing your savings appropriately. However, unlike the ‘extreme savers’, you never reduce your lifestyle … instead, you just don’t increase it as much as your income increases:
- Save 10% of your income starting right now (or, build up to it over the next few months, if you have started by saving less)
- Save 50% of all future salary increases; all additional income (from businesses, second jobs); and even more for unexpected windfalls (e.g. lottery winning, inheritances, tax refunds, etc.).
Instead of cutting costs – and, saving – which are inherently limited (even Jacob can’t save more than 75% of his income) – concentrate on increasing your income because the sky’s the limit: start a second job; start a part-time business; start an online, part-time business (call it Facebook and the rest is easy).
Most of all, start investing … actively, aggressively, wisely.
Simply follow my patented two-step wealth generation system (it used to be 4-steps, but I cut it in half … so, now you have no excuses) … voila!
$7 million in 7 years.
There you have it: two methods of retiring young.
Choose the one method that appeals to you the most and, from today forwards, read the creator’s writings carefully, and ignore anything that you read that contradicts their advice …
… because every other method will have you enslaved for the next 20 to 40 years, with absolutely no guarantee as to what your retirement years may bring.
And, don’t let anybody tell you otherwise
So it is with personal finance: most pf bloggers will answer a whole variety of questions:
- How can I become debt free?
- How can I pay off my credit cards?
- How can I save for retirement?
- How can I be more frugal?
BUT, these are not the questions that you need to be asking … at least, not at first.
No, there are only TWO questions that you need to ask. The first is in two parts, and it simply asks:
a) How much money do I need to support the life that I truly want to live? And, b) when do I want to begin?
I have a hypothesis about the typical answer to these questions, but the truth is that for every human being on this planet there is a different answer:
For some, it may be that they are happy doing what they are doing today, and are happy to keep doing it until they drop. For, them personal finance begins with maintaining their current lifestyle (which probably revolves around maintaining their employment) and staying healthy.
It probably also means learning all the lessons about personal finance that the blogosphere has to share: living below your means, eliminating debt, cutting up your credit cards, paying off your home, setting aside an emergency fund …
My second question – which I’ll come to in a moment – is moot for these lucky, satisfied, job-secure, working-class few.
But, my hypothesis is that most people are not satisfied with their current lifestyle … that you are not satisfied with your current lifestyle … that you:
- Want more time with your family,
- Want to indulge your hobbies and interests,
- Want to travel more,
- Want to be more relaxed and healthier,
… and, the list goes on.
And, I’ll wager that the limiting factor for you, right now, is money.
But, I’ll also bet that with a little thinking, you could come up with a salary that if a rich uncle were to pay it to you, would allow you to stop working full-time (or, altogether) and fund your ideal lifestyle.
I’ll also take a stab that ‘salary’ would bear little resemblance to your current salary.
But, if you can take an educated guess at what that ‘salary’ would need to be, I can tell you what your Number is (the answer to the first half of my first question) simply by telling you to multiply that amount by 20.
Let’s now assume that you have no rich uncle and have to amass this amount yourself …
How long will you give yourself to reach your goal so that you can begin to live the life you really want to live before you are too old to enjoy it?
I gave myself just 5 years to reach my Number of $5 million; in the end, I made $7 million in 7 years, starting $30k in debt.
[AJC: keep in mind that the longer you allow to reach your Number, the larger it will need to be because of the effects of inflation. For example, whatever Number you come up with today, you will need to add 50% if you aim to reach it in 10 years, and you will need to double it if you are prepared to wait 20 years ... just to keep up with inflation.]
Which brings us to the second most important question in personal finance:
How am I going to get there?
For example, in order for me to reach a $5 million target in 5 years from a virtual standing start:
- I had to learn how to invest (I had no investments and no idea HOW to invest or WHAT to invest in)
- I had to turn my business around (it was breaking even, at best)
- I (more importantly, my family) had to sacrifice our existing life: we had to move overseas, my wife gave up her career, my children their friends, we all gave up our families for the 5 years we were away from home.
But, we all agreed that it would be worth it, because we had already answered the first question (both parts).
How about you?
I’m reviewing the final draft (actually, the pre-publication draft) of my new book.
But, I’m not happy with the current intro: it talks about the Roadmap To Riches, but that’s not really what this book is about. My next one, certainly, but not this one.
I just added an epilogue based on this post (almost word for word), and I want to do something similar for the introduction.
You see, I feel that while the subject of personal finance – a.k.a. money – is supposed to be entirely rational …
… it’s actually totally the opposite.
I believe that all discussions of money are entirely rooted in emotion, then our point of view is justified rationally.
The reason for this is that our lives and our money have become so intertwined that it’s hard … nay, impossible … to separate one from the other.
Don’t believe me?
Well, do you think you’re totally rational on the subject of money? Do you think that your life comes first, and money is only a tool?
Then let’s test that, right here, right now: you have 24 hours in an ‘average working day’, how do you spend it?
If you are anything like the average US worker, you spend an ‘average work day’ (that’s around 2/3 of the average year) sleeping, eating, and maintaining your house and your family.
You spend the bulk of what’s left (8.7 hours: the largest chunk of your day) earning money. Leaving a sliver of ‘life’ for you.
Now, think about how much of that tiny slice of life you then spend thinking, worrying, arguing, balancing and maintaining your money?
And, you’ll do this through the entire 40+ years of your working life
I rest my case.
So, the angle that I want to take with my book’s intro is this:
If you were to script your life, would you choose:
- Study hard so that you can get a great job, and
- Work hard at the job – eking out the occasional high point (landing a big account, making the boss happy, bringing a new product to market, etc.) – just to earn money, and
- Spend what you have to just to support your family, saving the bulk of what’s left over just so you can retire at 60+ to do … what?
OR, would you script for yourself something like:
- Travel the world, and
- Live large on the world’s stage, and
- Give back to others,
… and, so on?
The restriction on the latter probably being money and time (and, if you had the money, you could create the time, right?).
Doesn’t it seem as though we live our lives according to money’s script …
… rather than putting money in it’s proper place, which is simply as a tool to support our Life’s Script?
What do you think? Am I on the right track?
1998 capped a long period in my life when I was imprisoned by a circle.
I suspect this is the same for most. What separates me from the others – and, I suspect you, too – is that I broke out.
The ‘circle’ was my life and the things that I was trying to deal with:
- Keeping myself sane in an increasingly mad world
- Keeping my family safe, fed, and healthy
- Trying to earn a decent living to pay the bills and keep a roof over our heads.
The reason why it’s a prison – well, a financial reason (there are others beyond this scope of a humble personal finance blog) – is that our ‘investments’ are similarly inwardly focused; aside from what little we manage to save in our bank accounts and 401k’s, our so-called investments center around the things that make our inner-circle lives a little better.
We invest in our health (as much as we can – or feel motivated to do), our education (often because our parents tell us that “it’s an investment in our future”), our home (because that’s what our parents did) and, of course, our cars & possessions (because that’s what our friends and colleagues do), and so on.
Why do we invest?
So that when our income stops we can try and continue living within our circle and simply maintain what we have?
But, when I broke out of that circle my life began to change!
My First Big Realization was that my life wasn’t about my money … so why was I spending so much of my life – that precious, finite resource – attempting to earn money?
When, in 1998, I found my Life’s Purpose, which included what was in the circle (family, health, and so on) but also a lot more than I had ever felt desirable or even possible, I was forced to look outside the circle … way out.
Interestingly, and logically, I also realized that the investments that I had been making for my circle-bound future would no longer be adequate for a far less bounded life.
So, in 1998, my investment strategy also shifted … and, shifted dramatically.
[AJC: if you want to understand a little more about this process, then check out this free site: http://site.shareyournumber.com/]
No longer would I try and upgrade my home and my car.
No longer would I try and upgrade my lifestyle in an attempt to keep up with the Jones’ (and, I had plenty of those to try and keep up with!) …
… I would simply begin to apply every spare penny to investing outside of the circle: in true investments that I could not eat, live in, drive, or share over a beer.
Now that those investments have born fruit, finally freeing me up to live my Life’s Purpose, I realize that living outside of the circle has actually also helped me live within.
The difference is that my inner circle is no longer my prison but my sanctuary.
The sooner that you identify what is in your circle and what – if anything – outside of the circle truly drives you, the sooner you will be motivated to seriously start making money and investing.
Then this blog will suddenly become very interesting to you