In this chapter we explore what it will take for you to become financially independent. But first, I need to stress how important it is to have a respect for the emotional, as well as the economic, aspects of wealth. Both play a critical role in your financial independence.
In order to address the emotional aspects of your personal financial management, you must start with the “why” of your ultimate goal. What does that mean? Simply, you need to understand your life’s dreams and why they are important to you. What are you working toward? Why are you investing? What is your end game? And do you have a process to achieve your life’s dreams? Fortunately, if you start with the “why” the rest will follow. The rest primarily includes the “what” and the “how” of getting there.
The first step in discovering your “why” is to recognize what makes you tick. For example, my wife and three kids are what make me tick. The love and support I receive from them, and the fulfilling feeling that I receive by reciprocating, is my “everything.” My “why” is to provide a consistently healthy and safe ecosystem for my family.
If you are married or in a long-term relationship, you might want to have a conversation with your partner about the “why.” Where do the two of you want to be in 10 years, or 20 years? Do you want to have a beautiful retirement to spend more time with the grandkids, do you want to sail around the world, do you want to devote more time to volunteering at charities and to help those in need? What is your end game, and do you both agree?
Starting with the “why” is the beginning of everything. It’s what motivates you to achieve your financial goals. Most people already have at least a general idea of how they want to live the rest of their lives. Unfortunately, many may get so caught up in their everyday lives that they lose sight of the big picture.
The goal then is to get to a point where money can help you achieve your ideal life vision. Money is essentially a conduit to get you to support your “why.” Once there, you are in control and can stand on your own two feet with grace and pride.
When I ask my clients about their “why,” some will quickly respond by saying, “I want to have $1 million, or $5 million, or I want to have a jet plane.” Many will jump ahead to the conclusion before figuring out what they truly want out of life and what it will take to get them there financially. Maybe they don’t need $1 million, or maybe $1 million is not enough. Basing your end goal on assumptions can distract you from honing in on what you actually need. Ask yourself: What are your needs, wants, and wishes, both now and for the future?
A client of mine, Jim Flesner, once shared with me something I will never forget: “There are three things we all need in order to be happy—someone to love, something to do, and something to look forward to.”
Once you realize there are no shortcuts and you understand the essence of your goal, then you track it and plan accordingly. On your path, you’ll need to silence all that noise from the media, markets, friends, and even the loud (often biased!) voices in your head. This allows you to direct your time, energy, and thoughts elsewhere, knowing that you went through the right process to stay focused on your “why.”
Do you have a written financial plan or process you follow to achieve your goals? Benjamin Franklin said, “If you fail to plan, you are planning to fail.”
When it comes to your finances you may know you want financial independence, but not know how to get there. Individuals should begin by analyzing their current and needed monthly cash flow, breaking down the fixed and variable components. This is the beginning step in creating a formal budget that can establish parameters around your spending.
Everybody has a “magic number” that represents their desired lifestyle. The difficulty lies in calculating the number correctly and then sticking to it. This holds true during your working years and in retirement.
Don’t forget. Make sure when you are designing your plan that you don’t miss something. You don’t want to realize 5, 10, 15, or 20 years down the road that you miscalculated and you have underfunded your lifestyle or retirement. There are no do-overs.
You can always kick the tires with software. Online programs like myOrangeMoney™ by Voya Financial (http://voya.com/tool/orange-money#step1) can assist you in finding your “magic number” for retirement. Software programs are a good start to help quantify how much is enough, what type of return on your investments is required, how much you need to contribute per year, and for how many years your money will need to compound in order to reach your goal. Each software system will have different variables, so it is always good to run a few scenarios on a couple of programs and then review it with a professional who can validate its assumptions.
Former NFL coach Herman Edwards says, “A goal without a plan is just a wish.”
Just remember, the moment you pull certain triggers, there may be no going back. For instance, if you’re out of corporate America for a couple of years, you may not be able to get the same quality of job if you want to go back. You may experience age discrimination, and jobs with your particular set of skills may be harder to come by. Today, there’s more of a burden on all of us to work harder and think smarter.
I believe it is important to have a conservative and realistic plan, because when times get tough, emotions can run high. People feel vulnerable because of their own mental biases, and an investor can feel himself or herself “going off the rails.” These are the moments when it is critical to stay true to your plan. The only way someone can firmly believe in a plan and have hope in that plan, is if they err on the side of caution. Try to always plan for the worst and hope for the best.
It is important to be prepared, too. As a teenager, I was fortunate enough to achieve the rank of Eagle Scout and now my son is working toward that same goal. We both understand and believe in the Boy Scout motto: “Be Prepared.” If you are out in the wilderness and it starts raining and you don’t have rain gear, you are exposed to nature’s forces. By that time, it’s too late; you are soaked. Once soaked, if you can’t get warm and dry by nightfall, the situation could become fatal.
We recognize that, in life, there are going to be a lot of thunderstorms. There will be many events that we didn’t anticipate or even imagine. Whenever you’re put in a difficult situation, if you haven’t had a moment to think about what you could do in that situation, you may very well end up making an emotional decision. That emotional decision may end up impeding you from getting to where you really want to go, financially or otherwise.
Often, we fear the things we don’t know, or the landmines we can’t see. We’re all vulnerable, but even more so if we don’t have that plan. Without a plan, if the markets decline, you might say to yourself, “I’ve got to get out. I’m already behind the eight-ball. I don’t have enough money for retirement and what I’m going to lose will delay my retirement; I’ve got to get out.” So you get out, and you feel relieved of your fear because that’s what you’re truly looking for—freedom from that fear. Then you don’t know when to get back into the market.
There are times when we may find ourselves losing focus. It is during these times that you may need a sounding board to let you know if everything in your plan is okay or if adjustments are in order.
The wisdom and experience of navigating a plan may be the most important value proposition that financial planners have in the 21st century. A big part of the responsibility of the financial planner is to advise you on how the world affects your plan, how to avoid making big financial mistakes, and how to plan for your future retirement readiness. A financial planner can help design a plan and be your financial coach. He or she can be your sounding board and assure you that you have someone who understands you and the markets.
In the next chapter, we’ll discuss the power of compound interest and the erosive effect of inflation.