MONEY Master the Game: 7 Simple Steps to Financial Freedom (34 page)

When she was done, I had her add it up and multiply the monthly total by 12. That shows the annual income she’ll need to cover these items for life—without working—to be financially secure. As you can see, her number of $34,000 is virtually identical to the number for the average American.

Now, how would Angela be able to have $34,000 a year without working? Remember, she’s going to build a money machine. She’s automated her savings of 10% of her income. She’s putting it in a Roth 401(k), where it’s being invested in low-fee index funds with an estimated growth rate of 6%. (This is the percent that Jack Bogle estimates the markets will return over the next decade. However, the average stock market return has been 9.2% over the last 20 years.) We ran it through the wealth calculator, which you’ll do in the next chapter, and she found out that instead of the $3 million she thought it would take to achieve financial security, she would need to accumulate only $640,000 in her Freedom Fund to have that $34,000 a year for the rest of her life—less than a quarter of the amount she thought she needed!

At first she was shocked. She asked me in disbelief, “That’s all it would take for me to have this? I’d still have to work, right?” I told her of course she would, but not to pay for her home, food, utilities, transportation, or basic health care! By the way, these five items, on average, represent 65% of most people’s expenses. So Angela now had a way to pay for 65% of her overhead without working. And remember, most of us want to do something meaningful. Without work, we’re a little crazy. We just don’t want to
have
to work! She could work part-time to pay for the rest of her expenses or full-time and have all that income for other things. I asked her how that would make her feel if everything from her home to transportation was paid for without her working for the rest of her life. “Extraordinary!” she said. “That’s an achievable goal. That’s something I could figure out how to make happen.” I said, “Exactly!” And what you could see in her eyes was a sense of certainty, and because she was certain, she had a reason to act.

I reminded her, “By the way, this doesn’t have to be your ultimate goal. It might be your short-term goal.” For some people, all they want is financial security, like someone in a later stage of life who may have taken a hit in 2008. For someone who is middle-aged or young, you’ll blow through this
goal—as long as you know what your number is and you act upon the seven steps of this book.

If you’re wondering, by the way, how long it would take to accumulate whatever your security number is, take heart. You don’t have to do this calculation. We’ll do it in the next chapter, “What’s Your Plan?,” and if you want, the app will calculate the number for you. Together we’ll create three plans: a conservative plan, a moderate plan, and an aggressive plan. And you’ll decide which of these plans are most manageable and achievable.

Remember the aspiring billionaire? His annual income for financial security was a mere $79,000. A far cry from the billionaire neighborhood. Your number might be higher or lower.
All you need to know now is the annual income you need to achieve financial security.
If you haven’t already done it, calculate the numbers on the app or do it right here now.

By the way, we can’t go on to the next goal without talking about something that’s a simple requirement, not a dream. And it’s something almost everybody should be able to achieve relatively quickly, though few people have it in place:
an emergency/protection fund. According to a Princeton University–University of Chicago study in 2014, 40% of Americans say they couldn’t come up with $2,000 if they needed it.
Yikes! That’s terrifying! Why do we need to have an emergency supply of cash on hand? What if there’s an unexpected interruption in your income flow? It happens in almost everybody’s life at some point. An interruption can be a health problem, it can be a problem with your business, it can mean being displaced from a job. So you need some money to cover yourself for somewhere between three to 12 months. But for most people, three months is too short a
time, while 12 months may seem like a lot. So perhaps you start by putting aside a few months’ overhead, and gradually build toward six or 12 months’ worth. Wouldn’t it be wonderful to know that if something happened, you had a year to be able to get yourself back on track? You’d still have a roof overhead, food in the cupboard, and the bills would get paid.

Again, this goal is not for an annual income for life. Once you have that, you’re set. This goal is just emergency cash to protect you until you develop a large enough nest egg to take care of yourself every year for the rest of your life without working, no matter what happens.

How much do
you
need? Well, you know what your monthly overhead is. So write down that number and memorize it. Again, you can do this exercise on the app, and the number will be saved for you and always available at a glance in your pocket. My friend Angela, who set aside 10% of her salary to build her money machine, started looking into her spending patterns to find more savings. Remember how she realized it was cheaper to buy a brand-new car than to keep fixing her old one? Well, she also found a way to set aside an additional 8% to build her emergency protection fund. She completed her goal, and now she sleeps much better at night! If you haven’t already, it’s crucial you set up an emergency fund. (And I guarantee you’ll have some great new ideas on how to do this after reading chapters 3.3 and 3.4, “Speed It Up.”) Keep that amount in cash or in a safe place like an FDIC-insured bank account.

Now let’s move on to the next level of dreams. With security achieved, let’s look at:

DREAM 2:
FINANCIAL VITALITY

What do I mean by vitality? This goal is a mile marker on your path to Financial Independence and Freedom. You’re not all the way there yet, but it’s the place where you can be secure and also have some extras thrown in that you can enjoy without having to work.

What do you pay for clothing every month? Is it $100? $500? $1,000? How about for entertainment (cable TV, movies, concert tickets)? How about going out for dinner? Is it Chili’s or Nobu tonight? So for food
and entertainment, are you shelling out $200 a month or $2,000 plus? How about small indulgences or little luxuries like a gym membership, a manicure or massage, or monthly golf dues? Is it $50, $500, or $1,000 plus? Whatever it is for you, how would it feel if
half
of those costs were already covered
without having to work,
for the rest of your life? That’s what happens when you reach Financial Vitality. Sounds like something worth celebrating, doesn’t it?

Here’s how to calculate your Financial Vitality:

Again, just type in these figures, and all of this math will be done for you on the app.

DREAM 3:
FINANCIAL INDEPENDENCE

Pop the champagne, because when you’ve reached Financial Independence, you no longer have to work to have the same lifestyle you have today! The annual interest earned on the return from your savings and investments (your Freedom Fund) will provide you with the income that you need—while you sleep. You are now truly financially independent;
that is, independent of work.
How amazing would that feel? What kind of peace of mind would that bring you and your family?

Financial Independence means that money is now your slave—you are not the slave to money. Money works for you; you don’t work for it. If you don’t like your job, you can tell your boss to shove it. Or you can keep right on working with a smile on your face and a song in your heart, knowing that you’re working because you
want
to, not because you
have
to.

So let’s figure out how much money it would take to maintain your current lifestyle. This number might be really easy to calculate because, unfortunately, most people spend as much as they earn! Or sometimes more than they earn! If you made $100,000 and you spent $100,000 that year (including paying your taxes) just to maintain your lifestyle, your financial independence is $100,000. If you spend less than you earn, congratulations! Unfortunately, you are the exception, not the rule. So if it costs you only $80,000 to live, on a $100,000 salary, then $80,000 a year is what you need to be independent.

So what’s your Financial Independence number?

Go to the app or write it here now: $_______.

Remember, clarity is power. When your brain knows a real number, your conscious mind will figure out a way to get there. You now know the income you need to be financially secure, vital, and independent. So let’s see what happens when your dreams get bigger.

Dare to live the dreams you have dreamed for yourself.

—RALPH WALDO EMERSON

Let me tell you the story of Ron and Michelle, a couple I met at one of the seminars I hold every year at my resort in Fiji. They were in their mid-30s, with two small children. Successful people, they owned a small business in Colorado. Ron was great at running their business, but neither of them paid attention to their household finances. (That’s why he was in Fiji attending my Business Mastery event, to grow his business 30% to 130%.) Their accountant drew up personal financial statements for them every month, but they never
bothered to look at them! No wonder they were having trouble envisioning the life that they wanted—which turned out to be a life of contribution.

When I asked Ron what he needed to be financially set, as I asked the young would-be billionaire, his number was $20 million. I wanted to prove to him it could be a lot lower than that and still have an extraordinary quality of life for him and his family, so I walked the couple through what they
actually
spent every month. (Bear in mind that, as business owners, Ron and Michelle’s annual household income is clearly higher than the average American’s.)

First we started with Financial Security, and he told me his five numbers:

So for Financial Security, all they needed was $137,400 in income per year. Well within their reach! By the way, if Ron wanted to know how much he would need to accumulate in his nest egg or his Freedom Fund, most financial planners would tell him to multiply his annual income number by 10, or even 15. But today, with such low returns on safe, secure investments, that’s not realistic. Remember, on the way up the mountain (the accumulation phase), you might put your investments in an aggressive portfolio that could give you 7% to 10%. On the way back down the mountain (the decumulation phase), you will want your investments in a secure and less volatile environment, where by nature you would likely get smaller returns. So it might be smarter to use 5% as a more conservative assumption. Ten times your income assumes a 10% return. Twenty times your income assumes a 5% return.

Ron discovered that financial security would be within reach—20 × $137,400 = $2,748,000—a number far less than the $20 million he’d projected.

For Financial Independence, they figured they needed $350,000 a year to maintain their lifestyle at the current level, because they had a second home and a lot of toys. Michelle was fond of things with Louis Vuitton labels on them. So, conservatively, they needed $7 million ($350,000 × 20) in their critical mass to live that way without working. Ron was amazed to realize that this number was
almost two-thirds less
than the $20 million he thought it would take! And he’s going to get there a lot sooner than he imagined, having to save
$13 million less
than he’d previously estimated!