By Chris Howard
Wealth building is no different from soccer or basketball. In order to score, you've got to know where the goal is. You need to identify the specific financial targets you intend to hit. So here's an easy way to clarify those targets. Start thinking in terms of four incremental goals on the way to monetary success: stability, security, freedom – and finally, opulence.
Financial stability means having two to three months' living expenses in a savings account, plus enough money to cover your basic insurance costs. This should be separate from the money you need to run your business day to day. That way, while you're growing the business, you'll still know that your personal financial needs are taken care of. At the start of my seminars, I ask everyone to calculate their basic living expenses. That's what's called 'the nut'. It doesn't include the luxuries you'd like to have in your life; it's just what you need to keep you alive. What would that number be for three months, and how much would it include if you purchased insurance? When your income is equal to that amount, you'll know you've hit your financial stability goal.
The second goal is financial security. I define this as 'enough capital, invested at a return of 8%, to cover your basic living expenses on an ongoing basis." That includes mortgage or rent, utilities, car, food, loans and basic insurance.
Remember, financial stability was only enough money to cover two to three months of your basic living expenses. So if you take financial stability money for three months and multiply by four, you'll see what you need for a full 12 months. That's the annual income you would need to cover your basic needs.
Let's say you need to make $50,000 a year to cover your basic living needs. What sum would you need to invest at 8% to yield $50,000? You've achieved financial freedom when you have enough capital invested at 8% to cover your current lifestyle without having to work again.
The third goal is financial freedom. To determine what that amount of money this would be for you, say to yourself: "My financial freedom goal will be attained when I've accumulated enough capital invested at 8% to provide an annual income of _______________."
By the way, I refer to 8% because that seems like an achievable rate of return on most investments. Warren Buffett says,
"Unsophisticated individuals who aren't equipped to take an active role in investing will be far better off putting money in an index fund than giving it to a managed fund. The index funds have outperformed the managed funds over the years." The index funds have historically returned above a 10% average over time. With that in mind, I believe that 8% is a reasonable number.
Financial opulence means you have enough capital invested at 8% to live the life of your dreams without ever having to work again. To calculate the number, think this way: "My financial opulence goal will be obtained when I've accumulated enough capital invested at 8% to provide an annual income of _______________."
Of course, it all depends on what you want! Some people will say, "For me, opulence is a quarter of a million dollars." Others might think it's $100,000 — that would be enough to retire and live in Bali.
Others will need $1 million or $2 million. Once again, you need to figure out what your targets are. Once you have them in mind, you can start taking whatever you're making from your business—either through income or through dividend payments—and investing that money in the right way.
Thinking clearly about your financial goals doesn't mean you have to retire some day, or have to do anything else. It means you will have the choice to do whatever you want. When the fear of going broke disappears, life is a lot more fun. And it's even more fun when real wealth becomes a possibility and then a reality. Then you can be a lot more playful as you're out there building your dreams. You can also give more back to others who are on the same path you've been travelling.
NB: This article is from Chris Howard's new book – Instant Wealth - Wake Up Rich!
International speaker and coach, Chris Howard, is a best-selling author, prominent speaker and the owner of Christopher Howard Training. www.chrishoward.com
