What Does Wealth Mean To You?

Hi friends. I’d like to start this post by asking you the question: what does wealth mean to you? I think wealth can mean different things to different people. For example, a person might look at being wealthy as having a well funded retirement plan. Another person might think of wealthy as less about money and more about having a rich life filled with friends and family. In any of these cases a person could be considered wealthy depending on what his or her definition of wealth looks like. According to dictionary.com one definition listed says that wealthy is “rich in character, quality, or amount”. So, what’s your definition of wealth and how are you going to get there? I believe building wealth is about making smart choices with your money. Becoming wealthy might be a far off thought to you but I’d like you to realize that it’s closer to reality for you than you might think. My definition of wealth means being financially independent and this is what I would like to focus on in this post.

So, what is financial independence? To me, this is the point that your investments are making you more money than your expenses and can sustain your financial needs for life. Let’s dig into this a little deeper. My definition of financial independence has two components. The first component is that on some sort of time basis your income from your investments are making you more than the expenses that you accrued on that same time basis. For example, let’s say that your expenses on a monthly basis amount to $3000. This means that your investments would need to make at least $3000 per month to essentially break even. If you were getting an average of 8% annual return on an investment this would mean that you would need an investment worth at least $450,000. The second component has to do with sustainability. This means that your investment have the ability to continue to pay for your expenses indefinitely. Ok, this is where my definition of financial independence gets a little more complicated. Your investment must not only cover your expenses on a time bases in the present time but must also have the ability to cover your expenses in the future as well. This means that you are taking into consideration growing expenses due to inflation or other reasons for increase in costs. In order for your investment to compensate for inflation and these other growing costs it must be growing as well. Let’s say that you have that $3000 per month expense and as we pointed out you would need $450,000 growing at 8% to cover that. Well, what if inflation is at 2% per year? This means that you need your investments to also grow at 2% in order to be able to cover that future increase in expense. In this case you either need to seek an investment that gets 10% annual return or you need to save up more in your investment so that your investment return is not only covering your current expenses but is also causing your investment balance to grow over time so that it covers your increased future expenses as well.

This all sounds great but saving up a bunch of money sound hard. The amount that I would need invested is a huge number and how do I even get that much? I agree, building an investment portfolio that creates enough return to cover your monthly expense is a sizable feat but if you want to become financially independent you must build a large investment. So, how do we start to build an investment that will allow us to become financially independent? In short, the answer is to put away as much money each month as you can. This answer, however, does not give us an estimate on how much we need to put away or how much we’ll have considering given conditions. There’s a lot of different ways to calculate how much wealth you’ll need to amass in order to hit your financial goals so let’s take a look at the basic steps of this calculation. The first step is to estimate how much your expenses are now and how much they will be in the future. To do this create a budget. I have used Microsoft’s Excel to create my budget and to help me with my financial independence calculations. If you haven’t created a budget yet I highly recommend using Excel. The next step is to estimate how much of an investment you’ll need at a given rate of return to cover your expenses. Next, estimate how much you’ll need to cover the growing amount of expense in the future. These calculations can be done using different techniques. If you’re not comfortable doing these calculations ask your financial adviser for assistance. There are also numerous online calculators and YouTube videos that can help you with this as well. Once you have an investment amount that you will need in order to achieve financial independence you can calculate how long it will take you to save that much money by using your budget.

Call to action:

  1. I’d like to encourage you to look at what being financially independent looks like in your life. Do this by calculating how much you would need to invest in order for that investment to cover your current monthly expenses.
  2. Now create a budget that will show you how much you can put away each month to get you to reaching the investment amount to be financially independent.
  3. Work like crazy to build up that investment portfolio!
  4. Enjoy being financially independent 🙂

Life Lesson From Chopping Firewood

In the summer of 2015 I went with my good friend Sam to cut fire wood. Being someone who grew up around plenty of apple wood I never had chopped firewood before because apple wood was small enough that it didn’t need to be split. After Sam fell an old dead tree, we got out the axes, and it was time to start splitting. I remember thinking to myself before I started how easy it was going to be, I mean, all you have to do is slam the axe into the wood right? Wrong. I chopped and chopped and chopped and I couldn’t get the wood to split. After about 16 swings and no success Sam stopped me and said “You’re doing it wrong”. At this point I was a little frustrated and I thought to myself, “How do you chop wood wrong? There’s only one way to do it.” Sam took the axe from me and as I curiously watched he brought the axe up over his head and slammed it down with every ounce of energy he had and sure enough the wood split. After watching Sam, it hit me, to split the wood you had to swing as hard as you could, and if you didn’t, then the wood wouldn’t split. Sure enough, when I put every ounce of energy into my swing, the firewood split. Later, I realized the same is true in life, if you want to be successful you have to give it everything you’ve got – every time – otherwise you’re just chopping at wood that will never split. Often in life we become complacent in our level of effort and then wonder why we’re not achieving our goals. If you’ve ever feel like you’re not getting where you want to be in life, maybe it’s time to look at your level of effort and choose to start swinging like Sam.

Takeaway Questions:

  1. Are you contributing enough energy towards your goals in order to achieve them?
  2. Do you need to cut out unnecessary things from your life in order to give you more time and energy to focus on your goals?
  3. Are you goals clear? Are they SMART goals: Specific, Measurable, Achievable, Relevant, and Time-Based?
  4. Are you holding yourself accountable for reaching milestones that will help you reach your goals?
  5. Are your goals helping you to reach your dreams?

Book Review: The Best Investment Advice I Ever Received by Liz Claman

This book is a compilation of investment advice from some of the most well known finance gurus in America. As you read this book you feel as though you are sitting right in front of these people and are having a one-on-one conversation with them. Some of the authors provide very rich insight while in contrast some of them use their input to simply promote their product or company. This is an excellent book for someone who would consider themselves a “just started” investor,  an intermediate investor, or even an investor who is looking for a fun, quick, interesting read.

Some of the content was a little redundant. Diversification, being greedy when others are fearful and visa versa, and the idea that timing the market is a fool’s game were all common ideas. Nevertheless, these are very important informational components of building a strong foundation of investment knowledge.

Some of my favorite quotes from the book:

“Despite what a professional planner might advise, you can’t save and consume.” Richard Bernstein P.19

All too often in our society we are trying to out buy our neighbors in an attempt to impress everyone. This is a road to failure. One of the keys to building wealth is putting money away so that it can grow and unfortunately that means not spending that money on the usual useless things. This quote embodies the idea of short-term sacrifice now in order to be benefitted later. This is the heart of building wealth.

“The more certain the crowd is, the more certain it is to be wrong.” Doug Kass P.92

This one really got the wheels turning in my mind. I started to think about how just before the Great Depression people thought that poverty was soon to be annihilated and something of the past. I also started to think of all those people in the banking industry that come on the news just before the Great Recession and said how everything was fine. It’s important to have your own view, something that you derive, with the information that you’ve collected. It’s dangerously easy to blindly follow the crowd and this can get you hurt. One of the keys to investing is being able to see where the crowd is going and how its direction can be an opportunity. This requires you to separate yourself from the crowd and think rationally, which sounds easy, but in reality is difficult to do.

“My father taught me the importance of saving early and saving often, which translates into investing early and investing often.” Joe Lee P.106

I liked this quote for a couple reasons. The first reason is that people who are great at building wealth are those who are intentional about systematically putting money towards their investments on a regular basis. The second reason is that it differentiates savings and investing. Yes, there is a difference. Savings is what you have in your checking or savings account at your bank earning next to nothing but that you can access quickly for emergencies or buying opportunities. An investment on the other hand is something that provides a return: a crucial aspect of developing wealth.

Overall the book is worth the read and Claman saves the best for last. One of the best pieces of advice is at the very end so at least read the last few pages. Enjoy! 🙂

Goals, Plans, and The 3 Keys to Wealth Building

Most of us have dreamed of someday being financially wealthy but how do we actually become wealthy? Here’s the 101 on building wealth. If you can learn to do these things well then you’ll find yourself on the path to financial success.

The first step to wealth building is to create goals. In order to set a goal you need to figure out what it is that you really want to achieve. Maybe your goal is to have a comfortable retirement where you can afford not to worry about working and can focus on spending more time with your family. Maybe your goal is to save up for you child’s college education. Whatever you goals are you must be able to define them. For example, your goal should be something like: when I’m 65 I want to have at least $500,000.00 in my retirement fund.

Once you have determined your goals you must create a plan to achieve your goals. Your plan should consist of a step by step process that will get from where you are now to where you want to be. Incorporating a forecast into your plan is very helpful. To build on our previous example, in order to have $500,000.00 I will need to put away at least $410.00 every month for 30 years at 7% compounded interest. The steps here are simply to put $410.00 away every month in an investment.

Key # 1 to wealth building is to maximize income. The idea of this key is to figure out ways to bring in the most amount of income that you can. To do this you could look at several different opportunities in your life. Maybe you could ask for an extra shift at work, maybe you have a hobby that you could monetize, or maybe you need to find a better paying job. For a business owner, maybe it would consist of taking on a new client.

Key #2 is to minimize spending. One of the ways to do this is look at your recent checking account statements and ask yourself what expenses you can do without. Did you really need all of those expensive espressos at the drive up coffee stand or could you have brewed your own coffee? Did you need to go out to eat so often or could you cut back and save some money there? The main idea of this key is to find ways to cut out unnecessary expenses.

Key #3 is to maximize your contributions to investments. Your goal with this key should be to invest enough to eventually achieve financial independence. Financial independence means that your investments will eventually be making you more money on an annual basis than the amount of your annual expenses. In other words at the end of the year you’ll have more money than you started the year with even after all of the expenses for that year. This is an excellent retirement goal. There are many different types of investments out there like rentals, mutual funds, and many more. The investment that you invest in will depend on things like risk tolerance, investment duration, and cash flow requirements.

To wrap things up make sure to remember that to maximize building wealth you must have goals, create a plan, and follow the three wealth building keys: maximize income, minimize expenses, and maximize investing.

What is a goal?

A goal is a declared result where you must put forth some level of work in order to achieve the declared result. Goals can be anything that you desire. They can be an interpretation of your dreams. For example, maybe you’ve dreamt of having a beautiful home that you imagine you and your family living in, well, buying that home can be your goal. Goals are a crucial part of wealth building because they help give us direction and motivation.

Success is hard to reach without goals. There have been many times in my life where I’ve witnessed people who worked really hard but didn’t have any defined financial goals. Many years later these people wondered why they weren’t getting ahead financially even though they were making good money at their job. They ended up squandering their money without really even noticing it. I’m sure that we can all relate to not knowing where the money goes at times, but all that changes with goal setting and planning.

After you set your goals create a plan in order to achieve your goals. When you’re setting goals for wealth building make a forecast (see April Blog post and Financial Tools link) so that you have a way to measure your financial progress. I like to use spreadsheet software like Excel. Computer spreadsheets are easy to customize and make adding the columns and rows easy. They’re also great for long term planning because they can be easily reproduced to forecast years and years into the future.

A goal and a plan are crucial parts of building wealth because they act as our roadmap to building wealth. Goals are the most useful for building wealth building when they are: clear, measurable, attainable, intimidating, inspiring, rewarding, difficult, and motivating.

The following steps can be used to help you create the financial future you’ve been dreaming of.

The 7 steps to Financial Goal Setting:

Step 1: Figure out what your dreams are.

Step 2: From your dreams identify your goals.

Step 3: Create a plan in order to achieve your goals.

Step 4: Track your progress so you know how you’re doing.

Step 5: When you reach your goals, stop and enjoy your achievement.

Step 6: Focus on your next goal on the list.

Step 7: Remember to enjoy the journey at every step!

Forecasting For Your Finances

Whether you call it a spending plan, a budget, or a forecast, you need to have one if you’re going to build wealth. I like the word forecast to describe the tool that I use predict my financial future. The three areas we’ll look at in this post are: what a forecast is, why it’s important to create a forecast, and why you should maintain a forecast.

What is a forecast? Creating a forecast is a lot like creating a budget. The components of a budget are actually a huge part of a forecast. In the forecasts that I like, I use Excel to create monthly budgets that are added together to create an annual budget. In your monthly budgets you will have costs such as housing, food, and insurance which are the expenses that you incur throughout the month. You will also have income from your job and investments. The accumulation of these monthly budgets allows you to predict or forecast how much money you will have saved at the end of the year or at the end of a period of time. Here is where a forecast is a little bit more than just a budget. The difference between a forecast and a budget is that a forecast also includes a prediction of your accumulated wealth that you’ve gained over time.

Why create a forecast? A forecast is a very import tool that can be used by anyone who has a goal of building wealth. Often, people are building wealth for many different reasons. Maybe you’re someone who is building wealth for your retirement. Maybe you’re someone who is building wealth for a child’s college fund. Or maybe you’re building wealth as a way to pay for a down payment on a car or a house. Regardless of the reason that you’re saving, creating a forecast will be a crucial tool that will help guide you financially every step of the way between now and where you want to go financially.

The third and final section of this post focuses on why it’s important to maintain your forecast. In life we experience many different financial changes. Maybe you lose your job. Maybe you get an unexpected raise. Maybe you have an unexpected expense such as a hospital bill. Change and uncertainty are a guaranteed part of life. As different parts of your life change so will your forecast. Maintaining your forecast will help keep you on track to reach your goals. For example, if you are some who is often tempted by a spontaneous purchase having a forecast will give you the excuse not to buy that thing that you think you need. Another example is when people receive a windfall of money, say a bonus from work, or an inheritance, they often see it as an excuse to go on a spending binge, but if you have a forecast in place and you’re regularly analyzing your investments you’ll be more inclined to put that money towards your financial goals.

All in all a forecast is comprised of many budgets that are added together to predict or forecast a future value that also takes into consideration your total wealth. Forecasting is a very important tool that can help you plan for your financial future and can help you stay on track to reach your financial goals.