Financial Life Notes #7
From Martin
Wealth Management, LLC
For your
Financial Independence and Peace of Mind
Martin Wealth Management, LLC
5 October 2007
Living a
Successful Financial Life
Rule #2 –
Know Where You Are Going
I am fortunate to have done a lot of traveling and to have seen a lot of things – the Eiffel Tower, the Empire State Building, the Golden Gate Bridge, and extraordinary works of art in the Louvre. Every one of these things was created twice - first in the mind, then in reality. A building is first created in the mind of the architect before it rises into the air. A car is modeled in the mind of its master designer before it cruises down the highway. Your vacation is created in your mind before you actually get to enjoy it.
Your financial successes will be created in your mind before they become reality. Having a clear vision of where you are going is key to a successful financial plan.
Even the great philosopher Yogi Berra knew it. He pointed this out when he said, "If you don't know where you are going, you might end up someplace else."
Sure – there are those people who stumble into something good, but they are few and far between. As a general rule, if you know where you are headed, you are much more likely to end up there.
Alice & The Cheshire Cat
In his well-know classic “Alice in Wonderland”: Lewis Carroll reinforced the idea of having a clear vision with his story of Alice and the Cheshire cat :
Lewis Carroll
Alice needed a goal and your financial plan needs to have clear goals:
- Where are you headed?
- What do you want?
- When do you want it?
- What will it take to get there?
The more crystal clear your goals are, the more likely you are to achieve them. A clear vision of what you want sets into motion all sorts of invisible forces that act to help you move in the right direction to achieve what you want and to have your financial plan be meaningful and successful.
Although most people will agree that a clear vision is important, few people actually take the time to develop their vision. In fact, it has been said that people spend more time planning their vacation then they do planning the rest of their lives.
Think back to last successful vacation you took. Chances are that it all started with a clear picture of where you wanted to go - a vision of where you were going to end up and what is was going to be like – strolling through an art museum in Paris, relaxing on the beach in Hawaii, fishing on a remote lake in Canada. You don’t stumble into excellent vacations.
Imagine going into a travel agent and saying “Sign me up for a vacation!”. To ensure that you have a good experience, they are going to want a little more information: where do you want to go?, when do you want to go?, how much money do you want to spend?, what do you want to do when you are?
Your financial plan needs the same level of detail.
A Few Practical Hints
· Create a list of 30 goals that you want to accomplish sometime in your life
· Make it a written list
· Make your goals vivid, alive and brilliant. The more vivid, the better.
· Keep your goals visible. Carry that list with you. I carry my list of 30 goals in my wallet and review it every morning.
· Share you goals with those important to you.
· Make a commitment to achieve those goals. Change does not happen easily. There will be competing priorities and having a clear vision makes it easier to resolve those competing options.
· Consider the following areas when you are making your list of 30 goals:
o Physical
o Psychological / Educational
o Social
o Vocational / Career
o Fiscal
o Family
o Spiritual / Ethical
I encourage you to spend time planning your life, getting clear on where you want to go and developing a clear vision of how it will be when you get there.
“The starting point of great success and achievement has always been the same. It is for you to dream big dreams. There is nothing more important, and nothing that works faster than for you to cast off your own limitations than for you to begin dreaming and fantasizing about the wonderful things that you can become, have, and do.” Brian Tracy
Happy Dreams –
Steve
Classes for Youth and Young Adults Now Available
Class 1: Creating a Great Financial Life - For Twenty-Somethings (21-25 year olds)
This workshop is designed to help adults in their early- to mid-twenties master the fundamentals of fiscal fitness and to establish habits that will lead them to a successful financial life. It addresses most of the issues that adults just starting their careers face and includes a session on the fundamentals of good investing. The workshop also includes one individual appointment to help address issues specific to each participant. The class consists of two 90-minute sessions and one 45-minute private session.
Class 2: Creating a Great Financial Life - for Early Starters (15-20 year olds)
This workshop is designed to help students in their late high school or early college years understand the fundamentals of fiscal fitness and to establish habits that will lead them to a successful financial life. It will get them thinking about taking responsibility for their lives – including their financial lives. The workshop also includes one individual appointment to help address issues specific to each participant. The class consists of two 60-minute sessions and one 45-minute private session.
Class 3: Financial-Life Planning Fundamentals
This workshop explains the nine fundamentals of fiscal fitness and helps participants establish habits that will allow them to lead successful financial lives. It covers creating a vision for your life, basic investing strategies, debt management, the law of risk and return and buying or refinancing a house. The workshop uses exercises and participative lecture to maximize the benefit of the class. The class consists of two 120-minute sessions.
Find out more – details, schedules, how to register, etc.
Ask Steve
Q: The article on Rule 1 – Save 10% of what you earn – was very interesting. Could you go into a little more detail regarding how you define "what you earn" and "what you spend"?
A: Sure – it can be a little confusing, The principle of saving 10% is the main thing. We don’t want it to get lost in too many details.
Most advisors will agree with the principle, but there will be differing opinions when it comes to details.
I’ll provide you the detail that I like to use. I cannot possibly address every potential question that might arise.
We need to define three terms:
“What you earn”
“Save”
“What you spend”
First – let’s define “What you earn”.
By “What you earn”, I mean the total of all your gross income.
Let’s assume a couple with $50K gross salaries + $6K bonus + $4K gifts
I would say that their gross income, and “what they EARN”, is $60K per year
I do not include matching funds received in the gross income – although a person could do that.
Next – let’s define “Save”:
In this case the couple should “Save” 10%, or $6k per year.
Younger people should be putting this 10% into 3 areas:
- building emergency funds
- saving for their first house
- starting a financial independence fund (401k, IRA, etc.)
The exact amounts that should go into each of these areas can vary depending on circumstances,
But 33% into each would be a good starting point. Thus, this year, the example couple would put:
- $2k into an emergency fund
- $2k into a fund for a down payment on their first home
- $2k into their financial independence account (401k)
After three years, they will have $6K (plus growth, matching, etc) in each of these accounts. Assuming that $6K is enough for an emergency fund, then they might move to a 50% split Into the 2 remaining accounts ($3k into home buying fund & $3k toward financial independence).
Two years later, they would have $12k + growth in the home fund and $12k + growth + matching in the financial independence fund.
Assuming they think this is enough for a down payment on their first home, they would then start putting the entire $6k each year toward financial independence. This would be the plan for the rest of their lives.
Replenishing “Emergency funds” or saving for a 2nd home would come out of “Spending” money.
A note on MATCHING: I do not include matching funds in income. I assume that 100% of matching funds go toward saving. I do not count matching funds toward the 10% you need to save.
A note on STOCK PURCHASE PLANS: if you will be saving the money you accumulate in your stock purchase plan toward your financial independence, it counts toward the 10% you are saving. If you are using it to get the discount or match, and then plan on selling your stock to spend on living or big items (boats, cars, vacations, etc., it counts in the 90% that you “Spend”.
Finally, let’s define “What you Spend”:
What you spend is everything else, including:
- taxes
- insurance – health, property, life, car, home, etc.
- house payment / rent
- utilities
- vacations
- stuff – furniture, stereos, magazines, clothes, grills, etc.
- cars and car expenses
- utilities
- entertainment
- replenishing emergency funds that you use for emergencies
- saving for “big purchases” such as cars, the next house,
- house maintenance, etc.
- pay off bad debt (credit cards) – paying off monthly is ideal
- Charitable donations
- Etc.
Therefore, our sample couple would:
- earn $60K annually
- “save” $6K annually
- And have $54K annually to “Spend” or live on
They need to manage their annual spending within that $54k. Since taxes are included in the $54k, it is important to do everything you can to legally minimize taxes. Every dollar saved flows directly to what you can spend on “you”.
A word on bad debt:
Everyone should be in a position where they have no consumer debt (credit card, car loans, etc.). If you are there now, stay there. If you have large consumer debt, pay it off as quickly as you can out of the 90% you have to spend and then keep it at zero.
Quote of the Week
“Life is full of uncertainties. Future investment earnings and interest and inflation rates are not known to anybody. However, I can guarantee you one thing.. those who put an investment program in place will have a lot more money when they come to retire than those who never get around to it.” Noel Whittaker
Does your group need a speaker?
If your group needs a speaker, please contact Steve at Steve.martin@mwm3.com. Topics include – “Your Money and Your Life”, “Passing on Your Values”, “The Five Fundamentals of a Successful Financial Life”, “Raising Money-Wise Kids”, and “Grandparenting for Money-Wise Grandchildren”.
I hope you enjoy this issue and find some of these tools
useful. If you have any questions or comments, please send me an email at
steve.martin@mwm3.com.
Steve
Martin Wealth Management Home Page
Arrange for Steve to speak to your group
Arrange for a free consultation
-
Martin Wealth Management was founded on the belief that people should use their money to create a fulfilling life – rather than using their life just to create money. Financial Life Planning from Martin Wealth Management begins with this assumption and focuses on your values and dreams. We utilize concepts and processes developed by George Kinder – known as the “Father of Financial Life Planning.”
Contact us: 970-443-1873 email: steve.martin@mwm3.com www.mwm3.com
Please call for
a free initial consultation or to arrange for a speaking engagement for your
organization.
Steve Martin – MBA, Fee Only Advisor, DFA Funds Approved Advisor, Member of the
Alliance of Cambridge Advisor and the FPA.