We at Clear Future want to help you reach your goals. First, however, you need to help yourself figure out your own goals. We can coach and guide, but only you know what your needs and wants will be.
But, before you start, you need to make the following a regimen. Just like an exercise plan or diet - each day you must take another step. If you succeed - then at the end you get a reward (what will it be?). So, don't go off spending money on advisors and so-called experts yet. Just get out a piece of paper or open your spread sheet software and do the following to create your goals:
Set aside some time today - maybe 30 minutes - and write out why you are putting together a financial plan. You need to clearly understand why you are going on this journey. Also, ... it needs to be emotional. Please don't say "it would be nice to be more organized" or "I'd like to save a bit more". No. No. No. You need to WANT to do this. You have to have POWERFUL reasons. You will not WIN if you don't TRY. Make a DECISION about what you want to do here, and why it matters to you. Write it down and then come back tomorrow.
All good plans need data. Today you have to collect all the financial accounts, assets, numbers and values. List all your asset categories and the value of each. You don't need to count each spoon. We only care about the following: Bank Accounts/Cash, Investment Accounts (separate retirement and non-retirement), Other Investment Accounts (like school saving accounts, health accounts, etc.), real estate investments (include your home too if you own it), and any other assets you own as investments. Do not list the value of consumption goods - like the spoons, or other such stuff (no cars, boats, furniture, etc.). Consumption goods will be ignored. Every time you buy one you need to understand that your financial assets take a hit and the investment value is zero. Break up the list into categories you find useful for tracking. You will be repeating this exercise every month and comparing your progress. Putting it all in a spread sheet is useful too. Try to fit it on one page: no need to list every stock or every little account, just buckets.
Then list your debts. Same process as above, but you will list all your debt, even the consumption debts too, like car loan, credit cards, etc. Not fair? Toughen up. If you borrow money to buy a TV which is worth a fraction once you buy it and makes no revenue for you, then you must take the hit to your net worth, and you will not hide this by adding it to your assets. The only exception would be assets that you buy to invest in a business - you can list the book value of the business, which would include the equipment - but it is depreciated over time.
Then do the math. You have just put together your financial balance sheet. What is your true financial net worth? Now put away the balance sheet, and come back tomorrow.
Go back and look at your balance sheet. Make sure you understand all the components. Now we need to project out your needs and your wants (those are different) over the next 5 years, 10 years and to retirement. Needs first: do you have to save for college tuition for your kids, do you need to plan for your parents' care, is retirement on your mind, do you have a need to replace your car, roof, appliances, etc.? Make a list of all the upcoming major money needs. Then make a list of Wants: business startup? retire in style? early retirement? dream boat? etc. How much money do you need to have and by what date to fulfill your needs and your wants. Keep them at 2 levels, separate targets, you must hit the needs level and you will try for the wants too. This is a good use of a spreadsheet. Especially the longer term items. Now before we finish, compare your balance sheet to your needs and wants. Are you ahead? on track? or, does it seem impossible to catch up?
Look at all you have put together up to now and decide what you are targeting for your wealth goals. What wealth do you want to attain - the dollar amount? What are the milestones over the next year, next few years and all the way to retirement. Will these milestones get you the Needs and Wants? You may find it helpful to have two sets of goals, or more. the basic, bare minimum, and the more aggressive goals. Write it out.
Then get out a calculator or spread sheet and validate the math. How much is needed in your investment categories to hit your goals? Please be realistic here. If you make $100,000 per year, it is not reasonable to think you will save enough to hit a $200,000 savings goal within 3 years. But also be prudent. If you make $100,000 per year, you cannot set a goal of saving only $200,000 over the next 25 years and rely on this as your only funds for retirement.
The PLAN ABC will be your customized set of plans to hit your specified goals. This is only the first draft - it will change after the budget process. Look at your needs again. Then take out another sheet of paper or new spreadsheet.
Plan A. Assess which needs are the truly absolute, cannot live without, if you fail you will starve, kinds of needs. We think you need to think a little bit selfishly here. Retirement is usually one of these important needs. But you might have other indispensable needs, like the care of a disabled family member when you get older or you pass on. When you are 60 or 70 and cannot work, will you be able to live in reasonable comfort, will your family be able to thrive? Your kids' tuition is a fine goal, but you cannot forsake your needs in old-age and other crucial needs. If you cannot have both, do you pay your kids tuition to attend private, out of state colleges, or do you first get your retirement nest egg in order, and put your kids in the state school?
Plan A is a part of the My Home - My Castle philosophy. Your Plan A for wealth building will be the long term, low-risk, savings plan for the most important needs you will face in your life. Some advisors use the "pay yourself first" label. We sometimes like to call it "tax yourself first" or be your own "insurance company". The Plan A can be viewed as a tax, or a type of insurance, paid each paycheck, to yourself, for ensuring your long-term vital needs. It is best set up as an automatic payment, like a 401k contribution, in a set amount, sufficient to hit your top needs milestones. What amount will be needed? For retirement, most will need to save about 15% of their pay each year, over at least 25 years. Your needs will be specific to your situation. But, regardless of your savings, once you pay it to yourself, never touch it, or do anything more than invest it in primarily broad market mutual funds, and occasionally rebalance it. It will grow to be there for you when you need it most. Your assumption and goal here will be 7-10% average annual growth.
Then, on to Plan B. Plan B will be your savings and investment goals for the less vital needs and wants. Maybe your kids' tuition or early retirement comes in here. You might want to invest in riskier assets here. Don't be foolish, but you can certainly stretch your range here a bit.
Then, Plan C. Plan C is your riskier strategy. Do you want to start a business? invest in alternative assets to make more money faster? lend money to your kids to start their careers? crypto? art? flip houses or Ford Mustangs? Or maybe you want to buy investment properties in a foreign country? These may all be worthy goals. Your Plan C is how you get to and implement these goals. If you are successful, Plan C may one day become your portfolio of real estate investments, venture capital and private equity shares, side businesses, and rare artwork.
Plan ABC may grow more elements, like a Plan D, etc. Savings for a boat? Initially, though, let's not get carried way. You can add more later.
Most importantly, you cannot and will not sacrifice Plan A for Plan B or anything. Plan A is sacrosanct. It is not optional. If you cannot achieve it each month, each year, for the entire life of the plan, you will need to revisit everything you do and fix it.
Review all you have done, revisit, revise, and then rest. Give yourself a reward. Tomorrow you will start the budget process.
Your first steps should include organizing your expenses and then your investment allocations. Here is a simple pie chart showing allocation of $100k.
You must allocate your savings/investments toward your wealth building goals. Here we have a PLAN ABC allocation.
Your key to financial freedom is to make at least 2, preferably 3, and maybe more financial Plans. We generally recommend a 3 prong, Plan ABC. Plan A is the sure thing. It is your plan if all else fails. It is easy, even boring, will take a long time and will be fool proof if you stick with it. Plan B is harder, but will get you to your goals faster. Plan C is both harder and riskier. It will cost you many hours, sleepless nights and stress, for a while, but if you can make it work, then you will be financially independent soon. And if it fails, you still have Plan A and B. And, you can start Plan D and so on. Wealth management is the first step to financial freedom. Below is further discussion on Plan A B C.
Plan A is the sure thing.
Do you buy insurance? Of course if you have a car, house or business, you buy insurance. Sometimes you also buy insurance when you rent a car, fly or even buy a more expensive product. So you do buy insurance, methodically paying each month or year, but do you believe with certainty that you will need it? No? Now think about your financial freedom; do you believe with certainty that one day you will need to be financially independent? At least by retirement you must be. Correct? Financial Planning for freedom requires a Plan A that is somewhat analogous to an insurance policy (some people even use whole life insurance as a part of their Plan A - but more on that later). You pay a little bit each week or month to prepare for the certainty of a future need.
Part of the problem is cultural. CEIC Data report that the Gross Savings Rate in China is 45.5% in 2022. US Gross Savings Rate is only 20.7%, and that 2022 figure was a tie with the all-time high in 1965. In 2009, the US measured only 13.3%. Covid and Money printing played a role in the record high for the US data recently; it will likely drop. Now, this is not an apples to apples comparison, but you can deduce that the Chinese save a lot more than the Americans. Plus, if you are saving like a typical American in the middle or lower classes, your savings rate is much worse that this. MarketWatch recently reported that 56% of Americans would not be able to cover an unexpected $1,000 expense with their existing savings. Even scarier is that 1/2 of Americans age 55-64 only have $6,400 or less in total savings. The median 401k for this age group is only $89,700. These are people on the verge of typical retirement age and if they put all their savings and 401k in a money market account tomorrow, they would only earn about $160 per month. Not enough to live on, even in China.
You need to do better that this. Target 10-20% of your income for your Plan A - retirement savings. Park this in a portfolio of mutual funds. You can put it all in 2-5 funds. Don't need to be complicated or to time the market. Take a look at the broad market funds like those by Vanguard. If you put away $10,000 per year, and can manage the historic average S&P 500 return of 10%, you will have about $175,000 in 10 years, $630,000 in 20 years. Notice the immense difference between a 10 year horizon and a 20 year horizon. In fact, even if you entirely stopped saving at year 20, your nest egg will double every 7 years at a 10% growth rate. That means in another 20 years, the $630,000 nest egg would be worth over $4 million. Enough to retire on, in any country. That is a pretty good passive income/growth strategy.
The real goal here is a simple, decision-proof, repeating habit of building wealth for your financial freedom. Longer term, this will involve estate planning, trusts, Class A NNN real estate investments, life insurance, tax planning and other more complex strategies to build a significant and safe nest egg for your permanent financial security. In the short term, start a savings plan, AUTOMATIC deductions or payments to a stock or mutual fund. 10% is the lowest your should save; actually shoot for 20% or better. Before you put any money into a normal account, first maximize your IRA or 401k or other tax-favored savings accounts. Rich people use every tax deferral method they can; so why don't you use the ones that are designed for people like you, who are not rich. Also, a side benefit of retirement accounts is that they are generally protected from lawsuits and creditors. If you go bankrupt you can keep your IRA! Rich people pay a lot for asset protection; here, it is free for you.
Plan A takes patience and time. The discipline of putting alway a piece of every paycheck and the math of compounding will ensure a retirement with enough money to enjoy your life. You cannot touch the funds; and don't think you can outsmart the markets (the SPIVA report in March 2022 stated that 79% of active fund managers underperformed the S&P 500 last year alone. Almost no active fund manager ever beats the broad market for 10, 20, 30 or 40 years). Remember, this nest egg is not for any expenses, not for your Plan B or C (to be discussed) and not for your best friend's new Yoga-Bagel business idea. It is like insurance and you cannot touch it.
For earlier financial freedom - take some risks. Perhaps start a business or side hustle. More ideas to come soon.
You have done Plan A and B, so now you will need to think even more broadly. Acquire business, offshore concepts, more complicated and riskier ideas. More to come soon.
Diets are not just for food. If you need to reallocate and adjust expenses so that you can build more wealth, then start a finance fast. Go though all your recurring bills, and cancel everything you can possible cancel. Stop shopping for a week, a month, maybe more? Make it a challenge.
Quit a habit like restaurants or cafes for a week, a month or more. If you don't use a service or subscription, or have not used it for 60 days, cancel it. Stop shopping for everything and use what you have. You probably have enough clothes and food to survive a while, so use up some of it to save money.
Maybe get really tough and just cancel everything that is cancellable - the service providers will call you and offer discounts, but delay any re-upping until you know you can or cannot live without it. Do this intermittently as well to cleanse your expenses. Take the extra savings and invest it all.
Review all your debt. There is good debt and bad debt. Good debt is reasonable debt you have incurred to fund a business that makes you money or for investments. Bad debt is debt you incurred for expenses or consumption. A house mortgage can fall into either bucket, depending on your decisions. Over-extending, or getting too much debt, is always a bad idea.
No investment which you can easily find on the open market will earn as much as the credit card companies charge you for consumer debt, so pay that off first. Highest rates initially and then the rest. Pay off all bad debt asap, and never get into bad debt again. Pay off all credit cards each month when due, and stop paying fees and interest. in extreme cases, lock up the credit cards or cut them up. Keep a couple for emergencies though.
Our culture (and corporate marketing) encourages everyone to buy big, fancy things and then replace them with even nicer stuff as soon as they get dirty. This is not a sustainable practice for anyone but the trust fund babies. Nobody really needs it. Nor is it good for the World.
If you are serious about building your wealth you need to spend your money on things that will make you money. The big house, expensive car, boat and countless toys do not help. So really be honest with yourself and assess what you need vs. what you want. Don't compete with the neighbors. If you have to move to significantly cut your housing cost, then do it. Moving also has been proven to help people reset habits and eliminate bad patterns. Even habits like smoking can be eliminated when you move.
Do the same with other assets. Get rid of everything you don't need or rarely use. Sell it and cease paying to carry it.
At the beginning of my career I had debt - a negative net-worth. I saved 50% of my after tax paycheck for a few years. The resulting nest egg became my investment fund, which today is enough to permit retirement.
It always starts with savings, and for years the primary driver of your net worth growth will be what you save. That is the reality.
So, do not get fancy. Just automatically invest in broad market mutual funds, don't time the market, and keep growing it. After saving a few years you will then notice that the returns from your nest egg will start adding more to your net worth than your savings. This will be a huge milestone!
When I had serious money to invest, I started looking at bigger and better investments. I still kept the core investment fund which would be my Plan A, and allow me to retire in comfort, but now I could add a Plan B.
When your nest egg starts to generate significant cash or increased value, you will need to pay more attention to your investments. Make a list of stocks you want to allocate funds to, and buy when the price is reasonable. Make sure any funds you have are low cost funds and perform as well or better than the S&P 500 - if not just buy low cost S&P 500 funds like those from Vanguard. You can venture into alternative investments (with some of your money) like rental properties, small side businesses, and things like cryptocurrency and precious metals. But, always keep the Plan A on full speed, and do not put more than 5% of your other investment funds into any one stock.
Your next milestone is earning more from your investments than your job. This will be financial freedom.
As I built wealth, I acquired rental properties and invested in businesses. There is more risk and more reward (potentially).
As you get more experienced and grow your wealth you will want to build and protect your assets for your retirement and for your family after you pass. Starting or buying a business to later hand over to your kids is a great goal. For some, the path is buying rental properties like houses, apartments, retail sites, offices, etc.
The governments in most places encourage business and commercial property ownership and essentially offer financial benefits to these assets that worker-bees do not get. One major benefit is the tax advantages. Depreciation and expense write-offs can minimize taxable income. Appreciation will generally be taxed at a lower "capital gains" tax rate. In the USA, you can also sell real estate and trade up to something better and defer all the profit indefinitely, through a 1031 Exchange structure. The advantages do not stop here.
Writers and consultants in the area of privacy and asset protection talk about 'levels' of privacy. The highest level is to 'disappear' completely - maybe off-grid in the Rockies or fake names like the witness protection program of a government. We will discuss, but these are not realistic or needed for most people, but thinking about levels and goals is useful. At Clear Future, we propose thinking in terms of six levels of privacy, each to be further discussed:
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