COACHING TIP: How to Calculate Your 6 Levels of Financial Well Being

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Transcript:

This is a really simplistic definition of how you build wealth, but this is definitely one of those things that common sense is not common practice. It’s basically spend less than you earn.

Running Your Life Like a Business

Like a business, you want to have profit. So spend less than you earn. And systematically put money away. So just decide that you’re going to put money away. And get it off the table. It’s not accessible. Sweep it off the table.

Spend less than you earn. Invest the difference. Not rocket science.

For some people it’s a percentage. Just decide on a percentage. And in real estate, if you don’t have a steady stream business, there will be months when you lose money. So maybe that month you’re not able to put money away. And we’ll go through the levels to make sure you don’t put money too far away, so you invest it in something that might go down and you have to pull it out.

Defining the 6 Levels

So these are the six levels. And we’re going to go through an exercise here where you’re going to write out your six levels, and I’m going to show you the calculations to figure out what it means to get to whatever level, however you define each of these levels.

1) Financial protection Do I have 6-12 months of non-risky invested money that I can get to? So we’ll go through the calculations. If you had to cut everything out of your life except basic living expenses, financial securities, and disability insurance, you need 6-12 months of that. 

2) Financial security – When this talks about critical mass, it’s talking about the lump sum. So if you have $1M, and you invest it in something, and you earn a really conservative rate of return of 5% - and I’m going to suggest that for you guys – you can earn $50K a year. 

So you’ve got $1M, that’s a critical mass, that’s the number we’re going to be talking about. And you invest it at 5%. You can use different percentage rates. So even some tax-free bonds in certain markets you can get at 5%. So that’s $4K a month critical mass off of $1M.
So when we’re talking about ultimate or absolute financial freedom, it’s what critical mass or lump of money do you need to earn income without you having to lift a finger?

So this is basic living needs - mortgage, food, utilities, transportation, insurance. 

4) Financial vitality – In the security world, this is like, “Man, things are really bad. We can’t even do entertainment.” In the financial vitality, it’s the critical mass to not have to work and to be able to live your life at a basic needs level plus basic entertainment and some luxury items.

So you can buy one article of clothing a month. You’re probably not going daily shopping at that point.

5) Financial independence – enough cash to live exactly the same quality of life you have today. So what lump of money or critical mass would you need to meet all of your monthly expenses. For me I think it’s about $10K-$12 a month is what we spend to live a pretty kick ass life.

So what does that look like? $2M at 5% would give $100K, so a little more than that, but returns can vary. So you’re independent from work at that point.

6) Financial freedom – I kept this simple. I just added $10K I think on top of that number before it. And I’ll show you this in a second and it will make sense.

7) Absolute financial freedom – Sufficient income to do virtually whatever you want. For me this number was $40K a month. I think at $40K a month after-tax month, I’m probably feeling pretty secure to give away, to travel, to do whatever the heck I wanted.