Goal Setting Part 4 – Financial Independence

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Today we have the fourth part of our series on setting financial goals, based on Tony Robbins “Wealth Mastery”, and this is a pretty major milestone: financial independence.

I have heard many definitions of financial independence, but I think this is the clearest: You have achieved financial independence when you have accumulated a critical mass of capital that, invested at an 8% rate of return, provides you with enough cash to live the exact same quality of life you have today, without ever having to work again for the rest of your life.

What we are talking about here is becoming independent from work. It doesn’t necessarily mean retiring, or stopping work. In fact, most people who achieve financial independence continue to work in some form or other, often on something that is meaningful to them.

Wealth mastery actually has two more stages after financial independence:

Financial freedom involves accumulating enough capital to provide you with sufficient income to live the lifestyle you desire, without having to work again. And absolute financial freedom is when you feel certain that you can do virtually anything you want, whenever you want, wherever you want, with whomever you want, as much as you want.

What you are probably realising as you read this is that the goal here is income without having to work. It’s not about having enough money to just buy everything you want. A new car purchase can be broken down into monthly payments, as can a new home. Kids school fees are paid on a quarterly / annual basis. It’s much easier to break your ideal lifestyle down into monthly payments, rather than a list of what you want and what it costs. The income to cover your lifestyle of choice could come from investments, property, royalties, a pension, or any combination of these things.

The key is to work out what is the monthly income you would require, and from there calculate the critical mass amount you need to accumulate to cover this. Once you get there, you need to know how to generate that 8% return without taking too much risk.

What is the total amount of capital you would need to be independent from work?

Goal Setting Part 3 – Financial Vitality

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Moving on to the third installment on setting financial goals, based on Tony Robbins “Wealth Mastery”, today we will look at Financial Vitality.

You have achieved financial vitality when you have accumulated a mass of capital that, invested at an 8% rate of return, provides you with enough cash to meet the six goals of financial security, plus the following three additional financial goals, without having to work again unless you want to.

  1. The ability to provide for your children’s education.
  2. Providing for basic entertainment needs.
  3. The purchase of new clothing, or one or two reasonable luxury items.

Obviously the big one here is children’s education, and it will require some research in order to understand the numbers on this goal. Here’s a little date that may help:

For school, Santa Fe Relocation Services website has a great overview of the cost of international school in Japan here. As a minimum we are looking at JPY 2,000,000 per year.

Higher Education costs will of course vary from country to country. There are some useful numbers in this article. Education costs are rising every year so you will need to keep updating your research but currently, including tuition, room and board, you could be spending somewhere between $20,000 and $40,000 per year.

What is the total amount of capital you would need to accumulate to achieve financial vitality?

Goal Setting Part 2 – Financial Security

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Continuing our series on setting financial goals, based on  Tony Robbins “Wealth Mastery”, today we will look at the second milestone, known as Financial Security. People have varying definitions of what it means to be financially secure, which is fine. However, if you are not sure how to define financial security, perhaps the following will help:

Financial security is not just a matter of job security or income. In order to be truly financially secure you need to accumulate a critical mass of capital that, invested at an 8% rate of return, provides you with enough cash to meet the following needs forever, without having to work again unless you choose to:

  1. Monthly mortgage payment on your home until it’s paid off (or otherwise your monthly rent)
  2. You and your family’s food needs each month
  3. All utilities
  4. Transportation needs
  5. Insurance
  6. Taxes

We are using an 8% return here based on a diversified, growth-oriented asset allocation. Feel free to change the annual return to fit your expectations.

Go ahead and calculate how much you need for each of the six categories above. If you don’t know the amount for each of these monthly expenses, then that is the first job. You can’t have a target for financial security without understanding these basic numbers.

Here’s a simple example:

  1. Mortgage: $1,200
  2. Food: $330
  3. Utilities: $360
  4. Transportation: $280
  5. Insurance: $320
  6. Taxes: $460

In this case the monthly total is $2,950, so annual is $35,400. That would require capital of $442,500 @ 8% return.

Now calculate how much capital you would need to be financially secure.