FULL DISCLOSURE: This is my second most favorite topic to talk about.
Congratulations!!! You have made it through “Get Real”! Working through the exercises in the Get Real section can be a little scary. Remember where you are today is just a starting point. Now comes the fun stuff … DREAM BIG !! Where do we want to be? The sky is the limit!!!
I do want to take a moment and give a shout out to all my non-goal oriented friends out there. First of all, stop groaning and rolling your eyes! Yeah I can see you from here. 🙂 Believe me when I say a properly set goal can be life changing. No exaggeration! Goals are personal achievements we work towards. All I ask is that you give it a chance.
Step 1: The Dream Big List.
In Mark Twains, The Adventures of Tom Sawyer, I love the scene where Tom and his friends come back to town to witness their own funeral. They listened to what their friends and family had to say about them (until of course they jump out and surprise everyone).
What would you want people to say about you at your funeral? Are you living a life to reflect that? Would you have regrets? What would you want your lifetime achievements to be?
Dream Big! Make a list. Nothing is off the table AND your lifetime goals shouldn't only be financial. Remember, a whole pie is made up of many slices (big and small). The Dream Big list should be specific as well as growing and evolving, so revisit it often. Add to and mark things off the list as you accomplish them.
Financial goals are unique in that they touch on all the other goals.
Financial goals are unique in that they touch on all the other goals in a supportive way. Want to own a home? That takes money and time. Want better health? A financial house in order will give you peace of mind and lower your blood pressure. Which brings me to Step 3, Setting up your financial kitchen with the basics.
You become financially free when your passive income exceeds your expenses. – T. Harv Eker
Step 2: Set up the “financial” pantry with the basics.
The secret behind any great chef is an organized pantry stocked with lots of yummy goodness and great tools. In order to do that, we need to take inventory of what is currently in the pantry. At this point, you should have the following in place:
1. Credit Report & Score (From Get Real Section)
2. Budgeting tool for daily record keeping (From Get Real Section) or skip this and leverage Plan B the Lazy Persons way to budgeting.
3. Lifetime Dreams list – must be written down and as specific as possible. (What our end kitchen will look like.)
4. Identified your top 3-5 dreams to focus on and track progress. As each accomplishment is met, so we add other goals… the best time to do this? Now! Why wait for Jan 1?
5. Clear out the cluttered “financial” pantry of stale debt and stock a rock solid emergency fund.
Got debt? Get rid of it. Especially BAD Debt. Bad debt is like expired food taking up much needed space in an overflowing pantry. Things like a car loan (throwing good money away on something that is depreciating every time your drive it), personal loans (the kiss of death), or credit card debt (silently killing your dreams).
Got emergency fund? Now that we have cleared out the debt, lets start building a proper emergency fund. A properly stocked emergency fund (3-6 months of expenses – not income) will keep you from derailing your goals. This is a very important part of planning your FIRE (Financial Independence Early Retirement). Do not underestimate the importance of a properly stocked emergency fund.
An emergency fund can keep your financial focus even when out of the blue expenses come up … and without losing a wink of sleep.
These small bites don't seem like they will get you to eating a whole pie, but with each bite is one less to eat in the future. It is THE strategy that will get you to eating whole pies in no time.
This next part is building the AWARDING WINING Pie.
As a rule of thumb, every $250,000 in cash investments can generate about $1,000 a month in passive income. Stay with me. Don't freak out. It does sound like a lot of money because it is a lot of money if you had to come up with it say, tomorrow. My point is, you don't. We have 15 years to build our FIRE.
So, take a deep breath and go through our recipe for success:
Step 3 Pay Yourself First.
Pay Yourself First with Pretax Investments (The Pie Crust).
Pretax money comes out of your paycheck before you get taxed. This pretax money has more buying power. It also lowers your overall tax bill for that year. Win-Win. However, when you withdraw the money (age 59 1/2 or older) it will be taxed. Here are a couple of ways to do that:
a. Max out your 401k (or at the very least start out with the company match – aka free money). If you are starting out with the company match, every 12 months add 1% to that until you max out your 401k. No 401k? Open an IRA.
b. Max out an HSA account (or at the very least take advantage of any company match). Triple threat: Pre-tax, no tax withdrawal, no tax on interest.
Pay Yourself First with After-tax investments (The Pie Filling).
This money doesn't have the buying power that pretax money has but it is equally important. Because the money has already been taxed, when you withdraw it, it is not subject to tax. So … to keep your overall tax bill in check you could leverage money in these accounts to offset your tax bill year after year. Opportunities include:
After maxing out your pretax investments, leverage your company direct deposit from each paycheck. Just like taxes, we will divide your remaining paycheck into several accounts but still depositing money into your checking account to cover monthly expenses. Its important to leverage direct deposit before you get paid. Unlike taxes, this money will be put to work for YOU leveraging compound interest (key ingredient). Here are some options.
∗ Roth IRA: Do you have a Roth? Are you maxing out your contributions here to provide leverage in retirement? Its a post-tax investment but the compound interest accrued is tax free. These are great for those who are young and in a lower tax bracket, to get the biggest bang for buck.
* Mutual Funds: Do you invest regularly in mutual funds? Vanguard Total Stock Market Fund, VTSMX, is the largest and inexpensive to invest in.
* Annuities: This is an option if you have already maxed out you 401k and Roth. GoodFinancialSense has a great article that talks more about who this would work for and when.
Pay Yourself First with a Side Business (Pie a la Mode):
In todays day and age there are literally TONS of ways to generate passive income. Below are just a few ideas.
* Other people's businesses or education. Know someone who is crowd funding to start the next Google or Facebook? Or maybe you know a kid who could be the doctor to find a cure for cancer.
∗ Social Security: In 15 years, will you have reached the age to social security? That could be your first stream of passive income. (not that I am saying to rely on it being available when you get to that point). We are just painting a picture.
* Blogging: If you enjoy writing and have a topic in mind you enjoy sharing, this may be a good side business for you. Passive income can be generated through Advertisement, Brand Ambassador, etc…
* Real Estate: This can be a great way to add passive income while growing your overall net worth. The property value increasing adds to your overall bottom line as well as collecting rent that can add to your monthly income.
* REITs (Real Estate Investment Trust): Maybe buying property isn't your thing but you still want to jump on the real estate bandwagon. REIT's is one way you can do that.
There are literally hundreds of side hustles that can generate some additional cash or at least too many to list here.
So there you have it. Goals of a lifetime in 3 steps. Life is so much more than one slice of pie. I encourage you to take a step back and look at your life as a whole, the good and the bad. We are but the sum of many slices.
What are some of your lifetime goals? I would love to hear from you.