Six Steps to Permanent Personal and Professional Financial Independence

By James Cunningham

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• Language: English
• Publisher: Xlibris US
• Release date: May 9, 2011
• ISBN: 9781456895655

Book preview

CHAPTER 1

What Is True Financial

Independence for You?

First, we need a definition on which we can agree as a starting point for the discovery of your personal definition of financial independence. Let’s start with a textbook definition of financial independence that is specific enough to be meaningful but is also broad enough to be applicable to everyone’s own situation:

Financial independence means having a pool of money large enough to pay for all your wants, needs and desires without liquidating the pool of money.

Pay for all your wants, needs and desires… Now that’s a powerful phrase, one that immediately starts you daydreaming.

Sweet Dreams and Hard Numbers

Let’s just go with the daydreaming for a moment. What would your life be like if you were financially independent? Would you continue in your practice, your business, your job, or are there other things in which you’re more interested? What would you do? What would you have? How would you feel?

Take a few minutes to formalize this vision of your personal financial independence. Right now, while the vision is vivid, write down some of the specifics of what true financial independence would mean for your life. Ask your spouse or significant other to participate with you in documenting what the future could be like. Not only do you need that person’s input, it is critical to your ultimate success to ensure that the key person(or people)with whom you share a life also shares the same vision of that life with financial independence. Make sure you’re both on the same page as you detail your vision of financial independence. Because this united front is a requirement for any family financial plan to succeed, I’m going to assume it is established for the purposes of discussion in the balance of the book.

(Turn to page 1 in your workbook and fill out the first section of the What is Financial Independence ? Worksheet. If you do not have the worksheet, or if it is more convenient, please log on to our website at www.cunninghamfg.com/worksheets where you will find step-by-step instructions for completing each worksheet for this book. The workbook is free.)

That feels pretty good, doesn’t it? Writing down the details of your personal financial independence paints a beautiful picture—enjoyment, security, no financial stresses—the ability to do what you want to do, when you want to do it. Detailing these sweet dreams and visions of financial independence can be a powerful tool to motivate you to make it happen.

Unfortunately, far too many people just leave it right here. They have a dream of what they would like their life to be, they may even think about the details of that dream daily, but they never get around to initiating a plan or taking any actual steps toward turning their dreams into real financial independence. People who get stuck at this stage would be just as well off playing the lottery. Without a plan and the determination to implement that plan, it takes an extraordinary stroke of luck to be even financially comfortable these days, let alone independent. Financial independence is not for wimps.

The Hard Numbers

These are hard numbers in two senses. First, they are fairly specific, concrete

numbers to define the dimensions of your personal vision of financial independence.

Secondly, they are hard, in the sense of difficult, numbers because they are accurate reflections of the harsh realities of adequately planning for retirement and financial independence. (Write your answer on line (a) of the worksheet.)

So let’s get the financial whiplash out of the way upfront. Once you understand the realities of your personal scenario for financial independence, once we establish real-world expectations and ground rules, I can show you the elements of a realistic plan to achieve what may seem like impossible goals. As daunting as the results of this exercise might seem, I am confident that I can help you create a plan to achieve your goals for financial independence and retirement.

The first step in developing any plan is figuring out what the goals are. Without goals, you don’t need a plan. When you don’t know where you’re going, any map will get you there. Without realistic goals, the most finely crafted plan will fail. You have to know where you are going before you can intelligently plan, step-by-step, how to get there.

So where do you need to go to achieve your personal financial independence? What is the financial goal you need to achieve, and what do you have to do to achieve it? What are the hard numbers that define your vision of financial independence? What would it really take for you to be financially independent as defined by your own vision of the future?

The first goal to establish in the development of your personal plan for financial independence is the amount of income you would require, on a monthly basis, to live your life paying for all your wants, needs, and desires—without liquidating your pool of funds. What is the amount you `would require to not only comfortably pay all your bills, but everything else as well—homes, vehicles, education, vacations—all your wants, needs, and desires? Think about the amount that would do it for you. Talk it over and come up with the net amount of money you would need each month, after taxes, to realistically fund your vision of financial independence. (Write your answer on line (a) on the worksheet.)

If you’re having trouble estimating an amount that seems realistic to you, I would suggest that you plug in $20,000. If that seems too high, I can tell you that here in America in the early twenty-first century, that’s a reasonable amount for an educated practitioner with the usual range of professional and family responsibilities. It might even be a conservative figure if you live (or plan to live) in or near one of the larger metropolitan areas. Your actual number might be more or less than that. If you can estimate a number with which you feel comfortable, write it in. If not, use $20,000 for this first pass through our calculation.

You will likely find that you return to these calculations several times to fine-tune them as you discover how various factors influence your personal financial independence. This first time through the calculation, the key is to get numbers down that reasonably reflect your situation in order to get a first look at your personal scenario. So where you may not be able to estimate accurately, I’ll make suggestions for numbers to use to produce your first scenario.

We’re ready for line (b) of our hard numbers calculation. It’s easy: just convert your monthly number to an annual amount by multiplying by 12.

Next, we need to estimate how big a pool of money would be required to meet the needs of your personal financial independence. The key variable in that calculation is the rate of return you will be able to achieve on your investments in retirement. If you have investments now and follow them closely, you may already know a good ballpark figure for the return you are currently achieving. This number can vary widely based on the mix of your investments—stocks, savings, real estate, etc.

If you don’t know and can’t accurately estimate the return on your retirement funds, I can help you plug in a figure for the purposes of this example. Over the past ten years, thousands of clients who have followed our plans have been able to generate returns in the neighborhood of 7%, 8%, even 9%. Of course, past results can’t predict future performance, but even over the past four or five years, when the market was down, I have been able to generate returns for my clients of 7.5% to 8%. So again, for this first calculation of the dimensions of your financial independence, unless you have a figure you feel is more accurate for your situation, enter 8% on line (c) of the worksheet.

We’re in the final stretch now. All we need to do is divide your annual