Financial Freedom - How to Quantify your Objectives and Beginning the
Journey

When you mention retirement to many people in the real estate business
they will tell you that they "never want to retire." That is a cop out.
If
selling real estate forever is your idea of a good time, then you are
retired right now.and you still need a reserve fund for those slow
periods
in the economic cycle so you can do "whatever you want to do, whenever
you want to do it, with whomever you want to do it with."

One of the reasons so few people achieve Financial Freedom is that they
fail to quantify their objectives. How can you get to where you want to
go if you
don't know where it is? You must have a target. From there you can
develop a planning horizon and a savings and investment strategy. In a
previous
article we discussed different funding objectives. Here, we will
consider the big one, retirement. The methodology is the same for any of
your
specific funding objectives.

Consider that there are 3 primary methods of generating income:

1. You at work - slavery

2. Others working for you - slave owner

3. Your assets at work - Money is the best employee; money never sleeps,
money never gets sick, money never takes a vacation.ultimately, you want
the
bulk of your income derived from this income generating method.

Your goal is less of 1 and 2 above and more of number 3

To arrive at this point in your life (some call this retirement), you
must increase your net worth over your working career, saving what you
can to get
to a point where your financial needs are met by the money you have
accumulated, suitably invested (suitability is a conversation for
another time).

So how much money must you accumulate, and how do you accumulate what
will no doubt be a substantial sum? Let's tackle the amount first.

You begin by deciding how much money per month you require to maintain
the standard of living you are looking forward to in retirement. You can
change
this number anytime you like.it is your retirement, but we need to start
somewhere. Let's assume that number is $6,000 per month (and that
includes
the state and federal income tax required).

$6,000 per month is an annual income of $72,000 per year.

Now let's pick a conservative rate of return.5% (you can change this as
well;if you can get more than 5%, you will need to accumulate less, but
we
must make some assumptions or we remain stuck in inaction).

The formula we use is one that is familiar to most real estate
professionals:
Income = Principal x Rate ( x Time, Time being 1 year)

Our Financial Freedom Target is the amount of money invested (Principal)
at 5% (Rate) resulting in $72,000 per year (Income).

Dividing $72,000 by 5% (.05) results in $1,440,000

To generate $72,000 in income from capital invested at 5%, you need to
accumulate $1,440,000 over your working career. You must accumulate this
money from the money you earn and from the money your invested money
earns.

How is that possible you might ask? If you are like most people, there
is too much month at the end of the money.

Simply stated you must:

1. Increase savings

2. Reduce taxes

3. Reduce luxuries (for the time being)

4. Live more efficiently (financially)

5. Make your invested dollars work harder

Of all the areas we consider in financial planning, effective month to
month cash management can contribute most to your goal of increasing
your net
worth and gaining control over your financial affairs. It doesn't matter
how complex your financial situation is, it all boils down to this: you
earn
money on one hand and spend it on the other. What remains before
investment spending is "gross cash flow." This is the amount you can
manipulate to
increase your net worth.

If you haven't read Clauson's "The Richest Man in Babylon," I highly
recommend it. In it Clauson gives us the "Seven Cures of a Lean Purse."

1. 10% of all I earn is mine to keep. I will learn to live comfortably
on 90% of my income.

2. Put my money to work earning more money, and that money to work in
turn.
(Saul's note: Invest it in assets that:1. Increase in value 2. Earn
income

3. Increase in value and earn income)

4. Guard my money from loss. Know about what I do. (Knowledge)

5. Own my house.

6. Provide in advance for my old age and the needs of my family.

7. Cultivate my own powers. Become wiser and more skilled.

Pay Yourself First

Pay the most important person in your life, you, first. You pay yourself
10% of what you earn before you pay anyone else. You then discipline
yourself to
live on the other 90%. Master this and you are on your way to Financial
Freedom.

Financial Success Secret: Small amounts of money accumulated and
compounded over long periods of time really add up. The real magic is
time and consistency.

If you were to save 10% of your annual income for 16 years, earning an
average of 16% compounded annually, you could replicate that income
forever
on the interest earned on the accumulated capital!

Of critical importance to achieving Financial Freedom is the magic of
compound interest.


Saul

Saul Klein e-PRO/GRI/CFP/JIM/JPO/USNA '72
President, InternetCrusade
1993 President, San Diego Association of REALTORS
1999 REALTOR of the Year
Sign up for e-PRO: http://www.eProNAR.com
(619) 283-7302 Fax: (619) 283-7343 MailTo:Saul@InternetCrusade.com