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www. PersonalFinanceCoaching.com Matt Kelly – Personal Finance Coach Email: [email protected] Phone: 970-749-0644 A Guide to Finding Your Magic Numbers As Tony Robins defines, in his book Money, Master the Game; there are 5 levels to financial achievement. Take a moment to read the definitions below. Put a checkmark next to the level you’d like to achieve. As you decide consider your current financial situation, your aspirations, and the number of years you have to work toward your goal. o Financial security: You do not have to work to pay for the basics, including housing, utilities, food, transportation, and basic insurance. o Financial vitality: The ability to meet your financial security and half of the cost of your small indulgences and luxuries without working. o Financial independence: The interest from savings and return from your investments allow you to maintain your lifestyle without working. o Financial freedom: You have financial independence and two to three significant luxuries. o Absolute financial freedom: The freedom to live and give freely without worrying about money or working. Having selected the level you’d like to achieve let’s calculate how much money it will take to reach your destination. Begin by calculating the monthly cost of your basic necessities. In a realistic budget I call these Level 1 and Level 2 expenses. Level 1 expenses are the basic necessities; the things that keep you warm, safe, and dry. Level 2 expenses are your obligations. The things that if you don’t pay them there will be consequences; obligations like credit cards, car payments, HOA Fees, loan payments, insurance, child support, and other contractual agreements you’ve made. Remember, the fewer Level 2 expenses you have the more attainable your financial security number will be. Level 1 – Necessities Rent/Mortgage Groceries Electricity Natural Gas Water Firewood Trash Phone Gasoline Monthly Cost Total Level 1 Expenses Level 2 - Obligations Car Payment Credit Card 1 Credit Card 2 HOA Fee Health Insurance Monthly Cost Total Level 2 Expenses Note: I’ve left you blank lines to add additional expenses if needed. Add your Level 1 and 2 expenses together. Total Level 1 Expenses + Total Level 2 Expenses Total Monthly Cost of Basic Security Now subtract any social security, pension or annuity payments you expect from your monthly number. Total Monthly Cost of Basic Security Monthly Social Security/Pension/Annuity Adjusted Total Monthly Cost of Basic Security Multiply your adjusted total monthly cost of basic security by 12 to get the annual cost of basic security that will need to come from your investments. Adjusted Total Monthly Cost of Basic Security X 12 Annual Cost of Basic Security - Paid For By Investments Now let’s calculate how much money you will need to accumulate, based on a conservative 5% Return on Investment (ROI), to provide for your financial security. If you have reason to believe that you should expect a higher or lower ROI you can use that number. Annual Cost of Basic Security - Paid For By Investments Divided by .05 Your Financial Security Magic Number Is Does your financial security number look to be within reach? Remember that number can go down – way down, if you pay off all of your debt including your mortgage! Achieving financial security will still mean working to provide for your Level 3 and Level 4 expenses. Level 3 expense are your less-than-monthly expenses for which you are accumulating money so that they won’t become mini-emergencies and Level 4 are your nice to have items. Let’s calculate these levels so that we can determine your magic number for financial vitality and financial freedom. Level 3 – Less-Than-Monthly Car Repairs New Car Tires Clothing Holiday - gifts Monthly Cost Total Level 3 Expenses Level 4 – Nice to Have Restaurants Entertainment Miscellaneous Spending Money Monthly Cost Total Level 4 Expenses Financial Vitality is calculated by adding the total of your Level 3 expenses to your Adjusted Total Monthly Cost of Basic Security – or you can think of it as the total of your Level 1, 2, and 3 expenses minus any expected social security payments. Total of Level 1 + Level 2 + Level 3 minus social security To make it an annual total multiply by 12 X 12 Divided by .05 Your Financial Vitality Magic Number Is Financial Independence allows you to live at your current lifestyle without having to work. Your investments do all of the work generating your income. To find you Financial Independence Magic Number add your Level 4 Nice to Have expenses to your Total of Level 1 + Level 2 + Level 3 minus social security and divide by .05. Total of Level 1 + Level 2 + Level 3 + Level 4 minus social security To make it an annual total multiply by 12 X 12 Divided by .05 Your Financial Independence Magic Number Is The additional cost of achieving can be calculated two ways. 1. If you intended to pay for the additional luxuries on a monthly basis just calculate the annual total and add it to the total of your annual Level 1, 2, 3, and 4 expenses minus social security and divide by 5%. 2. If you intended to pay for these luxuries out right, then you can calculate their total cost and add it your Financial Independence Magic number since you won’t need to make recurring payments. Absolute Financial Freedom is the total monthly income you’d need to never worry about money. Your Monthly Absolute Financial Freedom Number To make it an annual total multiply by 12 X 12 Divided by .05 Your Absolute Financial Freedom Magic Number Is I hope that by calculating each of your magic numbers you have gained some insight into how much money you need to accumulate to reach your desired level of financial success. If there is anything I can do to help you further I can be reached at: www.PersonalFinanceCoaching.com [email protected] 970-749-0644 Matt Kelly, Personal Finance Coach