MONEY Master the Game: 7 Simple Steps to Financial Freedom (37 page)

The six questions are related to two areas: where you are now and what you are committed to creating going forward. The few numbers you need to answer you can pull from your records, or perhaps off the top of your head. You may have to do a little bit of homework, but most of these numbers should be close at hand—and, if you can’t come up with them right now, it’s okay to use a round-number estimate just to get you started to keep the momentum going.

Using these numbers, the app will build a plan tailored just for you, based on variables
you
get to determine: like how much you expect your income to grow, how much you’re determined to save, and what rate of return you expect to get on your investments. You can be conservative or aggressive with your estimates—or you can run the numbers both ways and decide on some middle ground. And the beauty here is, once you capture these numbers, the app will do all the work for you. You’ll have a true blueprint for your financial future, a clear plan to follow.

CHOOSE YOUR OWN ADVENTURE

The wealth calculator in the app you’ve just downloaded is a device I’ve used for more than three decades in my workshops and seminars. It’s simple and flexible, and it’s helped millions of people create financial plans that work for them. It’s built on a series of conservative assumptions, but you’re free to go in and change those assumptions if you’d like.
You can make them more conservative or more aggressive. You’re in control, so put in numbers that fit with your lifestyle, your current reality, and your future dreams.
If you don’t like the picture that comes back to you, you can play with your numbers and choose a different path to financial freedom. In the rest of this section, we’ll work together to get you specific steps to speed up your plan and insure its success. The first plan you come up with is just that: your first bite of the apple. Then we’re going to take it and improve upon it significantly in the pages ahead . . .

A few things to keep in mind before we start:

One of the biggest factors will be our tax rate, which is radically different for each one of us. This book is read by people all over the world, so rather than make it complex, we’ve made it very simple. Wherever you live, in the pages ahead you’ll learn to utilize the tools in your country that give you the greatest tax efficiency. Wherever possible, you want to use tax-advantaged accounts to accumulate your wealth to generate a greater net rate of return.

This calculator will then show you three potential scenarios, with different annual rates of return for each plan: 4%, 5.5%, and 7%. A conservative plan, a moderate plan, and an aggressive plan. These rates are after-tax rates of return. Some might find these numbers too conservative, or too aggressive; again, you can adjust them to any numbers you like.

How did we get to those numbers? On the high end, if you look at the standard set by the Charles Schwab organization, it will tell you an aggressive return is 10%. Our app’s aggressive return is 7%. Why the three-point difference? Schwab has shown that over the past 40 years, from 1972 to 2012, the market has averaged 10%. But our calculator is assuming approximately 30% in taxes, which brings the number to just under 7%. In the United States, long-term investment tax rates are only 20%, not 30%—so our app is being aggressive on the tax side. Also, remember that if you are investing through a tax-deferred vehicle like a 401(k), IRA, or annuity, you are deferring taxes. So if you had a 10% return (as in the Schwab example), you would continue to compound at 10%—with no tax deducted until withdrawal. We are using our lower returns of 4%, 5.5%, and 7% to provide a buffer for mistakes or future returns failing to hit the aggressive mark you had hoped for.
⁸

On the low end, or conservative side, if you look at Vanguard, it uses a 4% return after taxes. But we’re looking at things a little differently. Most Americans who have money to invest do it through their 401(k), IRA, or 401(k) Roth. What’s the best option? We recommend that you go with a Roth (or your country’s equivalent), unless you truly are certain your taxes
are going to be lower in the future. (Lucky you!) Governments all around the world, and especially the United States, have spent money they do not have. How are they going to pay it back? By raising taxes. So while no one knows for certain whether taxes will go up or down, my bet here is they’re going up. In a Roth, your returns are 100% yours, meaning that if you’ve got a 7% return, you keep all 7%—no cut to the tax man ever on the growth of your investments. If you get a 10% return, you keep all 10%.

This is why we built the wealth calculator this way. It gives the flexibility to think about returns in a net (after-tax) approach. You design the plan with what you believe is most appropriate for your planning purposes.

This wealth calculator is designed to quickly give you a sense of how different choices will impact how long it will take you to achieve Financial Security, Vitality, or Independence. After you come up with a basic plan you like, you can also get precision too. As I mentioned earlier, Stronghold (
www.StrongholdFinancial.com
) has a technology platform to link all of your investment accounts. It will give you immediate feedback on what your actual rate of return has been on your investments in the past. (Most people have no clue!) It will show your best performing years, your worst performing years, and in how many years you have taken a loss. It will also show you how much you are really paying in fees, so you’ll know the true impact on your future savings. Go there, if you like, after you have your basic plan completed on the app.

Of course, with the app, the numbers and your plans are completely secure and remain accessible to you wherever you go, on any device. You can change your returns at any time, change how much you’re willing to save, and see the impact in moments.

One of the most powerful ways to accelerate the pace at which you achieve your financial goals—and the most painless way I know—is to implement the Save More Tomorrow plan,
which has helped over 10 million Americans grow their savings in ways they never thought possible. Do you remember how it works from chapter 7.4, “Your Money Machine”? You commit to automatically taking a percentage of any raise you receive in the future and adding that to your Freedom Fund.

So, for example, let’s say you’re saving 10% of your current income toward your Freedom Fund: you’re investing, but you want to find a way to
speed up your plan. By committing to the Save More Tomorrow plan, the next time you get a 10% raise, 3% would go toward your Freedom Fund and the other additional 7% would be available for your improved lifestyle today. Do this three times in the next decade, and you could be saving up to 19%—almost double what you are putting away today—and at no loss to you, because it’s all based on additional future income. This will make a huge difference in the speed with which you can achieve your financial dreams.

To take advantage, just click on the Save More Tomorrow option in the app. One final note: I’ve also taken out the value of your home from the equation. Now, hold on, before you scream and yell. Yes, I know, for many of you, it’s the largest investment you have. If you want to add it back in, you can, but I’ve taken it out so you have yet another conservative cushion. Why? Because you’ll always need a home to live in. I don’t want you to run these numbers and generate a plan that
relies
on the value of your home to generate income. You may sell your home in ten years and realize a significant gain. Or you may stay in your home for the rest of your life, or you might need to downsize and take some money off the table to help pay off an unanticipated expense. No matter what happens, your plan is designed to keep you afloat no matter what your living situation holds.

Why all these buffers built into the system?
Because I want these numbers to be real for you—not just real
in this moment,
but real over time, against any number of real-world events that could set you back. I want to soften the blow in case you veer off course. But I also want you to exceed your own expectations. Most of all, I want you to know with absolute clarity and certainty that the projections we generate together are truly within reach.

Ready to dive in? Open your app!

When I look into the future, it’s so bright it burns my eyes.

—OPRAH WINFREY

DRUMROLL, PLEASE . . .

Now, I know you are going to want to dive right in, hit Enter, and sit back while the app tells you how the rest of your life will play out. But that’s
actually not the point. The true value of this next step is to show you what’s out there: what’s realistic, what’s possible, what’s worth dreaming and fighting for. It lets you try on different outcomes, and play with some of the variables if you want to create a different picture or produce a different result. In the near term, it gives you a true plan you can follow—a blueprint for your financial future.

Think of it as your personal financial trainer. It takes your “real” numbers—your savings, your income—and calculates what they’ll be worth based on a series of anticipated outcomes. Don’t worry about
specific
investment strategies just yet. We’ll cover these in section 4, but it’s important to get some idea of how your money can grow once it starts to work for you.

Remember,
the focus is not on
where
or
how
you’ll invest your money. This exercise is an opportunity to forecast—
to look into the crystal ball of what’s possible.
What would your future look like if you could realize a 6% return on your investments? How about 7% or more? How much money would you have after 10 years? After 20? What if you somehow managed to hit the jackpot and found a way to generate gains of 9% or 10%? Remember, just one of the asset allocation portfolios you will learn in chapter 5.1, “Invincible, Unsinkable, Unconquerable: The All Seasons Strategy,” has produced an average rate of just under 10% over the last 33 years, and lost money only four times (and one of the losses was only 0.03%)! So there are many possibilities once you educate yourself as to how the top investors on earth conduct themselves.

So play around until you find a number that feels right to you—one that you have a healthy dose of confidence in.
Just a few minutes of your time, and you’ll know what your savings, with the power of compounding, at different rates of return, will bring you.

It is only the first step that is difficult.

—MARIE DE VICHY-CHAMROND

Congratulations on running your first plan. Are you excited about the results? Concerned? Frustrated? Or encouraged? Over the years, working
with countless people from all over the world, I’ve noticed their results tend to place them in roughly one of three categories:

1. Those who are young and in debt, wondering how they’re ever going to get to financial security. What’s beautiful is that they find out they can!

2. Those who think they are decades away from financial security, and are surprised—or, frankly, shocked—to learn they are only a stone’s throw away: five, seven, ten years max. In fact, some are
already
there but had no idea.

3. Those who started late and are fearful of never being able to make up for lost ground.

Let me share with you some examples of other people I’ve worked with in similar situations and show you how their plans played out—how they achieved Financial Security, Vitality; even Independence and Freedom.

ALL GROWN UP BUT STILL PAYING OFF STUDENT LOANS . . .

Let’s start with someone young and in debt. Like a lot of millennials today, Marco graduated with a big chunk of debt. As a 33-year-old engineer earning a respectable $75,000 a year, he was still paying off $20,000 in student loans. Like so many Americans, Marco felt like his debt was consuming his life—he thought he’d be paying it off forever (and probably would be, had he paid only the minimum payments). Marco did, however, expect his salary to grow, slowly but steadily with expected raises of about 3% to 5% per year. After working together on a new plan for Marco, we allocated 5% of his income to paying off his student loans. And Marco committed 3% of any and all future raises to his Freedom Fund.

What did this new plan give him? How about a debt-free life in seven years!
On top of that, Marco was going to be able to take that 5%, once he was debt free, and redirect it toward his savings to grow and compound his Freedom Fund.
With this savings and investing plan, Marco could reach Financial Security in 20 years. That may sound like a long time, but he’ll still be only 53 years old. And just seven years later, at 60, Marco could reach Financial Independence—a full five years before he’d ever dreamed of retiring,
with more annual income than he ever imagined! Marco went from worrying about
never
paying off his student loans to looking at a future of real financial independence. Even better, within five years, by age 65, with all of his growth and the boost of Social Security added, Marco would actually experience his definition of Financial Freedom—a prospect entirely unfathomable to him before running his new plan. Remember, he began this journey with no assets and nothing but debt!