Hi, I’m JJ Childers with another installment in the Monday Morning Mentor series. In our focus on your finances, we’ve been concentrating on the importance of a financial plan. The information over the past several segments has dealt with the 5 parts of a financial plan. These include setting your financial goal, assessing your current situation, evaluating your current resources, determining how much time you have for accomplishing your goal, and formulating the steps that you intend to take to get there.
This final part, formulating the steps of your plan, is much easier said than done. The information that you put together in the previous parts is what determines what types of steps that you’ll need to take. For instance, in keeping with our example from the previous segments, let’s assume that your goal is a $1 million net worth, you’ve got a current net worth of $150,000, leaving $850,000 to go to reach your goal, you’ve got a yearly income of $80,000 and investable assets of $75,000, and you’ve got 20 years allotted for reaching your financial destination, which means that you must average an increase of $42,500 per year.
This information is critical for us to have so that we know what type of returns that we will need to generate, what type of risk that we need to take, and what type of activities we’ll need to be involved with if we hope to generate the money necessary to reach our goal. By having this information available, we know that we’re going to have to do more than simply leave our money in a savings account that pays a minimal interest rate. That won’t work. On the flip side, we also know that we don’t have to take outrageous risks with our assets either.
How do we know this? Well, let’s think about it. If we’ve got $75,000 in investable assets for the next 20 years, we can run a couple of quick scenarios. First, let’s presume that we can generate an average return of 8% on this money over that 20 year period. At the end of that 20 years, the compounding effect of this money will add up to a total of $349,572.
On top of that, if we continue to pay off our house over the 20 years, I’m going to estimate that we will have an asset paid for free and clear that is worth $300,000 or more. This is presuming that we have no appreciation on the real estate at all. If we presume an appreciation rate of even 3%, that $300,000 home will be worth $541,833 in 20 years.
These two things, in and of themselves, will enable us to have accumulated $891,405 toward our $1 million goal. But think about it. This is presuming that we haven’t set aside any portion at all of our yearly income toward our plan. If we were to set aside just 5% of that yearly income ($4,000) and assumed the same 8% return on investment, this would grow to another $197,692. What I like best about this is that it’s not a difficult plan at all.
You see, the bottom line is that none of this is overly difficult, it’s just different. If you will take the time to follow a financial plan, you can have whatever you want for your life. The key is to plan your work and then work your plan.
The information that we provide can help you to do this if you’re willing to do what it takes. We can help you if you’re willing to work with us. Stay tuned for more great tips and an overview of the plan that can provide you with everything you’ve ever wanted.
