3 Key Steps for Financial
Success: Part 1
February 2010
There are two types of wealth
building obstacles that prevent people from successfully
managing and growing their personal finances: emotional
obstacles and practical obstacles.
In previous articles we discussed how to deal with the emotional
obstacles: procrastination,
fear
of loss
and fear of making a wrong decision. Now I want to talk
about the three most common challenges that, when identified
and addressed, will put you on the road toward financial
success:
1. Goals and numbers
2. A written financial plan
3. A road map for implementing your plan
If you lack these three essential
tools today you've been letting practical obstacles get
in the way of you maximizing wealth growing opportunities
in your personal finances and in your business.
Today, let's talk about the first item on the list.
Goals and numbers: You need both
Without clear goals and numbers, you lack a point
of reference for managing your personal finances and investment
portfolio.
Accumulating wealth is a financial journey. For those who
lack specific goals and numbers, the journey is long and
aimless. To build an effective financial plan you first
need to decide where you want to head and know where you
are now.
Here are seven key questions to ask yourself to help you
define your goals. You will determine what numbers are right
for determining where you stand today and where you want
to go. Have your wealth adviser (who should also be a CPA)
help you crunch the numbers relevant to you and your business.
1. How do I visualize my future desired lifestyle?
As straightforward as this first question sounds, don't
be surprised that it really takes some thinking to answer
it. For example, "going fishing" isn't enough
of an answer. Do you think you would remain where you currently
live or would you move? If you're going to stay put but
travel to your fishing destinations are you planning to
go first class all the way or would doing it 'economy' be
fine with you?
2. Specifically, how much money
will I need to support that lifestyle per year?
When you plan next year's vacation I'm sure that before
you book the trip you'll see what it will cost to travel,
to stay at your destination, to eat out and to do some shopping.
While many people will take the type of trip they can afford,
some will throw caution to the wind and book themselves
a huge trip that costs more than they can typically afford.
They'll borrow money to spend more on that one vacation,
and they'll pay back the loan over time.
When it comes to paying for retirement, you can't live off
borrowed money each year. At retirement the rules suddenly
change. You fund it by spending some of your accumulated
pot of wealth each year. And that's going to be some finite
amount.
It's really important to make yourself an itemized first
draft budget now and get a realistic sense of just what
your desired retirement lifestyle is going to cost you.
People often assume their retirement years will cost them
much less than what their current lifestyle is costing them.
Don't count on it! I find that many people's desired retirement
lifestyles tend to cost as much as their pre-retirement
lifestyles do.
After you've written your first draft budget for funding
your lifestyle in retirement, take it to your wealth adviser
and ask him to see if there is any expense category you
might have missed and determine your annual costs. (Remember,
wealth advisers do this every day so they're likely to remember
some items you might have forgotten.)
3. Exactly how much wealth will I have to accumulate
to live the lifestyle I want in retirement?
At this point you've determined what kind of lifestyle you'd
like in retirement and you have an approximate idea of what
your annual budget will be. Now you need to calculate how
much wealth you need to accumulate to afford that lifestyle
for all the rest of your years. For most people, the needed
sum is more than they current have. (And in my columns I'll
be showing you a variety of ways to accumulate more wealth.)
Do the math and figure out how much money you need on top
of the amount you currently have in savings and investments
that you won't spend away over the short- to mid-term.
4. How many more years do I have to work?
It's time to introduce a concept. The key objectives
our clients have at Zdenek Financial Planning is first to
achieve financial independence and then to maintain it.
Financial independence is the point at which you have the
choice as to whether to continue to work or not.
Some of you may wish to stop working and "retire."
Others may enjoy what they do for a living and would like
to keep on doing it, in some form or other, even once they're
assured they have taken care of themselves and their loved
ones financially.
No matter which camp you put yourself in I recommend your
financial planning and wealth building focus be on financial
independence rather than retirement.
5. To achieve my desired wealth, how much of this
money could reasonably come from my business income or salary
and how much from investments?
If you're a small business owner and you've gone without
a wealth adviser up to this point, running the numbers to
answer this question is yet another reason you need to get
one.
6. What do I plan to do with my business?
Assuming you plan to remain the owner of your business,
what will you do once you achieve financial independence?
Sell it? Close it? On the other hand, maybe bringing others
on as equity partners will be needed to grow your business.
What will the wealth advisory implications be for your business?
And what, if anything, will you need to do to work towards
getting your financials in order so you can pass due diligence
that prospective equity partners are bound to conduct?
7. What is my business exit strategy?
How will you plan for and manage your "Elvis has left
the building" moment for your business? And what are
the potential implications for your personal finances?
Answer these questions and you will be in a better position
to ensure your odds of success for achieving your specific
financial goals.
Guy McPhail, CPA, CFP®
President of Zdenek Financial Planning (www.zdenek.com)
and a personal financial planner, Guy McPhail is nationally
recognized for his expertise in cash flow management and
financial planning for small business owners.
A Certified Financial Planner® professional and a Certified
Public Accountant (CPA), Guy manages the personal financial
planning area at Zdenek Financial Planning, providing clients
with strategic analysis and support in the areas of cash
flow management, business management, tax planning, estate
planning, retirement planning, stock option strategies and
investing.
©2010 FiLife.com |
All Rights Reserved
Guy McPhail, CPA, CFP®, is president of Zdenek
Financial Planning, LLC.
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