Not everyone wants to wait until they’re 65 to retire. Here’s how you can retire at 45 with $40,000 in passive income every year. https://t.co/nLcRl96uxA pic.twitter.com/UnmNESI5da
— CNBC (@CNBC) January 17, 2023
Tag Archives: Financial Freedom
Grant Sabatier: The 7 Levels of Financial Freedom
“It’s important to view money not as something that allows you to buy things, but view it as a means of giving you more choices in how you want to live.”
Grant Sabatier, the author of “Financial Freedom”, views money not as something that allows you to buy things, but as a means of giving you more choices in how you want to live. “With every dollar you save, you give yourself more freedom and options in life,” he said. “Based on how much you have saved and invested, ask yourself, ‘How many months of freedom have you acquired?’”
Sabatier’s 7 levels of financial freedom
Level 1: Clarity
The first step is taking stock of your financial situation — how much money you have, how much you owe, and what your goals are. “You can’t get to where you want to go without knowing where you’re starting from,” Sabatier says.
Level 2: Self-Sufficiency
Next, you’ll want to be standing on your own two feet, financially speaking. This means earning enough to cover your expenses without any outside help, such as contributions from Mom and Dad.
At this level, Sabatier notes, you may be living paycheck-to-paycheck or taking on loans to make ends meet.
Level 3: Breathing room
People at Level 3 have money left over after living expenses that they can put toward goals such as building an emergency fund and investing for retirement.
Escaping Level 2 means giving yourself some financial leeway, which Sabatier notes doesn’t necessarily mean making a much bigger salary. Indeed, 31% of working Americans making over $100,000 live paycheck-to-paycheck, according to MagnifyMoney.
“Just because you make a lot of money doesn’t mean you’re actually saving that money,” Sabatier says. “Most people in this country live through debt.”
Level 4: Stability
Those who reach Level 4 have paid down high interest rate debt, such as credit card debt, and have stashed away six months’ worth of living expenses in an emergency fund. Building up emergency savings helps ensure that your finances won’t be thrown off track by unexpected circumstances.
“At this level, you’re not worried if you lose your job or if you have to move to a different city,” Sabatier says.
When calculating how much you’d need to have saved, thinking about what your financial picture might look like understand exigent circumstances, rather then your regular, everyday expenses, financial experts say.
“If you have a job loss, you’d make some changes. You’d probably cut your gym membership and get rid of your subscriptions, for instance,” Christine Benz, director of personal finance and retirement planning at Morningstar, told Grow. “Think about the bare minimum you’d need to get by.”
Level 5: Flexibility
People at Level 5 have at least two years’ worth of living expenses saved. With those kinds of savings, Sabatier suggests, you have the ability to think about your money terms of the time it can buy you: “You could take a year off from your job if you wanted to.”
You needn’t carry all of this money in cash, Sabatier notes: It could be a sum total from your savings and investment accounts. As long as you’re able to access that money somehow, if you need it, you have the flexibility to untether yourself, at least temporarily, from the workforce.
Level 6: Financial Independence
People who have achieved financial independence can live solely off the income generated from their investments, according to Sabatier’s framework.
“You generally have one of two things,” says Sabatier. “You either have a large pile of money in an investment portfolio that’s generating interest, or you have rental properties, and cashflow from the rent covers your living expenses, or a hybrid of the two.”
To get here, you’ll have to invest a high percentage of your income, which could require you to shift to a more modest lifestyle to drastically lower your cost of living. Pursuing this lifestyle requires a change in thinking away from the traditional paradigms of personal finance, Sabatier says.
“People are being taught to save 5%, 10%, 15% of their income, and maybe you’ll be able to retire when you’re 65,” he says. “Thankfully, more young people are starting to understand that if I aggressively save and invest, I can work less and have more control over my future and my destiny.”
Level 7: Abundant Wealth
Financially independent folks who live off their portfolio income rely on the “4% rule” — a retirement rule of thumb that posits that an investor can safely withdraw 4%, adjusted for inflation, from a balanced portfolio of stocks and bonds each year, and be relatively certain that the money will continue to grow and won’t run out.
Although economists debate whether 4% is the optimal number (some more conservative observers think the right figure might be closer to 3.3%), the calculation behind it serves as the basis for establishing a FIRE number — the amount of money you’d need to retire and earn an annual income you could comfortably live on.
The 7 levels of financial freedom, according to a millionaire — 50% of U.S. workers are at Level 2. (via @CNBCMakeIt) https://t.co/ze81Wvu46q
— CNBC (@CNBC) June 19, 2022
While those in Level 6 need to monitor swings in their portfolio to make sure their retirement is still going according to plan, those in Level 7 have no such worries. “Level 7 is abundant wealth — having more money than you’ll ever need,” Sabatier says. “You don’t have to worry about money, and it’s not essential to your day-to-day existence.”
References:
Differences Between Price and Value
“Price is what you pay; value is what you get.” Warren Buffett
“Don’t judge a company’s stock by its share price.” Many people incorrectly assume that a stock with a low dollar price is cheap, while another one with a four-digit dollar price is expensive. In fact, a stock’s price says little about that stock’s value. Moreover, it says nothing at all about whether that the market price of a company is headed higher or lower.
The most important distinction between the ‘market price you pay’ and the ‘intrinsic value you get’ is the fact that price is arbitrary and value is fundamental.
- Price is the amount paid for the product or service.
- Cost is the aggregate monetary value of the inputs used in the production of the goods or services.
- Value of a product or service is the utility or worth of the product or service for an individual.
To effectively deploy this strategy, it’s essential to find a company that you understand, that has solid fundamentals — then be patient and wait until the company’s stock price falls below its intrinsic value before you purchase the company.
Regarding ‘understanding’ a company, it’s important for investors to know how a company makes its money–revenue, profits and free cash flow.
At some point, a stock’s market price over the long term adjusts to its intrinsic value. This fact is how successful investors such as Warren Buffet have used to make billions over the long term.
“Finding differences between price and value is by far the most effective investment strategy”, writes Phil Townes, founder of Rule One Investing . “Not recognizing differences between price and value is also what causes many investors to lose their shirts, as companies are just as often overpriced as they are underpriced.”
How do you find companies that are on sale for less than their true value is to evaluate companies using a set of standards that look beyond the company’s current price tag. Phil Town call these standards the four Ms:
- Meaning,
- Moat,
- Management and
- Margin of Safety
The first step is to make sure you understand the company and the company you invest in has meaning to you as an investor. If it does, you’ll understand it better, be more likely to research it and be more passionate about investing in it.
The second step is to choose a company that has a moat. This means that there is something inherent about the company that makes it difficult for competitors to step in and carve away part of their market share.
The third step is to look at the company’s management. Companies live and die by the people managing them, and if you are going to invest in a company, you need to make sure their management is talented and trustworthy.
Finally, calculate the company’s intrinsic value and determine a margin of safety. Margin of safety is the price at which you can buy shares of a company, being more likely that you won’t lose money and have increased confident that you will make a good return on your invested capital.
When the market price of a company is lower than the company’s intrinsic value number, the company is deemed underpriced and represents a great investment opportunity.
“Leveraging differences between price and value is as simple as that”, said Town. “Find a company that you believe in, that has solid fundamentals — then wait until their price falls below their value. If you do this, you can buy companies on sale, sell them for their true value and make a lot of money in the process.”
The goal is to identify stocks that are undervalued—that is, their market prices do not reflect their true intrinsic value.
References:
- https://www.forbes.com/sites/forbesfinancecouncil/2018/01/04/the-important-differences-between-price-and-value/
- https://keydifferences.com/difference-between-price-cost-and-value.html
- https://www.investopedia.com/articles/stocks/08/stock-prices-fool.asp
The overriding goal is to help individuals learn how to successfully invest in assets, to build long term wealth and achieve lifetime financial freedom.
Building Wealth
Jack Ma the richest man in China said, “If you put the Banana and Money infront of a monkey. The monkey will choose Banana because the monkey don’t know that money can buy alot of Bananas.
In fact, if you offer Work and Business to most people, they will choose to Work because most people don’t know that a Business can make more money than salary.
One of the reason most people fail to build wealth is because they have not been educated or trained to recognise the entrepreneurial opportunity.
They spend alot of time in school and what they learn in school is work for a salary instead of working for themselves.
Profit is better than wages because wages can support you, but profits and owning assets can make you wealthy.
Source: https://www.facebook.com/109901988144184/posts/165519812582401/
Financial Freedom
“It’s the ability to live and maintain the lifestyle which you desire without having to work or rely on anyone for money.” T Harv Eker
Financial Peace guru Dave Ramsey proclaims that “Financial freedom means that you get to make life decisions without being overly stressed about the financial impact because you are prepared. You control your finances instead of being controlled by them.”
It’s about having complete control over your finances which is the fruit of hard work, sacrifice and time. And, as a result, all of that effort and planning was well worth it!
Nevertheless, reaching financial freedom may be challenging but not impossible. It also may seem complicated, but in just a straightforward calculation, you can easily estimate of how much money you’ll need to be financially free.
What is financial freedom? Financial freedom is the ability to live the remainder of your life without outside help, working if you choose, but doing so only if you desire. It’s the ability to have the things you want and need, despite any occurrence other than the most catastrophic of outside circumstance.
To calculate your Financial Freedom Number, the total amount of money required to give you a sufficient income to cover your living expenses for the rest of your life
Step 1: Calculate Your Spending
Know how much you are spending each year. If you’ve done a financial analysis (net worth and cash flow), created a budget, and monitored your cash flow, then you’re ahead.
Take your monthly budget and multiply that amount by 12. Make sure you include periodic expenses such as annual premiums and dues or quarterly bills. Also include continued monthly contributions into accounts like your emergency fund, vacation clubs, car maintenance, etc.
Add all these together to get your Yearly Spending Total.
Keep in mind the lower the spending total, the lower the amount of money you’ll need to become financially independent. Learn how to lower your monthly household expenses and determine the difference between needs and wants.
Step 2: Choose Your Safe Withdrawal Rate
The safe withdrawal rate (also referred to as SWR) is a conservative method that retirees use to determine how much money can be withdrawn from accounts each year without running out of money for the rest of their lives.
The safe withdrawal rate method instructs financially independent people to take out a small percentage between 3-4% of their investment portfolios to mitigate worst-case scenarios. This withdrawal percentage is from the Trinity Study.
The Trinity Study found the 4% rule applies through all market ups and downs. By making sure you do not withdraw more than 4% of your initial investments each year, your assets should last for the rest of your life.
Step 3: Calculate Your Financial Independence (FI) Number
Your FI number is your Yearly Spending Total divided by your Safe Withdrawal Rate.
To find the amount of money you’ll need to be financially independent, take your Yearly Spending Total and divide it by your SWR.
For example:
- Yearly Spending: $40,000
- Safe Withdrawal Rate: 4%
Financial Independence Number = Yearly Spending / SWR
- $40,000 / 0.04 = $1,000,000
Who becomes financially free? According to most financial advisors, compulsive savers and discipline investors tend to become financially free since:
- They live on and spend less they earn.
- They organize their time, energy and money efficiently in ways conducive to building wealth.
- They have a strong belief that gaining financial freedom and independence is far more important than displaying high social status and financial symbols.
- Their parents did not keep on helping them financially.
- They have a keen insight to recognize financial and wealth building opportunities.
Net worth is the most important number in personal finance and represents your financial scorecard. Your net worth includes your investments, but it also includes other assets that might not generate income for you. Net Worth can be defined to mean:
- Income (earned or passive)
- Savings
- Investing to grow and to put your money to work for you)
- Simple and more frugal lifestyle
Financial freedom means different things to different people, and different people need vastly different amounts of wealth to feel financially free.
Maybe financial freedom means being debt-free, or having more time to spend with your family, or being able to quit corporate America, or having $5,000 a month in passive income, or making enough money to work from your laptop anywhere in the world, or having enough money so you never have to work another day in your life.
Ultimately, the amount you need comes down to the life you want to live, where you want to live it, what you value, and what brings you joy. Joy is defined as a feeling of great pleasure and happiness caused by something exceptionally good, satisfying, or delightful—aka “The Good Life.”
It is worth clearly articulating what the different levels of financial freedom mean. Grant Sabatier’s book, Financial Freedom: A Proven Path to All the Money You’ll Ever Need, the levels of financial freedom are:
Seven Levels of Financial Freedom
- Clarity, when you figure out where you are financially (net worth and cash flow) and where you want to go
- Self-sufficiency, when you earn enough money to cover your expenses
- Breathing room, when you escape living paycheck to paycheck
- Stability, when you have six months of living expenses saved and bad debt, like credit card debt, repaid
- Flexibility, when you have at least two years of living expenses invested
- Financial independence, when you can live off the income generated by your investments and work becomes optional
- Abundant wealth, when you have more money than you’ll ever need
The difference between income and wealth: Wealth is accumulated assets, cash, stocks, bonds, real estate investments, and they have passive income. Simply, they don’t have to work if they don’t want to.
Accumulating wealth and becoming wealthy requires knowing what you want, discipline, taking responsibility and have a plan.
Hundreds of thousands of Americans have great incomes, but you wouldn’t call them wealthy because of debt and lack of accumulated assets, instead:
- They owe for their homes
- They owe for their cars and boats.
- They have little savings and investments
- They have few “paid for” assets
- They have negative net worth
Essentially, if you make a great income and spend it all, you will not become wealthy. Often, high income earners’ true net worth is far less than they think it is.
Here are several factors and steps to improve your financial life:
- Establishing financial goals
- Paying yourself first and automate the process
- Creating and sticking to a budget. Know where you money goes.
- Paying down and/or eliminating credit card and other bad debt. Debt which is taking from your future to pay for your past.
- Saving for the future and investing for the long term consistently
- Investing the maximum in your employer’s 401(k)
- Living on and spending less than you earn
- Simplify – separating your needs from your wants. You don’t need to keep buying stuff.
Financial freedom can look something like this:
- Freedom to choose a career you love without worrying about money
- Freedom to take a luxury vacation every year without it straining your budget
- Freedom to pay cash for a new boat
- Freedom to respond to the needs of others with outrageous generosity
- Freedom to retire a whole decade early
When you have financial freedom, you have options.
“Your worth consists in what you are and not in what you have. What you are will show in what you do.” Thomas Edison
References:
Planning for Financial Freedom
Planning for financial freedom is the key to getting there.
Your financial plan has to consider both the future and the present. For the present, you need enough cash available to cover your current expenses. Your long-term financial plan should prepare you for retirement, your kids’ college education or a big dream purchase. Putting money every month toward your current budget and your long-term goals is the goals.
For most investors, the biggest challenge has been staying the course and focusing on long-term goals in the face of market fluctuations. And, it’s important for investors to avoid getting discouraged since saving and investing are a long-term journey.
Working toward your goals:
- Create a plan. Figure out how much you’ll need and set a target date to have that amount saved up, so you can create a savings plan with a specific monthly goal.
- Automate your savings and investing. Include your monthly savings and investing goals in your budget to hold yourself accountable today for the future you want tomorrow.
- Manage or eliminate your debt. Keeping your debt-to-income ratio low can help you get a better interest rate on both the home you have today and the home of your dreams. Furthermore, eliminating your debt gives you increased flexibility with your income to Dave and invest.
Another key to that financial freedom is building an emergency fund that can more than cover your expenses for 3–6 months if you needed it for life’s unexpected surprises like unforeseen major car repairs and medical bills that can derail your personal finances if you haven’t built up a buffer to cover them.
Essentially, you should:
- Build an emergency fund. Create and track your emergency fund in a separate account that you can access easily in case you need it.
- Make a budget. Create a budget that includes a monthly savings goal, and track your savings contributions to build that emergency fund quickly.
- Track your expenses. Watch your spending to make sure you’re staying within your budget, and check in on that budget regularly to find new places to save.
- Track your debt. Create a comprehensive list of all your loans and credit card accounts so you can see everything together. Free yourself from debt by paying your minimums and attacking one debt at a time with extra monthly payments.
- Include all your loan information. Keep track of the interest rate and monthly payment for each loan to help you create a solid debt-reduction plan.
- Plan and schedule your extra payments. Pay extra on the loan with the highest interest rate until that one is paid off, then roll those payments into the next loan to pay that off even faster.
A financial free retirement is one in which you can do the things you enjoy in life without worrying about money. For long-term goals like retirement, it is imperative to stay on track with your saving and investing no matter what comes your way.
Planning for a financially free retirement includes:
- Track your net worth and cash flow. Tracking your net worth and cash flow can help you stay focused on your long-term objectives, reducing stress by giving you the information you need along with concrete goals to strive for. “Net worth is what’s yours, really yours. First, add up the value of everything you own, then subtract the total amount of any debts that you have. What’s left is your net worth”, explains Investment adviser Robert LeFevre Jr., a certified public accountant and certified financial planner
- Consider your options. As you face decisions along the way, experiment with various scenarios to see how those decisions could affect your retirement.
- Make managing and tracking your finances a habit. By reviewing regularly your long-term financial plan, you’ll have the information you need to keep on track with your financial goals—no guessing needed.
Financial freedom means that you get to make life decisions without being overly stressed about the financial impact because you are prepared. You control your finances instead of being controlled by them.
References:
Kevin O’Leary: Financial Freedom
Dividends have produced forty percent (40%) of market returns.
The Ten Steps to Financial Freedom, according to Kevin O’Leary, Chairman of O’Shares ETF, and better know as “Mr. Wonderful”, are::
- Get committed to a plan. Start by coming up with a clear “why”. Know your purpose and incentives for wanting to achieve financial freedom.
- Know your numbers. You must create a budget.
- Cost planning. Live within your means. Think twice before spending. Cut cost in order to save 10% to 15% of every paycheck.
- Go to war against debt and never surrender. Debt is the opposite of passive income; it erodes your asset base while you sleep. Don’t indulge your inner spending.
- Income plan. Focus on increasing income more than decreasing spending. Earning more is key. Before you spend, save. Invest surplus cash before you spend. Purchase assets that pay cash flow like dividend stocks, bonds or rental real estate.
- Emergency planning. Your the CEO of the business of your own life. Have cash reserve of three to six months of essential expenses. Remember, your psychology is always working against you and achieving financial freedom.
- If it matters, measure it. Know your expenses and income. Keep track of everything to ensure you can course correct if something goes wrong.
- Tax planning. Think about how much money you can save with simple tax planning. Use traditional IRA or Roth IRA. Also, consider donating to charities.
- Financial advisor. Hire a financial coach to help manage your money.
- Freedom formula. Freedom is when you have enough passive income generated from your assets to cover your essential expenses.
https://youtu.be/HsUQoEOu_bE