Setting S.M.A.R.T. Financial Goals
There is an old saying by Lewis Carroll that says “If you don’t know where you’re going, any road will get you there.” Truer words have never been said. It is imperative that before you embark down any path that you clearly describe the end state. This will not only serve as a reminder for the uncomfortable decisions along your journey, but will also allow you to set benchmarks by which success can be measured.
For example, you know you want to retire in Calabasas with the Kardashians but don’t quite know what it will cost to acquire the goal. By following these steps, you will know the importance of identifying a property, understanding what the avg. appreciation rate for that area has been, factor in inflation, look at your current financial situation to make necessary changes, determine if this is still feasible, and based on the investment strategy set a plan for purchasing.
Tip
The best financial gurus are able to calculate the Future Value of their goals by factoring in things like inflation.
Creating a Statement of Cash Flows
Without knowing how much money is coming in and going out, you will not be able to determine how long it will take to achieve your goals. The Statement of Cash Flows goes through the different types of income and expenses and categorizes them as necessary or discretionary. Similar to a budget, this process allows you to identify what absolutely has to happen (housing expense) versus the nice to haves (Disney+ subscription). Once the S.M.A.R.T. goal(s) and the investment strategy are determined, you will refer back to this statement to figure out how long it will take to achieve the goal.
After completing your Statement of Cash Flows, you determine that you are living paycheck to paycheck, what do you do now? There are a few options you have in this situation. Depending on your risk tolerance, you can look at creating new streams of income by partnering with someone in a better financial situation and offering your labor in order to increase your income and move you into a cashflow positive situation. You can participate in the gig economy and lend your writing, video editing, project management, sales, etc. talents to someone for compensation. Depending on your credit, you can get a loan to buy an asset and use the proceeds to service the debt and provide some supplemental income to you, think rental property (mortgage) or personal loan to purchase a vending machine…
Some things you want to avoid if at all possible. Looking at your expenses and saying that you are going to cut out all the luxuries for a period of time until you can afford them again. This think trap routinely leads to life creep. Whereby someone sees an increase in their income but instead of resuming their previous lifestyle, they upgrade to a fancier one by telling themselves they deserve it for all the sacrifices they’ve made. This will eventually lead you right back to a place of living paycheck to paycheck.
Tip
Budgets are good, but unless you are prioritizing the needs versus wants, you won’t be able to use them to make financial decisions for the future.
Tip
It is always better to look at the income side of the statement than the expenses side when attempting to optimize your cashflow.
Understanding Your Options
Once you know where you’re going and you know what your starting point is, you need to figure out the vehicle that will get you from start to finish. You have four vehicles to choose from: Real Estate, Business, Commodities, and Securities.
Depending on your desired end state, risk tolerance, and ability to overcome barriers to entry, you can decide to specialize in one of the four asset classes. The goal here is to understand that by becoming a Subject Matter Expert in one of them you will be able to hyper-target your dollars and achieve a critical mass amount much faster than trying to learn multiple asset classes simultaneously.
Tip
If you are going to cut back on expenses, cut back on the ones that you have little to no intention of reintroducing into your life.
Tip
Diversification is a risk mitigation strategy. When you’re starting your wealth creation journey you will have to assume more risk in order to enjoy the upside much sooner. Once you have reached a place where it makes sense to “protect the nest egg” or your "critical mass" you should look into alternative forms of investment.
Making an Informed Decision
Once you have researched all four asset classes it is time to make a decision. The key factors that need to be considered during this process are your personal risk tolerance, the barriers to entry, the average return of the asset class, and the time commitment required by each asset class.
Tip
Just because something has a high ROI doesn’t mean it is the right investment for you. Take the time to truly understand the requirements and be honest with yourself about if you have the time and energy to commit to growing the investment for the duration.
Act!
The last and most important step! Education without action is time wasted. This step is the most important and the most difficult for a lot of people. Up until this point the entire process hasn’t cost you anything but time. Things become real when it is time to “put your money where your information and training dictate”. This exercise can sometimes give way to analysis paralysis and make it so that you never really feel that you have all the information necessary to make a decision... so you don’t.
Some helpful ways to overcome this feeling are to partner with someone who has experience with the asset class you have chosen. The feeling of not going it alone is a really powerful one that is used by even the most experienced of investors.
Another way to overcome this fear is to change your mindset. Instead of looking at financial losses as just that, look at it as the tuition in the school of investing. You had to pay the cost in order to learn an important lesson and never repeat the same mistake again. In investing as in life, the losses we face are merely learning opportunities for what not to do in the future!
