Soundbite: How Much is Enough: What’s Your Number?

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Last week, we talked about the 4% Rule, which is a rough guide to calculating a fund value that you should be able to live on for the rest of your life. This week, I wanted to build on the idea a little further and go into a little more detail around the question: ‘How much is enough?’ Or, put another way, ‘what is your number?’

As we shall see, it might not be a single number and the question of how much is enough can also be open to some interpretation too…

Resources mentioned

Link to the Podcast feedback survey

The Property Voice Live on 7th October – Workshop Event Details

The Number – this is a spreadsheet that I developed to help us to determine how much of an investment fund we need to retire or achieve financial independence before retirement. You can see the original blog post here or drop me an email and I will send you the spreadsheet.

Tony Robbins has developed an app called Money, which will help you to calculate those levels of financial security, independence and freedom that I spoke about It doesn’t really look at the asset or investment fund side of that equation though, so my own The Number spreadsheet can be useful to accompany that.

Tim Ferris developed a concept and accompanying spreadsheet that he called Dreamline Costing, which is worth a look.

Then, Mr Money Moustache can also help you get motivated to saving more of your income. For example, in one of the classic MMM blog posts he shows that by increasing your rate of saving from 10% to 20% of income, you can shave a staggering 14 years off your working life.

Today’s must do’s

Join me at The Property Voice Live!

Measure your financial goals and targets using the 5 stages along the financial spectrum outlined in today’s show, Financial: Safety, Security, Independence, Freedom and Financially Carefree. Then set your investment fund to meet it. Finally, go do it!

Subscribe to and review the show in iTunes…and while you are at it please help us to spread the word by telling all your friends too!

Send in your property stories, questions or moans to podcast@thepropertyvoice.net and we will try and feature YOU on the show too!

Property Investor Toolkit – here is the book link on amazon.co.uk & amazon.com

Get talking!

Join in the discussion, either here in the comments section below, or by emailing us at podcast@thepropertyvoice.net

Start a conversation on Twitter with us @PropertyVoiceUK or on our Facebook page

Transcription of the show

Hello and welcome to another episode of The Property Voice podcast. My name is Richard Brown and, as always, it’s a pleasure to have you join me on the show again today.

Last week, we talked about the 4% Rule, which is a rough guide to calculating a fund value that you should be able to live on for the rest of your life. This week, I wanted to build on the idea a little further and go into a little more detail around the question: ‘How much is enough?’ Or, put another way, ‘what is your number?’

As we shall see, it might not be a single number and the question of how much is enough can also be open to some interpretation too…

Property Chatter

A few years ago, a really good friend and I were sat talking about investments and how long before he in particular could kiss goodbye to the day job. We asked each other, ‘what’s your number’.

In simple terms, our Number is the total value of our investment funds or our net worth, excluding the home that we live in, which in turn should produce our target annual income based on the 4% Rule.

For example, if we want to reach an annual passive income of £50,000 before tax, then our Number would be £1.25m. That’s because 4% of £1.25m is £50,000.

However, how do we arrive at our annual income target in the first place? Our annual income needs might not be the same as our current income, our future income say close to retirement or some other number plucked from the air because it sounds good.

I often hear people talking of generating a monthly income of £3,000, £5,000 or £10,000 for example…but these numbers sound quite round and random, don’t they?

I also ask people what they want to earn and they often say something like, ‘I want to replace my current income’ as an answer.

However, there is something of a scale in terms of financial needs and wants that might look something like this.

Financial Safety – this could be defined as an annual income that would keep you out of trouble for a while, whilst you figure something else out. It would probably cover your mortgage or rent and other main debt repayments (if any) for a period of say 6 months or a year. It won’t replace your income and it won’t make you rich either. What it will do is allow you to sleep better at night knowing that you are ahead of the majority of the people in the UK, who would be in significant financial difficulty very quickly if they lost their job. The idea of this target is as a safety net only and should be your first goal to reach. It could in fact be a small rainy day fund rather than an income goal as such.

Financial Security – this will be an income sufficient enough to cover your basic living expenses only. It will include the rent or mortgage payments, the bills and food plus a basic allowance for clothing. It is not a luxurious lifestyle we are talking about here; it is instead a simple and functional one. It means we can probably survive living a modest lifestyle without having much in the way of luxuries, meals out, entertainment or flashy brands. You wouldn’t exactly say it was an aspirational position to aim at, but it is a secure one…hence the name. This should be our second target and is probably still below our current income.

Financial Independence – I have a caveat to what I am about to say about this in a minute. However, put simply, financial independence is the income we would need to quit our job. It is therefore the job-replacement income and so is many people’s real target to reach.

My caveat to this is that of what I call the ‘lifestyle qualification’. If you currently live in leafy Surrey, holiday twice or more a year, dine out a few times a week and renew your BMW or Mercedes every 3 years, this will also come at a significant cost. But, do you really need this sort of lifestyle to be truly financially independent? For example, you could live in a lower priced part of the UK or even another country to reduce some of these living expenses.

This is why I often challenge people that come to me with a goal of income replacement within 1-5 years when they have a starting investment fund of £4.50. Yes, I know there are ways of making money when you don’t have much to start with and I will mention a few later. However, if you are working full-time and want to quit your job without taking on another one, then something’s got to give. Of course, the opposite could also be true…if you happen to live in meagre surroundings now, with barely enough money to make life feel too comfortable, then perhaps you do need an upgrade on your current income to achieve a satisfactory standard of living.

In other words, this Financial Independence income target is perhaps the one most open to interpretation or debate. So, have a look at what you NEED or HOW you could live in order to arrive at a comfortable lifestyle, rather than what you necessarily WANT to live on, is what I would suggest when looking at this target figure. The ‘wants’ bit comes next…

Financial Freedom – this is an income target that not only covers your living expenses, but makes you feel that you can have many of life’s luxuries too. This is probably the first financial freedom figure you arrived at when I spoke of it just now, plus a bonus of 30% or so on top…just because! It is an income that means you can live as you do today, perhaps with an upgrade to business class instead of economy and should leave you feeling contented and able to withstand a storm or two or support others in need along the way if necessary.

Financially Carefree – this is an income target that brings you all the toys that you hoped and wished for. It might include several homes, several top marque cars, luxury and designer brands, regular international travel, fine dining, private member clubs and these sorts of things. You will be able to support a range of good causes without having to even think about it. Your concerns will be more about quality, exclusivity and ease of getting what you want, rather than having to ask the price as the opening question. You should be able to leave a lasting financial legacy that should long outlive you. This is the stuff that quite literally dreams are made of! This could be our ultimate destination…unless you really have to become a billionaire, which is beyond the scope of today’s discussion.

Now, I have used the terms Financial Safety, Security, Independence, Freedom and Financially Carefree here…other people may use some slightly different terms but they boil down to the same sort of concept.

The idea is to look at our finances and so our income goals and targets on a linear scale rather than one single absolute number. There are a number of reasons why this is a good thing to do.

First, it is a realistic perspective, which allows you to set an initial goal that is perhaps more attainable when you get started. It is often said that people over-estimate their short-term goals, whilst underestimating their long-term goals. This sort of financial goal setting along a scale might help to avoid these traps therefore.

Second, it allows plans to be made that are more progressive in nature, a bit like going around the bases in a baseball, softball or rounders game. One base at a time with the overall aim of getting back home without getting out! So, it’s logical, it also steps up as our experience, resources and confidence grows.

Third, it allows us to set a stretch goal or a ‘someday goal’ that might really be the stuff dreams are made of, but without scaring the living daylights out of us! To illustrate the point, when I set my very first income goal it was £25,000 a year as a modest pension income. This was something of a Financial Security goal, albeit 25 years down the line. As I outlined last time, having then effectively fixed that problem with my very first investment property purchase, I was able to reset my goals and move along the scale from Financial Security to Financial Independence instead.

In my own case, I set my first financial independence goal not based on my last employed income when I worked full-time, which was around £100k a year. Instead, I stripped out some of the luxury or optional items of expenditure to arrive at a comfortable income goal well below that figure. I managed to achieve this passive income goal within around 2 years and was slowed down mostly due to the time taken to undertake projects and recycle my cash fund.

After achieving this first financial independence figure, I was again able to rest my goal to full Financial Independence, which I hit around 3 years in and then to true Financial Freedom, which I hit around 5 years in more or less. I now sit somewhere between Financial Freedom and being truly Financially Carefree and to be completely honest with you; it is simply a case of time and letting the power of compound growth, delayed gratification and repeating the same sorts of principles that will take me there. However, I am secure in the knowledge that if it all had to stop tomorrow, then I would be in decent shape.

I have decided to share some of my own experience not to show off in any way. In fact, some of you might be thinking, ‘is that it?’ I imagine. The points I wanted to share are that a) we can use the scale of financial goal setting to move forward and map out our journey in stages and b) to also show that financial success through property investing, whilst extremely effective, is not an overnight fix. It does take time, it does take patience and resilience and it does require diligent and persistent application of sound investment principles to get to where we want to be. But it will produce results and it will surprise you how the snowball gathers momentum along the way too!

So, now that you have your various financial freedom goals and targets, you can use these to work up to the target investment fund required. I will let you decide whether or not to include an element of the state or any other pension into your figures. So, that’s your call. In my own case, I am not totally confident that the state pension can always be relied upon decades down the line, but that’s just a personal view.

All you really need to do is to apply the 4% Rule we discussed last time as follows:

  1. Work out your target safe withdrawal rate final investment fund by multiplying the target annual income figure by 25. For example, £50k becomes £1.25m as previously said (£50k x 25).
  2. Work out your investment starting fund requirements by working out 4% of our target investment fund. It’s also £50,000 if our target income is also £50,000, however, remember that this is based on 25 year’s growth and reinvested net cashflow along the way as well, so don’t lose sight of these assumptions. It will take some time to save up this fund and then you will have to be patient enough to let it grow with the benefit of both compound capital growth and reinvested rental profits for around 25 years. So, it’s not a get rich quick scheme.

If you can’t afford to wait 25 years to turn your fund into your target income goal or if you don’t have the starting fund to begin with, then you need to do something differently than this patient set and forget plan.

Here are some options to help accelerate your rate of growth…

  1. Accelerate the rate of growth for the getting started fund – this could literally be by saving more of your current income or it could come from earning more (second job or business, etc.) or by selling other assets or unnecessary possessions on eBay for example. I have done all of these, as I saw the merit in what they could become if reinvested wisely.
  2. Make your investment fund work harder for you – this could be by taking advantage of tax breaks to retain higher net growth on savings, such as in a stocks and shares ISA, adopting added value strategies such as the buy-refurbish-refinance model and fast-turnaround property trading or by investing in properties with a higher overall investment return potential, such as HMOs, short-term lets and higher return locations both inside and outside the UK…provided you do it correctly that is! On that note, if you want to see some affordable properties with 15% or more gross yield, then just drop me a note and I will share with you some of what I have been getting involved with recently.
  3. Use leverage to your advantage – I am not simply talking about higher loan-to-value borrowing here. In fact, too high and it can be counter-productive in terms of risk exposure if you are not careful. But an 80% or even in some cases, an 85% loan to value mortgage means less of your own cash and more of the banks’ to leverage off. Joint ventures are another possibility…your time and know-how combined with another investor’s money and the profits can start to snowball if these are invested into long-term assets. Finally, leverage people, networks and systems to multiply your personal productivity and reach. Examples could include using a specialist deal sourcer or service, better material buying costs through membership of a landlord buying club like LNPG or a property management system to become more organised and so free up more of your time to concentrate on the things that will generate the best return on your time.

Finally, a few tools and resources that might help you with some of the things I have spoken about today.

In terms of defining your Number – I have developed a spreadsheet that helps to do this, drop me a line and I would be happy to share it with you.

You might also want to check out some of the following additional resources from other people:

Tony Robbins has developed an app called Money, which accompanies two of his recent finance books – the app will help you to calculate those levels of financial security, independence and freedom that I spoke about earlier under slightly different names. It doesn’t really look at the asset or investment fund side of that equation though, so my own The Number spreadsheet can be useful to accompany that.

Tim Ferris developed a concept and accompanying spreadsheet that he called Dreamline Costing, which is worth a look.

Then, Mr Money Moustache can also help you get motivated to saving more of your income. For example, in one of the classic MMM blog posts he shows that by increasing your rate of saving from 10% to 20% of income, you can shave a staggering 14 years off your working life. This assumes that you earn 5% on your money…so imagine how many years you could knock off with better returns than that!

In summary, then.

Think of your financial goals as a range along a spectrum rather than one absolute figure. You can move through financial safety, security, independence, freedom and onto becoming financially carefree by adopting this approach.

Use the 4% rule to work out both your target investment fund and your starting fund for the 25-year set and forget plan.

Adopt one of more of the tips under the 3 accelerate your rate of progress suggestions if you want to move along more quickly, which if you recall are:

  1. Save more money from your income
  2. Make your investment fund work harder for you
  3. Use all forms of leverage to multiply your performance and results

That’s it for today then, I felt that I should add another episode around the general topic of setting financial goals and to really address the question of how much really is enough. Whether you seek a little bit of financial safety or security, the extra comfort of financial independence or the true lifestyle living of financial freedom or being financially carefree, hopefully you will at least know what these terms mean and how to calculate them. This alone should help you with your targets and goal setting. The next step is to make a plan to make it all happen!

Talking of making plans to make things happen. If you are waiting until the last minute before buying tickets to my upcoming workshop The Property Voice Live on Saturday 7th October, then don’t wait any longer now please. For planning purposes tickets will not be available to buy after this Saturday 30th September, so don’t hesitate any longer will you and get over to the event page to secure your spot straight away. Full details are in the show notes and I won’t mention tickets for this event again I promise you!

As usual, email me podcast@thepropertyvoice.net if you want to talk about anything from today’s show or more generally in property investing. As usual, the show notes will be over at the website www.thepropertyvoice.net

But for now, all I want to say is thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao ciao.

The post Soundbite: How Much is Enough: What’s Your Number? appeared first on The Property Voice.

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