In my last column, we covered that in this country we do not receive any courses in high school or college to teach us how to plan for a successful financial future or how to manage our money. The result is most people in the United States fail to achieve financial security in their later years.
Let me demonstrate how important all of this is in determining the outcome of one’s financial future. Accomplishing any goal includes charting a course from one destination to another. Therefore, the science of navigation holds the critical key to accomplishment of your goals.
If you attempted to sail a boat from San Francisco to Hawaii, without any maps and only a compass, you would most certainly fail; it is an awfully big ocean, and you are trying to hit a tiny little speck of an island. However, the captain of a ship setting sail for Hawaii is going to successfully arrives 99.9 percent of the time. Therefore, it might bear asking, “What did the captain of the ship do in this illustration that you did not?”
The answer is, he recognized that it is physically impossible to sail from San Francisco to Hawaii in a single step. Therefore, before leaving port, he plotted a detailed course from San Francisco to Hawaii, breaking the impossible journey down into smaller, obtainable sub-journeys. These sub-journeys are called coordinate points.
Once finished, the captain then leaves San Francisco, but he is no longer focusing on Hawaii as the principal goal; he is focusing on coordinate point A, just 20 miles from shore. When he reaches point A, he then focuses on point B, just 20 miles from there. He continues this process until finally he is all the way to point Z, just one-step away from Hawaii; and he only has another 20 miles to go. Reaching point Z is no harder than reaching point A, but it is the accomplishment of this goal.
What is the relevance of this to one’s personal financial management? I have yet to meet a new client who could guess within $200,000, how many dollars they would need to accumulate, to accomplish their retirement goal. In fact, do you believe you can accurately guess the right amount within $200,000? If you do, please write your answer down, and we can later check out how accurate you were after we explore this in a little more depth.
What is missing for most people in the process of trying to achieve their long-term goals is the use of the same type of structured procedure the captain uses. Let me explain.
If people had to pay cash for their homes, how many people in the United States do you think would ever own a home? Unfortunately, the answer is not very many.
What makes home ownership possible in this country is a unique structure called a 30-year home loan. This structure takes the impossible task of paying cash for a home and breaks it down into smaller, more obtainable monthly payments.
Does this sound familiar? It should because it is the theory of navigation we discussed above, and you are already using it on almost every major project in your life that is working.
Now, what do you think the single largest expense in your life is going to be?
If you are like most people, you probably feel it is your home – right? Unfortunately, acquiring the asset base you will need for your retirement is going to dwarf the cost of your home. Additionally, if you have more than one college-bound child, providing for their college education will be another horrendously high expense. How horrendous? Forbes recently projected that to provide a child four years of college education in the year 2030 at a public school will be $292,000, and $460,000 for a private school.
What about your retirement? Assuming a 2 percent inflation, if a 35-year-old today wants to have a retirement income equivalent to what $4,000 a month will buy today, he or she will need to build an estate of $1,285,439 by his or her 65th birthday to achieve this goal.
Can you tell me how to get $1,285,439 in one-step, legally? Probably not, because that is what you might call an impossible journey.
In fact, please take a moment and focus on just how impossible getting $1,285,439 really is. Is there any way to do that?
Yes, by applying the science of navigation, we can make impossible journeys possible. Assuming a 5 percent investment return and using a gradient formula method of funding, if we started saving $1,387 a month at age 35, by age 65 we would have $1,285,439.
A minute ago, this problem was so large; it was impossible to comprehend. Now, using the theory of navigation, we have broken it down to something to which each of us can relate.
What if you can’t afford $1,387 a month; does that mean you cannot retire? Of course not; it only means you have selected parameters for your goal which exceed your financial capabilities. By working a little longer, or receiving a little less per month in retirement, you can substantially lower this monthly investment requirement.
The point is that every goal can be reduced to a monthly price tag. Everyone knows the monthly price tag for their home or car; it’s your house or car payment. Yet most people do not have a clue as to what they need to be setting aside each month to guarantee their retirement, or children’s college education expenses.
If you do not pay for something you want, what happens to it? If you choose to stop paying your car payment, what is going to happen to your car? That is right, it will be repossessed. What about your home loan? If you decide to not to pay your house payments anymore, the lender would foreclose on your home.
Unfortunately, as the majority of elderly Americans in this country are finding, your retirement and/or children’s education are also at risk if you fail to pay for them. That is why learning the crucial elements that make up the science of personal financial management are so critical for your success.
