Taking Stock.

This article is called “Taking Stock”. We are going to talk about the two most important principles to start your road to building wealth.

Know Where You Are

In 2008, I consulted an investment company and ended up moving most of my investments into their vehicles. Over the past six years, I received my quarterly reports, but I never really had a good idea of how they were doing because the reports never told me what my overall gain was. This was a big problem – and against the principle of knowing where you are. In the end, I moved all my

Net Worth is important!

Net Worth is the true measure of Wealth

investments into institutions where I could see clearly my money growing – and going (fees). In order to become wealthy, you have to start somewhere. Last week, we said Start Today. This week, you need to focus on Knowing Where You Are. It’s time to determine your financial inventory.

Your financial inventory will help you determine your net worth, which is the quintessential measure of your true wealth. If you are not familiar with calculating your net worth, check out my article called “Calculate Your Net Worth“, which gives you a short summary of how to proceed, and also a link to my Net Worth Worksheet. Once you complete a net worth statement, you will have a definitive inventory of all your financial assets and liabilities. We will be using this inventory in the upcoming months.

Know Where You Are Going

The second principle that will help you start your wealth journey is to understand your future objective – make a goal. If you want to take a driving vacation in another town, you need to make a plan. Where is the destination town? Is it 30 kilometers away or 300? You need to prepare your vehicle, find a place to stay, pace yourself on the drive, and plan your actual driving route to the destination (accounting for possible problems like bad weather, construction and traffic). When you check to make sure your car has a full tank of gas and that it is in good working order, you are knowing where you are – you’re taking inventory of your current state. Once you plan the route, make reservations and account for possible delays, you know where you are going.

In order to retire wealthy, how much money will you need? How will you get it? Are you hoping for a lucky windfall in the lottery or an inheritance from a rich parent? Most of us won’t have such luck, and it’s up to us to get ourselves to the land of milk and honey (or wealth and money). Once you have a concrete idea in your head of where you want to be, then you can develop a plan

to meet your future needs. We’ll discuss how to make that plan in the upcoming weeks.

When planning a retirement over 10 years away, you can’t rely solely on CPP (Canada Pension Plan) and Old Age Security (OAS) to fund your golden years. The income from CPP and OAS isn’t currently matching the rate of inflation, and the costs are soaring out of control. There have been many recent articles (2014 / 2015) about the dwindling funds in those plans and consequently, those in their working years are going to be paying even more so there will be something for their retirement as the baby boomers draw on the government funds currently in place.

How much is enough to retire on? Expect that you will need between 50% and 80% of your current gross income in order to retire comfortably.

Why so big a spread?!

The reason for the huge variation is that every financial situation is different. If you are a person who is mortgage-free, has no other debts, aren’t funding your child’s education (or adulthood), have no unexpected medical emergencies, and don’t plan on spending excessively above your current lifestyle (ie., space tourism), you will likely be able to maintain your lifestyle with 50% of what you are earning now. For most people, their mortgage is the biggest expense and hopefully you won’t be paying for your house into your retirement. If you plan on touring the world and doing everything you put off doing during your working years, then you should consider setting a higher goal for your retirement savings.

Here’s a sample calculation to help you understand what I mean. Joe is currently making $50,000 per year. He hopes to retire with no debts, no unplanned adult children living at home and with no plans to spend exorbitantly in his retirement years. He’s also hoping to live until at least 90 years old. We will assume that Joe fits in with the 50% model. That would mean that Joe will need $25,000 (of his own money – he will get CPP when he retires, as well as OAS if his yearly income is too low).  For the sake of simplicity, we aren’t not taking into account any growth on investments, inflation, unexpected medical costs and other factors.

Life expectancy: 90
Retirement age: 65
Yearly amount Joe needs to provide from his own savings: $25,000
25 years of income @ $25,000 = $625,000 total savings required

Joe will need $625,000 in retirement savings when he retires at 65 based on the low expense, 50% model. He will still receive CPP and possibly OAS as well. There are still unanswered questions for Joe. What if he lives longer than 90? What if there is a terminal illness with high medical expenses? What if Joe’s children get divorced and need some help getting back on their feet? All of these circumstances would mean Joe needs more than $625,000.

As you can see, if Joe has not started saving already or has no pension plan, he’s got some work to do.

If you are like Joe, it’s time to think about taking a financial inventory (part of your net worth statement), and start putting aside some money Today.

Next Week: Start Your Journey

Once you have a financial inventory, a net worth statement and a goal, you can look at planning how to reach that goal. We’ll start talking about that next week.

Starting Off.

If you don’t know how to proceed, baby steps will get you there.

The best way to start your journey to a wealthy retirement is… to start your journey. Today.

If you are like me, you spend more time researching and thinking and planning than actually doing.

I built a play structure in my backyard for my young children in 2010. The planning started in 2008. I drew some pictures, made some measurements in the backyard, made 10 trips to home depot, made a list of items to buy, researched the proper weight ratio to beam length for three swings, weighed the pros and cons of using 4x4s vs 6x6s, and costed everything out… 5 times…. in 2010, I finally decided that I better build it before my kids became teenagers (my son was 2 at the time). Once I had the materials and started building, it took me just over two weekends to finish up. After standing on the second story with a well deserved beer I wondered why it took me so long to get here, and then I began to feel some regret at waiting so long. The regret, however, passed quickly when I saw my son slide down into my arms from the second level (I had to lift him up since the stairs were too large). I watched him carefully as he waddled his way across the platform, with baby steps, and the look in his eyes when he realized he was taller than daddy was once-in-a-lifetime.

Financial planning is daunting at the beginning. There is too much information. There are too many options. However, if you’ve not begun, there is only one choice – to get started. If you’re new to finances, you’ll appreciate the next few weeks as we get started. With baby steps.

Starting next week, I’ll be providing Action Items that I urge you to act on, and Challenge Items for those who are already on their way to becoming wealthy.

Be well. Have fun, enjoy life!

Baby steps to success

One step at a time to learn and build on what you know.