10 Keys to Financial Success

Hey, what's up everyone and welcome to the School of Personal Finance. So I was sitting around the other night thinking about how I've been a financial advisor for over 20 years now. During those 20 years, I have helped people that were very wealthy, I've helped people who were barely making ends meet. Recently, I've been helping much more of the younger generation, people within the age ranges of like 25 to 45 through a monthly subscription model. And during all this time, I have learned so many different things about what it takes to become financially secure or to live your best life or to use money as a tool to do things that you want to do. So I thought it would be a good idea to make a video talking about the top 10 things that I've learned throughout those years and the successes that I've seen people have and what they've done to get there. So I hope you find this one helpful. Let's get to it. All right, number one, and it might sound very obvious, and that is to focus on your income. If you figure this one out and you could get a nice big income, everything else, it becomes much less important. It's a much easier conversation when I'm sitting with somebody who makes $800,000 a year compared to somebody that makes $80,000 a year. So education, skills, starting your own business, figuring out a way to have that big income, it just makes everything so much easier to plan for. Now that is not to say that it's not possible if you have a small income, if you don't make that much money. It's still very possible to become wealthy and to be financially free even on a lower income. It's just more difficult. You have to be more disciplined and you have to track everything much closer. So having a big income just makes it easier. All right, and then number two is knowing how much money you spend every month. And I call this turning the lights on, and it really is the first step when I'm working with somebody. You have to know how much money you're spending every month so we could see, do you have the happy gap, I call it? Do you have more income than you have expenses going out? So we could see how do we start diverting that money into different types of investments in order to make it grow. But the first step is knowing how much money do I spend every month and then being able to start making decisions around it. And then the third thing that I find is very common with people that have been financially successful in life, and that is that they prioritize tomorrow, their future over today. So they set up automations, they pay themselves first, they save money before it hits their bank accounts so they have no other options. Automation is key, and I preach that all the time. You take the thought process out of it, you just make it happen, and then you're left to deal with whatever is left after you've already paid yourself and saved that money for your future. And then number four, which piggybacks on number three, and that is having clear goals, setting saving goals for your future. And maybe it's not just for retirement, maybe it's to purchase a house or to buy a new car or to get out of debt or whatever it may be, but having a clear goal and a plan of attack to getting to that goal and then automating it so that you're going to reach it no matter what happens. I mean, obviously life doesn't always turn out exactly how we planned, but you need to have that vision, you need to have those goals and set up ways that you're going to track it. So now I'm going to introduce to you here my financial calculator, and I'm going to do a video in the future where I just play with numbers and show you. I would love for you to download this app, I'll show it to you here. It's called the 10B2 calculator, but I use it all the time to just play with numbers and just project things going into the future, like how much money would I have to save to hit a certain level or what rate of return do I need in order to accumulate the amount that I want to accumulate. So if we look at like a small little example using the calculator here, let's say that your goal is you want to save a million dollars in the next 35 years. So let's say you're 30 years old and you have a goal, I want a million dollars tax-free by the time I am 65 years old. So what do I need in order to do that? And let's make the assumption that you're going to be saving in a Roth IRA, which is very realistic for you to do. So if we just punch in the calculator here that you have a $1 million future value, which is your future goal, that you could get an 8% rate of return, which would be like investing in the S&P 500 index fund over the next 35 years. That is historically produced around 8%, a little bit above 8%. And then we say that you have 35 years to get there, what amount of money, how much would you need to save each and every month to hit that $1 million goal? And by punching it in here, we could see that you would only need to save $436 a month. So it's a little bit more than $5,200 a year, which is actually less than the maximum Roth IRA contribution that you could make every year. So this is very realistic and you would just have to be disciplined in order to do it, right? It's like you get not as nice of a car. You give up a little bit today in order to have what you want in the future. You could do it and that's $1 million tax-free 35 years from now. Now with this calculator, I could run all different types of scenarios, different lengths of time, different savings amount, different rates of return, see what the effect is with each one. So I'll make a video just on that in the near future. And then number five is the importance of starting early. So I've seen people who make very little money, but they started saving when they were very young and they were consistent and they did it for a very long period of time and they accumulated a very large amount of wealth. So this could be somebody like a teacher would be a very good example who starts working in their early 20s, they start contributing to their 403B plan right off the bat because another teacher told them that they should do so. They increase it every year with a pay raise and by the time they retire without even knowing it, they've accumulated a lot of money in that 403B. Not to mention that they're going to have a pension as well. But the importance of starting early, it makes such a huge difference and I could make a whole another video just on that and how the numbers play out for somebody who starts in their early 20s compared to somebody that starts in their early 40s. A very small amount could turn eventually into a very large amount. So start small, just get going, get in the habit of doing it. But starting early, it is a secret to success that many have done before me. All right. And now number six, it is an important one and not everybody loves this one. And that is investing for growth for your long term money. So if you are young, if you are investing for retirement, you have to invest in the stock market for growth. There is such a huge difference and we could run situations in that 10B2 calculator showing what those differences would be, where if you earn 3% compared to earning 8%, the amount of money that you have at the end, it is dramatically less. So investing for growth, not worrying about the ups and downs in the market, as long as you have a long term time horizon and it makes no impact if the market drops by 30%. It does not affect your life if that money is being held, is being invested for 20 years, 30 years, 15 years, just keep investing for growth, keep putting money in, dollar cost averaging every two weeks, every month, whatever it is, but you have to invest for growth. You have to go for it. You have to try to get those 8% rate of returns year in and year out. And it will not be a straight linear line. You will have some years where you make 15% or 20% and you will have some years where you lose 20%, 30%. I mean 2008, 2009 was a real gut check for a lot of people who lost 40% of their retirement savings. So you do not want to be in this situation if you are knocking on retirement's door and you are going to start pulling out the money fairly soon. But if you have a long time horizon, you just have to invest and forget it. Set it and forget it. Invest for growth and hopefully at the end it pays off. All right, and then number seven is diversification. And not just asset diversification, but also tax diversification. So for asset allocation, you know what that means. Don't put all your eggs in one basket, diversify. Own stocks, own bonds, own mutual funds, ETFs, own precious metals, own real estate, which you know that I am a big fan of. And these days, you know, maybe own some NFTs and some cryptocurrencies as well to round out your portfolio. Now, I know that there are some very smart, successful people like Warren Buffett or Mark Cuban who say, you know, diversification is for idiots. But that is because they started their own companies and they bet on themselves. And they pushed all their chips in on building their own companies and making a fortune doing so. And for them, it worked out great. But for your average normal people, having a very well diversified investment portfolio, it is a very smart thing to do. And what I mean by tax diversification, the last thing you want is in retirement to have all of your money in traditional IRAs or 401ks. When you pull it out, it gets taxed as ordinary income. We call this the tax bomb. So having money in Roth IRAs where it's going to come out tax-free is a very smart idea and you need to start preparing early for that. Also, investing in real estate, you get tax preferential treatment on rental income or when you sell real estate, you pay capital gains tax. Even investing in brokerage accounts outside of retirement accounts, that could be taxed at capital gains rates when you go to sell. So there's a lot of tax planning that goes into all this. And the last thing you want is to have all of your money being taxed, every dollar that you pull out once you're in retirement because who knows what tax rates will look like at that time. All right. And then the eighth key to financial success is protecting yourself and your loved ones using the right types of insurance. So for example, life insurance. Having term life insurance that is more than enough to protect your loved ones if the worst were to happen to you. It's something that is sometimes overlooked and it's so important because that's the last thing you want is to have a premature death. Yes, you'll be gone, so you won't have to worry about it, but you don't want to leave your family, your loved ones in a financial bind at that time. So that is very important. But then also like disability insurance and making sure that you are protecting your income if something were to happen to you. The point of insurance is to transfer the risk. You don't want to take on the risk of having to pay to rebuild your house if it were to burn down. You need to transfer that risk to the insurance company. So that's the point of having insurance. It's not an investment. It is a transfer of risk to make yourself whole if something were to happen that is unexpected. So be smart about the insurance. Make sure you have all the ones that you need to protect everybody around you, including yourself. All right. And then number nine is one that is just becoming so much harder and harder for people to actually achieve and that is having more guaranteed income than their monthly expenses. So people with pensions. This is why pensions are gold. People between pensions and Social Security that could cover their monthly expenses, then they're financially free. Then whatever happens in their retirement accounts or investment accounts, it's not going to have a dramatic impact on their day-to-day living. But most of us, we're not going to have that luxury. So how do you get guaranteed income? This will be one good thing out of interest rates starting to go up is maybe at some point you could buy a guaranteed lifetime income through a fixed annuity or something like that where interest rates are high enough that the payout actually makes sense. But right now with interest rates so low, it costs so much money to buy yourself a lifetime income that it's very tough to do where most people instead are going to have to rely on taking withdrawals, taking distributions from their retirement accounts, creating their own pension through their retirement accounts, and then also relying heavily on Social Security. But this is another reason why I love real estate. Even though it's not guaranteed, I mean, those rents, they do come in and that could be a great source of retirement income where it also goes up with inflation and you have the house appreciating. Just another reason why I love real estate. I've tried to build my own pension because I knew that I wouldn't have one being self-employed. So between my real estate being my pension and hopefully Social Security being there, that will cover my monthly expenses and then my investment accounts will be the party money. But we'll see what happens. But having guaranteed income, it does make everything much better in retirement. And then the last one, number 10, and I find this so common among very wealthy and successful people and that is that they run their personal life like a business. So they are tracking revenue, expenses, they have financial statements, they know what's going on on their tax returns, they're very organized, they have it down to a science. They are tracking all of this stuff and they are running their personal life like a business. So I know for many people that are not interested in personal finance, and if you're watching, this hopefully you're either interested or you're learning and you want to become more interested. But they run it like they're the CFO of their own corporation. They're the chief financial officer and they are keeping very good track of what their financial situation is. Run that thing like a business, keep track of everything, and you will be destined for success. All right, everybody, that is it for this one. I hope that you found that helpful. Please make sure to hit that like button if you enjoyed this video. Subscribe to the channel if you've not done so already, and I'll see you all next week. Thanks.