Financial Serenity Month - Chapter 4

This is the last post in the Financial Serenity Month. We have been talking about retirement planning. Before we conclude this month's theme, I would like to underline the fact that financial serenity does not have to happen at the "traditional retirement age" - it is exclusively about the ability to live according to one's wishes and standards without having to work; that is, you don't have to work in order to generate the income you need. Retirement planning is discussed in this context because that means you only work if you choose to, and not because you have to.

And if I have convinced you to start setting money aside, you may now start worrying where that money is going to go. The main objective is for the money you set aside to come back to you with friends – the more, the better. And in order for that to happen, you cannot leave it parked in a savings account. Nothing against banks, they are just not a great vehicle for increasing your net worth through savings; not with an interest rate pretty close to 0%. 

The type of investment and the company, as well as the status (qualified funds versus non-qualified funds), will depend on your needs, risk tolerance and when you need to have access to the money. All investments should be personalized for you. Therefore, either you are an expert, become an expert, or hire an expert to help you. 

The one sure way to figure out which investment will bring you the most money is using the Rule of 72. This will show you how many years it will take for your investment to double. No matter the amount you invest, don’t you want to know how long it would take for your money to double? To find this out, you would take the interest rate you receive and divide it into 72. This number signifies the number of years it would take you before your money doubles without your adding anything extra. For a 1% interest it takes 72 years to double the money you deposit – let’s not even look at under 1% (which is what you get from your regular savings account at the bank). For an 8% interest rate – the average growth of the market – it would take your money 9 years to double. Would you rather wait almost a lifetime, or would you like to double it in 9 years?

Now that you understand why it is important to have a plan to exit your business into retirement, you are ready to set a system in place. And the best thing to do is to make saving for retirement a priority. If you ever heard any financial experts talk about saving money, you are probably familiar with the phrase “pay yourself first”. There is no better recipe for retirement. Whether you can direct 10% of your income towards retirement, or you need to start with a smaller amount, it is always best to start. As you get into the habit of saving, you will find it easier and more rewarding. If you struggle in the beginning and are afraid you might run out of money for current expenses, don’t worry: you are not alone.

You will find creative ways to take care of current needs as soon as you have the system in place to redirect the money from current expenses to future serenity. Since not everyone has the discipline to set money aside for retirement on a regular basis, the best thing to do is to automate it – a set date, maybe a set amount. You can always change and adjust, you only need a starting point. And remember, you can always count on help from a financial professional if you lack the knowledge, the will or the discipline to follow through.

Financial Serenity Month - Chapter 3

Last week we discussed about the retirement ideas that pertain to entrepreneurs. This week we will also include the employees in our conversation. I would like to share some scary statistics, with the hope that you take them seriously and act on the information we are sharing here.

For someone who has a job, the retirement planning is set in place by the employer, and all they have to do is follow the system. Even with all the steps already planned, a large number of Americans do not take advantage of the offers. And the scary part is that among solopreneurs and the self-employed (without the path already designed for them) the numbers are even higher.

There are some really scary statistics I want to share: only 2 out of 3 Americans save for retirement currently (according to a statistic from 2017). And if this is not bad enough, more than half of the ones who save, have less than $10,000 in their retirement account. Yet, surveys say that 51% of Americans feel they are saving enough. The article I was reading was stating that “Transamerica found that only about half of workers feel they are building a nest egg that will sustain them in retirement” (The Motley Fool, April, 16^th, 2017). While the article implies there are not enough people who are comfortable with their level of savings, my first reaction is: how can that many people even feel they have enough? Reading the statistics, I realized that only about 30% of the U.S. population has more than $10,000 in retirement savings. And with that being the case, where does the extra 21% of people get their feelings from? Did I scare you yet?

As entrepreneurs, solopreneurs and self-employed increase in numbers all across America, this is a unique opportunity for them to change these statistics. I’m not saying it is easy but it is simple: there is no other way to be and feel secure in retirement. Even employees who see their retirement coming from the employer diminish, have to also set aside money. Entrepreneurs don’t even have that luxury. There is no cushion that can provide a feeling of security. For those who can sell their business, there may be a stress-free retirement in sight. But the majority of small businesses – the solopreneurs and the home-based businesses – will probably never have that option.

If you own a sellable business and decide to sell it, the first thing you need to find out is the value. And you need to understand that the value you think it is worth and the amount of money that someone is willing to pay may be two different things – as is most often the case. After having a valuation done by a third party, such as a CPA, the next best step is talking to a financial specialist who can educate the seller in a few options – financial and insurance products – that can be set up by the buyer in order to increase the amount received by the seller through this transaction. This is a way to increase either the retirement income or the family protection, or both.

When selling the business is not an option – or if you want to have more money in retirement to ensure enough income – the best idea is to start saving as early as possible. Now, I understand that most entrepreneurs reinvest the majority of their income in order to grow their business. Even so, retirement savings must be a priority. And if the 10% that financial advisors advocate sounds like too huge and intimidating of a number, it is OK to start with a lower percentage. The main goal is to start. You can always increase the amount. Plus, something saved is always better than nothing saved. One of my favorite quotes is a Chinese proverb: “the best time to plant a tree was 20 years ago. The next best time is now.”

Saving – for retirement, for a big-ticket item, or for a rainy day – works the same way. The younger you are or the earlier you start saving, the more time you have for it to grow.  But it is never too late to start, and you are always better off starting to save NOW than Never, or even Later.

Financial Serenity Month - Chapter 2

Let's continue our conversation regarding financial serenity with some ideas for business owners this week.

For the business owners who want to grow their business to the point where it becomes their retirement vehicle, while reinvesting all their earnings back in the business might seem like the smart thing to do, it may prove a disastrous financial sacrifice in the long run. According to the sensible principle of diversification, you should never put all your eggs in one basket; and when that basket is your own business, especially if it is a service-based business that relies heavily on you, that may be a very dangerous path to follow.

A wiser decision may be to save some of the money earned through the business in a retirement account – either pre-tax or after-tax – that will accumulate over time and be there when the business owner is ready to retire. Besides the tax advantages of this plan, the main benefit consists in the fact that the retirement money is not directly tied into the business, and it is protected from any hardships that the business may encounter, plus it will be available when the owner of the business wants or has to retire.

Most people are familiar with the term “compound interest” but that is usually in an abstract sense; they are familiar with the fact that it is important, that it can work in one’s favor or against them. And for the majority of people, that is where their knowledge gets blurry. They do not understand that the more time they have, the more they can benefit from the effects of the compound interest. 

Some of the most frequently used examples show friends who save for retirement at different times. While one starts in their 20’s and only saves for about 10 years, the other starts saving at the same time the first one stops and continues saving until retirement age. Even so, the first friend ends up with more money at the time of retirement – depending on the amounts used and the interest percentage used in the example, the difference can be from a few tens of thousands to some hundreds of thousands.

The difference between the two friends comes not from the amount saved but from the time they invest. The more time you give the compound interest to work for you, the more your savings grow, while the interest gains interest upon interest.

I’m not going to get on my soap box lamenting the lack of financial education from the US school system. Even though it is important to raise the level of understanding for all the people growing up in an economy so very different from the one experienced by their parents and grandparents. While the good news is that more and more people start businesses and/or become self-employed, the bad news is that these people’s financial security and safe present and future is in their own hands, since their employers are no longer present to provide the benefits that will take care of them in the long run.

Most solopreneurs make the decision to put all of their income back into the business in order to build the business. They think that it will all pay off in the future because they will make more money and, in the end, can sell the business. Unfortunately, most of the time, this is not a solid exit strategy. Nobody wants to buy your job. Therefore, the only way to have a sellable business is by building systems that can be followed and duplicated.

For the business owners reading these lines, I would like to suggest a great book that gave me a lot to think about, and made me tweak a few things in the cash flow of my company: "Profit First" by Mike Michalowitz. He uses the principle of "pay yourself first" - so often used in personal finances - and adapts it to the set up of a company. I would encourage anyone who wants to find their financial serenity, to read Mike's book and apply the knowledge he shares. It will change your life - literally!

And if you are an employee, don't despair, there is also a path to financial serenity for you! We will talk about it next week.

Financial Serenity Month - Chapter 1

There are so many financial gurus who advocate for financial freedom – the ability to maintain your lifestyle without having to work – either by accumulating a certain amount of money that is invested to generate the income, or by generating a passive cash flow that is equal or higher to the salary/commission received from the current work.

I started my financial education in the US with Suze Orman and Robert Kiyosaki, and I always thrived to achieve the financial freedom they taught me about. And through my journey toward financial freedom I heard Tony Robbins explaining about “the science of achievement” and “the art of fulfillment”. And this cemented my commitment to achieve financial serenity.

What is financial serenity to me?
Financial serenity is a combination of financial freedom and the serenity brought on by feelings of accomplishment and fulfillment. This is the result of achieving worthy goals and reaching significance by being able to give freely to a cause one is passionate about (may that be time or money). I learned from Zig Ziglar that financial independence means you can do what you want when you want. My goal then became taking women – and a few good men – to the next level, and guiding them to financial serenity: a step beyond freedom and independence.

According to statistics, getting out of debt or saving more money – or even financial freedom – is a popular New Year’s resolution, second only to losing weight. The problem with setting this as an annual goal – over and over again – is that it really is wishful thinking, and not a well thought out plan. Therefore, the resolution is renewed the following year, rarely with any significant success. Most people want to make a leap from the have-not to the have column when it comes to their finances. They feel that they can triple their income, or annihilate their debt within the year. Tony Robbins wisely said that “most people overestimate what they can do in a year and underestimate what they can do in a decade”.

The most likely approach to achieve a financial goal is the “slight edge” – per Jeff Olson, in his book with the same title. He talks about doing small things every day that will compound over time to achieve big results. While this approach can work with any goals, from health and fitness, to relationships and personal improvement, I believe it is the only sustainable path to achieve lasting financial goals.

It is my hope that more people will have financial goals for this year than the previous, and that even more will have these goals the next year. While anyone can achieve his/her financial serenity with proper planning and a focus on the long term goal in order to stay on track, I believe that the most likely path to lead to this accomplishment is through your own business.

I'm not suggesting that an employee cannot achieve such a goal, I'm merely expressing my opinion that self-employment or business ownership can be a simpler path to it. And with that, I must explain that I am by no means saying it is easy - just a simpler formula because you hold all the cards when you own your source of income.

Let's look at some ideas on how to accomplish such a goal next week!