In the first three parts of our series, you learned about Financial Freedom, The Five Uses of Your Money, and The Five Money Management Principles. Now it is time to unveil the 15-minute collaborative process and tool we will use to help you determine your Personalized Five Uses of Money. Then, once that is determined, a simple savings strategy for you to follow which will work you towards Financial Freedom.
Of the Five Uses of Money (plus your income), there are three that are fairly easy to harness through one simple source – Your Tax Return. Below is a snapshot from our tool that helps to find the exact values (the “Total” auto-fills to your Personalized Five Uses of Money):
Your Owe (Debt) can be determined by referencing a monthly bank statement. Plus, most people intuitively know what they pay monthly towards debt obligations. This is a good time to note that the collaborative nature of this exercise (P&A plus you) helps streamline the data gathering process.
Next is determining your Grow or current savings strategy. Retirement contributions can be found on your tax return as noted below and other savings contributions can be easily found on investment account statements. Lastly, growth in your bank savings accounts are savings dollars. Although not earning much at current rates, they should be viewed as available dollars for Grow.
So, what is left? Live. Groceries, entertainment, utilities, gym membership dues, dining, gas…the list goes on and on. But you don’t need to figure that out because we know the rest of the puzzle. If there are only five uses of your money, and we know four of them, we can use 2nd grade math to determine your Live! There you have it, your Personalized Five Uses of Money. An example is shown below.
Now we bring it all together: Desired Financial Freedom Age, Five Money Management Principles and your Personalized Fives Uses of Money to develop a Savings Strategy. We do this by using our Savings Needs Analysis Tool. This is no substitute to developing a comprehensive plan using our financial planning software (Money Guide Pro), however, it is a good interim step and is very quick and easy.
Below is a snapshot of the tool and a sample case. In this situation, you can see that the desired Live + Give to recreate from Investments ties back to the Five Uses of Money (Live + Give) as does the Current Grow. When we compare the current Grow + Company Match against the Grow Target in order for this client to achieve financial freedom by age 67, we see that they are right on track assuming a 7.5% annualized investment rate of return.
The real power of this tool comes when we change the variables through a collaborative meeting. When you change the Financial Freedom age, the Grow Target changes. It is dynamic and can help run a variety of different scenarios.
In the end, this is a 15-minute collaborative exercise that can bring a high degree of transparency to how your monies are being used. The ultimate goal in this life is to find true contentment. Finding it in our financial lives clears the way for purposeful living in many other areas. When we are truly content, we will do well, be generous, and live for the things that matter. It is one of our goals as your advisor to help you get there and this process and tool is a great way to start.
In Part V of our series, we will talk about the final piece to the puzzle and the component that has the most profound effect on your long-term plan. Maximizing the return ON your money while ensuring the return OF your money.
