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    Nurturing Financial Freedom
    Nurturing Financial Freedom
    Nurturing Financial Freedom
    Ebook187 pages2 hours

    Nurturing Financial Freedom

    By Edgar Lambert and Alex Cabot

    ()

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    About this ebook

    n the ever-changing landscape of personal finance and investing, investors need to understand where they are in relation to their long-term goals. It is easy to look at an account statement and see how much we have. But understanding how much that amount will provide for us in the future is a much more complicated task. Nurturing Financial Freedom: A Guide to Modern Financial Planning will address many of the concerns facing savers today. Among them are:

    ● Financial Planning
    ● Employer Retirement Benefits
    ● Time Value of Money and Compound Interest
    ● Inflation
    ● Risk Management
    ● Insurance
    ● Types of Investment Vehicles
    ● Asset Allocation and Diversification

    You are in control of your own “financial destiny.” You have the power to make wise decisions for your future. No one is going to do it for you. Take charge of your plan today!
    LanguageEnglish
    PublisherLulu Publishing Services
    Release dateDec 22, 2015
    ISBN9781483442945
    Nurturing Financial Freedom

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      Book preview

      Nurturing Financial Freedom - Edgar Lambert

      NURTURING FINANCIAL

      FREEDOM

      Edgar Lambert & Alex Cabot

      Copyright © 2015 Edgar Lambert & Alexander Cabot.

      All rights reserved. No part of this book may be reproduced, stored, or transmitted by any means—whether auditory, graphic, mechanical, or electronic—without written permission of both publisher and author, except in the case of brief excerpts used in critical articles and reviews. Unauthorized reproduction of any part of this work is illegal and is punishable by law.

      ISBN: 978-1-4834-4295-2 (sc)

      ISBN: 978-1-4834-4296-9 (hc)

      ISBN: 978-1-4834-4294-5 (e)

      Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

      Any people depicted in stock imagery provided by Thinkstock are models, and such images are being used for illustrative purposes only.

      Certain stock imagery © Thinkstock.

      Lulu Publishing Services rev. date: 12/15/2015

      Contents

      Introduction

      Section 1 - FINANCIAL PLANNING

      Chapter 1   The Myth of Income = Wealth

      Chapter 2   Inflation: The Silent Killer

      Chapter 3   Pension Plans

      Chapter 4   Defined Contribution Plans

      Chapter 5   The Time Value of Money

      Chapter 6   Insurance

      Chapter 7   Retirement Planning Assumptions

      Chapter 8   Modern Financial Planning Software

      Section 2 - INVESTMENTS

      Chapter 9   Asset Allocation

      Chapter 10   Risk

      Chapter 11   Investment Vehicles

      Chapter 12   Active Management Versus Indexing

      Section 3 - BRINGING IT ALL TOGETHER

      Chapter 13   The Evolution of Retirement Planning

      Conclusion

      About the Author

      Introduction

      DESPITE THE FACT THAT MUCH has been written about the capital markets and investment strategies, investors often struggle to find specific literature they can use in an effort to better understand their portfolios as well as make smart financial choices. If you visit your local bookstore—assuming, of course, that you can find one—you will discover many books devoted to specific investment strategies. These books may espouse the value of technical indicators to predict the stock market or claim to be able to turn you into an expert at flipping real estate. You will not find many, however, that address issues that an individual needs to consider when planning for retirement. It is our objective in writing this book to create a simple resource that you can refer to when planning for your future as well as making major life decisions.

      As financial advisors, we believe—and perhaps we are biased—that it is in most individuals’ best interest to retain a good advisor. Even with the help of a competent and trustworthy advisor, it is still the responsibility of the investor to understand the basics of smart financial planning and investing. We hope that by cataloging some of our knowledge for you in the pages of this book, you will enjoy a more successful financial life!

      The journey to financial independence is long and undoubtedly takes discipline and patience. In the end, however, applying these principles should help you to more easily achieve your financial and life goals. We live in a world filled with uncertainty. Economic and market actions are beyond an individual’s control. Too often, we find that people assume external events are responsible for their goals not being met. And while economic and market uncertainty can cause short-term pain, the main factor in determining long-term success is ourselves! We control our saving and investment habits. In the end, these habits determine the financial position in which we find ourselves as we near (and enter) retirement.

      It is our hope that you will at least take one lesson from this book and apply it to your own financial life. If you do, we will have achieved our purpose of helping you to move one step closer to financial independence. Even if this book just reaffirms what you already know, we hope that it will help you execute your financial plan with more focus and clarity.

      SECTION 1

      FINANCIAL PLANNING

      CHAPTER 1

      The Myth of Income = Wealth

      IN OUR CAREERS, WE HAVE learned from many financially successful people about how they achieved financial success. Many of these individuals made substantial amounts of money. Many, surprisingly, did not. What they all had in common, however, was a clearly defined work ethic and a disciplined financial value set. Having these two traits is not a guarantee of long-term success and financial independence, but a lack of one of these traits will almost certainly result in a greater financial struggle. We are fortunate to live in a country in which there are many opportunities for individuals to get to this point in their financial lives.

      Income does not equal wealth and a substantial income does not equate with long-term financial success. We have encountered many people who have earned a great living but have had very little to show for their hard work later on in life. Their choices were dictated by the need for instant gratification. In some cases, these individuals spent money before they had even earned it! Most of us will need to retire someday. Very few people have the type of job that will allow them to work forever! With life expectancies rising, many of us will be retired for 20, 30, and maybe even 40 years. Taking into consideration not only how many years left you have to work, but also the years you have left when you cannot (or choose not to) work, it is clear: having a large income does not equal financial independence

      For better or for worse, we live in a society today that applauds large incomes and conspicuous consumption. We tend to think that athletes and celebrities whose incomes dwarf our own are secure financially. If we pay attention, however, we are frequently reminded of famous people who go bankrupt. We are sometimes shocked by these revelations. Huge paychecks, fast cars and massive mansions are equated with wealth, not bankruptcy! Many are surprised to hear that prominent individuals have been forced into bankruptcy. Burt Reynolds, Kim Basinger, Larry King, Mark Twain, Wayne Newton and Mickey Rooney have all filed for bankruptcy¹! We wonder how these people can possibly be broke. Some of these notables have earned incomes well into the tens of millions of dollars! Many ask: "how can someone ever spend that kind of money?" Yet it happens! One of the most basic lessons that we can learn about personal finance is this- income does not equal wealth!

      Measuring a person’s net worth on an absolute basis can be extremely misleading. How well off is the athlete with a $3 million liquid net worth who spends $50,000 per month? If this person’s income goes away, he will likely deplete his savings in around 5 years. In addition to this, he will likely be left with a massive spending habit—a habit that is difficult to break.

      On the other hand, a person with a $5000 per month budget and a $1.5 million dollar diversified portfolio is in a much better financial position. If she were to lose her job, her assets would last 25 years assuming no portfolio return or inflation². She likely has a lifestyle that is sustainable in relation to her net worth.

      You are probably wondering how can I measure how well I am doing financially? When thinking about this, we propose that you consider 3 ratios:

      • Relative Net Worth: Net Worth / Gross Annual Income

      • Gross Savings Rate: (Investments Saving + Home Equity Payments) / Gross Annual Income

      • Burn Rate: Net Annual Spending / Liquid Net Worth³

      Relative Net Worth

      People who are truly honest with themselves should think of their net worth on a relative basis. This is a simple ratio in which you divide your net worth by your annual gross income. A fifty year-old investor who earns $500,000 per year and has a net worth of $1 million is much less well off, in our opinion, than a fifty year-old investor who earns $100,000 per year and is worth $1 million. Both individuals have the same absolute net worth, but the one who earns $100,000 has a much higher relative net worth. The person with the lower income is likely to be much closer to achieving financial independence⁴. We believe that we, as savers and investors, should judge ourselves on a relative net worth basis as opposed to an absolute net worth basis. What good is an income of $1 million dollars per year when every penny of that goes to spending and taxes? Someone with this income may enjoy the finer things in life, but what would he do if the income vanished? Talk about financial stress!

      Relative net worth needs to be considered with the context of the individual’s age as well. Someone who is 60 that earns $150,000 per year should have a higher net worth than someone who is 35 that earns the same amount. The 60 year old has had 25 more working years to save and invest. If the 60 year old had invested $10,000 per year for the past 30 years at an 8% return, he would have accumulated a portfolio value of $1.13 million. The 35 year old would have had to save $78,000 per year for the past decade to reach that level—certainly a more impressive feat!

      We have spent some time calculating target net worth ratios that we feel would be ideal at various ages. Do not be discouraged if you aren’t at these levels! They do not mean that you are a financial failure if your ratio is below what we consider ideal. Many factors come into play when calculating these ratios. These are simply benchmarks that we believe would indicate a high level of financial success. These ratios are not averages across any specific group of the population.

      • Age 30- Net worth greater or equal to 1.5x annual income

      • Age 40- Net worth greater or equal to 3x annual income

      • Age 50- Net worth greater or equal to 6x annual income

      • Age 60- Net worth greater or equal to 12x annual income

      For a 30 year old investor, these ratios would suggest a target net worth of 1.5 times annual gross income. For someone (or a household) who earns $100,000 at this age, the target net worth would be around $150,000. The young worker has not had many years to accumulate savings. Furthermore, the long-term value of compound growth has not yet been realized. This individual probably began his career at a much lower income level as he learned his craft. He may or may not own a home at this point, and may or may not have student loan debt.

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