Why Define How Much Money You Need?
The clarity that comes from understanding exactly how much money you need changes everything—from the way you operate your business to the strategic decisions you make. This isn’t about earning money just for the sake of it; it’s about wealth building to create enough wealth to have the freedom to choose whether or not to work.
The Philosophy Behind Wealth Building
For many of us, the ultimate financial goal isn’t just to accumulate wealth, but to reach a point where our wealth generates enough income for us to consider work optional. This stage is what I consider the ‘end game’ of wealth building. It’s not just about having money but having enough money to sustain your lifestyle indefinitely.
Applying the 4% Rule to Set Your Target
A practical approach to setting this goal is by using the 4% rule, a common principle in retirement planning. It suggests that you can withdraw 4% of your nest egg annually without running out of money. For example, if you desire an annual income of $1 million, you would need a nest egg of about $25 million invested.
How I Set My Financial Goals
Personally, I’ve set my bar at generating $1 million in personal income per year through the 4% rule. This may sound high, but it’s about creating a safety net that adjusts for inflation and ensures financial security long-term. It’s not about lavish spending but about safety and sustainability.
Reverse Engineering Your Wealth Target
Once you understand the 4% rule, you can start to reverse engineer your wealth target:
- Define Your Desired Annual Income: Decide how much you would need each year to consider work optional.
- Calculate Your Required Nest Egg: Multiply your desired income by 25 (based on the 4% rule).
- Plan Your Wealth Building Strategy: This might involve a combination of high cash-flowing businesses, selling a business, or investing in assets like real estate.
Real Estate and Other Investments
In addition to business income, real estate can significantly contribute to achieving your wealth goal. The cash flow from fully paid-off properties can be a substantial part of your needed income, potentially reducing the total amount you need to accumulate.
Why Set Such High Goals?
Setting a high financial target forces you to think bigger and explore strategies that you might not consider with a more modest goal. It’s about stretching your capabilities and thinking innovatively about how to achieve financial freedom.
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Time-Stamped Show Notes
- [00:00:30] Introduction to wealth building and financial clarity
- [00:01:30] Discussing the philosophy behind setting financial goals
- [00:02:30] How to use the 4% rule to determine your financial needs
- [00:03:30] Explaining my personal financial goals and reasoning
- [00:04:30] Step-by-step guide to reverse engineering your wealth target
- [00:05:30] The role of real estate and other investments in wealth building
- [00:06:30] The importance of setting high financial goals
- [00:07:30] Final thoughts on finding your number and planning for financial freedom