Eyes Wide Shut-Defining a New Financial Future

Eyes Wide Shut-Defining a New Financial Future

Everyone has a financial future. We are either consciously creating that future or unconsciously accepting a default financial future. An intended future, one that meets our needs and wants, requires a plan. Here’s a sports analogy: Think of your financial goals as playing a game. We need to understand the rules of whatever game we are playing and to have a conscious plan to achieve the outcomes we desire. Otherwise we are merely hopeful about our financial future.

This article will explain not only how to recognize the financial path you are on and what game you are playing, it will give you strategies to optimize your chances of reaching a desired financial future.  

FINANCIAL SURVIVAL

I call this the default game. It’s one that people play unconsciously, because we haven’t chosen any other future. Many people play this game because they’re afraid of the risks of playing and losing any other financial game. This game, however, actually carries the greatest risk.

Many people reading this article are playing “Financial Survival” and don’t realize it. Most administrative professionals have a good job and a steady paycheck—even in a down economy—that is more than sufficient to pay the bills and support their lifestyle. In fact, most people in “Financial Survival” have a comfortable lifestyle, own a home and a decent car, and have kids in good schools. They may have a long record of constant employment, and even earn six figures. So how could this be risky? Why call it “surviving?” “Financial Survival” is the act of living paycheck to paycheck, with no defined financial future beyond a current job and perhaps Social Security.

It’s quite possible that 80% of working Americans are playing this game. Today, having a great-paying job doesn’t guarantee a future income and ability to support our lifestyle without a paycheck. Being comfortable with “Financial Survival” is what keeps us there. It also means we’re not likely to actively participate in another financial game or consciously create a financial future that could move us away from living month-to-month.

What games could I play?

If being hopeful and gambling your financial future doesn’t appeal to you, and you are ready to actively participate in a new financial future, what games could you play?

If you’re playing any game other than “Financial Survival,” it’s important to realize that you won’t win every game you play. Your goal is to, in effect, win the Super Bowl. You can lose some of the games along the way and still win the Super Bowl.

Savings vs. Investing

There are three games to play—“Retirement,” “Wealth” and “Financial Freedom.” These games fall into two categories: savings and investing. Savings requires two steps create income (investing requires one step). First you save money, then you must to do something else to it (usually invest it) to create future livable income. Mostly the second step leads to spending, not income.

Some think of savings as a wealth-building strategy because it is an accumulation of cash, which is an asset. However, savings and wealth-building vehicles are not the same because fundamentally savings don’t increase in value (i.e., appreciate) over time. The value of the income you earn from interest is offset by inflation over time.

Let’s look at the three games:

1.  RETIREMENT—a savings game

The most commonly referenced goal is the game most call “Retirement”; i.e., at a certain age we’ll stop working and income from a variety of retirement vehicles will pay our living expenses for the rest of our lives. But “Retirement” is actually a savings game with a defined financial future date popularized with the passage of the Social Security Act in 1935, during the Great Depression. This government-created program incentivized older workers to leave the workforce so younger heads of households could get jobs and support their families. Sixty-five is an arbitrary, government-designated age. But many see it as the magic age when we should reach our financial goals and stop working. This limits our thinking of what is possible. Why wait until 65 to achieve your financial goals, lift the burden of “having to” work and allowing yourself the opportunity to “choose to” work?

I hesitate to include “Retirement” as a financial game because so many people are unconsciously waiting for retirement to happen (i.e., sitting in the bleachers), and not actively planning a financial future using retirement vehicles. In fact, retirement vehicles are designed mostly to provide people with tax savings, rather than future income. Retirement vehicles have changed over time.  Companies used to define the future benefit (or income) an employee would earn when they reach 65.  Now, those companies that still offer retirement plans usually only define the contribution (or savings). 

Most people playing “Retirement” simply allocate some of their income into their company 401(k) plan, never read the statements, talk to a financial expert, create a plan or define their future income goals. Inactively playing “Retirement” is more like the playing “Financial Survival” with a safety net full of holes and tied to a tree that may be chopped down at any time without your knowledge or permission. In our current economy, many companies are shutting down their retirement plans, eliminating their 401Ks and/or pension plans, or have gone bankrupt. The game has changed and no one knows the future. While you can still use pensions and Social Security as your ultimate retirement game, you must play differently now, or risk that the thing you’re depending on will no longer exist, and you’ll need something else to fall back on.

Including “Retirement” as a financial game to play and win requires us to be “on the court”—to be a player and to work with professionals and coaches who understand how to actively, strategically plan for our financial future.

If you choose the “Retirement” game, take a hard look at whether you’ll take an active or inactive role. Stop putting your financial future in someone else’s hands. Learn from the people who are in charge of your retirement vehicles and create a financial plan or strategy to redefine your financial future and win your financial game.

2.  WEALTH—an investing game

Wealth is measured by calculating your net worth—the difference between your assets and your debt. Here’s another way to think of it: If you sold everything you owned, took the cash you received and paid everyone you owed, this is your net worth. Of course, some people will be holding an IOU.

It’s vital to understand that wealth building is not a game of creating future livable income. It’s a game to create assets that you could eventually sell to create future livable income. You could have wealth, but still be living paycheck to paycheck if you aren’t mindful of combining this game with the next one: “Financial Freedom.”

Creating wealth is a game of reducing or eliminating unproductive debt and accumulating quality assets. An asset is something you own that has value. All assets, among them equipment, furniture, property, cars, cash retirement plans, and stocks and bonds, are not treated equally—they have different qualities and characteristics. There are appreciating, depreciating and income-producing assets. Understanding the quality and characteristics of assets and debt will enable you to make better choices with your money, and increase the opportunities you’ll have to ultimately win the Super Bowl of wealth-building.  

3. FINANCIAL FREEDOM—an investing game

Many people talk about this game, but few understand how to win. The most common meaning is using the income from assets to pay for our lifestyle. The difference between how people use “Financial Freedom” and “Retirement” is that “Financial Freedom” is not an age-derived plan, and it doesn’t usually encompass typical retirement vehicles like pensions, 401Ks, Social Security or government aid.

“Financial Freedom” is a game of “leverage.” In essence, leverage gives us the ability to do or create more with less. The key to playing “Financial Freedom” is to understand the nature of income-producing assets and methods of leveraging those assets. An income-producing asset is an asset that pays you income. Examples include rental property or bonds, the use of employees by business owners, and borrowing or raising money from other sources to invest or expand your financial future.

When I talk about financial freedom, what I mean is:

·         Freedom to choose how you spend your time and money

·         Freedom from worry about money

·         Eliminating money as a factor in making choices

·         Having enough money to do what you want, when you want to do it

“Financial Freedom” says nothing about the amount of wealth you have accumulated, but rather focuses on generating sufficient livable income without “having to” work.

What Now?

It’s vital to understand that it’s never too late to start. Most of us put off getting started because we don’t understand the rules of the game and which vehicles are necessary to make it to the championship. It can be scary and overwhelming. These concepts are not taught in schools, discussed in the workplace or in the homes in which we were raised. Many people learn about these concepts at weekend seminars from gurus who promise wealth or financial freedom. The reality is that if it were that easy, everyone would be winning the game.

So what does it really take to win your financial game and create a new financial future? Stay tuned for the next article, where we will go deeper into the strategies, rules and tactics—the playbook. I’ll dispel the myths of what it takes to win the game and give you practical tools for what you can start to do today. 

Playing these three games for a new financial future is not something you do for a few days, weeks, or months and get the result you are looking for. These games require an entire shift in your lifestyle, knowledge about money and financial choices. Most people are too comfortable to make the necessary adjustments. If you are ready, have the commitment and are willing to go the distance, I recommend you look for the next article where we go deeper into the strategies, rules and tactics—the playbook. 

Can’t wait for the next article? Want access to free tools designed to educate you and create a values-based financial plan? Visit www.cpa-moms.com/tools and click on the “free tools” button for access to free audio training and worksheets to begin to create your financial plan and future.

by Mayumi Young, CPA

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