RPF0116-Achieving_2015

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00:00:15.200 | It's December 2014. Would you like to hit your financial goals next year? Have you started

00:00:22.640 | thinking about them? Today I'm going to share with you how you can learn to become your own

00:00:27.920 | financial planner and how you can build a rock-solid financial plan that will allow you to

00:00:35.280 | hit or at least make significant progress toward all of your financial goals this coming year.

00:00:41.760 | Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheet and I'm your host.

00:01:02.720 | Today is Wednesday, December 10, 2014. We're coming up on a new year and now is the time

00:01:10.240 | to start thinking about your financial plan. Today I'm going to tell you how to do it,

00:01:14.720 | but no boring useful pack stuff or 10 tips you can use to implement.

00:01:20.080 | Rather a coherent framework that you can use this next year.

00:01:24.000 | Right about now you're going to start to see, if you haven't seen already, a bunch of articles

00:01:34.480 | coming through all of the various media sources that you consume. They'll be coming up on your

00:01:39.280 | Facebook news feed. They'll pop up on your Google homepage. Does anybody use those anymore?

00:01:44.000 | They'll pop up on Yahoo Finance and maybe your financial planner, your accountant might send

00:01:50.960 | you a link. Nine-year-end or 10-year-end planning ideas or 14 things you can do to save on taxes this

00:01:58.080 | year. Those things are good. There's nothing necessarily wrong with them, but more than

00:02:05.920 | anything else, they're primarily intended to essentially harvest your click on the internet

00:02:11.840 | and to build page views. When I look at them, most of them are really not useful for the average

00:02:18.880 | person. We're going to have a discussion of tax loss harvesting. Tax loss harvesting is

00:02:23.040 | utterly irrelevant to the vast majority of people who A, have no money, B, have no investments,

00:02:27.840 | and C, if they do have money or investments, it's in a tax qualified account where tax loss

00:02:32.160 | harvesting is a waste of time. There's just no point in that, but it's what makes the news.

00:02:39.200 | People don't realize it's irrelevant. What I'm going to share with you today is something that's

00:02:43.840 | eminently relevant. I would encourage you. I think today's show will be a good show. If you're

00:02:48.640 | looking for something to send to somebody, I hope that today's show can be useful for you.

00:02:52.960 | The end of the year, is it useful for you as a resource that you can send to somebody? The end

00:02:57.120 | of the year really is a good time to review finances. New Year's resolutions get a bad rap

00:03:02.400 | in our society. They've become somewhat cliche. I think they're very useful as far as a plan for

00:03:08.320 | setting out what you're going to accomplish in the coming calendar year. I think they're very

00:03:13.760 | useful, but there's such a back and forth about New Year's resolutions that many people are turned

00:03:18.160 | off of thinking about this, but thinking about New Year's resolutions. In financial planning,

00:03:25.920 | transitioning to a new year is a great time to focus on what your goals are and what your

00:03:31.360 | progress has been toward your financial objectives. For most people, the average individual is

00:03:39.680 | using accounting lingo, would be what we call a cash basis entity. What that means is that the

00:03:47.280 | calendar year is your fiscal year. January 1 through December 31, that is your fiscal year.

00:03:52.000 | That's when all of your personal accounting is done for your federal income taxes and things

00:03:56.320 | like that. Because of that, this is an important time of the year where you need to sit down and

00:04:00.880 | look at your planning and figure out, is there something that you need to do? There are a lot

00:04:07.920 | of detailed tax things and detailed little tricks and tips and things that you can implement. I may

00:04:13.840 | do some shows on that as well. Today, I want to start with what's actually practical, what actually

00:04:20.080 | makes a difference. That's your overall framework for your personal financial plan.

00:04:25.440 | Success with financial planning has a few core guiding principles that you need to follow.

00:04:35.760 | To begin with, in order to successfully develop a plan, it's important to take full responsibility

00:04:46.560 | for, frankly, for your life and also, most especially, for your financial life.

00:04:53.760 | See, the only people that plan are the people that take responsibility. If you don't start

00:04:59.760 | with saying, "I am responsible for my financial condition," you're never going to set out a plan.

00:05:05.920 | Start with that. If you haven't done that before, sit down and take responsibility. It doesn't mean

00:05:11.920 | you have to take blame if something unfortunate has happened. It doesn't mean that you have to

00:05:18.240 | somehow take some kind of criticism that's not actually yours. Things happen. Situations

00:05:24.320 | develop. There are unfortunate circumstances that happen to all of us. We have to start

00:05:28.800 | with taking responsibility. That's what gives us the power to go on and build a plan.

00:05:35.760 | Many people are overwhelmed by finances. I think it's okay to recognize, if that's you,

00:05:43.520 | if you feel overwhelmed, I think it's okay to recognize that. Many people feel inept,

00:05:47.920 | incompetent, unqualified, unskilled. Many people feel like they lack the knowledge,

00:05:55.120 | they lack the skill, they lack some sort of discipline.

00:06:00.320 | We're not trained much in our society of how to think about finances.

00:06:04.880 | So it has to be something that, a transformation that we go through to where we learn those skills.

00:06:12.720 | But good financial planning, personal financial planning, is just a skill. It's just a skill that

00:06:16.960 | you learn. It's a skill and you need some tools and a thinking process, and then you apply that

00:06:21.280 | to your life. That's what I'm going to share with you today. You can do it. It's really not that

00:06:26.800 | tough. But it does require a disciplined thinking process. And that's primarily what financial

00:06:36.240 | planning is. It's a thinking process. It's a systematized, disciplined way of thinking

00:06:40.640 | about the situations and decisions that you face. Now, the good thing is you probably already have,

00:06:48.720 | if you're listening to a show like this, you probably already have the skills that you need

00:06:53.440 | to do this. But if it is overwhelming for you, you may need a little bit of encouragement to

00:06:59.280 | figure out how to apply those skills. One of the big things that helps is to distance yourself

00:07:05.120 | from your own personal situation. I've worked as a professional financial planner for a number of

00:07:11.040 | years. And one of the advantages that I always have in working with clients is that I'm not

00:07:15.760 | emotionally involved with their situation. If you're working with somebody who's deeply in debt

00:07:20.960 | or who's going through a traumatic emotional experience, the death of a loved one, a divorce,

00:07:25.360 | loss of a business, bankruptcy, something like that, it's very challenging to help them through

00:07:30.880 | because they are so overwhelmed often by the emotional reality that they face. But from my

00:07:37.840 | perspective, it's fairly simple. I don't have that emotional burden, so it's fairly simple.

00:07:41.520 | I think you can apply in your own life. If you don't have a good financial planner to help you,

00:07:46.080 | I think that you can apply the idea of doing something for someone else to your own life.

00:07:52.400 | And pretend that you were hired to run a business unit. Pretend that an employer has hired you and

00:07:58.960 | said, "Here, I need you to fix this." Or pretend that you have a goal of, you know, you were hired

00:08:04.160 | to turn somebody else's health around. How would you approach that process? I would commend to you

00:08:12.320 | with financial planning that if you're interested in making a difference in your life, you've got

00:08:18.240 | to actually really be interested. And you have to have a reason to do something. If you are

00:08:24.000 | interested, if you have a goal, you'll figure out the path of how to do it. If you're not interested,

00:08:29.920 | if there's not a goal that you have, then no amount of list of tips or tricks or tools is

00:08:37.360 | going to be helpful to you. The best example to illustrate this that I have ever heard,

00:08:42.000 | it was an example given by Dave Ramsey. And I'm not sure if he still uses this example,

00:08:47.360 | but years ago, I proctored his Financial Peace University class for some friends.

00:08:53.520 | And at that time, one of the initial ways that he opened his Financial Peace University course

00:08:59.440 | was with an example of a young person, a favorite nephew or niece or child that had a significant

00:09:08.720 | illness. And what he said was he said, "Pretend that, you know, picture in your mind the favorite

00:09:13.440 | young person that you know, maybe a young boy or girl, maybe seven years old, super cute,

00:09:18.240 | a little out of that baby stage. Just picture someone very cute. Pretend that you just found out

00:09:22.640 | that you got bad news and this young man or woman has been diagnosed with a serious,

00:09:31.360 | fatal, guaranteed terminal illness. And they're going to die one year from today,

00:09:38.480 | unless somebody can afford the treatment to buy the treatment. Because the good news is there is

00:09:43.120 | a treatment for the illness. And the treatment is very expensive. You can't borrow for it and it's

00:09:48.480 | not covered by insurance of any kind. You have to actually save money and pay for it." And I think

00:09:54.800 | the number he used at that time was $10,000. And he said, "If you had to come up with $10,000 one

00:10:01.200 | year from today in order to save this boy or girl's life, and you had to save that money out of your

00:10:08.720 | budget, could you do it?" And I've used this scenario dozens of times with clients. I always

00:10:14.320 | adjust the numbers to try to be a number that's a little bit high, a little bit of a stretch. So

00:10:18.720 | for some people it's $50,000, for some people it's five. But to make it meaningful, and every

00:10:26.400 | time I've asked it, as long as I've had the number within an appropriate range, and I've said,

00:10:31.840 | "Do you think that you could save this money?" The answer every time has been, "Yes, absolutely.

00:10:38.800 | I could save that money." Now, nobody knows how they would save the money. Nobody knows what I

00:10:43.760 | work extra, what I get three jobs, what I start a business, what I sell my house, would I stop

00:10:47.760 | spending money, would I just live in my house like a hermit? I don't know. Nobody knows how.

00:10:51.760 | The point is that you could figure out how if you had the clear goal.

00:10:54.720 | So I'm going to start with just giving you ideas of how to set out your financial goals. If you

00:11:02.000 | have clear and compelling financial goals that are your goals, not given to you by society,

00:11:08.400 | by your parents, or by your spouse, or by your friends, but that are your goals,

00:11:12.880 | then you can figure out a way to do it. Dave Ramsey's example is brilliant from that perspective.

00:11:18.880 | You could figure it out. And I've seen this time and time and time again with people that have

00:11:23.280 | other goals, whether it's—one of the ones I see this the most often is someone says, "I want to

00:11:27.200 | go travel the world for a year or two." And this is not that tough of a goal to hit. It's really

00:11:33.120 | not. It takes a little bit of focus, a little bit of saving, and a few life changes. But if you want

00:11:37.040 | to go travel the world for a year or two and take a sabbatical with your family and visit

00:11:40.720 | 10 or 15 or 20 countries, go do it. It shouldn't take you more than a couple of years to plan for

00:11:45.360 | it and make it happen. And I've seen so many stories of people that said, "Well, I just decided

00:11:49.760 | to do it. And so I stopped spending money and I started saving money and I sold a bunch of stuff

00:11:53.680 | and I rearranged my life, and three years later, we left on our trip." Having a clear and compelling

00:11:58.560 | goal is the key. I would encourage you to build your financial plan. Begin with some goal-setting

00:12:05.360 | exercises. Create a mental vision of what you'd like to have. You might already have one,

00:12:13.680 | or you might not. You might have one that is clear, or you might have one that's fairly vague.

00:12:21.040 | I think most people have a vague general idea of what their financial goals are, but they've never

00:12:28.480 | really clarified them. So I'd encourage you to start with a step one of sitting down and

00:12:34.240 | trying to clarify what your personal goals are, what your personal vision is of things you would

00:12:42.720 | like to see and enjoy and appreciate and have in your life. There are no right or wrong answers

00:12:49.040 | in this scenario. There's only your answers. If you've got a goal of a thing, great.

00:13:00.480 | Write it down. If you've got a goal of an experience you want to have, a bucket list

00:13:06.400 | you want to create, you want to check off, something that you want to do, a contribution

00:13:12.640 | you want to make, there's no right or wrong answer, but we can't figure out how to

00:13:16.560 | achieve something until we know what it is that we want to achieve.

00:13:21.040 | We can't figure out how to accomplish an outcome until we know what the desired outcome is.

00:13:28.560 | December is a really good time to do this. If you can get away from your normal life,

00:13:32.880 | I've always found that to be helpful. So if you take some time off around the holidays,

00:13:37.680 | in the middle of the busy season, perhaps you can take a day, maybe two, maybe a week,

00:13:42.160 | and try to get away. Even if you can take a couple of hours off, take an afternoon off from work.

00:13:47.840 | What I've often done is I like to go to a fancy hotel. I live in West Palm Beach,

00:13:51.920 | Florida, so I like to go to a fancy hotel on the water and sit out by the pool deck and

00:13:57.120 | have a drink and look at the ocean and write in my journal and do that for a couple hours and

00:14:02.160 | just get away. That works for me. Some people will get away for overnight and they'll go

00:14:07.680 | somewhere. So if you wanted to go away with maybe you and your spouse and set up an overnight trip

00:14:13.760 | where you're going to go and you take your journals and you take some of the journaling

00:14:18.000 | activities and exercises I'm going to give you and you set some time apart sitting on the hotel

00:14:22.560 | balcony and looking out at a pretty scene and talking about your goals, I think it's worth the

00:14:26.320 | money to do that kind of thing. But even if you just need to turn your cell phone off and sit down

00:14:30.720 | in your office and lock the door and put out your do not disturb sign, but sit down and make a time

00:14:36.320 | to figure out what your desired outcomes are, what your goals are, what your vision is for your

00:14:43.120 | financial life. I would commend to you that this really should be on paper. Some people find it

00:14:48.800 | natural and easy to write and to journal. Some people find it difficult. It doesn't really matter

00:14:55.200 | in my mind whether this is just a list of bullet points or whether this is an 18-page essay.

00:15:00.640 | But if you can get it on paper, that will really help. Another useful alternative,

00:15:05.840 | perhaps writing on paper doesn't come easily to you, make an audio recording. Pull out your phone,

00:15:12.480 | fire up the voice recorder application and make an audio recording of what your goals and your

00:15:19.360 | ideas and your visions are. I'm going to give you some exercises, some prompting questions,

00:15:23.520 | or make a video. Some people are very, you know, a video recording of yourself talking it through.

00:15:28.000 | You can do this while you're driving down the road, easy to do. If you've never done this

00:15:32.800 | and you're a commuter, I'd recommend to you spend a couple of the commutes and just take some time

00:15:38.560 | and record this on your phone. Some people are visual, so maybe you can draw a picture. You can,

00:15:44.800 | you know, there are people that make collages of boards of the things that they want, whatever

00:15:49.840 | those things are, images. You know, I've done that some here and there, but that doesn't really

00:15:54.640 | compel me very much. I'm more of a verbal person. So for me, having the words written down and then

00:16:01.040 | hearing them and seeing them in my mind is easy. But maybe you're the type of person that's going

00:16:05.120 | to draw a picture, cut something out of a magazine. But write down anything that you think

00:16:11.200 | of that you'd like to have. And don't be scared of that. This is not some frou-frou end of the

00:16:18.720 | year thing of what would you like to do this next year? It's just a guiding point. I'm going to get

00:16:22.080 | to some practicalities in a minute. Here are some useful ways, things that I have done that I have

00:16:26.640 | found useful. And there are a few different scenarios. I would encourage you to start with

00:16:33.760 | the simpler ones and then move to the complex ones. And I've done all of these and I do all

00:16:39.520 | of these and I will continue to do all of these because each one of them will isolate something

00:16:44.480 | different in my thinking. The reason that you do exercises like this is to get information out of

00:16:49.520 | your head and onto paper where you can look at it and you can think critically of it outside of your

00:16:56.880 | head where you're not trying to work through something in your head. That's the whole reason

00:17:00.000 | for this. So here would be a couple of journaling prompts that I have found useful. And you can

00:17:05.360 | consider them and if any of them are useful, great. I'll write them down in the show notes

00:17:09.920 | so that you can print them and use them another time. So very simply, number one is start with

00:17:16.560 | 10 things you'd like to do in this next year. 10 goals that you have for the next year. So December

00:17:24.640 | is an easy time. Just write down 1 through 10 and write down 10 things you'd like to do this next

00:17:28.160 | year. It could be everything from go on vacation, buy a house, get a new car, save some money, etc.

00:17:34.480 | So it could be as simple as that. One of the things that I've enjoyed doing is using as a

00:17:42.640 | prompt list a longer list with instead of just saying what are my 10 goals for the coming year,

00:17:47.840 | it's a good place to start, but I've enjoyed doing a what I want list. I do this from time to time

00:17:54.960 | and I have my wife do it also separate from me and then we can compare them and I can see what

00:17:59.600 | does she want so I can make sure that I know and that she knows what I want and then we can work

00:18:04.400 | those things together and look for ways to accomplish this. But what I call a what I want

00:18:08.560 | list is make a list of 30 things you want to do, make a list of 30 things you want to have,

00:18:15.200 | make a list of 30 things you want to be before you die. The number 30 I think is a good number.

00:18:22.800 | With all of these, if you've ever studied the science of brainstorming or mindstorming,

00:18:28.560 | then you see that having a stretch is important. So 10 is fairly easy for most people, but 10 is

00:18:35.360 | a good place to start. 30 is great. I find that for me about the first 15 or 20 come pretty easily

00:18:40.400 | and the last 10 take me a long time to think through what do I want to be, do or have.

00:18:44.320 | When you're doing these exercises, don't have any fear of commitment. Just because I write it down

00:18:51.840 | on a paper as something I want to be or do or have doesn't mean I'm committed to making it happen.

00:18:55.760 | Just an idea. You might do that list eight times and have something completely different on all of

00:19:01.520 | them. It's just a way of mind prompt. Another set of questions that I think is useful is

00:19:10.000 | Dan Sullivan's questions. He's the founder of an organization called the Strategic Coach.

00:19:15.760 | These are useful questions. There's a series of four of them. The most important one is the first

00:19:21.680 | one. I've often used the first one in financial planning engagements with clients, but the other

00:19:27.360 | three are helpful as you're figuring out how to coach yourself. But question number one is,

00:19:33.840 | if we were meeting three years from today, what has to have happened during that three-year period

00:19:40.320 | for you to feel happy about your progress, personally, professionally, financially,

00:19:46.000 | and any other category you want to think about? Then the three follow-up questions are these.

00:19:52.320 | What are the biggest dangers you'll have to face and deal with in order to achieve that progress?

00:19:56.720 | What are the biggest opportunities that you have that you would need to focus on and capture

00:20:01.920 | to achieve those things? What strengths will you need to reinforce and maximize? What skills and

00:20:09.200 | resources will you need to develop that you don't currently have in order to capture those

00:20:13.040 | opportunities? That one's useful. It's more of a technical one. I commend that one to you.

00:20:19.360 | One of my favorites is to do a visioning exercise of what my ideal day is.

00:20:24.560 | So essentially, just think through what would a perfect day look like for you and describe it

00:20:32.720 | with as much detail as possible. Where are you? What do you do? Who are you with? What does your

00:20:39.680 | day look like? What are your surroundings? Things like that. I find that one useful. I like to do

00:20:44.560 | that one myself in an audio format. So try the voice recorder. Written is good, but I find writing

00:20:51.520 | to get in the way of that. For me, it's easy to sit down and say, "When I wake up in the morning,"

00:20:55.280 | and just kind of look around in my mind's eye and describe that. There's a really great one,

00:21:00.000 | lengthy one, in Jack Canfield's Success Principles book where he goes through an exercise,

00:21:07.040 | visioning exercise. It's fairly lengthy. Look through the show notes. Look at the show notes

00:21:11.040 | on that one. I don't want to take the time now to read it. But essentially, you go through and

00:21:15.760 | think through what your financial life, think through your ideal job or your career, think

00:21:20.000 | through your free time, your recreation time. What do all these things look like? I think this is

00:21:24.480 | super, super useful. Now, many people are scared by these things, by writing these things down.

00:21:31.040 | Here's what I see as the primary benefit of them. So that you can look at your thinking and see

00:21:35.440 | what themes there are. When I do these lists, there are certain themes that are consistent.

00:21:40.240 | And then there are certain things that just kind of pop in and out. What I look for are the themes.

00:21:44.400 | What's similar between a list of 10, a list of 30, an ideal day exercise, and more of these complex

00:21:51.840 | scenarios? I try to figure out what is consistent and look for the themes. That helps me to clarify

00:21:57.680 | what those themes are. It's not some kind of frou-frou thing of just simply saying, "Okay,

00:22:05.600 | I'm going to imagine these things and that's going to happen." I'm trying to figure out what's in my

00:22:11.120 | mind so that I can make a plan to accomplish it. The key is to implementing these exercises,

00:22:17.440 | is to figure out what would need to be done in order to actually accomplish the goals.

00:22:22.480 | So if you have an idea, if you have a goal, however you're able to state it,

00:22:26.800 | whether that's something that you can state clearly or something that's more nebulous,

00:22:33.040 | then the next step is make a list of anything that you can think of that would help you towards that

00:22:37.280 | goal. And then look at it and try to figure out which of the things on that list would make the

00:22:43.920 | biggest difference and what would be the quickest way to accomplish it and what order should those

00:22:49.040 | steps go through. Just by making the list, I think you can be really, really helped.

00:22:57.280 | In doing this, I find the process of mind mapping to be very helpful. If you're unfamiliar with

00:23:04.000 | that, essentially it's where you, at the center of a piece of paper, there's some really great

00:23:08.640 | applications. There's free ones online. Just search "free mind mapping program" and you can

00:23:12.240 | use an online one where you write down a question or a goal or a thought. And then you just start

00:23:17.840 | drawing out from that. You draw a spoke out, almost like a center of a wagon wheel. You draw

00:23:21.840 | at the center, "I want to be financially independent." Then you draw out a spoke from

00:23:26.240 | that and you write down whatever comes to your mind. I would write down something like,

00:23:30.080 | "What does financially independent mean?" Then I draw a circle around that and I draw a spoke

00:23:34.960 | from that. Then I would write the ability to wake up every morning at whatever time I want to wake

00:23:40.240 | up, to have $5,000 a month of income that's available for me to spend every month without

00:23:48.000 | my needing to work at a job, whatever that would mean to you. You just go through that process and

00:23:54.720 | you draw circles and bubbles and you just write out whatever comes to mind. I find that to be

00:23:59.920 | really useful in my way of thinking. I commend it to you if you've never tried it. But the key is

00:24:05.200 | making it through the list and thinking it through. And this is not a one-time process. This is an

00:24:09.280 | ongoing process. One of the key steps, I think, is to try to think through what would be the

00:24:14.720 | smartest way to accomplish goals and question everything. For example, this is a personal

00:24:22.400 | finance podcast. So let's talk about financial independence. There can be many ways for you to

00:24:27.600 | achieve what you would consider to be financial independence. Perhaps financial independence to

00:24:31.920 | you means the ability to retire down to Costa Rica so that you can surf on the Pacific Ocean

00:24:39.920 | every morning and so you can drink an Imperial beer every night with your buddies. Imperial is

00:24:50.400 | the national beer brand of Costa Rica. So maybe that's your vision. Well, there could be a couple

00:24:58.400 | different ways to do that. Maybe you need to do that by saving a million dollars. And if you can

00:25:02.880 | save a million dollars, then that'll give you enough money every year where it'll come off and

00:25:08.720 | you'll get $30,000, $40,000 a year of income coming in and you can spend that and that gives

00:25:13.520 | you the ability to cover yourself. But you know what? Another way of achieving that goal,

00:25:18.800 | you might just need $300 for a plane ticket down and enough to cover yourself at $20 to cover

00:25:27.200 | yourself for two nights in a hostel so that you can find a job as a bartender and then you can

00:25:33.280 | surf in the morning and drink every night. Those are both two valid ways of hitting that goal and

00:25:42.240 | only you would know and be able to clarify which is important to me. For some people, they need

00:25:47.840 | the million bucks. For other people, they say, "I don't have time to work and save a million bucks.

00:25:51.360 | Let's do it now." Asking yourself the questions of how you can actually accomplish something and

00:25:57.360 | brainstorming, brainstorming, brainstorming, brainstorming, writing down, writing down,

00:26:00.880 | looking at the goals, looking at it, saying, "How am I actually going to do this?" is super valuable.

00:26:05.200 | You might consider goals that you haven't considered. And especially if you can develop

00:26:09.120 | a comprehensive list of the things that are important to you, then you can figure out how

00:26:13.760 | can you do all of them. Let's continue with a theme of having two goals. Let's say that I have

00:26:20.800 | a goal of financial independence. Now, I've defined – for me, my personal definition of financial

00:26:24.960 | independence, for me, financial independence is a portfolio of investments that don't require my

00:26:30.640 | active management in a company that provides enough income to provide my family with about

00:26:36.240 | $6,000 a month of excess cash flow. That's kind of to me where I think an ideal level of my

00:26:41.360 | personal definition of financial independence would be. Well, in order to accomplish that,

00:26:46.080 | with round figures, I need somewhere just under $2 million in the bank in order to accomplish that.

00:26:52.400 | I would probably be comfortable with a lower amount, but that's my current working definition

00:26:58.560 | of financial independence. We'll see what happens as time goes on.

00:27:02.320 | Well, in order for me to accumulate a million and a half, $2 million, somewhere in that range

00:27:06.960 | in the bank, then I'm going to need to work and I'm going to need to save a lot of money.

00:27:11.280 | So let's say that I have a goal of taking my family on a ski trip. Well, the question I would

00:27:18.160 | ask myself on paper is how can I make a plan that will allow me to do both of these things? This

00:27:22.640 | winter, I want to take a ski trip. Pretend I don't actually want to go skiing this winter,

00:27:26.240 | but pretend that I want to take a ski trip with my family. Well, skiing is not cheap. I took my

00:27:30.880 | family to Whistler a few years ago. It was an awesome experience out in British Columbia,

00:27:34.480 | but it was not cheap. So let's say that I ask myself, how can I accomplish and make significant

00:27:40.960 | progress toward both of these things? Well, if I know I need to accumulate a couple million bucks,

00:27:46.160 | and if I have a short timeline for that, I'm probably not going to be doing that with just

00:27:50.800 | a straight up corporate job making $50,000 a year. That's not going to allow me to achieve

00:27:55.280 | my goals in a short enough time frame. So I'm probably going to be investing on the side in

00:27:59.600 | a private business. That's going to be my investment plan. So in that side business,

00:28:04.080 | I'm going to have expenses. So I'm going to choose to put all of my business expenses

00:28:09.040 | onto a credit card with a mileage rewards program. That would allow me to take those miles and spend

00:28:18.480 | them tax-free on a ski trip without damaging my savings rate from my income. So now I've got

00:28:25.680 | multiple benefits. Let's assume that my ski trip is going to cost me all in a price tag of $10,000

00:28:31.760 | just in the open market. But let's say that I have a lot of business expenses rolling through on my

00:28:35.760 | credit card, and so I can do that on miles instead. I can trade in the miles for the plane tickets,

00:28:40.640 | the hotel stay, and maybe some of the food or I pay it through out of my pocket. Well,

00:28:44.640 | pretend I'm in a 28% tax bracket. If I were going to spend $10,000 out of my personal budget

00:28:50.160 | on the ski trip in a 28% marginal tax bracket, I would have to earn $13,888 of income,

00:29:01.120 | $14,000 basically gross income to get the same benefit if I spend after-tax dollars.

00:29:06.320 | By the way, if you ever want to know how to do that math and how much you want to do,

00:29:10.960 | 28% bracket, take 100, subtract 28, that equals 72, and then just divide $10,000 by .72. So if

00:29:19.440 | you divide $10,000 by .72, you get an answer of $13,888. That's the mathematically correct way

00:29:25.920 | of running those calculations. So you'd have to earn $14,000 or I can accomplish both things by

00:29:33.920 | putting my business expenses and then having a tax-free, not having to pay tax on the $14,000

00:29:40.560 | of income to cover my $10,000 ski trip. So it's just writing things down, writing things down,

00:29:46.960 | writing things down. Now, I never seem to actually be able to finish my lists.

00:29:52.160 | From time to time, I go through and look at all my lists and I find every few months,

00:29:55.920 | I kind of just scrap everything and start over again. I do another goal-setting exercise,

00:30:00.160 | do a brainstorming exercise, try to figure out what's the smartest way forward. And I never seem

00:30:04.640 | to cross everything off of my list. But when I look back, I find that strangely, I'm closer

00:30:10.000 | than I ever thought in the past. And so the process of thinking it through in my mind is the key.

00:30:17.840 | One example from my life that I thought was useful, years ago, I had just graduated from

00:30:23.600 | college and I was working in a corporate job and I was making at the time, I think,

00:30:26.720 | 40,000, 45,000 bucks. And I wrote down a goal that for me was I thought, "Okay, I want to make six

00:30:33.040 | figures. I want to make $100,000 a year." And I sat and looked at my job and I thought, "I don't

00:30:38.320 | see any possible way where I can make six figures six figures." And I said, I can't remember what

00:30:44.000 | the date was. I think it was, it doesn't matter. I set a specific date on it. And I looked and I

00:30:49.440 | said, "There's no possible way for me to do it." But I kept kind of thinking, "This is my goal." I

00:30:53.840 | wrote it down. At that time, I was doing an exercise where every morning I would wake up and

00:30:57.440 | I just write down, "What are my top 10 goals right now?" And it's useful to center. Sometimes,

00:31:01.360 | you write the same thing every day, every day, every day. And then finally, you recognize,

00:31:04.160 | "You know what? I don't care about that." So write down, "What are my top 10 goals right now?

00:31:07.280 | What are my top 10 goals right now?" So on that six-figure goal, what was remarkable to me is I

00:31:13.120 | had no idea how I could do it. I didn't see any way that I could make enough progress in the

00:31:18.480 | corporate job that I was in at the time, enough in order for me to earn the money. So I wound up,

00:31:26.400 | I kind of forgot about the goal and over time, it just wasn't important to me. But I wound up

00:31:31.600 | getting laid off from that company and I wound up starting a job in the financial services business.

00:31:37.200 | And all of a sudden, I woke up and realized, "Wait a second. I'm in the situation now where I can

00:31:44.320 | earn six figures a year." And it was this remarkable chain of events that happened.

00:31:49.360 | I don't fully understand how this happens in the success industry. If you read any kind of success

00:31:54.400 | literature, they call it the reticular activating system, where essentially when you set a goal,

00:32:00.320 | you become tuned in to ideas that you never have thought of. Best example is the red sports car

00:32:07.040 | example. You consider going out and buying a red sports car and all of a sudden, you look around

00:32:11.440 | and there's red sports cars everywhere. And you never know. They were always there, but you never

00:32:15.120 | saw them. But because you decided to buy one, you start seeing them everywhere. Same thing happens

00:32:19.040 | with financial planning. I bet you start to see little ideas, little tax ideas or little investment

00:32:23.360 | ideas or things if you listen to this show. So I get that. It makes sense to me as far as a way

00:32:28.560 | that this works. Now, when you actually apply this though, you've got to think through and make a

00:32:34.160 | plan for accomplishing the goal and start breaking that down into action steps. Because stuff doesn't

00:32:38.800 | happen unless you take some sort of action. Some of those actions are planned and intentative. Some

00:32:43.120 | of them seem to be just—they just happen. But you make a different choice. You choose at points in

00:32:49.600 | time based upon what you have an opportunity for. Some people want to build wealth. They want to

00:32:53.840 | build a business. So when they have the opportunity to get a job, they turn it down and they start

00:32:57.520 | their business instead. Other people want safety and security. So when they have the opportunity

00:33:01.200 | to start a business, they don't. They take a job. Not right or wrong. It's just up to you.

00:33:04.960 | What do you want to do? I suggest that from the perspective of financial planning, there are three

00:33:10.640 | variables that you can control. But you have to cycle through them continually. And this is a

00:33:16.480 | useful mindset, a useful framework for guiding your thinking, for building a disciplined way of

00:33:24.080 | thinking about financial planning. The three variables that you can control are your income,

00:33:28.960 | your expenses, and the rate of return that you earn on the difference between those two things,

00:33:34.480 | which would be your investment money. Or it may be the rate of interest that you're paying if you're

00:33:38.880 | in the black—excuse me, in the red—if you're spending more than you are bringing in. All

00:33:44.000 | financial planning is built on this cycle. Now, there are subsets that don't fit into that cycle.

00:33:48.800 | For example, risk management and financial planning is very important, but it doesn't

00:33:52.320 | really fit into that cycle. It's a way of assuring income and insuring income, but it doesn't fit as

00:34:00.720 | easily into that little mindset. But the key is to recognize you can't do everything all at once,

00:34:05.120 | so you need an order of attack. And here's where people go wrong.

00:34:09.200 | I think it's very important to recognize that it's going to take probably a long time. It's

00:34:19.120 | probably going to take longer than you think. Ask anybody who's built a house, and what do they tell

00:34:22.560 | you? It takes—plan for double the time and double the budget that you prepared for. Same thing with

00:34:27.360 | financial planning. Prepare for double the time and double the budget. You're going to have

00:34:30.000 | problems. Now, if you don't, awesome. You'll be pleasantly surprised. But take whatever your

00:34:33.840 | estimates are and stretch them out. I think we have a disease, an epidemic in our culture,

00:34:38.560 | of praising and lauding overnight success stories. We always write and read articles about this

00:34:46.400 | person who became rich at 20 years old or this person who became a multi-billionaire overnight.

00:34:51.760 | In my mind, those stories—and there's a balance here. You can draw some things that are useful.

00:34:59.600 | When I do a show on a 23-year-old young man buying a house for cash, I think that's cool.

00:35:04.080 | But it wasn't an overnight success story. Overnight success stories, I've found, don't really

00:35:10.080 | serve me. They're very rarely true. I won't quite say never true, but they're almost never true.

00:35:17.920 | Because usually what's happening is you're seeing the end of the compounding curve. Perhaps this

00:35:22.880 | person had an overnight business success financially. They started this new company.

00:35:27.520 | But what we don't know is that the last 14 years they had been building their skills and building

00:35:32.880 | their ability and practicing and learning things. They just weren't applied in a business,

00:35:38.400 | and they didn't make any money off of them. But that compounding curve of those skills

00:35:43.040 | brought them to the right place at the right time, and then you see the growth.

00:35:47.600 | Overnight success stories to me aren't useful. They just make me feel not worthless, but they

00:35:54.480 | make me feel inept. At this point, I assume they're all irrelevant, and I just plan on

00:36:00.160 | slow and steady growth. I can't plan for an overnight success. I can't plan for going viral.

00:36:05.520 | But what I can do is I can plan on slow and steady growth over time, the application of steady,

00:36:11.200 | steady effort. Jim Collins talks about this in his book, Good to Great. He talks about the concept

00:36:16.080 | of the flywheel. The point of the flywheel is this big heavy thing on a piece of equipment,

00:36:22.000 | and you put your shoulder into it, and you just turn it just a little bit. You push and you push,

00:36:28.400 | and it goes slow, slow, slow, slow, slow, slow, slow, slow, slow, slow, fast, fast, fast, fast,

00:36:36.720 | fast, fast, fast, fast, fast, fast, fast, fast, fast, fast, fast, fast, fast, fast, fast, fast,

00:36:38.480 | and it's super fast. That's the concept of the flywheel, that you never see and talk about that

00:36:43.680 | slow turning of it, the grinding of it out. But then over time, it builds up the momentum. So

00:36:48.160 | in my mind, that's what I plan on with most things is just assume it's going to be slow and steady

00:36:52.480 | and take a long time. But you have to start where you are. So with your personal financial planning,

00:36:56.480 | here's what I would commend to you. Here in December, start by constructing two simple

00:37:01.680 | financial statements. Construct for yourself a current statement of financial condition.

00:37:06.480 | We usually most commonly call this a balance sheet, what you have and what you owe.

00:37:12.560 | And then also conduct a statement of cash flows. This would also be known as an income statement

00:37:21.360 | or a cash flow statement. It's basically just a statement of income and expenses,

00:37:25.280 | what money is coming in and what money is going out. Now, the harder of those two is the second

00:37:29.520 | one. The easy one is the balance sheet. You can gather the information for that and usually about

00:37:35.680 | an afternoon of work. You sit down and you say, "What do I have? What are all the assets that I

00:37:39.680 | have?" You write down all of the things that you own at the top of a piece of paper, and you write

00:37:43.760 | down the current balances on all your debts and you figure out what you have. That takes about

00:37:48.400 | an afternoon's worth of work. The statement of cash flows is usually a little bit trickier because

00:37:53.920 | you may or may not have good records on that. So I'm going to give you some ideas of how to do it,

00:37:57.440 | how to bring together that information. My most important tip for you is keep it simple.

00:38:04.640 | Keep it simple. You can do this with a pen and a piece of paper. You don't even need a calculator.

00:38:10.880 | Just keep it simple. There are some keys of knowing how to actually analyze these statements

00:38:17.920 | and pull information out of them, but start by just creating them. Great investors in companies

00:38:25.520 | need to be able to look at and understand financial statements. If you don't understand

00:38:31.040 | what a financial statement is signifying, you can't gather the information from it.

00:38:35.200 | Just like if you didn't have a concept of the meaning of A's, B's, C's, D's, and F's

00:38:40.720 | for academic grades, you would look at a report card and you wouldn't have any idea what A's and

00:38:46.960 | C's and this F means. You might think F means fantastic and A means awful, but because you

00:38:53.680 | have a concept of A's, B's, C's, D's, and F's, you can look at a report card and you can know

00:38:58.400 | whether it's so-called a good one or a bad one because of that concept. Same thing with financial

00:39:02.640 | planning. It's the concepts behind the statements that make a difference, but start with just

00:39:06.400 | creating them. There's no other way to learn that I've ever figured it out. I've done two

00:39:11.040 | entire shows on this. I would commend them to you to listen to next if you haven't heard them.

00:39:16.240 | You'll find a show on the balance sheet at radicalpersonalfinance.com/balancesheet and

00:39:22.560 | you'll find a show on the cash flow statement at radicalpersonalfinance.com/cashflowstatement

00:39:27.520 | and you'll find that information. Those will help you. The hard one of these, easy one is

00:39:34.480 | a balance sheet. The hard one is the cash flow statement. You need a tracking system for your

00:39:39.040 | money. You have to design a tracking system that's going to work for you. There are many good ones

00:39:46.720 | that you could do. I personally think the best one is actually just a simple checkbook register.

00:39:51.520 | I know very few people, okay, let me be specific. I don't know anybody other than me who keeps a

00:39:59.280 | checkbook register, but I think it's actually one of the best financial tools ever invented,

00:40:05.600 | and when I've been able to convince people to try it and to stick with it until they get used to

00:40:10.560 | using it, it's the best tool ever invented because it's both a backward-looking and a

00:40:16.240 | forward-looking planning device. It's way better than an app on the phone. It's way better than

00:40:21.600 | just about anything else, but most people resist it and they resist balancing it.

00:40:29.680 | I find it easy to balance when you balance it regularly. Instead of doing it on a monthly

00:40:34.880 | basis, which is what people would get behind on, pull out your smartphone, pull up your bank

00:40:39.040 | account, and balance your checkbook register right side by side. I would commend to you the idea of

00:40:44.480 | using a simple checkbook register, but that will allow you to have a history of your transactions,

00:40:51.840 | and you could figure out what you spend on different things. You could go the direction

00:40:57.920 | of setting up a system of cash envelopes. Now, this is helpful in a proactive way. It helps by

00:41:04.320 | preventing overspending, but in my experience, it's actually really tough to track, and it's

00:41:09.600 | tough to have a record of the transactions. It's unwieldy for the purpose of tracking.

00:41:14.560 | It's good for the purpose of controlling spending. It's bad and unwieldy for the purpose of tracking,

00:41:19.600 | and it's tough in our situation where so much bill pay and so many transactions have become

00:41:24.560 | electronic. You could use an electronic solution. There are a lot of great apps for your smartphone.

00:41:29.360 | Most banks now provide an app for you that tracks your income and expenses. I would recommend you

00:41:35.200 | start with whatever your bank provides. If your bank doesn't provide one, just do a search in

00:41:39.280 | your app store and find one that you like. There are lots of good ones. One useful tip for you

00:41:46.160 | is you might consider simplifying your accounts down to, if possible, one account, or if necessary,

00:41:53.680 | perhaps one account and one credit card. This helps. It's tough to track things across seven

00:41:59.600 | or eight accounts, but if you have one account or one account and one credit card, then that

00:42:04.560 | can be helpful. You may have one personal account, one business account, but simpler is better.

00:42:10.480 | My new favorite Tony Robbins quote from his recent book on money, "Complexity is the enemy

00:42:17.840 | of execution." I like that quote. Consider simplifying. One tip for you at the end of the

00:42:23.360 | year, if you have transactions that are everywhere and you're trying to figure out what to do,

00:42:28.640 | one little idea for you is you might just consider changing your credit card numbers and maybe your

00:42:36.080 | checking account numbers. Call all your credit card numbers and get new cards issued with a new

00:42:41.760 | number. Just call the lost card department and they can do that no problem for you. That will

00:42:46.320 | automatically cancel for you all of the people who are charging your cards. You'll get a notice

00:42:50.560 | of, "Hey, you need to pay your cable bill because it's usually charged to your card." That's great.

00:42:54.400 | That can be sometimes easier than you going through and manually doing that. You can set

00:42:59.120 | them up on a new payment system that you've designed in advance, so a new monthly tracking

00:43:04.000 | system and a new budgeting system. That can be useful. Some people I've worked with have so many

00:43:07.840 | cards and so many transactions all over the place. Take back control. If you feel like you're

00:43:12.800 | overspending, one useful tip is always to consider taking full manual control back over everything.

00:43:18.560 | Today, it's very easy to automate everything. Automation is powerful,

00:43:23.200 | really is. Automation of overspending and excess is really tough because you have to break those

00:43:30.560 | habits. Sometimes, taking things back under manual control is useful. I find writing out paper checks,

00:43:40.080 | paying the bills with paper and envelopes, even though the bill-paying system is easy,

00:43:44.240 | it can help because it helps you to stay current. You have to figure out what works for you.

00:43:48.800 | Plan out a system that you think will work, but here's the key. Prepare for it not to work.

00:43:54.400 | Plan in advance for what you're going to do when it doesn't work. If you never track your cash and

00:44:00.880 | you don't have a system established that's going to work for you, then recognize, "I'm not good at

00:44:06.320 | this." Don't think that January 1 is going to create some kind of magical transformation where

00:44:11.680 | all of a sudden you're not good at it now, but after January 1, you're going to be good at it.

00:44:15.360 | You're not, so expect it to fail. If you know that it's going to fail and you expect it to fail,

00:44:21.600 | then you'll be mentally prepared to keep working on it until you figure out a system that works

00:44:26.800 | for you. You've got to carve out time for yourself to work on your finances. Put a calendar appointment

00:44:35.520 | of some kind onto your calendar system, whatever you use to do some focus targeted thinking,

00:44:42.800 | focus targeted planning. Set it aside, whether it's Sunday evening at your home on your computer

00:44:47.840 | or Friday morning right when you're starting work or Monday at the end of the day before you go home

00:44:54.160 | or Wednesday lunch. Put a calendar appointment on your books for you to do some focus targeted

00:44:59.680 | thinking and work on your financial system. You've got to develop it and dedicate the time.

00:45:04.640 | Remember, finances fund everything in your life, everything. You spend how many hours working?

00:45:11.600 | Don't you think it's worth a little bit of time to focus on allocating things?

00:45:17.360 | By setting up a tracking system, you're going to begin to develop some data.

00:45:22.000 | What you need to know is what you're spending each month and on what. That's one of the keys

00:45:29.280 | about this useful about the new year is you can set a system up now in December and then just

00:45:34.480 | track from January. Track now so you're starting to practice it. But now from January 1, you just

00:45:39.280 | want to know what am I spending in January. That's not right or wrong. Just know the data.

00:45:43.200 | So you can say and look back at the end of the month, last month I spent $327 on food. Great.

00:45:49.280 | You need to know that. Then once you have that information, you've got to continue your thinking.

00:45:56.320 | So during your regular financial appointments with yourself, sit down and think about what your

00:46:02.320 | biggest problems and what your biggest opportunities are and compare how you're doing toward your

00:46:09.440 | goals. Think on paper, disciplined thinking, disciplined thinking. You have to learn a skill.

00:46:17.760 | Consider one of those three variables I mentioned one at a time. So ask yourself,

00:46:24.720 | is my biggest problem? What's standing in the way between me hitting these goals?

00:46:29.440 | It might be income. Is your income too low?

00:46:32.480 | Would your plan be helped by making more money? Don't too automatically answer yes.

00:46:38.240 | It probably would be, but it's not necessarily automatic. But if you think that making more

00:46:46.080 | money should be a major priority, then you need to write down another journaling exercise. You

00:46:51.120 | need to say, what would help me make more money? What could I do to make more money?

00:46:56.160 | Powerful tool I learned years ago from Brian Tracy is he talked about every morning,

00:47:01.920 | take out a fresh sheet of paper and write at the top of it whatever your biggest problem is

00:47:08.800 | and write it in the form of a question. So he would say, you would write at the top of your

00:47:14.160 | paper, what would help me make more money? It's probably a more empowering question than why do

00:47:20.480 | I not make any money. But why do I not make any money can be a useful scenario too, I guess.

00:47:28.400 | If you say, why do I not make any money? You might diagnose the fact that, well, I come in late,

00:47:33.520 | nobody likes me because I'm mean to everybody and I'm lazy and I goof off all day. So that

00:47:39.360 | would be useful. Or it might be I work in a part of the country or I work in a dead-end job or

00:47:44.240 | something like that. That might be useful. But I would start with what would help me make more

00:47:48.080 | money? And then he would say, make a list of 30, number your list from 1 to 30. And for me,

00:47:56.080 | when I've done this, I've just used however many lines are on the notebook that I'm using. Often,

00:47:59.360 | it was 34 or something like that. And write down 34 ideas that would help you make more money.

00:48:06.880 | So I could move across the country. I could move from a dead economy in insert town here to North

00:48:15.600 | Dakota where there's an oil boom. That would help me make more money. I could develop a new career.

00:48:21.040 | I could start a business. I could get a second job. Just write down all the ideas and figure out what

00:48:27.040 | would help getting a promotion. And then at the end of it, start looking at those lists. And if

00:48:35.040 | you don't have anything good, maybe you did 34 bad ideas, do it the next day and write down another

00:48:39.200 | 34 things that would help you. And step back and look at it. And then pick whichever one of those

00:48:45.280 | things makes the most sense to you. And then ask yourself the next question. So let's say that,

00:48:49.600 | well, how could I make more money? I could get a promotion. Well, the next day's question would be,

00:48:54.160 | how can I get a promotion? And write down 34 things for that. Then maybe one of those things is

00:49:00.320 | produce more great work. That would usually help many people get a promotion. So the next day,

00:49:05.760 | how can I produce more great work? Well, one of the answers to that might be, I need to learn

00:49:09.840 | how to be more skillful at marketing. Or I need to learn how to improve the company's profit margins.

00:49:16.880 | Next day's question, how can I become more skillful at marketing? Well, I can read these

00:49:22.640 | books. I can go to some seminars. I can go to these courses. What do I need to do next? And you

00:49:27.920 | write it until it becomes a task to where you go on Amazon, you buy the five books that are going

00:49:32.160 | to be helpful. You search the App Store. You search iTunes for a podcast on marketing. And

00:49:38.800 | you start listening to that or whatever the situation is that you need. And you start doing

00:49:43.680 | things. So would you be served by making more money? Now, that's a really useful scenario.

00:49:50.960 | But you've got to make sure that you don't overstate that when compared to the next category.

00:49:56.640 | Would your financial plan be helped by cutting your expenses? A review of your current expenses,

00:50:04.320 | to my mind, is always important. I don't know any successful business owner who makes a lot of

00:50:10.480 | money who doesn't routinely review their expenses. The scale at which expenses are reviewed changes.

00:50:17.280 | When you're getting started, if you're making minimum wage at a minimum wage job,

00:50:21.680 | the $1 you spend on a hamburger on the value meal is probably a massive overpayment

00:50:32.080 | compared to how you could create the same food value for yourself for 30 or 40 cents.

00:50:38.080 | That's double the cost of what you need. And when compared to your income, that is a big deal.

00:50:44.880 | It really is. That's a 50% savings. But if you're making $100,000 a year, the $1 you spend on the

00:50:52.880 | value meal as compared to the 40 cents that you could make the equivalent for yourself

00:51:00.800 | is utterly meaningless and irrelevant. But it's very important to you if you're shopping for a

00:51:06.960 | new boat that if you can figure out a way to get the same value for 50% of the cost, that would be

00:51:13.760 | really, really important to only spend $15,000 on a boat instead of $30,000 on a boat. That would be

00:51:20.960 | well worth your time. But if you're making a million bucks a year, it's important for you

00:51:27.760 | to spend more time reviewing what is the profit margin of this division of my company. And should

00:51:33.440 | we move our operations from this high-cost region of the world to a low-cost region of the world?

00:51:39.200 | Or can we find and buy a technology solution that will allow us to eliminate $300,000 a year of

00:51:46.560 | labor costs? And don't worry about spending $15,000 to $30,000 on the boat. We all have a

00:51:51.360 | limited amount of time. So the scale has to change. But the thinking process is consistent throughout.

00:51:57.840 | You have to keep an eye on expenses at every single level. There is no level of income and

00:52:07.200 | no level of wealth that can't be destroyed by expenses out of hand. Consider all the famous

00:52:11.680 | celebrity examples, Mike Tyson, Willie Nelson. Consider all of the people that earn tens of

00:52:16.640 | millions of dollars and go bankrupt. A review of expenses is always important. I think a useful way

00:52:22.960 | to do this is pick a category each month to work on. Recognize that this is not a one-time thing.

00:52:28.160 | This is an ongoing cycle, which I'm going to finish up the show by talking about. So just simply look

00:52:33.120 | at your budget and pick a category. So now that you're starting to track for maybe we're in

00:52:37.840 | February 2015 now, and you have to—at the end of February, we have two months of data. Look at your

00:52:42.640 | tracking and say, "What are my expenses?" And pick a category. Categorize your expenses and pick a

00:52:51.360 | category and make that a target. Put a bullseye on it. Now, it can be either a big category or it can

00:52:58.560 | be a little category. I commend to you that it's usually a better idea to start big with whatever

00:53:05.200 | your largest expenses are and move on to small. Hopefully, probably for most people, the largest

00:53:12.000 | expenses are taxes, income taxes, employment taxes, housing, transportation, and food. If you

00:53:22.080 | look at the averages, those are the three areas that most people spend more money on. Pick one of

00:53:28.080 | those areas and consider changing. And consider and ask yourself the question, "How can I get

00:53:33.120 | every bit of value or happiness out of this?" Or, "How can I get more value for half the money?"

00:53:39.280 | Or however you want to phrase it. That's how I like to phrase it. "How can I get double the value

00:53:42.960 | for half the money?" Make that the topic of your daily journaling exercise, top of the page. "How

00:53:49.600 | can I get double the value for my housing at half the money?" Well, write down 34 ideas, and those

00:53:56.560 | ideas could come from—they could be all over the place. They could be move from New York State to

00:54:03.760 | Texas where I get double the square footage for half the price. Or it could be as simple as rent

00:54:11.120 | out a room. Or it could be as simple as—I mean, it could be any number of things. So you just write

00:54:16.720 | down your 34 ideas and then look at them and ask yourself if you actually want to do any of them.

00:54:21.520 | If you want to, great. Pick one and do it. If you don't, then write a different question and keep

00:54:27.120 | doing it until you come up with an idea that you actually like. Now, a lot of people are

00:54:32.640 | intimidated by starting with big. If I were to walk into, say, an average couple's financial

00:54:37.360 | lives and say, "Got to sell the house, got to sell the car, what are you doing? You're crazy,

00:54:40.720 | crazy, crazy," it doesn't work. Maybe the resistance would go up. So if you find your

00:54:45.120 | resistance would go up internally, then switch it around and start with the little things.

00:54:49.280 | And just pick something that's small. Pick a topic and focus on it and say, "What can I do? Maybe I

00:54:54.480 | can cut my cell phone bill. Maybe I can cut my cable bill. Maybe I can shop my car insurance."

00:55:00.560 | Pick an area, pick a category, spend some time researching it, thinking about it, planning on it,

00:55:06.720 | and then implement your solution. Think on paper. Ask yourself these questions.

00:55:10.880 | Write down, "How can I reduce my electric bill and increase my happiness or increase my value

00:55:17.520 | or increase my satisfaction?" Brainstorm your answers. One may be, "I can turn lights off when

00:55:22.720 | I leave." One may be, "I can insulate my attic." One may be, "I can upgrade my furnace." One may be,

00:55:28.720 | "I can buy a smaller house." And just brainstorm your ideas. Brainstorm ideas and then look,

00:55:34.480 | pick one if you like them. If you don't like any of them, move on. Do research. By having

00:55:39.600 | a focused category, it gives you an opportunity to focus your research. Things are always changing

00:55:46.240 | with every category of expenses, and I'd recommend to you that you have a mental schedule. I used to

00:55:50.480 | recommend, for example, to clients that they review their life insurance basically about every two

00:55:53.600 | years. Things change. Situations change. The amount of insurance you need changes, and you can lower

00:55:58.640 | or you can adjust. You can shop. You can move. You should be quoting your auto insurance,

00:56:02.960 | your home insurance maybe every year or so. There are always opportunities for change.

00:56:07.120 | And the key is look for value. If you just focus on price, I think oftentimes that can raise

00:56:13.920 | internal resistance. If you focus on price and on value, that'll make a big difference.

00:56:19.440 | Finally, of those three categories, would you be helped by increasing the rate of return on

00:56:26.320 | your investments? Now, if you're in debt, this is very important. You still need to improve the rate

00:56:32.240 | of return, but it's not on your investments. You need to improve the rate of return on your interest

00:56:36.640 | payments. So think to yourself, "What can I do?" One trick that I use when I'm making a cash flow

00:56:43.120 | statement for myself or for clients, if I can get the data, is I break out the interest component

00:56:50.560 | of any debt payment as a separate line item. So on my cash flow statement for a mortgage,

00:56:56.560 | for my mortgage, it would say mortgage principal reduction and mortgage interest payment.

00:57:01.200 | This is useful to me to know what I'm actually spending on interest, to know what my debt cost

00:57:08.960 | is. It's a good discipline if you're a business owner because it allows you to deduct that

00:57:14.720 | interest expense. It's a good discipline if you're a homeowner. Yes, they'll send you your tuition,

00:57:18.880 | excuse me, the statement of interest that you're paying on your mortgage at the end of the year,

00:57:22.320 | but it's a good discipline to know what that number is. And it's a good discipline because

00:57:26.960 | it should lead to the question of, "How do I deduct this debt?" And I think you should never,

00:57:30.960 | ever, ever have any debt that's not deductible. Totally a silly thing to do with as many simple

00:57:36.320 | ways to deduct interest. At least get the government to subsidize your interest payments

00:57:41.040 | if you're going to have any interest payments. Ask yourself if you can refinance the debt at

00:57:45.840 | more favorable terms and a lower cost. Now, if you're not in debt or if you're focusing also on

00:57:51.200 | your investments, which is ideal, ask yourself good questions and use this in your journaling

00:57:56.560 | exercises. What do you want to invest in? Are you investing in your best ideas that are appropriate

00:58:01.760 | for you? Is there a strategy for investments that you know of that you need to research and learn

00:58:07.360 | more about or that you need to go out and search for? Where can you get the highest return on your

00:58:11.680 | money right now with the skills that you have at the investor level that you have right now?

00:58:15.600 | What's the best investment for you? What fits your temperament? What fits your experience?

00:58:20.240 | Thinking in terms of a stock portfolio and reconsidering your asset allocation is good.

00:58:26.640 | That needs to be done and that makes a big difference over the long term. Your personal

00:58:31.200 | asset allocation will make a bigger difference in explaining your personal returns on your

00:58:35.360 | portfolio than anything else that you do. But don't stop there. And remember that publicly

00:58:40.880 | traded securities are probably not your highest rate of return investment. The highest rate of

00:58:45.120 | return for you will probably come from investing in your personal earning power or in private

00:58:50.160 | business. So make sure you're prioritizing this if you're interested in that. You may have already

00:58:55.760 | reached the point at which you're in the top 4% of your career. And so in that case, it would be

00:59:02.160 | less important to focus too much on earning power unless you know of a way to improve that.

00:59:06.960 | And now you're going to focus on other areas. There's a point of diminishing returns in anything.

00:59:12.080 | But make sure you're prioritizing investments outside of just your public traded securities.

00:59:16.800 | There are extra risks to that type of investment that don't exist if you buy a McDonald's stock.

00:59:22.480 | But there's also more potential return. Now what's the right ratio?

00:59:26.800 | That's again back to that asset allocation question. What fits you in your situation?

00:59:30.480 | Don't forget risk management in this ongoing thinking process. Ask yourself,

00:59:36.000 | what are the biggest risks that I face that could derail my financial plan? And then how can I plan

00:59:41.840 | for them? You might need insurance. You might need savings. You might need to build an emergency fund

00:59:48.400 | or a cash cushion. It could be as simple as that. If you don't have any savings, you need some

00:59:53.120 | savings. You might need insurance. It could be as simple as you need some life insurance. Or maybe

00:59:57.920 | you just joined a nonprofit board and now you need to sit down and review your options for directors

01:00:03.840 | and officers' liability insurance. Maybe you've unintentionally exposed yourself to a risk and

01:00:11.760 | you need to cover that risk. So think it through. Ask what should I next do? In my mind, this would

01:00:20.720 | be a good scenario for an insurance agent. Do a good review with an insurance agent. Ask the

01:00:24.800 | agent, what do you see? What risks am I not thinking about? It's a useful question, by the

01:00:30.000 | way. What do you see that I'm not thinking about? If you put this together in an ongoing cycle,

01:00:36.160 | you will make substantial progress toward your financial goals.

01:00:40.160 | Now, I don't know what you should focus on first. You have to figure that out.

01:00:44.080 | But if you go through this type of disciplined thinking in an ongoing manner, it will help you

01:00:52.000 | and you'll be able to guide yourself toward your goals. I commend to you that it's a good idea to

01:01:01.520 | forget looking for the magic bullet. I would suggest to you that it's a waste of time to look

01:01:09.440 | for the one thing. I don't think it is about one thing or there is any magic cure that's going to

01:01:14.880 | create overnight success. I think it's more about ongoing cycles. It's like forget about the diet

01:01:20.000 | and think about the lifestyle. Forget about the magic incantation to say to somebody and think

01:01:26.960 | about the overall picture of who you are being toward them. And forget about necessarily the

01:01:36.880 | things that you need to do to reach a specific goal and focus on becoming the kind of person

01:01:44.240 | who is able to build the disciplines and the habits that will allow your goals to be reached.

01:01:53.680 | As the saying goes, "Don't wish things were different, wish you were better." Isn't that

01:01:59.600 | the aphorism? Frankly, I think I've wasted a good bit of my life wishing for the next thing and

01:02:06.080 | focusing on the next goal. Things would be better if only, and I don't know, for me, I've just

01:02:10.880 | learned that if only doesn't really exist. Money doesn't seem to fix most problems. It just changes

01:02:16.560 | the problems and the scale of the problems. I used to think that if I only made a little bit more,

01:02:21.440 | if I only had a little bit more money, it would fix my problems. I've learned through my experience

01:02:25.760 | and also through vicarious experience of others listening to them that money doesn't fix any

01:02:31.760 | problems. It just changes them. Just changes them. I've met with a lot of multimillionaires

01:02:37.120 | that said, "I thought if I were a multimillionaire, my life would be great." But the point is that it

01:02:42.400 | didn't necessarily fix it. It just changed the problems. Yes, there are fewer problems with,

01:02:47.760 | and there's less of a, there are fewer heart palpitations when the tire blows out and you

01:02:52.880 | got to get a new tire. But it's a problem to sit down with the attorney and figure out,

01:02:58.720 | "Who do I leave my money to if I die?" That's a problem. So don't miss today by looking forward

01:03:07.040 | just to tomorrow. I think there's a healthy tension between these two things, and I don't

01:03:12.320 | see any way to resolve the tension, nor am I convinced that there's any reason to want to

01:03:16.320 | resolve it. The tension in this sense is healthy. We only live once. I think there's a good healthy

01:03:21.840 | tension between deferring gratification and experiencing gratification now. Now, where that

01:03:31.040 | line is, I don't know. I have some ideas on where it is for me and my family, but I can't presume

01:03:38.480 | to tell you. I think only you can ultimately know what's right for you. But I do think if you focus

01:03:44.000 | on using a process of disciplined thinking like I've illustrated, and you can become a person

01:03:51.920 | who is focused, who is thrifty, who is wise with money, who's working toward specific objectives,

01:03:58.800 | specific goals, specific outcomes, who is planning toward them, I think you're always

01:04:03.920 | going to have money, no matter what, because you're a different person. And as I close today's

01:04:10.480 | show, I want to illustrate this to you with a couple of anecdotal examples that I do think

01:04:17.040 | are instructive. Consider your favorite famous rich person, Donald Trump or Warren Buffett or

01:04:26.160 | I don't know. You pick who your favorite rich person is. I like to pick personally on Trump

01:04:32.880 | because he's so extreme. He's almost a caricature of many things. So I'll pick on Trump.

01:04:39.040 | Question. Can you imagine Donald Trump being poor? Seriously. Can you imagine if Donald Trump just

01:04:49.440 | being a millionaire, having a net worth of a million bucks, and imagine him being satisfied

01:04:55.600 | with that? I can't even conceive of it. And I always think that's a little bit funny when I

01:05:01.600 | think about it. Because many people, rightly so, for many people, me included, I don't have a

01:05:08.800 | million dollars yet. But for many people, accumulating a million dollars would be a

01:05:13.920 | watershed moment and they would feel as though they had accomplished a major goal, and rightly so.

01:05:23.040 | Many people, if they had a million dollars, would feel rich, I think.

01:05:30.880 | What would Donald Trump feel about that? So my point is,

01:05:35.040 | we get used to where we are unless we become a different person.

01:05:41.600 | What do you think Donald Trump would do if he took all of his money away?

01:05:45.280 | Well, it's kind of fun to think of him because this has happened to him. He had suffered some

01:05:53.280 | disastrous results with his real estate investments back, I think it was in the 90s,

01:05:58.960 | and he was a billion dollars in the hole. But what do you think he would do if he took all

01:06:04.240 | his money away? Take away every dollar he has. Do you think he could rebuild?

01:06:08.240 | I think if he gave him a decade, he'd be back where he is today. Now maybe a little bit less,

01:06:14.400 | a little bit more. Once you get to the billions, it really doesn't, it's just a matter of scale,

01:06:18.080 | and it doesn't measurably affect your lifestyle in any way, whether you have one billion or two

01:06:23.680 | billion dollars. But I think it's an interesting scenario, because to me the key is not what did

01:06:33.440 | Donald Trump do, although that is probably a useful thinking process. It's rather, who is he?

01:06:40.720 | What has he become that allowed him to accomplish his objectives? He became a deal maker. He became

01:06:49.600 | an entrepreneur. He looked for opportunities and he capitalized on them.

01:06:53.360 | Am I focused on becoming somebody different? I really do think if you took every dollar,

01:07:01.920 | or whatever the foreign currency equivalent is, from every person in the world, and you just

01:07:07.440 | simply divided all of those dollars equally among the population of the world, was it seven billion

01:07:13.280 | people? You divided it out equally. I think within a decade, they would be right back in just about

01:07:19.520 | the same hands as they are today. Now, why? First, I think there are two reasons. First,

01:07:27.280 | money really has no practical value, other than as a representation of either an exchange of value,

01:07:37.600 | or some kind of coercion or force. In my mind, money is a simple system of accounting that we've

01:07:46.960 | come up with and designed, which measures transactions between people. That money can

01:07:54.960 | measure a transaction of force. It can. In centuries past, wealth wasn't measured in

01:08:07.120 | currency. Wealth was measured in land. Wealth was measured in soldiers. The wealthiest ruler,

01:08:15.520 | by force, could keep his or her—I guess it was mainly his in many cultures—his or her subjects

01:08:22.720 | under subjection and extract wealth by force. The wealth was an illustration of the power that they

01:08:33.440 | were able to put on other people. Now, in a capitalist system of voluntary exchange,

01:08:37.520 | I think money is a representation of value, and it's very different. I think it's pretty cool that

01:08:42.080 | we live in a system that's tilted more toward the capitalist end than the force or coercion.

01:08:48.320 | Certainly in our economy, I could be short-sighted and naive to think that it's all based upon a

01:08:53.920 | representation of value. There is a measure of coercion or force, but I'm not interested in

01:08:58.560 | dealing in that system. But primarily, money is a representation of the value that's been brought

01:09:03.280 | to buy people. It's not the money that has value. It's the value that has value, and the money is

01:09:08.880 | our system of accounting for it. So that's the first reason that the money would flow. It would

01:09:16.400 | either flow to those who exert force over other people, or it would flow to those who bring value

01:09:20.800 | to other people. The second reason is people that are rich usually become rich by becoming a

01:09:27.200 | different person. And again, having a million bucks in the bank is less important than becoming

01:09:33.520 | the type of person who can accumulate a million dollars. I see this all the time. You take the

01:09:40.240 | money away from a millionaire, they'll make it again. They know how to do it. It's the same

01:09:43.920 | thing when you look at the business success and business failure statistics, and there are

01:09:47.520 | oft-repeated statistics about how many businesses fail. But if you look at how many new businesses

01:09:52.800 | fail by people who have had previous businesses, it's a much lower statistic. I hope this show has

01:10:01.280 | been useful to you. As we finish up one year and we move to another one, it is, I think, a really

01:10:08.160 | neat period of time. And I would commend to you that this is a good time to think through afresh

01:10:14.160 | what your goals are. In my mind, there's nothing magical about January 1. There's nothing magical

01:10:18.720 | about a New Year's resolution, unless that resolution is tied to a vision, a plan of action,

01:10:25.760 | and a system, a framework, a methodology that you can put in place that will assure

01:10:32.640 | that you keep going toward that vision. That will be useful to you.

01:10:39.280 | Finances touch every part of life. I guarantee that if you sit down and make a list of 10 goals

01:10:46.320 | that are important to you, it's very possible that none of those 10 have anything to do

01:10:55.600 | with money from a dollar perspective. You may not say, like I used to, "I want to make $100,000 a

01:11:00.320 | year." You may not say, like I used to, "I want to have a million-dollar net worth." Those goals,

01:11:05.120 | I think, sounded good, but they weren't really connected to anything. You might say, "I want

01:11:09.520 | to take my family to South Africa or on safari. I want to go and spend time with my grandmother

01:11:16.720 | before she dies." We've got to figure out the financial end of that. So that goal has to be

01:11:22.640 | tied to the money in some way or to the financial wealth in some way. There's no one big thing

01:11:29.040 | that's going to make a difference for you or make any difference in 2015 versus 2014. If you keep

01:11:33.840 | doing about what you did in 2014, you'll probably get about what you got in 2014. So who was it?

01:11:40.480 | As Zig Ziglar used to say, I think, "If you like what you've been getting, keep on doing it." He

01:11:45.360 | had a great way of saying it. But if you like where things are going, great, keep doing it.

01:11:52.880 | There's always a few tweaks. If you don't like where things are going, that's okay. As long as

01:11:57.600 | you're not expecting an overnight transformation, you can begin the process, and that ongoing

01:12:04.000 | process will transform the ends. You can do it. Any culture, you can do it in any culture. You

01:12:09.360 | can do it in any situation. You can do it in any scenario. You can make meaningful progress

01:12:15.120 | toward your goals. At least what I've learned, for me, making meaningful progress, that's what's

01:12:21.200 | fun. Life is pretty cool when you feel like you're making progress. Tackling challenges. We've been

01:12:26.480 | sold a bill of goods about pleasure. In a modern society, we have a very hedonistic society where

01:12:32.960 | everything is focused on pleasure, self-pleasure, and hedonism.

01:12:39.680 | Pleasure has its place, but progress I find more fulfilling than pleasure.

01:12:45.600 | I think many people do. It's satisfying to make progress towards something. I find it to be so.

01:12:56.720 | That's it for today's show. I hope that you enjoyed this. I hope this was useful.

01:13:00.880 | If I can get it done soon with the things that I'm juggling in my schedule, I will produce for you

01:13:08.560 | a technical show on some year-end planning ideas. I wanted to begin with this.

01:13:14.320 | It's always the problem with financial content. How do you balance what's valuable

01:13:20.800 | in the technical sense with what's practical in the behavioral sense? I feel that these concepts

01:13:28.480 | are way more valuable than the technical. The technical stuff is easy. You can hire it done.

01:13:34.160 | A few hundred bucks and you can hire somebody to fix the technical stuff. A few thousand bucks will

01:13:40.000 | hardly get you started on the ability to hire somebody to do this for you. You can do it for

01:13:45.440 | yourself. This is what will make a far bigger difference than putting money into a traditional

01:13:50.960 | IRA before the end of the tax season. Often, that's a bad idea. We'll talk about that another

01:13:54.560 | time. Thank you for listening to today's show. If you'd like to get in touch with me, you can

01:13:59.680 | email me joshua@radicalpersonalfinance.com. Twitter, we're @radicalpf. Facebook.com/radicalpersonalfinance.

01:14:07.920 | I've got a number of shows planned over the next couple of weeks, a bunch of interview shows,

01:14:14.400 | a couple more things. I'm not going to go into that because I don't want to commit to what I'm

01:14:17.040 | going to get on day one versus another day. I hope this has been useful to you. I'm done for the day.

01:14:22.080 | Membership program, radicalpersonalfinance.com/membership. Thank you for your support

01:14:26.880 | to the show. Have a great day.

01:14:33.840 | [music]

01:14:35.360 | [music]

01:14:47.840 | [music]

01:14:53.840 | [music]

01:15:07.840 | [music]

01:15:16.080 | Thank you for listening to today's show. This show is intended to provide entertainment,

01:15:22.480 | education, and financial enlightenment. Your situation is unique and I cannot deliver any

01:15:31.600 | actionable advice without knowing anything about you. This show is not and is not intended to be

01:15:40.320 | any form of financial advice. Please, develop a team of professional advisors who you find to be

01:15:49.360 | caring, competent, and trustworthy, and consult them because they are the ones who can understand

01:15:56.880 | your specific needs, your specific goals, and provide specific answers to your questions.

01:16:03.520 | Hold them accountable for your results. I've done my absolute best to be clear and accurate in

01:16:10.160 | today's show, but I'm one person and I make mistakes. If you spot a mistake in something

01:16:15.360 | I've said, please come by the show page and comment so we can all learn together.

01:16:20.000 | Until tomorrow, thanks for being here.

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