What drives you?

The key to achieving financial wealth is understanding what it is you really want. Then understand why that’s important to you. You create the target and then go after it in a consistent way. What is it that you want in your life with regard to wealth?

• What type of home do you desire?
• What type of an annual income do you need?
• Is that the income you need to replace in retirement?
• What’s the timeline to achieve it?
• Why is financial freedom important?
• Why do you want it?
• What will financial freedom do for you?
• What emotions will you feel having achieved it?

The why you want something is the big driver of success. The why, if it’s deeply rooted, provides an avenue of moving beyond the adversity you face. You will encounter challenging roads in the quest to achieving financial freedom. Any objective you desire will likely involve roadblocks you will have to overcome. The why is the fuel to increase your determination during those trials. It’s the passion that causes you to stick to the path when conditions get tough. It’s the focus that needs to be present for 10, 20, or even 30 years to achieve wealth.

Few people achieve financial wealth in a few years. There are certainly examples of people who did. The vast majority of financial independent people have achieved it over 10, 20, or 30 years. You must be prepared to endure economic downturns, lost jobs, bad investments, and emotionally draining life events and still continue on to financial wealth. The Internet is full of too-good-to-be-true opportunities that claim to create wealth in the blink of an eye. The vast majority of them offer the same glowing opportunity that Bernie Madoff did for his investors.

What emotions are connected?

You are reading this part of the book to learn better how to attract the money and wealth you desire. But in truth, money is not what we are after. The money is not the causality of success. It’s not even the result, although you will have more of it. What we desire are the feelings and emotions of being empowered: freedom, security, pride, and acceptance. We want to have choices, give our children a better lifestyle, and give to charity. These are what drive most humans to acquire, save, invest, and work hard to achieve wealth. So the question is, what are your drivers? It might be none of what I have listed, and it’s something else for you. Your ability to define and acknowledge the driver in you is step one.

Most of us are driven by our feelings. What feelings will wealth create for you? In the fall of 1994, Joan and I were celebrating our fourth year of marriage. I had just completed my third year in real estate sales. I was 32 years old and wanted to make a statement of “I have arrived” and that I was a success. That year we bought a building lot in a golf course community in Bend, Oregon. Our intent was to build a second home that next summer in 1995. Because my parents had a second home, the emotions of accomplishment, success, and wealth for me were attached to having a second home. It was a realization of a dream from my childhood. We started construction in June of 1995 and moved in mid-February 1996. A sense of self-worth welled up in me as each stage of construction was completed.

Looking back, it's safe to say that my ego was out of balance. I was over my skis and likely to have a yard sale crash on the mountain. For those non-skiers, a yard sale is a big wipeout where your gear is scattered all over the ski run. Frequently, our most basic drivers and motivators come from childhood experiences and expectations. The good ones we want to re-create; the bad ones we want to never have happen in adulthood. It’s the desire to have what my parents achieved (or even achieve more than they did). For some, it could be that moment in childhood when there wasn't enough food on the table, and you never want to experience that again.

The financial independence driver for me at its core is all about freedom and choice. Those are my drivers for me personally. I have always wanted the options and freedom that financial independence brings. I choose how to spend my time and answer to no one. The bills of life are being paid through what I already have in financial wealth, and I have passive income sufficient enough that I can choose to do what I wish at all times.

When I started my real estate career, it was in the same year my father was retiring after 30 years as a dentist. I saw firsthand the freedom of choice he had in his life. He had worked hard, but now he had achieved that choice to retire. He was ending his career while I still had the vast majority of mine ahead of me. The timing was curious and not lost on me at the time. If I had been further in my career, or even younger, it might not have had the impact that it did. Some of success is being there at the right time. The timing, in looking back, was fortuitous.

You have to tap into that driver for you. What are you seeking? What is the emotional need or feeling that is going to drive you to wealth? What is your definition of wealth? The best thing you can do is pause here for moment and review these questions to create your clarity. The second best step is resolving to achieve your why and your wealth objectives. In essence, to make the decision to start crafting a plan and sticking to the plan no matter how small.

The secret of getting ahead is getting started. —Mark Twain

It doesn’t matter where you are right now. Some of you are on solid footing. Some of you are deep in debt. You might be hanging on by a thread financially with large debt on credit cards or student loans. Wherever you are … it’s okay. You can finish where you desire. Some of you have a lot of years left. Some of you, only a few. What matters is right now, right here. What is in the past is there. Don’t bring it forward in a big chorus of “if only.”

When you resolve to get started, your mind can often say, “It’s so small that it doesn’t matter.” This change is so small; this savings amount is so small; my income is so small. The truth is that it does matter because it’s movement in the right direction. When you start an exercise program, you don't expect to run five miles on the first day. Even walking around the block is progress toward the new, healthier you.

The best time to plant an oak tree was 20 years ago. The second-best time is right now. Get out of the past and into the now. Leave the whole “what if” or “if only” behind. Those thoughts really will not serve you at all. They're a waste of energy and feed a negative mindset.

The difference in their thinking and their attitude

Wealthy people expect positive outcomes. That's the biggest difference in the way they think. They expect to achieve their goals and objectives. Wealthy people, when they launch a new business venture, expect it to be a success. That doesn’t mean they all are successes. If they are in sales, as I have been most of my adult life, they expect to make sales and do it in sufficient numbers to acquire the new car they desire, the large home, college savings, or anything else they set their mind to.

Their attitude and expectation are set to positive. A positive attitude means that each day they decide to focus on the positive progress they are making toward their goals and dreams. Being and having a positive state of mind is a choice that we all make every morning when we wake up and approach a new day. We have the new opportunity each morning with a clean slate to make that decision. We can be grateful for what we do have in life.

Creating the difference daily

Your results are the effect of a series of causes you engage in over time. The record of your wealth is merely a scoreboard with numbers on it that are influenced by your daily thinking and actions. A financial scoreboard is all about the numbers. It’s like a golf scorecard: The story of how I parred a hole doesn’t go in the square, which is only large enough to write in a number. It doesn’t matter that I hit my drive poorly, landed my second shot in the bunker, chipped out of the bunker, and sunk a 50-foot impossible putt. There is only room to write in a 4 in the box. In the next few sections, let me share with you a few things to do daily to increase your wealth and status.

Earning replacement income

The first method is to focus on the replacement of income. The goal would be to acquire enough income-producing assets to replace all, or a part, of your current earnings. What is the amount of money you need to acquire to replace your present-day income, plus a factor for inflation. The goal is to buy enough bonds, annuities, pension payments, dividend stocks, real estate, and mortgage notes that create a cash flow to cover your expenses. This is certainly a viable way to create a number that you craft a plan too. This plan creates a replaced income without reducing your asset base. It allows you to spend your income freely, knowing you have future safety as well.

Setting a gross asset number

Another way to develop a wealth strategy is to calculate a gross asset number. What overall net worth number do you need where the income plus drawing on the asset will create years of income to fund your lifestyle? It gives you a very specific target, which allows you to plan as well as check your progress too. It becomes a simple math equation of lifestyle and length of life. You then apply a standard 4-percent rule to your net amount.

The 4-percent rule has been around for years as a benchmark for retirees. This rule describes how much a retiree can withdraw each year in retirement while also retaining enough of an asset base in their account to last 30-plus years. So if you have $1,000,000, you can draw out $40,000 per year and likely never run out of money. This rule is just a guide, so if your asset base drops due to a stock market crash, you might have to adjust.

Beware of being general, arbitrary, or having round ballpark numbers. My belief is that specificity creates attraction. The law of attraction states that you will be attracted to what you are looking for and what you desire. If you are specific, the power of the pull will be greater. As you march along to your specific goal, your intention, energy, and excitement will increase because you can clearly see the progress. The law of attraction is a powerful tool to the achievement of wealth.

Getting help from other sources

I have scoured numerous websites and information sources to help you on this journey of defining your number. A good financial planner can really be invaluable in defining the number and factoring for inflation. If you want to go it alone in your calculation, I have found what I think is an outstanding resource. Kiplinger has an easy-to-use retirement savings calculator. Check it out at www.kiplinger.com/tool/retirement/T047-S001-retirement-savings-calculator-how-much-money-do-i/index.php. It will take you about ten minutes to work through it. It factors in the variables of time, returns, inflation, and years in retirement. You can include Social Security in the calculations or not. I have found this tool to be invaluable for the do-it-yourself planner.

The objective is to give you a target. That target is reasonably accurate in what you need plus what you need to save on a regular basis for how many years you need before retirement. When you use the retirement savings calculator, be sure to adjust the timing, rates of return, and length of retirement. All those factors can influence significantly the nest egg number. What I am saying is that you should play with the numbers. Create some variation so that you understand how different economic conditions might affect your results, or higher savings rates will affect the outcome, and so forth. I suggest taking a screen shot of a few different scenarios or even printing them out for discussion. Discuss all of the factors, variables, and expected outcomes with your significant other. Talk about risk tolerance. Then you might discuss your ideas of investment avenues: stocks, bonds, mutual funds, real estate, and commodities. There are unlimited options that all carry differing levels of risk and management with them.

Deciding what you need

Take a look at Figure 14-1, where I've used the Retirement Savings Calculator. I realize that for some, a 1.5-million dollar nest egg goal seems big. For others, it might seem small. The $159,000 annual income goal in the figure is two and a half times the median income the United States currently. That’s not in the 1-percent income level, but it's certainly an upper-middle-class lifestyle in terms of annual income. The real question is, what do you need?

The $76,020 in Social Security income might also seem like a lot, but it’s only 47 percent of the overall income. The Social Security Administration quotes that Social Security is designed to replace about 40 percent of a person’s income in retirement.

In this example, the savings still needs to be at $1,543 per month toward retirement. According to Vanguard, about 12 percent of 401k plan participants contribute the maximum amount to their 401k plan each year. The present maximum level is $18,500 per year if you are under 50 years of age. If you are over 50, you are allowed another $6,000 for a total of $24,500. Interestingly, the example I share, the $1,543 a month, would be achieved just by maxing out your 401k plan each year.

This first step is looking at the “what is your number” target. Is that a number that makes sense for your nest egg goal? Then review the monthly savings. Is that something you could save and achieve? Will you need to make adjustments in your family budget or increase your income to achieve that target? I find that people are more willing to make a change if they understand clearly the reward and what price they must pay to achieve it.

Most people want financial wealth or financial independence but have never even taken the 10 minutes I am asking you to invest to define what that number is for you. You can’t hit a target that you have not defined or aimed for. Imagine going out to shoot guns but not having specific targets to actually aim at. Your guns would merely be big noisemakers.

The path is in the math

You have to do the math so that you can work effectively to craft your plan and set the strategy. Let’s look at a few more basic math calculations to check how you are doing. The goal is to give you a perspective of exactly where you need to be long term, as well as compare it to where you are right now. If you used the Kiplinger tool discussed in the preceding sections, you understand clearly where you need to be.

I realize for some of you, you don’t want to look at this or deal with where you really are. I know it’s uncomfortable. It’s like looking in the mirror when you are overweight. You see where those love handles are, especially if you turn on the lights. No one is comfortable with this kind of self-scrutiny. The truth is, you can’t finish well off or wealthy without a wealth number and a willingness to look at where you are now or where you should be. You have to be able to recheck yourself at intervals along the way. Doing so drastically improves your odds of it even happening. You won’t get where you want to go by burying your head in the sand. The common occurrence is to think about crafting a wealth and retirement plan in your 40s or 50s. That's too many years of being the ostrich with your head in the sand.

A good financial plan is not really glamorous. It’s not exciting. What creates excitement is having the plan and starting the process to achieving it. A good plan works because it is just common sense combined with simple savings disciplines. It has savings targets and savings goals. For example, consider forced savings out of your paycheck. You decide to deduct $200 per paycheck and place the money in a savings account or a 401k.

The complex stuff makes for great conversations at cocktail parties. But the strategies of paying off non-deductible debt, forced savings, solid real estate cash flow investing, and compound interest don’t make for great conversation at cocktail parties, but they can eventually pay for great cocktail parties!

What is your current savings goal monthly? How does that relate to your needed goal of monthly savings you calculated? If it’s short, how much short is it? What steps in your family budget are you going to take to increase your savings? What extra work, overtime, or side jobs can you do to increase your monthly savings rate? What is a reasonable timeframe to achieve the increase in savings? You might not be able to do it now due to other debt you are paying off. That won’t sink your ship if you can eventually improve your position. If I am off by $500 a month now, but through raises and expense cuts, I can get there in two years, I have only missed paying in $12,000. That might be $60,000 to $70,000 total at retirement, which is only 4 percent of my 1.5 million dollar nest egg, so it's not a big calamity.

What is a reasonable timeframe to close any gaps that exist? You don’t have to make up the shortage this month, or even this year. If you, through a deliberate plan, close that gap in the next few years by even placing 100 percent of the raises or periodic side job earnings into savings, the fact that it took you a few years to reach your savings goal will likely be a non-event 30 years down the road in retirement.

The power of compound interest

The eighth wonder of the world is compound interest. “He who understands it, earns it. He who doesn’t, pays it,” stated Albert Einstein. Compound interest is one of your best friends in crafting a wealth plan.

Compound interest is like a snowball that is traveling down a hill. It continues to pick up more snow, growing in size as it travels. That is the principle as well as the outcome of compound interest. Compound interest does all this work of growth automatically. It does it while you sleep. As long as your investment is paying you a return in interest, dividend, or rent, you reinvest those gains. The longer the timeframe, the wealthier you become. Time is actually your ally with compound interest.

If you start to save $5,000 a year at age 20, by age 60, in 40 years, you would have 2.4 million dollars. You would have saved a total of $200,000 in that 40 years. At 80 years old you would have 16.7 million by saving only $300,000 of income over 60 years. Look at the difference between ages 60 and 80. In 20 years, with only $100,000 added through savings, you went from 2.4 million to 16.7 million. It's astounding!

Why am I so excited about compound interest? Because it's simple success reality is lost by so many people. We are focused on the now too much. For most people, compound interest effects and results are like watching paint dry: boring. But it is what the Warren Buffetts of the world have used to acquire huge sums of wealth. According to Business Insider, 99 percent of Warren Buffett’s wealth has been created after the age of 50. One of the wealthiest men in history has used the eighth wonder of the world to his advantage. That is how powerful compound interest is over the long haul.

Net worth targets

There are a number of factors that influence your wealth and net worth. Net worth is defined by taking your assets and subtracting your liabilities to create a net asset number, or net worth number. If you sold everything you owned, paid off all your debts, and had money left over, that would be your net worth. Your net worth is one measure of how you are doing in your quest for financial independence and wealth.

The net worth number can be influenced by a number of factors. Your income is certainly a factor, as well as your age. As you age, because you have been working more years, your net worth should be increasing. You also have more assets. You have cars, boats, furniture, and real estate. The home you own is likely one of the biggest influences on your net worth, but be careful. A home you own, rather than an apartment you rent, can help you increase net worth through the home’s appreciation, as well as paying down the mortgage debt each month.

Thomas Stanley wrote the landmark book, The Millionaire Next Door, one of the classic wealth books of our day. He describes a formula for checking your net worth based on your earnings and age. If you earn more, you should theoretically have a higher net worth. This formula gives you a simple way to check the math.

• Net worth target wealth formula to success:
• Age x Annual household income ÷ 10 = net worth at age

The following table gives you an example of how this formula works:

As you can see in this example, the age is the same but the income is different. Someone who has a higher earning power should have far more in net worth than someone in a more normal earning level. That is often not the case because the higher earner might be income wealthy but not really wealthy. If you are ahead of this formula, don’t get complacent or comfortable. If you are behind, don’t panic. You can make simple changes to catch up.

This formula provides a gauge on how you are doing with your personal expenses, savings, and net worth. The largest portion of most people’s net worth in their 30s and 40s is likely the home they own. That is to be expected. When you reach your 50s and 60s, if that is still the case, you need to step up your savings, and fast.

You might find that you are behind the benchmark, at it, or ahead of the benchmark number. I think this quick calculation shows you how you are doing in your savings and spending. It’s not an in-depth report, but it's a quick, easy way, as my late friend Zig Ziglar used to say, to get “a check up from the neck up.”

Home ownership and net worth

I have a personal view about your primary residence that I must express. It’s obvious that I am a proponent of homeownership. I believe that a home that you own is a foundational building block to wealth. Unfortunately, too much of our net worth is attached to homeownership. We all saw the affect of the recent recession and housing crisis that hit in 2008. The net worth of so many people was devastated. Most people say that my home was the best investment I ever made. I am sure that is true for most because it’s the only investment they have ever made, and that is the problem. I believe you should have a home that you enjoy, that’s comfortable and meaningful to you and your family. It's a wonderful asset, but I think we can get too attached to a home, and then we risk becoming house-rich and asset-poor.

If your home presently is a significant portion of your net worth, that is fine for today. When that is not fine is ten-plus years from now. Your goal should be to change the influence of your home from a significant portion of your net worth to a small portion of your net worth. From being 60 to 80 percent of your net worth to over time being less than 20 percent of your net worth. I can hear it now: “But Dirk, my home is worth 400,000 dollars. That means I need a net worth of 2 million dollars” That’s right!

Before I lose you completely, hear me out! It all boils down to one simple reason: You can’t spend your home. Your home doesn’t create income. It’s not an asset in classical terms. It doesn’t create income or return. Yes, it can appreciate in value and likely will. But you can’t spend that increase unless you mortgage it or sell it. You are not creating more assets from your home like you would stocks, bonds, mutual funds, or rental real estate assets. You will likely achieve appreciation in value of your home. The only way you can spend or live off that appreciation is to sell your home and downsize to a smaller home or lower standard of living. The truth is, few people do that in life. They might when their health requires it, but then they have expenses in an assisted-living facility.

Now there are folks who might sell the older home they raised their family in because it’s too large for them or the maintenance is too much. What happens most frequently is that they buy a smaller, newer home with more quality and amenities. They say, “I deserve a nicer home with new hardwood floors and custom cabinets. I want to be able to live on a golf course and have a three-car garage where I can park a golf cart.” That gap between their larger, older home and the new home is not as significant financially as they first imagined.

So your home is part of your net worth, but it should not, in my opinion, be a large factor in your asset base or nest egg calculations.

The roadblock to success for aspirationally wealthy people

There is a difference between being wealthy and acting wealthy. There is a difference between looking rich and being rich. In reality, most people who look wealthy are not. They are generally living at the top or above their means. They have the appearance of wealth and they are aspirationally wealthy, but they aren't really wealthy, nor do they have freedom. They don’t have freedom because they are in bondage to the image of wealth. They are in bondage of debt.

I was doing very well income-wise by my fourth year in real estate. We had moved into a large home on a golf course in Portland, Oregon a few years previously. Joan and I were building a large luxury second home in Bend, Oregon, also on a golf course. I was 33 years old. I was working hard, earning well, and I wanted the lifestyle of success. I wanted the outward appearance of success. I wanted people to know I was successful. At that point, I had more the appearance of wealth rather than true wealth. I had aspirational wealth but was not really wealthy. I had a big consumption lifestyle because that is what I thought wealthy people did. Don’t get me wrong, I was doing very well income-wise for my age. I was house wealthy and lifestyle wealthy. I was aspirationally and income wealthy but not balance-sheet wealthy. I had put 20-percent down payments on both houses, so I was not sliding in with 5-percent-down loans. If you knew me at that time, you would have said, “He is doing very well. He is wealthy.” The truth was different from the outward appearance.

The upshot was the vast majority of what I earned went to paying taxes and funding this lifestyle. I had a very small amount left over to save. We can fall in love with keeping up with the Joneses. We can consume more and more, but that keeps us in the aspirational category for life. It’s okay to be aspirationally wealthy in your 30s but not in your 50s.

I don’t think there is anything wrong with rewarding yourself for your hard work. In fact, I think to stay motivated, you must reward yourself periodically with tangible things you need and want. You can’t be only focused on financial independence and wealth creation without having some fun along the way. If I have made mistakes along my path to wealth, it’s this: I probably over-focused on the wealth and freedom of the future at the expense of the present. I might have delayed too much in gratification.

The perils and pitfalls of being income wealthy

Income wealth comes from having achieved a high income but also a high spend rate. Income wealth is frequently associated with advanced-learning professions like doctors, dentists, and attorneys. They have high income but frequently also high consumption. In the modern day, many of these advanced-degree individuals have high debt levels due to student debt. When they finally get out into the workforce, their earnings can support higher spending but not higher spending, high savings, and a debt-reduction strategy. The higher spending tends to win out because of the desire to reward oneself after all that toil in school.

Human nature is to spend up to and even beyond your means. When your income increases, so does your spending. I am speaking from personal experience that I continued far too long. I spent years of my life being income wealthy before I figured it out.

Becoming balance-sheet wealthy for life

Balance-sheet wealthy is the objective. Your goal is to have assets that create income. You want to have assets that are not overleveraged, so you have peace of mind and freedom. The goal, if you desire to achieve financial independence, is to be balance-sheet affluent. Balance-sheet affluent is where you have strong assets, meaning equity that automatically creates new wealth for you, with limited effort. What does your balance sheet look like without your home? Remember, you can’t spend your home, or in my case, even my second home. In fact, they actually were a negative drain on my monthly budget. For many years, in my 30s into early 40s, the largest portion of what I had saved over the years had gone into my two homes. I had high income with high consumption. I was income-statement affluent but not balance-sheet affluent. I was not saving enough and in danger, if my income dropped, of losing everything.

If you looked at what I was making for listing and selling real estate, you would think, “Wow, he is doing very well financially.” If you looked at our cars, homes, clothes, and travel, you would say Joan and I were well off or wealthy. It’s what you have besides the houses, cars, and clothes that will make you wealthy, financially speaking.

If your net worth is in the millions and 85 percent of it is tied up in your homes, you really aren’t wealthy. And if the value of your homes depreciates by 50 percent, like they did from 2008 to 2011, much of the wealth is gone, so the wealth isn’t real. You are at too much risk when an economic downturn happens. All you can focus on will be survival. But for wealthy people, when economic downturns hit, they think thrive! They can thrive because they have the funds to capitalize on the opportunity.

To be balance-sheet wealthy, you want your primary home to be less than 20 percent of your overall net worth asset base. The lower that percentage is, the more balance-sheet wealthy you will be. If your nest egg goal is two million dollars and your home net value (home value minus debt) is, say, $400,000, which would be 20 percent, then you have 80 percent, or 1.6 million dollars, working to create more assets. You are using compound interest on 80 percent of your assets. Now that’s balanced! Your age plays a role in this calculation as well, as I stated earlier.

Looking back, I made a lot of errors but managed to figure it out early enough that I recovered well. I learned a lot from that period of being income wealthy and aspirationally wealthy. I would not trade the experience of being aspirationally wealthy. Joan and I, through that second home we built in Bend, received something more valuable, rewarding, and amazing than anything. I sold real estate in Portland, Oregon Monday through Thursday, and then we would go to Bend for Friday, Saturday, and Sunday each weekend. Without spending three days a week in Bend, Oregon, we would never had gotten connected to our church in Bend. Westside Church changed our lives, but not in the typical church experience way. Through Westside, we finally became parents. Both my kids, Wesley and Annabelle, were adopted through a series of miracles and God’s blessings that were orchestrated because of our church family. If we had never built that home in Bend, I would not have experienced the richness of being a father. That’s ultimately true wealth in life.