Welcome to the 137th episode of the Alternative Investing Podcast!
In today's episode, I'll discuss the six fundamental elements of a one-page wealth plan I share with my clients so you can also achieve financial freedom in 3-5 years.
If you're a business owner or an investor who wants to simplify your wealth-building process and set yourself up for long-term success, then make sure to listen to this episode!
Do you want to learn a framework that can help you create a one-page wealth plan to determine how you can achieve financial freedom in the next three to five years?
In today’s topic, let’s talk about the fundamentals of the plan I share with my clients that you can also use, no matter what your long-term financial goals are.
But first, let me say that this focuses primarily on a three to five-year timeframe because it works well for the goals of my clients who want to achieve their own version of financial freedom.
However, I encourage you to think about it so that you can use the ideas in your own life.
If there’s one thing that frustrates me the most, it’s the wealth professionals who create financial plans that are unnecessarily complicated and full of unnecessary details.
They do this to make the plans look more impressive, but it does not actually help people make better decisions.
Instead, these plans are often designed to motivate people or push them towards investing in certain products or assets they offer.
Rant aside, let me tell you that wealth-building is not rocket science.
You can make your financial plans as detailed as you want, and it can be helpful to forecast different scenarios to understand the potential outcomes of your decisions.
However, a one-page plan can be useful for anyone, no matter their age or financial situation. It can give you the basic information you need to start building wealth, and you can add more details later.
So whether you’re just starting your career and want to begin building wealth or approaching retirement and want to understand how to bridge the gap, what we’re going to talk about will be very helpful for you.
To give you some context, I like the idea of investing a small percentage of your net worth into alternative real estate assets as a great way to build wealth.
These investments primarily focus on cash flow and can provide a predictable, sustainable income stream supplementing your active income.
By gradually investing a small percentage of your net worth and adding some additional income, you can significantly increase your passive income stream over a period of three to five years.
This can help you move from a typical passive income rate of 1-3% to a rate of 8-12% after expenses.
The only reason it even takes that three to five years is that they want to dip their toe in, build their confidence, and gradually create that exit ramp for themselves rather than just dumping a whole lot of capital into the market in one go.
When I ask people where they are now, what they want, and how they plan to get there financially, their typical goal usually sits somewhere between 15 and 35 years into the future.
And now, what we want to do is plan how we can pull that back into the next five years using the framework we’re going to talk about today.
So, this one-page plan has six key elements that are important to consider when planning for your financial future.
Key Element #1: Your Inkosi
The first thing you need to know is what your "inkosi" is. Inkosi, for me, is simply a reference to what passive income you desire and what percentage of that goal you have achieved.
I came up with the term because 'inkosi' is the Zulu word for tribal leader, and in my opinion, we are working to create wealth to be leaders in our family and community and have the influence and impact we want.
So the starting point is, what is your passive income stream?
Now, instead of thinking about unrealistic goals like earning $10 million a year, let's focus on how much money you need to meet your basic needs. Because if you’re earning a certain income that would cover your living expenses without actively working, that’s already considered life-altering wealth.
Again, as a starting point, you need to figure out what that number is, and then work out what percentage of that number you have achieved so far.
Key Element #2: How Much Are You Willing to Invest in Alternative Real Estate
The second piece you need to understand is what you currently have and how much you would be willing to invest in alternative real estate.
For example, if you have a net worth of $5 million, you might decide to invest 10% of that, or $500,000, in alternative assets.
This investment could earn you around $50,000 in the first year at, let’s say, 10-12%.
And if you allow the returns to compound, they could increase to around $80,000 to $90,000 over a three to five-year period without investing any additional capital.
You should ask yourself how much of your current net worth, which is the total value of your assets minus your liabilities, you are willing to invest in cash-flowing opportunities.
So going back, the question you need to ask yourself is, "How much of my current net worth (meaning assets minus liabilities) am I willing to invest in cash-flowing opportunities?"
Key Element #3: Your "By-When"
The third element is really about the by-when.
Many wealth plans today fail because the products and services that financial planners and other wealth professionals can offer are often limited and have a long timeline for achieving your goals, often 30 to 45 years.
This is because these products, called capital assets, only increase in value when the market rises.
As your net worth grows, the hope is that you will eventually reach a state of positive passive income, even if you initially had negative cash flow.
So the by-when piece is really about turning this on its head and saying, “Look, I really want to achieve financial freedom in X number of years.”
Because if you can do that, you can then start to reverse engineer and figure out what kinds of assets you need to invest in if you want to achieve that outcome.
Key Element #4: When You Will Stop Adding Capital
The fourth element is also something I highly encourage my clients to think about, which is when do you want to stop adding more capital?
So let me explain what I mean.
Sometimes, people come to me with a specific amount of money they want to invest. For a while, they were willing to save money from their regular income to put into their investments. However, there will come a time when they no longer want to add more money to their investments and just let the investment grow on its own.
This might happen after a couple of years or even longer.
So again, this is a really important piece.
Ask yourself, "When are you intending to stop adding any more capital and just allow your returns to compound?"
Key Element #5: The Fuel You're Going to Invest from Your Active Income
Then the next piece is, and I've already touched on this is what fuel you are going to add or allocate from your active income each year.
The next thing to consider is how much money you will use for investing each year.
For example, if you earn $250,000 per year and you only need $120,000 for living expenses, you need to decide whether you will put some of the extra money towards investing and the rest towards reducing debt or if you will put all of the extra money towards investing and not focus on debt reduction.
This is an important decision because it will determine the "fuel" or resources you have available for investing.
Key Element #6: Milestones That Will Affect Your Finances in the Next Five Years
And the last thing to consider is the important events or milestones that will affect your finances in the next five years.
Some examples might include taking a sabbatical, having a baby, or going through a divorce.
When planning your financial strategy for the next five years, it's important to think about these events so you can properly prepare and budget for them.
Recap of Six Elements
To summarise, here are the key elements to consider for your one-page wealth plan:
When you have all the pieces of information you need, it's easy to make predictions about what might happen in the future.
If you're considering adding more properties to your portfolio or investing in other income-generating assets, you can try out different scenarios to see how they might work out.
It doesn't have to be a complicated process, but it's important to consider your financial goals and how much risk you're comfortable with when making decisions.
If you have a lot of debt and the market is uncertain, it might make sense to focus on paying off that debt instead of trying to make more money through investments.
This is all about finding opportunities and managing risks in a way that helps you achieve your goals.
So, this is pretty much everything I want to cover for you today.
I just want to let you know that a wealth plan is a document that outlines how you will manage your financial assets to achieve your financial goals. It doesn't have to be a long, complicated document - in fact, it can be as simple as a one-page plan.
The key is to focus on the most important elements, such as your financial goals, your current financial situation, and your risk tolerance.
By mapping out these elements, you can create a plan that guides your investment decisions and helps you make the most of your financial resources.
The goal is to be proactive about your financial planning rather than waiting until you have a lot of money and not knowing what to do with it.
By starting with a simple plan, you can begin to build a solid foundation for your financial future.