WHY BUILD A FINANCIAL FORTRESS?
What is a financial fortress? It is a place of refuge where you do not have to be worried about money. This is a place where you have confidence, wealth and security – where you are wealthy and prosperous in many ways and no threat can bring you to financial ruin.
To build a fortress, we are required to create a model or financial plan – a visual representation of where we want our money to flow and how we want it to be structured. With a financial fortress building plan, you can have peace of mind that you are heading in the right direction.
A financial fortress gives you a financial buffer to meet immediate and future financial needs. In cases of emergencies, it provides you with cash to continue covering your expenses, giving you peace of mind and confidence. Eventually, it also enables you to give back to your community.
Have you taken the time to find out where you are now in your financial journey? I would suggest you take few minutes to write down where you think you are, even if it is no more than a feeling. Now take the next step to forecast where you want to be in one year, five years, 10 years and possibly 25 years.
Now, you must build a bridge in between, to get from where you are to where you need to be. You are absolutely the only person who can build this bridge, but you can easily start this process with the right knowledge.
One of the first steps I took in my own journey was to define clearly what financial independence would mean for me, as this can mean different things to different people.
To keep it simple, I clarified my short-, medium- and long-term goals, determining approximately how much money would be sufficient to meet my needs now, in five years and in 10 years. I then started to build a rock-solid plan to get to where I wanted to be.
The lifecycle of personal finance
Our attitudes and priorities shift as we go through the various seasons of life. The diagram below illustrates these stages as they occur for many people.
Image courtesy of EntrepreneurshipFacts.com
Our relationship to money and resources also changes as we advance from being a baby or toddler to an adolescent, teenager or young adult, then into our working prime, mid-life, retirement/old age and finally death.
Babies are 100% dependent on the goodwill of others, bringing zero resources to the table and requiring a lot of time from other people
Toddlers are not much different. They rely on other people’s money and have no responsibilities that require them to plan or budget. Toddlers want what they want, when they want it, and if their needs are not immediately satisfied, they become very unhappy and throw tantrums.
Adolescents also have few responsibilities and still possess toddler-like desires. And while rewards are increasingly tied to effort, they still view money as something to spend rather than save.
Teenagers spend money on whatever they fancy, only to run out and then ask for help from the ‘Bank of Mum and Dad.’ They occasionally borrow money from friends, but repay it only when more money flows from their parents.
Young adults start to learn how to respect money because they finally appreciate it is something that requires intelligence and application. A young adult knows how to earn money but must now learn how to control it, for example by saving, and to see the value of investing and pensions. Most people start creating spending plans at this life stage and seek to buy their first property.
Working prime is the stage of life in which adults earn a good, regular income, and invest it in a consistent and appropriate way. This is a time for in-depth planning, budgeting and money management. It is a time to approach money matters with care, ensuring money is given to, spent on or invested in things, people and causes that matter.
For many people, mid-life sees old ideologies start to break down. Income/earnings often slow, health challenges creep in and financial losses can be exacerbated by compulsive spending.
Retirement has its own challenges. Many see income and investments shrink and may be forced to dip into core capital or see their investment strategies fail. Fear, frustration and panic set in and a bad “fall” can lead to reliance on someone or something, whether that is debt, the government or family members. Many have to re-mortgage property or sell their home to pay care bills.
The quality of response we receive is determined by the type and quality of question asked. Ask yourself, in order not to run out of money, where do you really need to be financially?
Most people assume they need more money than they really do. This is because in terms of expenses, we struggle to distinguish between necessities and ‘nice to haves’. We often acquire more luxuries, falsely believing these are necessary expenses – meaning our outgoings steadily exceed our income. To prevent this happening, stop now and ask yourself the question: how much money do I really need?
What we really need is not a large sum of money, but CASHFLOW. We need enough monthly cashflow to cover our monthly expenses.
To achieve financial success, it is essential to define milestones – a concept we will touch on throughout this book as we work to build our fortress, milestone by milestone. All milestones are limited by the psychology of the individual in pursuit of them.
Below are the main milestones you need to be aware of:
1. Crisis milestone: you have the equivalent of three to six months of your typical spending budget or income available in cash or liquid assets – enough to see you through a crisis such as the current global pandemic.
2. Survival milestone: you have enough income or liquid assets to cover your housing, food, utilities and all necessities.
3. Complacency milestone: you have already achieved the survival milestone but now also have enough to cover your entertainment needs and provide a very limited level of luxury.
4. Equilibrium milestone: you have enough monthly cashflow to accommodate your current lifestyle without the need to work.
5. Prosperity milestone: you also now have additional cash to comfortably give and contribute to causes that are most important to you.
6. Freedom milestone: you have accumulated enough income-producing assets that you have absolute certainty you can afford to do pretty much anything you want indefinitely. You lead charitable causes through a foundation or other organisation.
7. Legacy milestone: you have redefined your family’s finances and now create wealth freely. You are very intentional about how you use money, you actively mentor and teach others, and you have put in place rock-solid estate planning to pass on your wealth to future generations.
An individual may feel comfortable with their status quo and opt to maintain their current level, or decide to move from point 1 to 7 in a timely manner, but this will depend on his or her mindset.
To achieve each milestone and move to the next, we need to create stepping-stones between them. Start planning now on what you will do to reach the next milestone.
You need to have something more exciting to look forward to than working a job, so create a buzz for yourself. A lack of buzz limits the mind and makes breakthrough difficult to achieve. You need to learn how to reward yourself when you reach a milestone.