The Journey to Economic Freedom – Are You Where You Want To Be?
In this episode of the Science of Economic Freedom podcast, “Are You Where You Want to Be on Your Journey to Economic Freedom?”, we start with some eye-openings statistics.
According to my data:
- Only 30% of Americans are financially literate.
- Some 50% of households say they expect to see a decline in lifestyle post retirement.
- While 55% of Americans have access to a 401(k) plan, only 38% participate in their plans.
- Approximately 2 million people in the U.S. overpay their taxes.
- A startling 30% of households have a negative net worth, and live paycheck to paycheck.
Now, most listeners to this show are in a much better place than most Americans financially. But, have you achieved your financial goals? Are you financially independent?
In this episode, we cover some of the strategies needed to both gain, and keep, your economic freedom.
We do this by going through an exercise I call the “Wealth Management Pyramid.”
This exercise forces you to examine your balance sheet, goals, cash flow, tax profile, etc. Doing so can help you see where you are, and help you decide the next step on your journey toward economic freedom.
Podcast transcript Episode 26
What is your next step on your journey to economic freedom? What resources are right here, at thescienceofeconomicfreedom.com to help you? What are the strengths and weaknesses of your balance sheet? All this, on today’s episode of the science of The Science of Economic Freedom. The Science of Economic Freedom is intended as an investor education resource.
The views and opinions expressed on this program should not be construed as a recommendation to buy, sell or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio.
This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Welcome to the Science of Economic Freedom. I’m your host, Doug Fabian.
This podcast is all about helping you achieve your financial dreams. We call that economic freedom. This program is about your journey to achieve economic freedom for yourself and your loved ones. Today, we want to help you identify your next step on that journey. This is Episode 26. Are You Where You Want To Be On Your Journey To Economic Freedom? Now, let me give you some background on this episode. I have been doing some market research of late.
I’ve been gathering statistics on the state of economic freedom in America today or to put it another way, the state of financial independence. I have some statistics to share with you. Now, I am not endorsing nor vouching for all of these numbers. They have been taken from sources I believe to be reliable but I’m just trying to set some context for today’s show because today’s show is about you, not about America. Some research results. Only 30% of Americans are financially literate. 70% are financially illiterate. 50% of households will see a decline in their lifestyle post-retirement. Now, think about that.
I believe all of us would hope that we would be able to maintain our lifestyle in retirement but the numbers posted is that 50% households will see a decline once they retire. 55% of Americans have access to a 401(k) plan but only 38% of Americans participate in that plan. All working Americans can contribute to an IRA. Only 8% do. Now, think about that. Now, I realize many people are contributing to a 401(k) and they feel like they don’t get a tax break when you contribute to an IRA as well but an IRA is still a viable option. But I was surprised by this number, that only 8% of Americans who are eligible are contributing to an IRA. Now, even high-income families are at risk of a decline in their lifestyle.
41% of high-income families will see a decline in their lifestyle once they retire. Only 32% of consumers have a written financial plan, 68% do not. I was actually surprised by this number. The 32% in my mind was high. I believed that most people did not have a written financial plan. Here’s another number, 2 million people are overpaying their taxes.
The last number I’m going to share with you, 30% of households have a negative net worth living paycheck to paycheck. Now, I bring all these numbers into play because you are most likely in a much better place than many Americans but where are you on your journey to economic freedom? Here’s another question. Have you achieved financial independence? It’s a yes-or-no question. There’s no gray area. Now, if the answer is no and you truly desire to achieve economic freedom, the question is, what is your next step?
What should you do tomorrow or next week or next month? I begin each show with this statement, we are here to help you find your next step, and I’m going to walk you through an exercise in a moment, to help you answer that question. But before I do, let me address those of you who answered, “Yes, I have achieved economic freedom.” Then the question is, how do you keep it? If you have made it, why risk it? The easiest act with money is to lose it. You can lose it from over confidence, you can lose it from lack of planning.
You could lose it from some unforeseen event, a decline in your mental or physical health can take your wealth away. Let me tell you brief story. I had a client couple that were on the East Coast and they were in their mid-60s getting ready to retire. The woman was an emergency room physician. Her husband had a small business and they loved each other dearly. Had no children. Were looking forward to 20 to 30 years in retirement and they’re right on that cusp. The husband had just started taking Social Security because he reached age 66. The woman was still working but in 6 months, 12 months, they were going to be done, going to move to Florida and going to enjoy the rest of their life.
One morning I received an email and the email was from the woman who told me that her husband had suffered a stroke and had passed away. Such a sad story. She was absolutely devastated. They were such a wonderful couple and their happiness was taken away from them because of an unforeseen event. I bring this up because many people who listen to this podcast have achieved economic freedom and I want you to know that it can be taken away from you in a moment. It’s not that any money was taken away from this couple but certainly, their partnership was taken away from them.
We have to realize that life can sometimes give us a bad break. So, let’s address both of these groups with the following exercise. I call this exercise, The Wealth Management Pyramid. Now, visualize a pyramid for a moment and at the bottom of the pyramid is the foundation. So, if you were to dross six lines parallel to the foundation on this pyramid, in that bottom quadrant, this is where I would ask you to place your balance sheet. This is the foundation of your wealth, this is your net worth, this is everything.
Now, we have done an episode here on The Science of Economic Freedom on your balance sheet. I want you to understand that once you’ve achieved economic freedom, it’s your balance sheet that’s going to generate the income to sustain you and your family going forward. That’s the whole concept of economic freedom. Your balance sheet is the first layer and the foundation of the wealth management pyramid. The next layer is your goals and objectives.
Now, again, we’ve done a podcast and I’ve talked about goals many times on the program but it is Episode 4 in The Science of Economic Freedom and I believe that everyone should have written goals and objectives. Goals and objectives give you context for what you should be doing next on your journey to economic freedom. And then the next layer and we’re only going to talk about 3 layers today, is your cash flow. We also have done an episode on cash flow, it’s Episode 6.
Now, notice that none of these layers involve investing. You have investments on your balance sheet but to gain a handle on where you are today and what your next step is, your investments are not part of the equation. I’m going to stop you right here and I’m going to ask you some questions. Question number one in regards to your balance sheet, what are the strengths and weaknesses of your balance sheet? Now, one of your weaknesses could be that your balance sheet is not big enough, this is why you’re still working today. Your balance sheet does not have you in a position to be able to retire.
I had a phone conversation with a gentleman the other day and he told me that he was in his mid-50s and he’s got 2 kids in college and he’s working towards his economic freedom but right now, in his life, he’s really needing to generate a lot of cash flow in order to be able to put the kids through college and maintain the family’s lifestyle and the like. It’s not time for him to retire. Next question. What are your goals and objectives? This is ahead of cash flow for a reason. When do you want to retire? What milestones do you want to achieve?
A milestone could be you want to generate, your first big milestone is a million dollars of net worth. Going back to my friend in Texas and his milestone, he certainly wants to retire once his kids are through college. He wants to retire in his early 60s and so that’s part of his goals and objectives. The reason why he called me was he didn’t have a plan. He was accumulating enough assets. He’s doing real well. Everything’s going good but he doesn’t have a plan. And then the third part of the pyramid, what is happening to your cash flow? Am I saving enough money? What’s happening with my income? What about taxes and how can I increase my income and reduce my expenses?
Now, ladies and gentlemen, whether you have achieved economic freedom or you’re still pursuing economic freedom, the strengths and weaknesses of your balance sheet, your assets, the goals and objectives that you have and your cash flow, all matter. It matters to every single group. I had a couple in my office yesterday and they are in retirement, they’re in the early 70s. They’re done working. They have their balance sheet. They have income that’s being generated off their balance sheet.
They have achieved economic freedom but one of the things we talked about is the fact that they have a large asset on the balance sheet, their home and they have a home in Southern California here. It’s fully paid for, it’s worth over a million dollars but it’s not generating any income. It’s certainly providing them with a place to live but now, they’re thinking about whether or not they should move from Southern California. They might want to move to a different place.
They might want to take advantage of the 500,000-dollar tax-free exclusion for a married couple that you receive when you sell your home. How many times in your life do you get a 500-000-dollar tax free event? So, that’s something that they were thinking about. A big portion of their balance sheet, one of the weaknesses of the balance sheet is the fact that they have a big asset that’s not generating any income. So, all of these things tie together.
Again, I want to come back to the issue, we’re not talking about investments at all. So many times, people get so caught up in what the market is doing today, whether the market is going up and down. The fact that the markets only up 5% so far this year, where last year at this time, it was up 12% and what’s going to happen next in the market. Let me tell you really, in your quest for economic freedom, what the market is going to do in the next 6 months does not matter. What matters is what are you accumulating on your balance sheet?
What are your goals and objectives and what’s happening to your cash flow? These are things you could really influence but many times people don’t know or are not thinking about what their next steps should be. So, I’m coming back to that question. What is your next step on your journey to economic freedom? What should you do next? I’m suggesting, I’m coaching you to take a look at the balance sheet, review your goals and objectives.
Take a look at the cash flow because when you look at the cash flow and if your balance sheet’s not big enough, one of the things we have to do is we might have to save more money. We might have to make more money. We should try to figure out a way to reduce our taxes. These are the things that you should be focused on because these things are in your control. The market, completely out of your control. So, let’s review the basics of the Wealth Management Pyramid. The base is your balance sheet.
The next layer is your goals and objectives and the third layer is your cash flow. Maybe your next step is to get an expert’s opinion, an expert’s point of view on the basis of your payment. That is the purpose of the wealth coaching sessions that I offer here as a part of The Science of Economic Freedom. We want to help you figure out what to do next. So, take a look at these things. Ask yourself these questions and you will discover what your next step should be on your journey to economic freedom.
This is Doug Fabian, thanks for listening. The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio.
This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services.