October 6, 2020 by Dymphna

T-Bomb: two numbers every investor lives by

Truth Bomb Tuesday: Here’s something I do with my students to get them clear on what they’re trying to do.

How long is the road ahead of you?

Give me 5 minutes and I can tell you exactly.

Today, I’m going to share something with you here that I do with my students, to help them see the bigger picture and see just what they have to do.

Now this is something that comes after a visioning process – where you’ve dreamt into your ideal life – you’ve gotten ego out of the picture and you’ve got an idea of just what it is that you’re trying to create.

You’ve got to do this step first, otherwise you’re going to have trouble answering some of these questions.

Now, assuming you’ve done that, and you’ve got a picture of the life you’re creating, let’s map a course from here to there.

So first, imagine a day five years from now and put some detail on it. Now we have to keep this picture realistic. This is just the five-year milestone. Save the Lear-jet and the Scottish castle for ten or fifteen years down the road.

Now in a notebook somewhere, answer the following questions. Be specific and detailed.

  • Where am I living? What city? What suburb? Is it acreage somewhere? Is it a fancy unit on the waterfront? Is it somewhere with room for the kids and their motorbikes.
  • Now describe your bedroom. What does it look like? Is there an ensuite? Have you gone for a modern or a vintage feel?
  • Go to the Kitchen. What’s in the fridge? What brand appliances do you have? What about the benchtops?
  • Go to the entertaining area. Do you have one? Is it indoor or outdoor? Is there a pool? Do you have guests over regularly, or do you meet out?
  • Now go into the garage. What cars are there? Which one’s yours? What other toys have you got? Boat? Jetski? Harley?
  • Now, what’s on your agenda today? What does your day look like? How do you spend the morning? Are you working? Full time or part time? Are you retired? What do you do for lunch? What do you do in the afternoon and evening?

Ok, now that we’ve got a bit of a picture, let’s put some price tags on it.

That house you saw, how much is it worth? What about the cars, the boat, the kitchen appliances, the caravan? Go through everything you’ve identified and put a price tag on it.

Now, if you add all of that up, what’s it worth? The house, the car, the boat, the permanent jumping castle, what’s it all worth?

This is the asset value we need. This is our wealth. Put a big box around this number, or run a highlighter through it. This is our first target number.

Second, let’s calculate our income figure. Take stock of your lifestyle in this picture. How much do you need for the most basic version of it? Do you have kids and private school fees? How much do you spend on food each year? What’s average annual petrol bill? Get as clear a picture as you can on how much you need to get by.

Now, importantly, imagine we’re debt free here. You’ve got no mortgage, no car loans, no credit card debts. Once you take away these debts, you’ll be surprised at how little income you actually need to get by.

Get a figure for a bare-basics lifestyle.  

But then, add another 20% to this figure, for a bit of quality of life. Something to give us a few nights out every now and then, some presents for friends and family etc.

Now add the cost of two holidays a year. This is not your ‘bucket-list’ holidays where you’re spending six months in Europe. It’s just whatever you need for a break. It could be camping. It could be going to stay with family.

But factor in giving yourself a regular break.

Now if you add all of this up, what do you get?

What you get is your income figure. This is the income you need to be creating out of your investments (and work if you’re still working) to live the life you want to be living.

Draw a big box around this number or run a highlighter through it. This is your second target number.

So now you’ve got two figures telling you what you need. You’ve got your asset figure and your income figure, or your wealth figure and cashflow figure.

This is your goal. This is what you’re aiming for.

The next step is to identify where you’re at right now.

What’s your equity position right now? (Remember to include credit card debts as a negative here!) What about your income from work and investments?

What’s the difference? How big is the gap between here and there?

This tells you what you’ve got to create. The difference in wealth tells you how much equity growth you’ve got to manufacture through your investments, and the difference in income tells you how much passive income you need to generate through your investments.

These are the numbers that will guide your journey as an investor.

Pull these numbers out and stick them to your fridge.

Now you know where the goal posts are. These are the concrete figures that you can chart your journey by.

Now you’re ready to get started.