Below is a good video by Tony Robbins. It’s long (over an hour), but below is my synopsis. I assume these are in his new book Money Master the Game: 7 Simple Steps to Financial Freedom. Reminds me a lot of Rich Dad, Poor Dad.
To be wealthy, don’t start with arbitrary number of dollars, start with a central purpose in life. You can be wealthy in spirit, even if not dollars. Focus on that first.
But having a number for financial freedom is important for reaching goals. So if you want financial freedom, know what it will take. Be specific. And be sure find investments that keeps building value over time.
To find financial freedom follow these three steps:
Step 1. Spend less than your earn and invest the rest.
Step 2. Re-invest your income
Step 3. Create a money machine to earn interest income so you never have to work again.
The biggest mistake you can make is in asset allocation. Avoid that mistake at all costs. How should it be done? Start with making three buckets, a security bucket, a growth bucket, and a dream bucket. Fill the security bucket first, secondly the growth bucket, and lastly, the dream bucket. That is how the rich get richer. They create money machines that are secure against loses so even if the economy tanks, they don’t lose everything.
1. Security bucket
- Cash for 2-6 months
- Your house
- Fixed income investments
2. Growth bucket
- Buy and hold stocks
- Real estate
3. Dream bucket
- Buying a luxury car
- Building your dream home
- Taking trips around the world
- Hiring your own personal chef
Here’s what he didn’t say, but I’ll connect the dots.
Fill your security bucket until income from these investments cover the basic necessities of life. For me that, would be approximately $3000/month for my family of 5. So I should shoot for $3000/month of income from my security bucket. Next, once the security bucket is filled beyond this point, take some (and only some) to put in your growth bucket. The growth bucket can help push your money machine to new heights. There are different strategies for allocation here, but the primary point is to keep it growing through re-investment. Once that growth bucket is producing residual income sufficient to replace your current living standards (for me around $6000/month after taxes), then you reach financial independence. That’s when you can comfortably start filling your dream bucket. In your dream bucket, it’s far more okay to take high risk gambles because everything else is cranking out money, so if you lose it, you can quickly regain it. But occasionally, you’ll hit it big and get your dreams even faster. Of course, buying dream items may raise the stakes on the security bucket and growth bucket, but the essential process is the same. Re-adjust the buckets as necessary, but keep the money machine going.