How to Build Wealth
The process of creating and calculating your vision statement is a 4 step process:
1) How to Build Wealth #1
Creating your vision statement:
Creating your vision statement should be a soul-searching discovery, not a clinical exercise. Your vision isn't something you can formulate and write in one sitting. You'll create it over a period of time, after much introspection and several drafts. There's no universally acceptable way to create your vision statement, but the following can be used as a guide to help you formulate yours.
Your vision statement can be as short as a sentence or as long as a couple of pages. If you do write a lengthy vision statement, I recommend that the first sentence or paragraph serve as a summary for your overall statement. You can apply the following process to help you formulate your vision statement:
- Plan some quality 'alone' time.
- Brainstorm with powerful emotions. Describe what you would feel and see in your perfect future.
- Be as descriptive as you can about your vision: sights, colors, smells, sounds, feelings, emotions, etc. The more specific you are, the more powerful your vision statement will be.
- Think of yourself as being old or retired in this ideal future. Pretend you are being interviewed or reflecting on your life. Be totally honest with yourself. Answer the following questions:
* What principles are important to you?
* What does your life look and feel like?
* How do people think of you?
* How would you describe yourself?
* What has your wealth given you?
* How has your wealth helped others?
* How would you like to be remembered?
* What title would you put on your bibliography (or tombstone)?
* What three things were crucial to your success?
- Take all your notes and answers to the above questions and write the first draft of your vision statement, including a deadline by which your vision will be completed.
- Reflect on your draft and take time to refine it many times until you're happy with it.
- Share it with someone significant to you and get their honest feedback.
- Place your vision statement in a prominent place so you'll see it all the time, for example, on your fridge, on your computer as a screensaver, in your wallet, etc.
2) How to Build Wealth #2
Value your vision statement in today's money:
In step two, we take your vision statement and value it in today's money.
In other words, what would it cost you today to live the lifestyle of your dreams? You need to work out how much cash you'd need to buy your ideal future goods such as your home etc, as well as the amount of annual income you'd need to live the lifestyle of your dreams.
Let's use a really simple example (which I've filled in in the attached vision statement spreadsheet calculator for your guidance). Let's say your vision was to live in a beautiful home which you estimate will cost you $1.5m and you wanted $200,000 per year in spending money. Thus to realize your dream you'll need $1.5m in cash to buy your home and enough assets to produce an annual income of $200,000.
3) How to Build Wealth #3
Adjust for inflation
Unfortunately, you're not going to retire today, so you need to adjust your dream costs for the effects of inflation until your retirement. Inflation reduces the purchasing power of your money so that one dollar today will buy more than one dollar a year from now.
Let's say your dream is to retire 15 years from now and you estimate that prices will likely rise 3% percent per year. The effect of inflation on your dream costs is to increase the amount you need to accumulate by a multiplier is of 1.56 (i.e. (1+0.03)^15). Thus your $1.5m dream home will actually cost you $2.34 in 15 years, and your $200,000 income requirement becomes $312,000 per year (again the attached spreadsheet will calculate this for you). You now have a fixed target to aim for.
4) How to Build Wealth #4
Calculate the assets you need to produce your required annual income. Since your intention is to maintain and grow your asset base and live off the income that the assets produce (rather than sell any of your assets like a typical retirement plan), the calculation is simply:
Required assets = Desired income / expected return
So your goal is to earn $312,000 per year in 15 years. You need to estimate what your likely annual return is going to be on your assets. If your planning to become wealthy it is fair to assume that you'll be a better investor than the average poor or middle class retiree, so let's use a slightly higher expected return on your money, say, 8% to 10% per year.
Thus, your required capital is:
Required assets = $312,000 / 9%
= $3.46 million
With $3.46 million, you could earn $312,000 per year forever. This is why your life expectancy is irrelevant to a wealth plan. You never erode your assets to live, so you'll have $3.46 million to pass on after you die, whether that's in one year or thirty years.
So to fund your dream retirement you will need $3.46m to pay you your annual income and $2.34 to buy your dream house. Thus you'll need a total of $5.8m to live your dream - your vision!
(Remember, $5.8m is money 15 years from now. If you divide this number by the inflation multiplier of 1.56, you get the value of your dream in today's money, which is $3.72m.)
Good luck creating and calculating your own vision statement.
