As a child, each of us had dreams of who we wanted to be and what we wanted to accomplish. As we mature, we begin to lose sight of those dreams and aspirations as the daily reality of life takes up more and more of our time. Despite lifes best efforts, many of our dreams are still alive inside of us, and for many of my clients, the point at which their dreams begin to take shape is when they are financially free to do as they please. They have reached their Point of Independence (POI). Simply defined, the POI is a perpetual income stream with little or no labor. When your perpetual income stream exceeds your annual expenses, you have crossed the finish line.
A former client of mine, who was in her late thirties at the time, was both very frugal and very well paid by a large corporation. After accumulating a nice nest egg, we began to eliminate every expense that did not add happiness to her life. She saved up to a certain level so that her deferred compensation plan would provide ten years of cash flow. Although her company paid well, she simply was not happy there and wanted to allow herself enough financial freedom to discover what truly made her happy. With that in mind, we calculated how much monthly income her assets would need to provide for her by retirement age and mapped out a plan to reach that point. By sitting down and discussing her hopes and desires along with her financial picture, we were able to pinpoint her financial Point of Independence and plan accordingly.
Although most people are not in a position to walk away from their jobs, the important takeaway from my clients experience is the necessity of having a defined goal. In my experience, most people simply have no idea how to think about the money they spend and a point in their life in which they are able to do many things they have always wanted. With that in mind, I encourage anyone, no matter their net worth or age to sit down, and think about the amount of annual cash flow they will need to live a rewarding and fulfilling life during their retirement and begin to work towards that goal today. Everyones financial picture is unique and it is up to the individual to determine what their finish line looks like and begin setting goals to reach it.
Read more from Rusty Holcombe on the Holcombe Financial Blog.