Hey. This is Jeff Rose, GoodFinancialCents.com. Today I am asking the question,
“What is your number?”
The reason I am asking this question is because one of the most common things that I run into when I am meeting with a client for the first time is that the one thing that they are absolutely obsessed with, tunnel vision, only thing they can focus on, is how much they are going to make. What is the interest rate that they are going to make on their money? How much return? By how many dollars are they going to see their account grow each month?
When I am working with clients, I can’t stress enough how unimportant that is. You are like, “Wait! What? What do you mean?” Here’s what I am talking about. When you are just focused on how much you are going to make, you are totally missing out on the financial planning process. Case in point example, I had a client who was so gun ho on making 12% return (this was prior to 2008 mind you), that he was invested into 100% stocks and doing other types of strategies that based on his age, based on his risk tolerance, based on the income needed, he was way too aggressive. He had more money than he knew what to do with, but he was so dead set on making 12% that he put his financial backing at risk.
Don't Focus on The Wrong Number
You can’t be so enwrapped in how much return you are going to make. What you need to focus on first and foremost is how much do you need, meaning how much income do you need per month to pay the bills, to take care of the mortgage payment if you still have one, to take care of your health insurance premium if you have to pay it, to take care of the vacations that you want to take, to take care of the money you need to spoil your grandkids, to do everything you want to do for them. Those are the things that you have to focus on first. And, what does that involve? It involves a budget. I know most people hate budgeting, but those are the things that you have to pinpoint to realize how much you actually need on a month to month basis.
Once you derive that number, then that leads you to how much you need to be invested in the stock market, bonds, etc. The individual that was so gun ho in trying to make 12%, in reality he only needed to net 4% to 5% return, and he would have been fine. I don’t know if he even needed that much. But he was so dead set on trying to make 12%.
The Flip Side of The Coin
I have had other individuals who were extremely, extremely conservative. They just wanted to do safe, guaranteed investments. When we looked at their retirement outlook, we looked at their social security, and we looked at if they had a pension, what we came up with was that they needed a decent amount of money each month to live off of. Based on what they had saved and based on what the interest rates were paying on those investments that they had saved, it was not generating nearly enough income per month to where eventually they were going to have a deficit. Unfortunately, when it comes to retirement planning, there are no government bail out programs that are going to add money to your retirement account because you took out too much. So, don’t be expecting anything like that.
You need to focus on the income need – how much you need per month. That is the crucial part of the financial planning process that most people overlook because they get so focused on how much they are going to make interest wise. That I don’t want to say is the last thing, but it is definitely not in the first few steps of the financial planning process.
So, I ask you, “What is your number?” The number is not the interest rate that you are going to make. The number is how much you are going to need per month to live off of. So, keep that in mind. Do a budget. Fine tune your numbers to get a sense of where you really are. Then you will get a true sense of what your real number is.[fmecalc cid=”1″ w=”520″ c=”4″ s=”3″ gs=”1″ incd=”1″ lid=”V1-1-17-12-8″]