Level 7. Wealth-Planning GuideOnline version
Learn how to build your wealth blueprint by reading through this guide!
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Level 7. Wealth Planning
Even with all the knowledge in the world, it isn't useful if you don't have a strategy to implement it. This guide will teach you how to apply these concepts in real life so you can navigate your wealth-building journey with confidence.
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Start With the End Goal
Before you begin, first answer the question: "What am I trying to accomplish?" The answer becomes your starting point. Then you're able to work backwards to fill in the blanks
Example: - "What am I trying to accomplish?"
- "How much time do I have?"
- What rate of return would I need?"
- How much would I need to invest?"
The Key: Don't start with an investment. Start with a goal.
This rule helps you work backward from retirement. Instead of asking, "How much can I withdraw?", the 4% Rule asks, "How much wealth will I need to support the income I want?"
Formula: Desired yearly income/4% (0.04) = Target Portfolio
Example: - You want to live on a $60,000 yearly income
- 60,000/0.04=1,500,000
- You would need to have $1.5 million invested to withdraw $60,000 per year in retirement
The Key: The 4% Rule is only a guideline, not a guarantee that a portfolio will last (you could outlive it)
The Rule of 72 uses an expected rate of return (RoR) to approximate how long it would take an investment to double. It's a tool designed for quick planning, not calculating future wealth.
Formula: 72/Expected RoR) = Approximate time to double
Examples: - With a 6% return, it would take an investment 12 years to double
- With an 8% return, it would take an investment 9 years to double
- With a 10% return, it would take an investment 7.2 years to double
- With a 12% return, it would take an investment 6 years to double
Key Reminder: An assumed RoR is not a guaranteed RoR
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Dollar-Cost-Averaging (DCA)
Oftentimes, people have concerns over when it's the right time to invest or if they have enough money to make a meaningful investment. This can cause them to either never invest at all or waste lots of time saving up a lump sum of money to invest all at once.
DCA eliminates the guesswork and puts your money straight to work. You don't worry about timing the market or making huge impacts at once. Instead, you reinforce the habit of consistent contribution so time and compounding can do the heavy lifting
Example: - Person A saves up $1,000 to invest at the right time
- Person B invests $84 every month regardless of timing
- Both people ultimately invest the same amount, but Person B gives his investment more time to compound while Person A is waiting
The Key: There isn't a certain frequency for how often to invest. Some people choose monthly, bi-monthly, or quarterly. The most important part of DCA is consistency.
The Rule of 100 gives you one simple way to think about how your investment strategy might change as you get older. Essentially, it says that the younger you are, the higher your investment allocation should be in stocks or higher-risk investments.
Formula: 100 - Age = Stock allocation
Example: - Person A is 35 years old
- 100-35=65
- Person A should have 65% of his portfolio in stocks and/or other high-risk investments.
- The remaining 35% should be invested in safer, fixed-income investments
- As Person A gets older, their allocations will shift
The Key: This rule is a starting point, NOT a universal formula (Doesn't account for goals, risk tolerance, financial picture, etc)
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Why & When to Rebalance?
Rebalancing is about asking yourself if your portfolio still matches the strategy you originally chose. Based on how investments perform, it can cause your allocation to shift to an undesirable ratio
Example: - You originally wanted your portfolio to consist of 60% real estate and 40% stocks
- Years later, stocks have significantly outperformed real estate, and your portfolio is now 30% real estate and 70% stocks
- To get closer to the original ratio, you have to rebalance. One way you can achieve your desired ratio is by selling some of the stock investments and investing back into real estate or other assets
It is good practice to review your portfolio every 6-12 months and check for rebalancing
Put all the concepts into practice and craft your wealth-building blueprint!
- Set your goal with the 4% Rule
- "I want $50,000/year for retirement"
- $50,000/0.04=$1.25 million
- Target portfolio is $1.25 million
- Time Horizon
- "I'm 22 and want to retire at 62"
- 40 years to build wealth
- Growth Timeline with the Rule of 72
- "With an average 8% return, it will take 9 years for my investment to double"
- Investing System with DCA
- "If I invest $525 every month, I should hit my goal"
- Adjust strategy with the Rule of 100
- "Since I'm 22, I will allocate 78% of my investments to the stock market"
- Maintain the strategy
- "Every year, I will review my portfolio and rebalance if my allocation drifts too far"
- Adjust as life changes
- Your goals, income, timeline, and financial situation won't stay the same forever
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