What’s YOUR Escape Plan?

       Wendy and I have a worn out three-ring notebook with a faded white label across the front that says ‘Escape Plan’. In it we recorded our plans, our goals and our dreams for becoming financially independent. Over the years we would open it, record the accomplishment of a short-term goal, and refine our plans and our dreams. And then we would talk for an hour or so at a time about what each of us would do when we were free. This little notebook had a powerful impact on how we spent our money over the years, because every dime either went towards our Escape Plan or some other unrelated thing that wouldn’t get us retired.

On December 15, 2017 (over two years earlier than our first aggressive estimate) we retired. We are now free. Our Escape Plan worked!

I am passionate about helping you become financially independent too, so that you can one day retire. I’m sure I must be annoying, but I’m on a personal mission to help change people’s thinking.

HOW MANY PEOPLE DO YOU KNOW WHO ARE MARCHING TOWARD THEIR 50’S OR 60’S AND HAVE NO HOPE OF EVER RETIRING? WORKING UNTIL THEY DIE. IT’S A PLAGUE!!!!

Rant over.

Let’s continue.

       People don’t retire early (before age 65) by accident. They dream about it, scheme about it, talk about it and live it in their minds until it becomes a reality. It takes real forethought, focus and effort to achieve. And they do this planning over and over for years ahead of time.

Retiring early requires that you become financially independent.

• What is financial independence? It means that you have a passive source of income that pays you more than your monthly expenses. So you no longer have to be at work every day. Being financially independent means you can retire, if you desire.
• What is passive income? Passive income is cash flow received on a regular basis, which requires minimal effort on your part to maintain it. It’s an income machine that pretty much does the work without you showing up, except to make a few decisions here and there.
• What are examples of passive income?
  • Investment income from stocks or bonds you own.
  • Rental income from property you own and rent out.
  • Royalty income from music or books you have published.

Reaching financial independence is very simple, in concept. Save each month. Invest your savings into one of the three passive income machines above, and when it produces more income each month than you will be spending in retirement, you have reached financial independence and can now retire. Or keep working because you enjoy it, whichever you choose. Simple right? But easier said than done.

What are the necessary ingredients for becoming financially independent?

1. Find your dream. What will you do each day when you no longer need to go to work? What is your ambition? What will bring you happiness? Figuring this out is critically important. Your dream must be big enough to motivate you to sacrifice today so that you can live your dream tomorrow. Some have creative juices that have been put on hold while they toil away to earn a living and can’t wait to unleash their creative energy full time. Others find happiness in serving others and keenly yearn to spend their time serving full-time in their community or on missions. Others want to build an airplane or a boat and explore the world. What is your dream? Figure it out!
2. Set goals. Begin with the end in mind. When will you retire? How much will you spend each year in retirement? How much will you need to put in your passive income machine each month so it will become big enough to fund your retirement? What will you need to buy or sell (e.g., airplane, boat, house, motorhome) in order to live your dream? What do you need to learn in order to run your passive income machine? Make a list of to-do’s, with deadlines that will lead you to your goal of becoming financially independent.
3. Pay yourself first. What do I mean by that? In order to reach financial independence, you must save money each month. Put it aside and put it to work to build your passive income machine. You will not be successful at saving if you try to put aside the money that’s left over at the end of each month – because there won’t be any left. Paying yourself first means to set an automatic deduction that goes directly from your checking account (at the beginning of the month) into your passive income machine. Learn to live on what’s left, not the other way around.
4. Get out of debt. All the way out of debt. Forget the mortgage deduction, pay the ($#*!) thing off. Until you rid yourself completely, and I mean completely of debt, you will not become financially independent. There is something magical that happens when you no longer owe anyone, when you no longer make payments, and when you no longer pay interest on loans. Get out of debt! Make it a priority. The day you pay off your last debt is one of the seminal days of your life!
5. Learn to live within a budget. Isn’t this obvious? Find a budgeting tool and use it. Wendy and I like to use budget apps (see some examples at the bottom).   These apps synchronize constantly with our bank accounts so we can see on our cell phones where we stand in each budget category as we spend money throughout the day. Keeping track of our spending helps us modify our behavior.  For example, when we run out of “Entertainment” money for the month, we stop spending in that category.
6. Develop expertise in one of the passive income systems (investment, rental or royalty income). Learn how to become a master at your passive income machine by reading, attending classes, and experimenting with your passive income machine. These machines are not built in a day. It will take years to learn how to run your passive income machine. Create a financial journal that records your successes and failures each year so you can learn from them.
7. Write down your plan for becoming financially independent. Review it regularly and make adjustments. This is your personal ESCAPE PLAN.
8. Do all of this as a couple. Your dream (step 1) must make both of you excited. Thrilled! Otherwise you will find that one of you will start sabotaging the system (busting the budget). If you find that one of you is having problems staying within the budget, go back to the beginning. Review the dream and make adjustments to your retirement plans so that BOTH of you are excited about being financially free. Just like raising children, working toward financial independence requires that you talk about it a lot and make changes in the goals and methods until you are both truly excited, committed, and in sync. Then divide and conquer as a team. The two of you will become a powerful force!

Wealth vs. Income.

Why don’t they teach this stuff in high school? There is a huge difference between wealth and income. Each can only be measured with a completely different tool. Let’s start with income.

Income = revenues minus expenses. News flash. Most of your friends and neighbors have very little income. They may get a large paycheck (revenues), but they spend it all (expenses), so that there is no remaining income. Some believe that only doctors and CEOs have a big enough paycheck to afford to save. Not so. Read The Millionaire Next Door by Stanley and Danko. You will find that school teachers, garbage truck drivers, in fact, people from all walks of life have become millionaires. It’s not so much how big of a paycheck they have, it’s what they do with it that counts. Millionaires become millionaires because they pay themselves first, they get out of debt, and they build passive income machines with their income.

When Wendy and I moved to Georgia so she could start her career as a physician (at the age of 40), the attorney who did our house closing was shocked at the small price we paid for our house (only $150,000). He said, “Well, you’ll be back to buy your castle in a few short years.” Wendy and I knew better. This little house was all we needed. We had financial goals that included paying off that house mortgage and all of our other debts and we had a strong desire to continue to feed our passive income machine.

Wendy and I know of many physicians who have their castles, their exotic cars and who put their children through private schools. They make big paychecks, but they have no income. They have now arrived in their 50’s and they have no hope of retiring, even when they reach their 60’s or 70’s or 80’s. They assumed that it would all ‘just happen’.

This is the world we live in, for doctors and lawyers and professionals of all kinds. It’s not that they did not have the capacity to retire.  They simply did not plan and sacrifice for retirement. They did not look to their future.

Most people are arriving at the magical age of 65 and assume they will retire on Social Security. But very few people can survive on what Social Security pays. Why don’t they teach this stuff in high school?

If you want to see how much money the Social Security Administration has projected for you to get from the government when you retire, look up your personal data on www.ssa.gov/myaccount.   It will show every dime you declared to the government from every job you worked in your lifetime and will forecast how much you’ll get if you retire early, retire on time, or retire later. Then, look at your retirement budget and see if they come anywhere close to each other. If not, then you need to make up the difference with a passive income streams.

This is assuming Social Security exists in some form when you choose to retire. Nothing is guaranteed in this life.

So what is wealth?

Wealth = assets minus liabilities. What are assets? An asset is something that has and holds value. Examples are houses, apartment buildings, retail buildings, land, stocks, bonds and savings accounts. Are there good assets and not-so-good assets? Yes. Assets which produce passive income (apartments buildings, retail buildings, stocks and bonds) are good assets. Assets which you personally use and spend money on like your home and car are not-so-good assets. They are necessary, but do not imagine that you are building a passive income machine when you buy yourself an expensive house or vehicle. They suck money, they do not produce money.

What are liabilities? Debts. So wealth is measured by taking all the stuff you own (measured by how much you could get for it if you sold it today) and subtracting what you owe in debt. That is your wealth, also known as Net Worth.

Obviously there are two things you must do to increase wealth. One is to get completely out of debt. The other is to use your income to buy more and more assets. And most importantly, these need to be smart assets — the kind that produce passive income, not the kind of asset that you personally drive or sleep in.

Choose Your Passive Income Stream.

So what kind of passive income machine will you choose to build to fund your retirement? Let me mention three:

1. Investment income from dividends and interest produced by stocks, bonds, mutual funds and ETF’s (Electronic Traded Funds).
2. Rental income from property you own and rent out.
3. Royalty income from music or books you have published.

I suppose there may be other categories of passive income, but I can’t think of what they would be. Very few people are still alive today who can count on a company funded retirement plan. And many who have counted on them have discovered that they were underfunded and the company’s promise to them was broken. I have pilot friends, for example, who were within a few years of retiring from Delta Airlines when it went bankrupt and their retirement funds simply disappeared. There are many now who are counting on state or municipality funded retirement programs who may be deeply disappointed. Many states and municipalities have grossly underfunded their retirement funds and now face either significant tax increases to fund them or they will have to reduce the promised retirement. Caveat Emptor (Buyer Beware)!

Suggestion: Take your retirement into your own hands. Choose a passive income machine, feed it, and learn to operate it. To make the choice, you need to understand your own strengths, weaknesses and interests. And you need to understand what is required to be a successful operator of each of these types of passive income machines. Or, you need to find a qualified, competent company that can manage the passive income machine for you.  Let’s take them one by one and see what they entail.

Royalty Income.   This takes talent, time and perseverance. Some come to planet earth with unique abilities with their voice, their mind, their fingers or their toes. And, they come with a strong desire to develop and share those talents. Be it as an inventor or a singer or a writer— they love to express themselves with their unique talent. And so they practice and practice. And then they take a risk. They perform. They put their book ideas out there for review or go for a singing audition. Most have to accept seemingly unending rejection and critique before they can produce what people will happily pay for. But in the end, some are successful. Success for them comes not only in the development of their talent, but in agreeing to a well-written contract with a trusted manager that gives them income every time their book is purchased or their song is listened to. So ask yourself: Do I have a talent and a strong enough desire to develop it? Am I willing to risk rejection and critique? Can I find someone trustworthy to help me manage this passive income?  If so, this may be your source of passive income.

Rental Income. My uncle had a TV repair business (way back in the day). Early in his career, he created a passive income machine by purchasing small homes and renting them out. Later, when his TV repair business became obsolete (it became cheaper for people to just buy a new TV than to repair one), he and his wife retired early and lived on the rental payments from the houses which he owned. This is a common way for people to build a passive income machine. With their ‘pay yourself first’ money, they buy income producing properties. They may specialize in rental homes, condos, apartments or commercial retail space. They become adept at handling responsibilities such as writing effective rental agreements, wisely selecting from rental applicants, collecting rent, and handling repairs. There are plenty of books and educational sources to help you learn to be an excellent landlord.  Or, again, you can seek out people and businesses who are competent and trustworthy to manage these assets.

Wendy and I considered building a rental income machine several times in our lives. There is much I like about rental income. But we also knew ourselves. We are wired differently. Wendy and I have an oversized need for constant travel. And we knew that with a rental income machine, we would need to be somewhat anchored to one place so that we could respond to lessee needs and stay abreast of the local real estate market. This is an important point. Understand what is required by an income machine and make sure, like us, that it will gel with your lifestyle and temperament. The rental income machine is very doable for most people.

Investment Income. Owning a business, but not being the manager, is awesome. That’s what happens when you own shares (stock) of a publicly traded business. As an owner, the company pays you a percentage back, four times a year, in the form of dividends. And over time, if the company is successful and grows, that dividend will increase.

Take for example the publicly traded pharmaceutical company Pfizer (PFE). (I don’t recommend any stocks for you to buy: that’s your job to pick and choose.) But let’s pretend I own 1400 shares of Pfizer. Today (February 9, 2018) 1400 shares would be valued at $47,000. As a stockholder, I wouldn’t go to work there. And I’m not a scientist and I don’t know the first thing about creating a new drug. But I don’t need to, because I’m not an employee, I’m an owner. Being an owner rocks!

As an owner of a publicly traded company I don’t have to hire anybody, fire anybody, attend any meetings, or even get dressed for work. My job as an owner or investor is to understand the nature of the business, their competitive position and the health of their company.   And I can do this from the comfort of my couch, in my pajamas if I want.

What does a stockholder of Pfizer get out of it? Dividends. Those 1400 shares should pay almost $2,000 in dividends in 2018. And that $2,000 dividends should increase by around 7% each year thereafter.

But a wise investor does not own just one company like Pfizer. A wise investor has a diversified portfolio to take advantage of the strengths from many different types of investment markets. The idea of investing using this fundamental analysis method is to research businesses and build a portfolio of strong companies. A portfolio may include many stocks and bonds in different companies in a variety of business sectors (health care, energy, utilities, real estate, etc.).

Another method of investing, called technical analysis, focuses on the rise and fall of a stock price to anticipate whether the price of the stock will rise or fall in the future. There are a huge variety of technical analysis methods and a plentiful supply of books and classes that you can study to become familiar.

And, there are some who combine fundamental and technical stock analysis to identify healthy and growing companies who’s stock price is likely to climb.

Fundamental and technical analysis can be used to buy and sell stocks, bonds, preferred shares, Electronic Traded Funds (ETFs), mutual funds, etc.

Ambition and Energy.

How many people take charge of their lives? Conversely, how many people float along like a leaf in the wind with no real plan, just banging into things that seem to ‘happen to them’. You have a choice. It is your responsibility to find happiness. Take charge! Working toward financial independence is taking charge of your life.

A book we read when we were in our 20’s that changed our lives was Your Money or Your Life by Joseph R. Dominguez, Monique Tilford and Vicki Robin. Some of the principles they taught were related to time and energy.

Think about what we do every weekday. On average, we as Americans spend five days a week submitting ourselves to a company and a boss, 48 to 50 weeks each year, for most of our adult lives. We do what they ask us to do, and in turn, they pay us. We exchange our life’s energy for money. What do I mean by our life’s energy? There are two things we have very little control over in this life:

1. Time. How much time do you get to live? You don’t know. It could stop at any moment. But you can hope for the average 75 to 85 years. And you can increase your odds of a long life on planet earth by exercise, healthy diet, avoiding harmful substances and high risk activities. But your time in mortality is limited, and there’s not much you can do about it. It’s a fixed variable, which makes it precious.
2. Energy. Some people absolutely vibrate with energy until the day they die. Most of us, however, have an energy peak in our twenties with a gradual decline until our 50’s or 60’s, at which time there is an energy cliff. Our stamina just disappears. Again, we can marginally affect our energy level with exercise, etc., but nature has a bigger say here.

So we only have so much time and energy to expend in this mortal life. Every day at work, we’re exchanging our limited supply of life’s energy for money. With that money we eat, we house ourselves, we buy the clothes we wear to work and the car we use to get there. Much of what we spend our life’s energy for is so we can be productive workers. We buy a home near the office, a reliable commuter car, clothing to look competent, and then we take vacations (and seek therapy, take mood medications?) to recover from work. Much of our weekend is spent decompressing. It’s a loop.

Don’t get me wrong, I loved work (most of the time) and felt a sense of satisfaction and purpose from my efforts. But did I want to submit to the company and the boss for the rest of my life? No way. Working toward financial independence is working toward jumping out of the loop. What if you could become financially independent while you were still young enough that you would have the energy to fulfill your life’s ambitions?

Something that you don’t understand when you are 20 or 30 or even 40 years old is that ambition and energy decline with age for most of us. In fact, somewhere in your 50’s you really start to not give a darn any more. It’s quite an amazing transformation. Now this might not happen to all, but I think it happens to most. And, stuff starts to not work like it did with these human bodies when we get into our 50’s. The energy level and the stamina go down the tubes. It becomes harder and harder to face the commute to work and the endless meetings. When the ambition and the energy leaves as you get older, but you still have to work because you need to make the car payment and the house payment, you begin to feel like a rented mule. You begin to feel like a slave to the system, with no hope of escape.

Begin with the end in mind!  While you are young, set your date for becoming financially independent, develop your detailed plans and live with a dream of freedom that is so enticing that it motivates you to discipline your spending so that you can become financially independent early in life. Then you will be able to spend your life’s energy doing those things that bring you the greatest emotional reward and joy. If that is continuing to work at the same job you have had for 45 years, then good for you! But most of us want to get off the hamster wheel.

One of the heroes of my youth is Benjamin Franklin. Among other things, I was fascinated that he retired in his early 40’s, and the vast majority of his great ideas, his public service, and his inventions occurred in his retirement years. Why? Because he was free to think! Being financially independent allows us the creative bandwidth to study and think — deep thoughts without interruption — on any subject we desire without regard to what a boss or company needs. Financial independence gives us freedom.

Plan and Execute.

I tried to keep my message to you simple and straightforward. Plan for retirement using these steps:

1. Find your dream.
2. Set your goals.
3. Pay yourself first.
4. Get out of debt.
5. Learn to live within your means.
6. Develop expertise in one of the passive income systems.
7. Write down your plan.
8. Do all of this as a couple if you have a significant other tied to your retirement.

My message is directed to my children, my nieces, my nephews and to all my young friends (younger than 50). Don’t come to me when you’re old and tell me — ‘Nobody told me!’

Because, with this missive, I just did.

You now have a basic map to follow to become financially independent — to become truly free. And I promise to be here for you to bounce ideas off. I’m happy to be your sounding board.

If you’re over 50 then it’s time to really get serious about where you stand because you’re in the 9th inning and, in this game, you don’t want to have to play in extra innings, if you know what I mean.

Having said all of that, let me issue one more caveat: there is truly no financial security in this life, nor any other form of security, except for your faith in God. But putting your head in the sand just gets sand up your nose. God expects us to use our brains and manage our resources.

Let me conclude with a few recommended books and websites. Good luck!

Your Money or Your Life, newest editions by Vicki Robin

Rich Dad Poor Dad by Robert Kiyosaki (He has a whole series of books, including books on real estate)

The Millionaire Next Door by Thomas Stanley

Can I Retire Yet? By Darrow Kirkpatrick

Goodbudget.com

Monarchmoney.com

Morningstar.com (Premium membership for fundamental stock analysis)

RevereAssetManagement.com