You
Know Thyself
The “You” or human nature component is critical and its importance in wealth building cannot be overstated. At the basic level is getting to know some key facts, goals and temperament preferences.
Some examples included:
Current Earned Income (money you work for)
Earned Income goal (increasing Earned Income affects all other ratio based planning)
Your Freedom Number (minimum unearned income needed to cover core needs)
Your Lifestyle Number (unearned income needed to cover wants and luxuries)
Earned Income Optimization plan (steps to increase your earned income)
Immediate Personal Goal (a non money related short term personal goal)
Legacy Statement (your big WHY, passions, desires, dreams, values and definitions for pursuing “true wealth” and mastering the money game)
Biggest Challenge (what often gets in your way and prevents you from progress)
Lifestyle Preferences (your active or passive investment preferences)
Temperament (your patience and detail oriented personality traits)
Risk Preference (your sensitivity to volatility)
Primary Wealth Strategy (your primary wealth building focus - typically active)
Secondary Wealth Strategy (your secondary wealth building focus - typically passive)
Getting a clear understanding of these attributes will help you in future planning and decision making.
Freedom Number
Core Needs & Necessities
Your Freedom Number is the minimum monthly Unearned Income (money that works for you) needed to cover your core needs. It is the first specific target number and milestone in the TWF money mastery system and is used to plot your financial independence plan.
Using Maslow's Hierarchy of Needs model (ie; “food, clothing, shelter”), the wealth builder makes a clear distinction between Freedom (core needs) and Lifestyle (luxury wants).
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Ie; If my core needs are covered, I no longer need to “work for money”, I am free to contribute to society or follow a passion. I am working for fulfillment not survival. If for some reason I cannot physically work, my core needs are covered.
How it’s used?
Your Freedom Number is used to plot your progress when running calculations and projections on your existing Assets as well as “forecasting” and running simulations on possible A/B “what if” scenarios.
Lifestyle Number
Wants & Luxuries
Your Lifestyle Number is the total monthly Unearned Income (money that works for you) to cover wants and luxuries. It is the second specific target number and milestone in the TWF money mastery system and is used to plot your financial independence plan.
It should not be confused with Freedom Number, which relates to core needs based on Maslow's Hierarchy of Needs model (ie; “food, clothing, shelter”).
Your Lifestyle Number includes your Freedom Number plus the 3 core luxuries of Travel, Shopping and Entertainment. But it can include literally anything you want.
How it’s used?
Your Lifestyle Number is used to plot your progress when running calculations and projections on your existing Assets as well as “forecasting” and running simulations on possible A/B “what if” scenarios.
Budgeting (ND1)
Earned Income Rules Based System
Money should be managed via ratios (relative values) not dollars and cents (absolute values). Wealth is created through production not consumption. ND1 is the first formula in our non discretionary rules based system. It is how we manage our Earned Income (money we work for: ie; wages, tips, salary, commissions, bonuses, 1099 income) to begin the process of mastering our money.
Wealth is created through production not consumption. Money is always looking for a place to go, flowing from dumb to smart or where its treated best. We become its master by giving it purpose and reason for existence and not letting money with different purposes co-mingle.
We do this by setting up 4 separate accounts and applying the following ND1 rules to every deposit (of Earned Income).
Rule: Live off of 70% of your income.
Our system uses the following ratios which have been proven across time to create and sustain true wealth.
10% giving account - to help those in need
10% wealth account (20% when debt free) - to develop Unearned Income (managed via ND2)
10% debt account - to accelerate debt payoff
70% living expenses - to cover bills
You are free to customize the above ratios but that is the proven and recommended formula. You can also add custom accounts as well.
Action Steps:
Open new accounts, close unneeded ones, consolidate what can be consolidated.
Label the accounts at your bank, brokerage or fintech solution.
Schedule automated transfers according to the ratios above to trigger every time you make a deposit.
How to apply ND1 to variable income. If you have variable income from a job or business, you can identify the baseline (low range) income amount over a period of time and setup your ND1 ratios and automated transfers accordingly. Then every month or quarter, identify the difference between the baseline trend and the higher spiked payment periods - whatever that difference is apply ND1 ratios via manual transfers. Test until you figure out a system that works best but the key is setting up a non discretionary system, sticking to it and applying it consistently.
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