Whatever financial freedom looks like to you, it won’t happen unless you take conscious action to plant a Money Tree. Remember the phrase, “The grass is greener where you water it”? Well, I’m going to help you grow not just grass, but a big fat tree that will generate enough income to cover the lifestyle you want.
Exercise from The Abundance Loop: Grow Your Money Tree.
Here are the basic steps in this process:
Step 1: Calculate how much of a “nut” you need. First, figure out how much money you need every year to live comfortably. Creating a traditional budget is one technique that will help you. Your budget informs how much you need to live on each month to maintain your current lifestyle. In Money Tree terms, we call this your “nut.” Alternatively, you could look at your monthly take-home pay after taxes. Do you have money left over after paying your bills? If yes, how much do you save every month? If you don’t save, how much of a deficit do you have each month.
This equation will also get you to your monthly “nut.”
Take-Home Pay – Savings + Deficit = Monthly Nut
Step 2: Determine the Size of Your Tree. Most people know they need to save, but they don’t know how much. That number depends largely on your lifestyle. Someone with a modest lifestyle needs a smaller Money Tree. A more extravagant lifestyle means a bigger tree is needed to sustain it.How Does Your Tree Grow, and How Do You Harvest?A well-invested money tree (in the financial industry, we call it a portfolio) grows based on interest from investments. A healthy portfolio can withstand a “harvest” or withdrawal of about 4% a year. If you want to harvest more, like a 5% withdrawal each year, your tree may die when you do, but you’ll be able to get more money each month to support your lifestyle.
Step 3: Water your tree: Consistent Investing. Now that you understand the size of your tree, don’t faint! I know some of these trees look bigger than a lottery jackpot, but I encourage you to expand your imagination and believe that you could indeed accumulate this much. I’ll show you how.
There are three critical factors that directly impact your tree’s growth: time, market performance, and regular contributions. The more years you have to save and invest, the more each dollar can work for you. If time is not on your side, it’s up to you to sock away as much as possible from each paycheck.
The Power of Compounding.
The earth works its magic with the seeds we plant in the ground, and the market works its magic with our “nuts.” Assuming an 8% compounding rate, take a look at how much each monthly nut can get you over 20, 30, and 40 years.
These numbers are just guidelines—whatever your financial situation, you should talk to a professional today and get started on the path to abundance. Believe you can be abundant, and then take the steps. Plant your money tree today!