Three simple steps can help shave 10 years off your path to total financial freedom and a high-net-worth.

Net worth is the value of your assets after all your obligations (read "debts") are paid off. For the purposes of this article, a high-net-worth is having enough assets that allows you to live off of it. That is, it throws off enough cash to ensure your total financial freedom.

How much is enough?

For most individuals, that number is somewhere between $1 million and $2 million. A simple Certificate of Deposit (check yields at Bank Rate), yielding north of 4%, would then give you an income of $40K-$80K/year. To adjust for inflation, you may actually invest in TIPS or I-bonds for extremely safe, inflation adjusted returns. Hence somewhere between $1-$2 million is sufficient to gain total financial freedom.

 

How do I get there?

Let us say that your income is $50,000/year, from which, you are able to put away 15% towards your total financial freedom portfolio - i.e. $7500/year. If all you were doing was simply saving money without investing - it will take you 133 years to reach $1 million! Since you would rather reach that target a lot sooner, let us see your returns and net-worth profile:

Thus it is not until you earn an 8% return on your portfolio can you expect to hit the $1 million mark in a reasonable amount of time - that is, 31 years! Of course if your savings rate is higher, say $10,000/year, you will reach that mark in 28 years on an 8% return. What are my choices? The above data thus clearly shows your choices:

1. Reduce your final nest-egg requirement to a smaller amount
   
   
2. Increase your rate of investment return
   
   
3. Increase your rate of savings

Choice #1 is risky, though you could cut some corners. Choice #2 will raise the risk/reward profile of your investment portfolio - something to be undertaken with great care. Choice #3 is possible to a certain point, but not beyond that.

Most individuals thus focus their efforts on choice #2 not only because it seems the most palatable, but also because choice #2 can deliver you the proverbial "home-run" - a quick rise in net-worth that lets you retire in say 10 years instead of 30! However, choice #2 can also set you back several years - leaving you with 10 extra years of work ahead instead of 20 less years of work.

Yet another avenue that is not frequently tapped is: raising your income. You can raise your income by:

• Becoming more valuable at your current job
  
  
• Getting suitably trained and changing careers
  
  
• Establishing an extra income source

If your income rises to $75,000/year, then, with a 15% savings rate ( $11,250/year), growing at 8%, you will have $1 million in 27 years, a 4 year reduction.

 

Generic Investment Vehicles

The above calculations have been done with an 8% return on your portfolio. Let us take a quick look at the expected returns (as mentioned by some very knowledgable investors like Warren Buffet and Bill Gross) over the next 10 years for various investment vehicles:

• CDs (5+ years duration): 5%
  
  
• Bond Portfolio: 6%
  
  
• S&P 500 Index: 6%-8%
  
  
• Wilshire 5000: 6%-7%

As you may notice, the commonly recommended investment vehicles are unlikely to return much more than 8% at any time, if the expectations of the market seers holds good.

You could do better if you could pick and choose individual stocks and mutual funds and thus significantly increase your returns. However, doing this by yourself requires a high level of expertise.

But fortunately, there is an option - investment newsletters. By using some highly respected newsletter editors and following their recommendations, you can easily add 4-5% (or more really, but we are being conservative here) to your returns! Thus, for an income of $50,000, and savings rate of 15% ($7500/year) and a 12% return, you will have $1 million in 24 years! And if you have a total income of $75,000 and savings rate of 15% ($11,250/year) and a 12% investment return, you will hit the $1 million mark in 21 years flat!

 

One, Two, Three

To review, the following three steps will ramp up your portfolio:

• Increase your income by 25-50% by adding an extra source of income
  
  
• Ensure your savings rate is 15% or higher for your financial freedom portfolio
  
  
• Make use of proven investment newsletters to ensure your returns are always 4-5% in excess of market returns

Combined, this will shave off 10 years to your pathway to a high-net-worth and total financial freedom!