Sunday, 10 October 2010

The Flywheel of Finance

You have probably heard it said before, “the first million dollars is the hardest to save.” As I continued teaching from Jim Collin’s book 'Good to Great', he speaks to how disciplined thought and disciplined action brings about disciplined results. It is like a  flywheel -- like starting a lawn mower, where it is hard to get started and then through continual little pushes (disciplined action) the flywheel begins spinning faster and faster until you reach breakthrough (the engine's running).

As I am reading this, I keep thinking about how hard it is to make your first million dollars (I’m a long way from my first million) and how the flywheel provides a great analogy to saving your first million. It takes disciplined thought and disciplined action to start saving on a regular basis. If you start out saving $25 a month, you are starting your million dollar flywheel moving. Every time you get a raise, receive a bonus or a cash gift, you can add more to your monthly savings and you are pushing the flywheel faster. The more money you have in savings, the faster the flywheel turns because of compound interest. If you have $100,000 saved and you get a 5% annual return, you have just added $5,000 a year ($416.67 a month) to your savings. If you have a million dollars in savings with a 5% return, you are adding $50,000 a year to your savings or $4,166.67 a month.

When you look at your retirement flywheel, what ever your magic number for retirement, it is a big, heavy flywheel. It takes disciplined thought and disciplined action to get disciplined results. The best way to get your retirement flywheel moving is through monthly automatic transfers to your retirement savings; 401k, Roth IRA, traditional IRA or other retirement investments. Whether you start off with $5, $25 or $250 a month, you are starting your flywheel moving. The more you contribute the faster your flywheel moves and the quicker you will reach your goal.

The goal should be to have your flywheel move on its own without you adding money to it with enough to cover your expenses. At that point, you are independently wealthy and reach your point of financial independence. Your passive income is making enough to cover all of your expenses. Jim Collins would refer to this as “breakthrough.” What is your breakthrough number --$1,000,000 in savings returning 5% so you get $50,000 a year? $2 million in savings returning 5% so you get $100,000 a year? What ever your number, you can’t get there unless you start making contributions to your retirement savings.

Start Pushing Your Flywheel…..TODAY!

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