How much do I need?
LESSONS FROM THE SOUTH POLE
In his fantastic business book Good to Great, Jim Collins examines the example of the differences in strategies between the explorers Roald Amundsen and Robert Falcon Scott, in their efforts to lead their teams to be the first to the South Pole in October 1911.
The two teams of explorers were faced with a round trip of roughly two thousand kilometres, the equivalent of the distance from Melbourne to Brisbane. The environment was uncertain and unforgiving; temperatures could easily reach -20˚C, even during the summer. They had no modern communications — no mobile phones, no satellite links, no radio. If they ran into trouble, a rescue would have been unlikely.
One leader led his team to success.
The other led his team to their deaths.
One prepared rigorously for years in advance of the journey. He learned what worked in polar conditions, going as far as to live with Eskimos to learn how they moved about in sub-zero temperatures. He reviewed every conceivable situation that his team might encounter en route to the Pole.
The other’s preparation was limited, and what plans he made were based on his own intuitive conclusions rather than direct research of the environment he was entering.
One built enormous buffers for unforeseen events. He designed the entire journey to reduce the role of natural forces and chance events. He presumed that bad events would strike his team somewhere along the journey, and he prepared for them.
The other did little in the way of planning.
On 15 December 1911, Amundsen and his team reached the South Pole, he and his teammates planted the Norwegian flag, and they headed home.
More than a month later, Scott found himself staring at Amundsen’s flag.
Amundsen and his team reached home base on 25 January, the precise day he had planned.
Running out of supplies, Scott and his team stalled in mid-March, exhausted and depressed. Eight months later, a British reconnaissance party found the frozen bodies of Scott and two teammates in a forlorn, snow-covered tent, just 10 miles short of his supply depot. His whole team had perished.
There are some important lessons to be learned from this tragic outcome.
Throughout the journey, Amundsen was consistent in managing his and his team’s progress. He never went too far in good weather. He always pushed the same distance in bad weather. Amundsen pulled back his well-tuned team to travel between 15 and 20 miles per day, in a relentless march. No more, no less — always with the end goal in mind.
In contrast, Scott would sometimes drive his team to exhaustion on good days, and then sit in his tent and complain about the weather on bad days.
These two approaches produced radically different outcomes.
PLANNING YOUR JOURNEY
What relevance does this story have to you?
While not quite as difficult as being the first people to the South Pole, creating financial freedom using your business is still a tough assignment. There are constant obstacles along the way. However, by starting with the end in mind, knowing what the end looks like, and taking small steps every day towards it, the goal becomes achievable.
You create a plan.
To illustrate, let’s look at a case study of clients we recently worked with: Jim and Barbara (not their real names).
Jim and Barbara were entrepreneurs, being part owners with an investor in two businesses. They were in their early forties, owned a house, but had few other assets.
Talking with Jim and Barbara, they knew they wanted $150,000 per year after tax to live on to afford a comfortable lifestyle. Their house would be paid off in five years time, so they were in a position to begin their journey to financial freedom.
If Jim and Barbara wanted $150,000 of income per year, we needed to work out what amount of assets they needed to accumulate to generate this. As we looked at in the previous chapter, the assets you accumulate will earn a certain level of income (from rent, dividends or profits) that can provide you with financial freedom if the income is high enough.
Let’s say, as a conservative guide, that we use 5% as a figure when calculating the income generated per annum; that is, the assets generate an income of 5% of their capital value. If you own a property and that property is valued at $500,000, 5% income per annum would be $25,000.
Jim and Barbara wanted to generate $150,000 per annum of income, so if we used an income figure of 5% per annum, they would need $3,000,000 of net assets to be financially free ($150,000 X 5% = $3,000,000). I call this figure the ‘Financial Freedom Number’.
By starting with the end in mind, Jim and Barbara now know the exact value of the assets they need to accumulate to be financially free. They know what their net wealth needs to be.
They can now begin their journey.
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You too can accumulate this level of assets if you start with the end in mind. You have a figure in mind — now you just need to break it down into little, achievable targets and celebrate the wins along the way.
Join us tomorrow when we look at how you can start to achieve your Financial Freedom number.
Check out my new book, Freedom Assets: The Entrepreneurs Roadmap to Financial Freedom. It outlines the 3 Step process to creating your ideal life, freedom and time that allow you to have an impact on your community and creating a lasting legacy.
You can pre-order your copy now here