I love being a financial planner. 

However I’m sure that my Dad assumes that I’m spending my time in front of screens full of technical looking graphs, my friends assuming that I’m spending breakfast, lunch and dinner out and about meeting people.

The reality is that our job is really diverse. Of course we talk about tax, investing and protecting assets…

However what we talk about most of all is what our clients want to achieve with their lives. You see whilst making the right tactical financial decisions is really important, it’s important to start with what you want from your money.

For most of us that means we want to accumulate enough wealth for us to live the lives we want and in this blog I want to share the broad three step process you can use to get closer to what ‘enough’ looks like for you…and in Step 2 I’m going to share the common mistake many people make and how to avoid it!

1)      Understand what ‘enough’ looks like for you

The first step towards understanding financial independence is to work out your ‘enough’. 

‘Enough’ is the amount of money you need to make sure that you’ll never run out of money again.

Now often, when I’m working with clients I’ll ask the following question to start the thought process of working out what ‘enough’ means, and if you’re thinking about whether you’re currently financial independent I’d recommend it’s one you ask yourself…

“If you never needed to do a shred of paid work again. How much income would you want every year to live the life you truly desire?”

The interesting thing is the pretty regular response I get is…

“I don’t know, what does everyone else choose!”

The reality is that doesn’t matter. This is your ideal life and the way that I’d start is the simple budget plan.

I’d recommend you sit down and work out, in today’s money, how much you need to live the life you want.

However, there’s a couple of important factors you need to consider.

Firstly, if you were fully financially independent today some of your expenses might not be there. For many of my clients, school fees and mortgage costs are stopping before they’re going to be fully financially independent. So, when you are thinking about financial independence consider the fact that some of your spending might not be there anymore.

Secondly, you might need to add some expenses in! The main reason is that if you become financially independent, you’re probably also going to want to consider how you spend your most valuable commodity.

Time.

This might mean that additional expenses might be added. For instance, I do a lot of travel but intend to do a lot more when I stop work. So in my plan I need to make sure that’s factored in too.

We’ve built a document which has a brilliant budget plan which you can get access to for free.

So, once you’ve worked out how much annual income you need to live the life you want, what’s the next step?

2)      Work out how your assets and continuing income contribute to your plan

Once we’ve worked out what you need in income, you need to look at the progress you’ve made when it comes to building your wealth. However the key factor, and the mistake most people make is they don’t include all of their ‘assets’…let me explain.

There’s two main elements of your wealth.

First, there’s the assets everyone believes are most important. ISA’s, pension pots, savings, the value of property portfolios…and the values of these assets are really important.

However the element most people don’t take into account is the amount of continued income they’re going to expect if they don’t work.

There’s any defined benefit pensions, pensions that aren’t simply a pot of money but pay you an income starting at a particular point in time for the remainder of your life.

There’s income from assets which require minimal work but generate income, an example might be income from a property rental. However make sure that you’re using the net income (after all expenses and taxes) as this might skew your numbers.

And then there’s retirement state benefits. In the UK that’s the Humble state pension but here’s the interesting thing. A couple who have both fully funded their state pensions are, as I write this, entitled to £22,985 per year.

This means that if the income they need to live the life they want is £50,000 per year they’re already 45 and a bit percent on the way.

However, the big mistake many people make (in the UK anyway) is not understanding the impact of the state pension on their financial plan. The good news is that it’s really easy to check whether you’ve fully funded your state pension (here)

This  will provide you with ‘the gap’ and then simply take action

So, once you’ve worked out what you need an what you’ve got, you need to work out the gap.

I’d do it like this…

Take the income you think you’re going to need to live the life you want.

Remove the income you know you’re going to get 

This will leave you with an income gap – the amount of income you need to find every year to live the life you want 

Multiply this ‘income cap’ by 25 and this will give you (based on a really basic rule called the 4% rule) the amount of capital you need (your ‘capital requirement’)

Take your capital gap, look at the assets you’ve built up for your financial future (don’t include money you’ve got short or medium term plans for) and this will give you your ‘capital gap;…the amount of additional money you need to accumulate to achieve financial independence.

Now a couple of really important things to mention…

• This is a really broad overview and even the formula I’ve talked about (the 4% rule) isn’t particularly nuanced…and if you want to get a more accurate picture it’s probably worth getting proper advice. This is a starting point which allows you to see where you are.

• The key factor here is, if there is an incremental gap, to start to take action. Now you’ve got a budget plan you can also understand how much you can save and contribute to achieving financial independence.

However there’s also a flip side. If you’ve achieved financial independence already you can also make choices with your life.

The reality is that being clear on what enough financially looks like for you gives you a decent amount of clarity…and it might be time to plan for the other areas of your life now you’re financially independent. In this video I talk about that, and why you can avoid falling off what we’ve deemed ‘the retirement cliff’