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Safe Strategies for Financial Freedom

Safe Strategies for Financial Freedom

4.3 13
by Van Tharp, D.R. Barton, Steve Sjuggerud

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Commonsense Rules for Financial Freedom--Anyone Can Do It!

Safe Strategies for Financial Freedom shows you how to know in 30 seconds whether you should be in or out of the market. The authors show you how great investors avoid mistakes--and win big. With Van Tharp's legendary risk-control techniques, learn how the world's most profitable


Commonsense Rules for Financial Freedom--Anyone Can Do It!

Safe Strategies for Financial Freedom shows you how to know in 30 seconds whether you should be in or out of the market. The authors show you how great investors avoid mistakes--and win big. With Van Tharp's legendary risk-control techniques, learn how the world's most profitable investors reduce their risk and leave their wealth-generating potential unlimited, and how you can too. You'll learn how to invest wisely--in every type of market, protecting what you earn, and developing sources of regular income to achieve financial independence. Safe Strategies for Financial Freedom provides you with a specific program for freeing yourself from the workplace--forever. Let it show you how to seize control of your financial life by investing in the assets that will provide you with steady income until the day when your investment income surpasses your monthly expenses--and you are, once and for all, financially free.

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The McGraw-Hill Companies, Inc.

Copyright © 2004Hezekiah, Inc., and Lake Lucerne, LP
All rights reserved.
ISBN: 978-0-07-144290-9




"There is a strong correlation between investment planning and wealth accumulation."

—Thomas Stanley and William Danko

Imagine that you never have to work again in your life. If you do choose to work, all the extra money that comes in is used to improve your lifestyle and help those you care about. You take two month-long vacations each year. You even have a list of places you want to visit — exotic places around the world that most people will never get to see.

You are now free to spend most of your time doing the things you love to do. You spend at least 30 hours per week on your hobbies. In fact, you have a new interest—finding deals and investigating investment opportunities. The amazing part is that your new hobby will bring you much more money than you ever made while you were working 50 hours per week at a job.

You also have plenty of time to exercise, to eat right, and to be happy. Now that you are financially free, that's just what you do. All it took for this to happen was a small shift in the way you thought about money. It took you about 18 months to achieve this financial freedom and it started with a simple step—determining your financial freedom number.

Discovering Your Personal Financial Freedom Number

People have been brainwashed to think that they need millions of dollars to be financially free. This is not true. Financial freedom is not just a goal for the rich, and you don't have to be a genius to achieve it. All you need to do is look at how much money you require to live comfortably every month. Then find ways to bring in that money each month from investments that work for you rather than from you working for money. When you have this passive income every month, you are financially free.

Let's start with the first step—determining your financial freedom number. Your financial freedom number represents the difference between your passive income and your expenses. If your passive income is greater than your expenses each month, then you are financially free. It's that simple.

Let's go through the exercise of determining your financial freedom number right now. It will only take you about 15 minutes. And isn't it worth a few minutes of your time to figure out what it takes to get rid of your boss, your job, and your money worries?

Step 1: Calculate Your Monthly Expenses

If you currently keep track of your personal and household expenses, this step will be simple. If you don't have such records handy, don't despair. We'll first make a rough estimate of all your expenses. If you can easily look up a helpful piece of information, go ahead and do it. However, it's very important that you take no more than one minute on any expense category. The reason for this time limitation is simple. When starting a distasteful task, one of our coping mechanisms is to procrastinate. It would be easy to convince yourself that you'll do this exercise as soon as you get all your records together. If you allow yourself to wait, it may take a day, a week, or a year to compile those records. You can't wait that long to get moving on an important task. And chances are good that your best estimates will be very close to actual numbers. So get started! Keep in mind that your figures should be based on what you actually spend. Use the worksheet provided in Figure 1.1.

Divide any annual expenses by 12.

Start with your monthly income and write that down here. Monthly income is __________. If you are a U.S. taxpayer, you can take the informations from line 22 of your 1040 tax return. If you take this number from your tax return, remember to divide it by 12 to get your monthly income. (If you are not from the United States, take the total income figure from the tax return that you do file.)

For example, determine how much you spend per month in category one, charitable expenses. If you give $300 to charity each month, enter that amount. You might then determine that you spend $670 on taxes, which is the second expense category. Fill in all of the expense items in each category. If you discover that you spend more than you make (i.e., your expenses seem to be more than your combined income), then determine what's wrong. Either you made an error in your computations or you are spending too much (meaning that you're using your savings or borrowing money each month to pay expenses). But don't worry; you will learn how to fix the problem later.

When you finish, do a reality check to make sure that your number makes sense. For example, if you make $4,000 per month and typically run out of money by the end of the month, then total monthly expenses of $3,500 before savings do not make sense. If you run out of money by the end of the month, how can you have only $3,500 in expenses? You've obviously missed some expenses, and you need to find them. If your numbers suggest that you are saving $500 each month, be certain that $500 is what you are actually putting away. Be honest with yourself and determine where your money is going.

This exercise was intended to give you a good estimate of your expenses. If you do only what was asked and the numbers add up, you will probably get 90% of the intended results. If you want to dig deeper for more accuracy, take whatever time you need to gather the records to verify or correct your original estimates.

Now you know what it currently costs you to maintain your standard of living. This is your base number and, for many of you, it is also your financial freedom number.

Step 2: Determine Your Passive Income

To find out how close you are to being financially free, you'll also need to determine how much passive income you make on average each month. For most people, the list of passive income sources is much shorter than their list of expenses. Passive income represents the cash flow produced when money (or an asset purchased with money) works for you. This cash flow may come from an investment in real estate, in a business, in stocks, in bonds, or in other financial instruments. Although the cash flows from a passive source, it is generated by having an asset work for you rather than by directly trading your time for money. With that said, passive income still requires management and oversight. And in the start-up phases it may require even more time and energy than traditional jobs. But the end result is an asset that produces cash flow (or passive income) without directly trading an hour of work for an hour of pay.

A valid example of passive income would be the cash amount that you receive from a rental property after all expenses (i.e., principal, interest, taxes, advertising, maintenance, property management, vacancy, insurance, etc.) have been paid each month. If the property costs you money after you have deducted all expenses, then it is a negative cash flow property and needs to be recorded as such until the rent increases or the costs go down and the property is making money.

If the rental property is providing you with cash every month after the expenses have all been paid, then it is a positive cash flow property. Sure, you may have to put some time into maintaining the property and collecting the payments, but you are not directly trading an hour of work time for an hour of income. Your property (asset) is generating cash flow for you. And this cash flow is what we are calling passive income.

Note that the value (or appreciation) of the property is not included in this calculation. Values go up and down and cannot truly be determined until you actually sell the property. In

Excerpted from SAFE STRATEGIES for FINANCIAL FREEDOM by Van K. Tharp. Copyright © 2004 by Hezekiah, Inc., and Lake Lucerne, LP. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Meet the Author

Van K. Tharp Ph.D., is president of the International Institute of Trading Mastery (IITM). A globally recognized coach for traders and investors, he is the bestselling author of Trade Your Way to Financial Freedom and publisher of the successful monthly newsletter Market Mastery and the free weekly email, Tharp's Weekly Thoughts.

D.R. Barton, Jr., P.E., MBA, is chief operating officer and risk manager for the Directional Research and Trading hedge fund group and a lead instructor with IITM. He is the editor of the newsletter Ten Minute Trader, and is a sought after speaker and developer of seminars for traders and investors.

Steve Sjuggerud Ph.D., is president of Investment University, an educational program with more than 250,000 students, and editor of the investment newsletter True Wealth with over 40,000 subscribers. He is a former portfolio manager, hedge fund manager and equity research director.

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Safe Strategies for Financial Freedom 4.3 out of 5 based on 0 ratings. 13 reviews.
Anonymous More than 1 year ago
Great book. I read Trade your way to Financial Freedom and didn't get anything new from it. Read this it has everything on trading and strategy.
Guest More than 1 year ago
I have read several Tharp books and I find them interesting and they give me ideas to test on my own. Unfortunately, they all share two features (flaws?): (1) they make statements of results and don't give any analysis or data to back up the statement and (2) they are pretty relentless in selling the services of Tharps and his partners various web sites.
Guest More than 1 year ago
If personal finance seems like a no-brainer for every brain but yours, this book will enhance your gray matter and your bank account. The payoff begins immediately. The authors explain complex and potentially mind-numbing terms such as 'passive income,' 'stop loss' and 'productive assets' in lively language that entertains without condescension. The text is sprinkled with helpful easy-step programs, charts and worksheets, features that integrate your financial data into the learning curve. Your participation enhances the book¿s real-life examples. Quick summaries and detailed postscripts make the bite-size chapters even more digestible. Most of the examples are clear, with color and commentary that brighten potentially dry data. Occasionally, the authors slide into abstract number-crunching gymnastics that may leave readers stranded on the mat. But such mishaps are rare. And don¿t skip the concluding chapters about human behavior. The insights about personal accountability, positive visualization and family education provide valuable dividends. We recommend this strong performer; it will yield excellent market advice.
Guest More than 1 year ago
This brilliant book explodes all the fears and mystery that I associated with being in the Stock Market and gives equally valuable advice about the other major investment classes. Van Tharp and his co-authors freely share the REAL strategies used by successful (rich) investors in simple language accessable even to beginners like me. The myth of being able to see the future of certain stock is debunked and the art of moving with the flow of the market to keep losses small and allow profits to run up is presented in step by step form. This book is not hype. It's solid mathematics and filled with wisdom about the 'human factor' that can sabotage us all if we don't manage it at the same time we're managing our investments. The book Works for the average guy or gal who is just trying not to lose their 401K shirt in this long Bear Market. Thanks Dr. Tharp.
Guest More than 1 year ago
This is a practical, honest guidebook to real financial freedom. There is no pie in the sky here. If you will follow the new paradigms this book lays out, and really change the way you think about investing for your future, you can get there. I personally am using this book as my 'business plan' for financial freedom. The authors are highly credible, the writing is clear, and the steps to follow are laid out plainly. All you or I need to add is personal responsibility to take the steps. There is even some valuable guidance on how to overcome psychological roadblocks to success included in the book, as well as access to updated information on markets as they change in the future.
Guest More than 1 year ago
This book goes straight to the heart of sound financial investing with straight-talking, easy-to-grasp and clearly presented concepts on the foundations of common-sense investing: how to manage risk, preserve existing capital, and use your investing power to create an investment income where you are making more than you spend (i.e. at that point you are, in the words of the author, `financially free.¿). In my mind, the book has earned its price many times over just by clearly defining and explaining these fundamental `need-to-know¿ concepts of successful investing. The authors offer their readers further value by evaluating the current conditions in several major investing arenas (including the stock market, mutual funds, real estate) and presenting a series of low-risk, easy-to-implement safe strategies that are specifically designed for investing in these current uncertain and often volatile market conditions. Jack Schwager, in his original book, `Market Wizards,¿ devoted a chapter to profiling Van Tharp, one of the principal authors of `Safe Strategies for Financial Freedom.¿ It looks like Van Tharp has not only survived, but thrived, throughout the differing and sometimes euphoric, sometimes tragic, market conditions of the last several decades. He and his associates draw on decades¿ worth of depth of experience and breadth of understanding across various-and radically varying-market conditions, and are able to put the recent and current investing scenario into a coherent perspective that will appeal to everyone who wants to improve their investing performance in a safe, solid, `I can sleep at night¿ way. I found it hard to put the book down, I refer to it frequently for practical strategies, and probably many others will have a similar experience. Whether you¿re looking for down-to-earth ways to begin investing, or whether you¿re already an investor and looking for highly successful, proven ways to increase your investment income, this book is an obvious and highly productive `must-have¿ for your life and library.
Guest More than 1 year ago
This should be required reading for anyone in high school or older. All of the basics, and many clear, usable economic topics, are covered in ways that make it relatively easy to invest for yourself. These strategies take only a few minutes per week, and work in most market conditions. Answering the questions/excercises, you will end up with your own, personal business plan for investing. Following it, of course, is up to you, but the authors suggest ways to identify and overcome your personal obstacles. The 1-2-3 stock market model, and the inflation model are easy, valid ways to know which direction you should participate in many markets. If you practice the advice about how much to invest and when to get out of an investment, you will probably produce returns above 80-90% of all investors, professional or otherwise.
Guest More than 1 year ago
This book was excellent. It goes in to great details about how to obtain financial freedom. From the defensive strategies about decreasing debt and spending to great offensive strategies from real-estate to stock market trading. I especially enjoyed the section on risk managment and position sizing this is definatly a must read for anybody interested in financial freedom.
Guest More than 1 year ago
This literally is one of those rare books that should be on everyone¿s ¿must read¿ list. In a world where we are bombarded with messages about how life consists of working hard so that we can retire at age 65, this book shares ways for every single person to become financially free at any point in their life. Best of all, the authors lay out step by step methods for implementing the ideas that they share. In the opening chapter, the authors start with ¿What it takes for you to never have to work again.¿ In that section, they help readers identify their all-important ¿Financial Freedom Number¿. This is the current difference between someone¿s monthly passive income, and their monthly expenses. By the time the first chapter is over with, readers have a clear picture of where they want to get to financially. Chapter two contains excellent ideas on how to save for financial freedom, including the idea of ¿Pay Yourself First¿. Using that concept, people prepare for their own financial freedom first, before distributing the rest of their income. In a book full of paradigm shifting concepts, without a doubt, one of the most powerful ones is in the chapter titled ¿Getting Out of Debt in Just a Few Years¿. In that chapter, the authors go step by step through a very practical, possible, and incredibly powerful method by which people can quickly become debt free. Not only that, but after using this method to become debt free, people will be in fantastic position to gain their financial freedom, and never have to work again if they don¿t want to. As readers get deeper into Safe Strategies for Financial Freedom, they will learn about different ways to generate passive income, such as through the stock market, real estate, and other means. These sections are not merely high level descriptions of how to be successful. The authors take readers by the hand and walk them step by step through how to be successful. If you never get beyond the third chapter of Safe Strategies for Financial Freedom, it will still be a book that forever changes your views about wealth. If you take the time to read it all, this book will become your map for never having to work again.
Guest More than 1 year ago
This book provides you with the basics you need to develop your own path to financial freedom. Prior to presentation of any strategies, there are worksheets and exercises for your own financial evaluation. This in itself was a big eye opener. In addition to the concepts of financial freedom, the authors do a fantastic job in presenting the reader with many options to acquire your financial freedom; from stock market (including Mutual Funds) strategies, to Real Estate strategies, and more. Each chapter ends with a series of action steps for you to perform to get you moving on your own safe path to Financial Freedom. The examples given in the book illustrate the needed information to evaluate any particular strategy. It is then up to the reader to act upon their selected path. A must have for those who want to take control of their financial future!
Guest More than 1 year ago
The first 4 chapters of this book do a really unique job exploring debt reduction and financial freedom techniques. I have never seen the authors concept of financial freedom number anywhere else before and it is very helpful. In addition, there are some excellent investment concepts in stocks, commodities, and real estate.
Guest More than 1 year ago
but how to extract money from the markets with lower risk. About a quarter of this book is a rehash of Trade Your Way to Financial Freedom ¿ position sizing, psychology of trading, risk evaluation, keys to investment success, analyzing mistakes, etc. The additional material gives a good argument for what you should be invested in and when, under any market conditions. There are several suggestions for making money in different markets under different conditions and Tharp provides a simple system for doing so. There are good chapters on bear funds, real estate, inflation, and the dollar and what to invest in when interest rates are high, low, declining, and rising. The chapter on position sizing is expanded from the earlier book. If you¿re already financially free, you¿ll probably slog through the first 50 pages which are a bit like a personal finance primer, but there are good tips on redeploying your assets. Overall this is a good compilation of the best ideas that are out there. This is a terrific book for those who¿ve never read Tharp, and a pretty good follow up for those who have. For an experienced trader making a living from the markets, this book probably doesn¿t offer that much, unless you have had trouble making safe profits under all market conditions. For the average guy this book is a must read.
Guest More than 1 year ago
Majority of the book revolves around market timing techniques and trading strategies. Very little has to do with acheiving financial freedom. Misleading book title.