Personal financial planning is important if you want to achieve financial freedom.
The basic idea with the financial planning for financial freedom is to make sure that you are building up funds and assets that eventually will pay for all your expenses.
When you have reached that point you have financial freedom per definition.
The planning is a way of trying to get there as smoothly and quickly as possible without having to sacrifice all ‘The good things in life’ during the process.
Everyone knows that it is good to have saved some money if there are unexpected things happening, but there are only a few who does something about it.
Why? Because most people think they can’t. They think it is to difficult, they don’t have enough money, they have to pay of their debt first or any other reason you can think of.
And anyway, saving money is really hard and you have to stay at home and you can never do things you like anymore, like going to a restaurant or to the movies. So that’s why people put it off, they have so many ideas about it that they never even try!
It is important not to get to stiff and uptight about this, because then it becomes a pain. If you can not enjoy your journey to financial freedom, most probably you will not be able to enjoy the financial freedom itself. You would probably be too worried about loosing your money, or spending to much of them!
There are a few basics we will cover here and then you will be shown a few other resources that you can benefit from.
The process is the following:
Action Steps
2. Deciding what are your financial goals
3. Making a detailed financial plan of how to get there
4. Putting the financial plan into action and monitoring it
Financial inventory
Taking inventory of your financial situation
The first step on the way to financial freedom is to take inventory of your current situation. This is important because you need to know where you are at to be able to make a plan of where you are going to go. Taking an inventory means getting a detailed overview.
It is not complicated and do not have to have fancy equipment or special programs. Start by doing it simple. You will need to write down everything you owe and everything you own.
1 Writing down all your assets
2 Writing down all your liabilities
3 Calculating your net worth
4 Writing down your income
5 Writing down expenses
6 Calculating your net income
If you would like an easy way to do this, use this form. It gives an easy overview over the above mentioned and is free to use.
To get a free credit report and find out your credit score, go here:
Worth to mention here is also the importance of having a total overview over your personal information and all legal documents, account numbers and other information that is vital to your financial health. Let the people closest to you know where they can find this information if something where to happen to you. Make an overview over this on a separate document.
The document should include:
1 Your full name, date of birth, and Social Security number.
2 The names and contact information of your lawyer, accountant, broker, insurance agent, and other important people that you have had regular contact with (ex: government officials)
3 A list all account numbers (bank, brokerage), credit card numbers, list of other investments and any identifying numbers and contact information that is related to your finances.
4 The document should say where all key documents can be found. That are documents like insurance policies, trust documents, your will, landlord-tenant contract or real estate contract and any other legal form or contract that are important.
If you get this far you will already feel more on top of your own financial situation, and it is easier to go to the next step______________________________________________________________________
Financial Goals
You will need to make a list of goals of what you would like to achieve with your financial planning.
The best is to write down the financial goals in a list of priorities that are the most important to you, and what is absolutely necessary. This can be goals like paying for education, medical expenses, paying of expensive credit card debts and so on. These are all important things that will back fire on you if you let them lapse.
Secondary goals would be paying of mortgages and car loans and other debt that is less expensive then consumer debts.
Then you should make a list of your personal goals, everything that you are dreaming of and wish for. Like having longer holidays, buying a new car, playing golf or whatever. The personal motivation for short term goals are often many times stronger then saving for retirement many years ahead. Saving for retirement is what most people are talking about, but in my personal opinion this should be a secondary side goal that comes along with your primary goals.
What would be the easiest to motivate yourself for: A new flat screen TV next year, or retiring in 20 years?
*This does not mean that you give up paying off your debt, and just buy the TV on your credit card.
*It means that when you have paid off your current credit card debt and saved enough money to buy the new TV, you go buy it if you still want it.
*Maybe you by then have changed your mind and want to save a bit more for something more expensive and more useful.
*Maybe by then you have discovered another opportunity to actually make money on the money you have saved, instead of buying the TV.
*Maybe by then you have discovered how easy it actually is to save money and reduce your debt.
No matter how you look at it, you have to set goals that inspire your motivation. The first priority is clear; you have to cover all the things that you have to have.
For the rest the goal setting process is about making smart choices.
_____________________________________________________________________
Financial Plan
You will need to make a clear plan of how to get where you want to. The financial plan needs to be broken down into realistic achievable goals with a clear deadline.
The plan needs to include how much you are currently using to pay off debts, how much you are currently using to cover all living expenses and how much you are currently saving.
When you have that clear you need to look at where you are going to cut costs.
What can you live without?
Do you subscribe to magazines or newspapers you do not need?
Do you have memberships you do not need?
Is your rent or mortgage very expensive?
Are you spending a lot of money on driving where you do not need to go?
Do you rather eat out then cook yourself?
Do you pay too much for electricity, telephone, Internet connection and TV?
Do you have the best credit card, insurance, rent or mortgage and bank account deals you can get?
The meaning of these questionins is that you should not settle with what you have now. Then your situation will stay the same.
Always shop around for better deals and always look at how you can cut costs.
Maybe you find out you need to move to another place where it is less expensive.
Maybe you need to eat more canned beans.
Maybe you need to use your bike, or your feet instead of the car.
Maybe you need to read magazines only when you go to the dentist or to the hairdresser.
Whatever it takes to improve your financial situation; decide to do it.
Write down both the longer term goals and the short tem goals and what you will do to achieve them.
*You need to set time limits for when you want to achieve the goals you worked out in the previous step.
*Write down exactly what you are going to do to achieve them.
*Make a detailed clear plan of exactly what you are going to do to cut your expenses.
*Make a detailed clear plan for how you are going to get out of debt.
*You need to set the amount of money you are going to save each time you get your pay check.
When that is done you are ready for the next step.
_____________________________________________________________________
Financial plan into action
Making the plan and getting the overview over your current financial situation is not enough. You need to put the plan into action and follow it up and evaluate it as you go along.
Many things can influence the plan after it has been put into action. Maybe your job situation changes, maybe the overall economic situation changes in your country, like higher interest rates. Maybe the oil and gas price keeps changing. Maybe you divorce or marry. Maybe your investments suddenly loose all their value!
You can not plan for all of these things, and if you could your life probably would be extremely boring. It is a bit of the beauty that life changes. You need to be able to change your plan accordingly, so you can still achieve your goals.
Remember that all your efforts in the direction of financial freedom are going to benefit you. Unless you invest all your savings in some crazy pyramid scheme instead of in mutual funds.
You need to learn to be smart, and that means sticking with your plan. If you see that the plan is no longer practical you adjust it. Do not drop the plan. You might be tempted to drop it if it does not work out as you planned straight away, but all your passion and persistence involved in implementing your plan, and it will be easier.
Monitor and evaluate your plan regularly. Keep a record of all the small short term goals that you have set and reached. That is a great motivator.
No comments:
Post a Comment