Squeeze A Dollar Till It Hollers
- Friday, February 08, 2002
Set financial goals Start planning by describing your vision of your financial life in one year (short-term), five years (medium) and ten years (long-range). List your priorities and dont be afraid to dream a bit. Review these goals regularly to make sure youre on track to meeting them.
Determine where you are Calculate your net worth by taking the total of all your assets (house, car, investments) minus your debts (house and car payments, loans, credit card balances). This is the amount you own. Once a year, compute your net worth and compare with the previous year to record your progress.
Create a spending plan Find your monthly net income by subtracting your taxes and automatic deductions (retirement, medical insurance) from your total earnings. Next, determine your monthly expenses. Create columns for expense categories like housing, utilities, food, transportation, clothing, medical, insurance, debts, entertainment, savings, charitable giving, and miscellaneous. Record your average spending in each category by reviewing your checkbook, bank statements, and receipts over the past three months. Remember to include items requiring annual payments, like insurance, taxes, or subscriptions. Also, track your cash spending for 30 days, adding expenditures to the proper category. When finished, add these categories to determine your total monthly expenses. Subtract this total from your net income. A positive number reveals that you are adding to your net worth each month while a negative number reveals a monthly drain.
Reduce spending Review your spending plan for opportunities to save money. Review magazines and websites for money-saving ideas and get tips from friends and family. Get the whole family involved and make a game of how you can work together to get more for less in every area of spending. Even fixed expenses, like housing, transportation, and food can be reduced if theyre out of proportion. Every expenditure has the potential to be reduced dont let any stone go unturned.
The biggest financial mistake I see is a consumptive lifestyle simply spending more than you can afford, notes Ron Blue, author of Master Your Money. Controlling your spending is a simple way to grow your net worth. Spending less is easier than saving more, note Bill and Mary Toohey in The Average Familys Guide to Financial Freedom. And they should know they accumulated a whopping $467,000 in eight years on an income of $65,000.
Eliminate debt The average American owes $5,000 on her credit cards, paying $900 a year in interest! Car loans, school loans, and mortgages add to these totals. Paying off debt and determining not to borrow is a guaranteed investment as high as 18% -- obviously, a wise financial move. To become debt-free, financial expert Dave Ramsey recommends a debt snowball in Financial Peace. List your debts, smallest to large and put any extra money on the smallest. Then, reallocate payments from the retired debts to those existing, until all the debts are consumed. Retiring all your debt can earn you thousands of dollars over your lifetime.
Create an emergency fund Emergencies arise. Cars break down, ankles get sprained, and jobs get terminated. Ramsey recommends that you prepare yourself from getting into debt by creating an emergency fund of three to six months living expenses. This fund will cover those inevitable, unexpected costs and keep you from borrowing money when they occur.
Carry adequate insurance Car, medical, disability, homeowners, and life insurance can prevent a financial crisis. Agent Jeff Flowers comments, You want to do business with a company that will be around for years to come one that will be there if you ever need it. Insurance is complicated, so consult with a trusted professional to secure the right coverage. (Ask your parents, friends, or co-workers for recommendations on insurance agents.) Review your coverage annually for rates and to adjust for lifestyle changes.
Save for lifes major expenses through stock investing Saving early for long-term expenses like retirement or college will allow you to capitalize on the most important investing force: time. Time helps your money multiply itself. In Retire Rich, Bambi Holzer notes, Regular saving is the key to a successful retirement. Do it early and often, and it can be relatively painless. Wait till the last minute, and you could be in trouble.
But starting early is only part of the formula. To beat inflation, its also important to invest aggressively. Stocks are the best option as they have historically exceeded other investments over long periods. Stock mutual funds are great for investing, comments Chartered Financial Consultant Scott Pruski. You can utilize the diversification and professional money management of a mutual fund with systematic investments of as little as $25 per month. Look for no-load (no fee to purchase or sell) mutual funds with low expenses. Review the investments performance at least annually, making adjustments as necessary for under-performing funds. Make this process even easier by having money automatically transferred from your paycheck to an investment account. Multiply your efforts by using employer and government sponsored vehicles like 401ks, IRAs, and education IRAs to their fullest extent.
Get a will A will can ensure your assets will be divided according to your wishes and save thousands in taxes for your heirs. Also, a will allows parents to designate their childrens caregivers. A simple will usually costs less than $200 and can be changed as peoples lives change, either by writing a new will or only changing provisions of the old one, adds attorney Jay Nardini. Dont try to do this yourself, though. A simple will can be complicated for the average person and a do-it-yourself kit is not a bargain if somethings missing. Use a lawyer instead.
Give It might seem hard to give when youre trying to get your finances straightened out, but try to contribute some money from each paycheck to your local church or charity. Remember, youre rich compared to most of the world. Besides, giving helps us focus on others and keeps finances in perspective not letting them becoming an all-consuming part of our lives.
Congratulations! You have broken from the pack and entered the realm of financial planning! All these steps dont have to be done at once in fact, some will take years to accomplish. But if you focus on one area at a time, and stick with it, your effort will pay off. Youll not only find financial freedom, but youll also be on your way to making your dreams a reality.
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