Financial planning today provides major benefits tomorrow, and for the remainder of your life.
Regardless of your current income level or personal situation, learn why you must be committed to the following personal finance strategies in order to secure your financial success.
Planning now for your financial future is, quite simply, a smart thing to do. The tools and process detailed here will pave the way for anyone who is serious about conquering their debt and taking control over their financial existence.
Financial planning is how you get from point A to point B, as well as points C, D and E. Depending on where you are financially today, you no doubt have multiple goals that you wish to accomplish. "Hoping" for your luck to finally change, or "waiting" for your ship to come in, is NOT a financial plan - it's simply a dream.
Most people get into a set routine with their finances. The longer you allow yourself to continue down the same financial road without a clear map in hand, the more you lessen your chances of realizing your financial goals.
Let's face it, most people are not known for their patience or their planning skills, and even less people are admired for their ability to save money. No one should be surprised to learn this given how the mass media is constantly teaching people in our society to "buy it now- pay later!"
To ensure financial success, people must break away from this destructive, and weak, mind-set.
Do not make the common mistake that financial planning is only for the wealthy, or that you must already have a good sized nest egg before meeting with a financial advisor. Nothing could be farther from the truth.
However, you don't need to pay out your hard earned money for a professional. The most effective financial planning occurs in the home at the dining room table or home office.
Common tools include the household checkbook, a pen, calculator and a piece of paper with a line down the middle. One column is titled, "Cash Coming In", and the other column reads "Cash Going Out".
The main goal to keep in mind is that you want to spend every dollar of your monthly income ON PAPER, before you actually spend it. This way you will plan your expenditures for the month, knowing you have set aside adequate money to cover all the fixed expenses. In addition, you will have thoughtfully allocated the remaining funds to the areas of your life that are most important to you.
Examples of important financial goals might include:
* Buying a new car
* Saving for a down payment on a house
* Future college saving
* Dream family vacation
* Purchase of investment property
* Planning for retirement years
Regardless of what your financial goals are, your chances of realizing those goals are highly dependant upon your decision to plan ahead and your willingness to take action - right here and right now.
There is a great tool available to anyone who is not comfortable with sitting down and creating a household budget on their own. This important tool is called a Personal Financial Statement.
If you've ever applied for a loan or credit card, you have filled out the majority of what is found on a personal financial statement. Starting immediately, you can begin using the same process that a lender uses to account for all monies coming in and going out.
Once you have completed filling out a personal financial statement, you will have all the information you need to take the financial planning process to the level - that is, creating a budget that works!
"Budgeting" gets a bum wrap. No one likes to hear the word "budget"; however, it is the process of budgeting (aka. financial planning) that will ultimately set you free and secure your financial future. Too often, people make the mistake of assuming "only broke people have to budget". The reality is that most rich folks are rich because they budget.
Monday, November 16, 2009
Tuesday, November 3, 2009
How Far to Financial Freedom?
What you live off when you're not working ... financial freedom.
In our introductory meetings with potential new clients, we want to obtain a preliminary view of their "Net Investment Wealth". It quickly gives us an idea of how far along the road to financial freedom or independence they have come and how far they have to go.
Net investment wealth is your net worth less your lifestyle assets. It's the stuff available to live off when you are no longer earning income from your work.
How much do you need for financial freedom?
If the Wilsons are in their late 30's-early 40's, and looking to work for another 20 years, a net investment wealth of $95,000 may not be cause for concern. But it is definitely a focus for a meaningful conversation.
However, if they are in their mid to late 50's and hoping to retire within 10 years, there may be some major issues to confront. Because when the Wilsons retire, it is their net investment wealth and its hopeful growth that will be used to finance their desired lifestyle.
If they tell us that they want to spend around $125,000 p.a. in today's dollars in retirement, a (very) rough rule of thumb is to multiply this amount by 25 times to obtain an idea of how much net investment wealth is required to support their lifestyle. In this case, required net investment wealth is $3,125,000 (i.e. 25*$125,000). This compares with current net investment wealth of $95,000 - a shortfall of $3,030,000.
What has to happen to accumulate this shortfall?
If the Wilsons are now aged 55 and wish to retire at age 65, assuming investment returns of 4% p.a.(after-tax and inflation), they need to save an average of about $250,000 p.a. in today's dollars for the next 10 years. They better have a substantial income. However, if they are aged 40 and also wish to retire at age 65, the required saving reduces to about $69,000 p.a.
Such "back of the envelope" calculations will help you to quickly get a good idea what needs to happen for you to achieve your retirement or financial independence goals.
Net Investment Wealth: a "financial independence" indicator
Financial independence, that we equate with financial freedom, is achieved when you have sufficient net investment wealth to support your desired lifestyle, without the need to work. Work is a choice, rather than a necessity.
Your current net investment wealth provides a guide to how far along the financial independence road you have come. Together with other inputs, such as how much you would like to spend when you no longer wish to work, it can provide guidance to how far you have to go.
The simple analysis described above will highlight issues to address to increase the chances that you will achieve the financial future you want, such as:
* Do I need to save more? If so, how much?
* Do I need to earn more income? If so, how much?
* Are there structural changes I can make in my financial arrangements to increase my after-tax income and, hence, savings
* Do I need to work longer? If so, for how long?
* What sort of investment risk do I need to take to earn higher expected returns and, potentially, accumulate net investment wealth quicker? Am I prepared to take that risk?
* Is there scope to convert lifestyle assets to investment assets e.g. down size the family home?
* Should I be changing my retirement expectations?
A focus on your net worth or total assets, in isolation, can give a false sense of your options for financial freedom. A heavy bias to lifestyle assets may give the feel and appearance of wealth but it is wealth that is unlikely to be consistent with aspirations for early financial independence.
And if financial independence at a particular age is a goal that is important to you, then knowing your current net investment wealth and having a plan that addresses how you are going to grow it is critical.
In our introductory meetings with potential new clients, we want to obtain a preliminary view of their "Net Investment Wealth". It quickly gives us an idea of how far along the road to financial freedom or independence they have come and how far they have to go.
Net investment wealth is your net worth less your lifestyle assets. It's the stuff available to live off when you are no longer earning income from your work.
How much do you need for financial freedom?
If the Wilsons are in their late 30's-early 40's, and looking to work for another 20 years, a net investment wealth of $95,000 may not be cause for concern. But it is definitely a focus for a meaningful conversation.
However, if they are in their mid to late 50's and hoping to retire within 10 years, there may be some major issues to confront. Because when the Wilsons retire, it is their net investment wealth and its hopeful growth that will be used to finance their desired lifestyle.
If they tell us that they want to spend around $125,000 p.a. in today's dollars in retirement, a (very) rough rule of thumb is to multiply this amount by 25 times to obtain an idea of how much net investment wealth is required to support their lifestyle. In this case, required net investment wealth is $3,125,000 (i.e. 25*$125,000). This compares with current net investment wealth of $95,000 - a shortfall of $3,030,000.
What has to happen to accumulate this shortfall?
If the Wilsons are now aged 55 and wish to retire at age 65, assuming investment returns of 4% p.a.(after-tax and inflation), they need to save an average of about $250,000 p.a. in today's dollars for the next 10 years. They better have a substantial income. However, if they are aged 40 and also wish to retire at age 65, the required saving reduces to about $69,000 p.a.
Such "back of the envelope" calculations will help you to quickly get a good idea what needs to happen for you to achieve your retirement or financial independence goals.
Net Investment Wealth: a "financial independence" indicator
Financial independence, that we equate with financial freedom, is achieved when you have sufficient net investment wealth to support your desired lifestyle, without the need to work. Work is a choice, rather than a necessity.
Your current net investment wealth provides a guide to how far along the financial independence road you have come. Together with other inputs, such as how much you would like to spend when you no longer wish to work, it can provide guidance to how far you have to go.
The simple analysis described above will highlight issues to address to increase the chances that you will achieve the financial future you want, such as:
* Do I need to save more? If so, how much?
* Do I need to earn more income? If so, how much?
* Are there structural changes I can make in my financial arrangements to increase my after-tax income and, hence, savings
* Do I need to work longer? If so, for how long?
* What sort of investment risk do I need to take to earn higher expected returns and, potentially, accumulate net investment wealth quicker? Am I prepared to take that risk?
* Is there scope to convert lifestyle assets to investment assets e.g. down size the family home?
* Should I be changing my retirement expectations?
A focus on your net worth or total assets, in isolation, can give a false sense of your options for financial freedom. A heavy bias to lifestyle assets may give the feel and appearance of wealth but it is wealth that is unlikely to be consistent with aspirations for early financial independence.
And if financial independence at a particular age is a goal that is important to you, then knowing your current net investment wealth and having a plan that addresses how you are going to grow it is critical.
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