Financial freedom comes from creating a nest egg of assets that can support your lifestyle with passive income. Writing a Financial Plan will help you to keep focused.
There are 7 key steps to Financial Freedom:
• Set your goals
• Pay your self first
• Utilise compound interest
• Protect your assets
• Buy low – Sell high
• Asset Allocation/Diversification
• Leverage or Gearing
1. Set your Goals:
Financial Freedom is a journey from where you are today, to where you want to be in the future. Like any destination, if you don’t know where you are going, it sure is hard deciding what is best today to hit that target.
In 1953 a Harvard University study, noted only 10% of the class had goals, with only 3% having them written down. On reviewing the situation in 1973 – the 10% with goals had achieved more wealth than the other 90% combined and were also healthier and happier. So what are you waiting for – write down those goals, something magical might start to happen
2. Pay your self first:
Ever noticed when you get a raise at work, that you still can’t save anything? Suddenly everything costs more just when the wage increase hits the bank account. What ever we are left with in our pay each week, we adjust our livestyle to need all the new pay as well. Taking a percentage out of the pay before it is credited to your bank account is a sure way of looking after yourself. If you spend everything before next payday, oh well better luck next week.
The State/Government understands our purchasing habits. That is why Tax is taken out by the employer as Pay as You Go/Earn (PAYE) and sent directly to the tax department. Stand up and be as important as the Government in your life and pay your self first as well. Ask your pay clerk if they can put a percentage of your wages into a special long term savings account.
3. Compound Interest;
Compound interest is magical – it is the 8th wonder of the world. This is where you get interest paid on your savings, let the interest buildup and then get interest on the original sum + the interest. Watching your investment grow requires patience and discipline.
There is an investment rule called – the rule of 72. If you were to get 7.2% interest on your $1000-00 every year ( and left the interest to grow with the original sum). In 10 years your investment would be $2000-00. What the rule says – if you divide the interest rate into 72, the answer is the number of years it takes for the investment to double ( with the interest compounding)
Time is the friend of compound interest. If you put $10,000 away when you were 25 years at a compounded interest rate of 7.2% how much would it grow to by age 65 ? *
4. Protect your assets
What is your most valuable asset ? Do you think it is your house, or maybe your car ? It is easy to see the physical assets (or are they liabilities) that we own.
Your ability to earn an income is your most important asset. This is a vital part of financial planning and wealth creation. If you are 30 years old and earn $40,000 per year, by age 65 your earning capacity is $1,200,000 – YOU ARE A POTENTIAL MILLIONAIRE. It is how much your end up keeping that makes the difference in the end.
You can protect your income through income protection insurance. Insurance companies offer different conditions and it is important to read carefully how they define “ loss of earning” The 3 greatest life time risks are:
• Becoming disabled
• Dying too soon
• Living too long
To fully evaluate your own risk circumstances contact your Insurance adviser who can do a Risk Management Plan to assess what best fits your situation.
5. Buy Low – Sell High
What do you do if you see a sale ? – go in and look so you can buy a bargain !! What do you do or say when the share market is low ? – it’s too risky, we will wait until things are stable again !!!
Investments follow a cycle – stocks, property although they may not follow identical cycles. Investments are affected by the wider economy, inflation, interest rates and shocks like rising oil prices, or disastrous events.
Results come form time in the market, rather than trying to time the market. Investing in the share market means that at times there may be losses, but over the long term there are considerably higher gains than with other investments
Dollar cost averaging is a methodology whereby you invest a regular amount and accept the highs and lows of the market. Over time you will average an effective rate on a unit price, rather than waiting for the right time to buy .
6 Asset Allocation
In 1930 the US President asked the US Securities Commission to investigate how to avoid a future financial crisis that had occurred in 1929 with the share market crash on Wall Street. The Cowles Commission was formed. The 4 key conclusions from the commission are:
• Buy quality
• Diversify
• Hire Professional Fund Managers
• Dollar Cost Average
Asset allocation is fundamental to maximising your investment strategy within your investment time frame. The main asset classes are cash, fixed interest, property and shares. All these assets have different returns and risks associated with them. Cash is mare predictable in the short term. Shares need a longer time frame to move through the economic cycles. Diversification is selecting across the four asset class to spread your risk. We often say don’t put all your eggs in one basket
7. Leverage / Gearing
There are different ways to leverage an asset. You can leverage an asset, such as a house, shares, investments or income. Leverage is where you take on extra risk and borrow against the asset to purchase a higher priced asset. Leveraging your income is where you borrow money to make investments and use the excess income to pay off the debt. Leverage can increase your wealth exponentially in a favourable market, or increase your losses dramatically in unfavourable times. Leverage and equity structures can be tax efficient, and specific advice must be sort from a Tax Specialist to assess your own specific circumstances. This article is not specific in regards to tax, and is commenting at a general level only as different country jurisdictions can vary .
So to start on you journey to Financial Freedom, click here to go back to the top of the article and start with the 1st step – take a break and think of what you want to achieve in the future.
Good luck – I’ll look out for you on the highway to success
From Financial Health Check.com
