There is a popular
saying that goes like this, "he who fails to plan, plans to fail".
Having no financial plan is the worst financial plan you could have as it is
the surest way to fail in your finances.
Downfall of no financial plan
The downfall of not
having a financial plan are as follows:
Lifestyle creep: Having no financial plan is the
surest way to suffer from lifestyle creep. Lifestyle creep is allowing your
lifestyle to grow faster than your income. For instance, a sales man convinces
you to buy more car than you can afford. When the first bill comes due, you
find yourself robbing Peter to pay Paul.
Out of control debt: With an increase in lifestyle also
comes a corresponding increase in debt
Paying more than
your fair share of taxes: Without planning, you will definitely pay more in taxes than you ought
to.
Creating your
financial plan: Your wealth account
Your wealth account
consists of assets less any liabilities. Assets increase your wealth while debt
has the reverse effect.
·
Examples of assets are:
o Investments
o Retirement funds
·
Examples of debt/ liabilities are:
o Mortgage
o Car loan
o Business Loans
o Student loans
o Credit card debt
To determine the
net of what should be in your account you deduct your assets from your debt.
The net amount in your wealth account is known as your net worth. Net worth is
what you own minus what you owe. With a good financial plan, net worth should
grow year over year. Net worth could decline at retirement or after a savings
goal has been reached and expended.
Building your
wealth account
Human choices are
very fickle so gaining focus is a very important part of any wealth building
strategy. This is why it is important to write down your goals and save it in a
place you can see it often. We need that consistent reminder as to why we do
what we do or we will give up easily.
To build your
wealth account:
Take an inventory
of all assets and debt
Building your
wealth account starts by having a detailed list of what you own versus what you
owe.
Create a budget
A budget is a way
of telling your money where to go rather than your money telling you where to
go.
Automate your
savings
I have learned over
the years that I cannot always trust myself to do the right thing all the time,
as a result I have learned to automate the actions I want to consistently see
applied in my life. For instance, I arrange for a certain amount of money be
taken out from my main account and put into several accounts. I have my wealth
savings fund, my vacation fund and my emergency fund. Every month, money gets
automatically taken out of my main checking account and transferred to this
savings account. The amount I take out is determined by a budget I make at the
beginning of the year. So, if I am planning an exotic vacation, I will compute
how much I need to have in that fund by the vacation day and figure how to earn
the extra money I need.
Minimize your debt
Debt is using today's
income to pay for yesterday's expense. When you are in debt, you are caught up
in the past. Moving into the future while taking care of the past is like
running a marathon with your leg tied to the pole in the starting line. You are
not going to get very far.
To minimize debt, I
do not buy assets that have a fast diminishing return with debt. For example, a
car once it leaves the car lot loses 20% of its value. Why would I want to keep
paying for an asset with diminishing returns?
Educate yourself
Educating your mind
is one of the best ways to increase your income. You do not have to engage in
formal education to get educated. You can read books, take online classes,
attend webinars, listen to podcast, etc. Be sure to educate your mind about
various investment opportunities.
Invest wisely
The education you
received from the step above will go a long way in helping you invest wisely.
Use the income from your investments to make more income.
Plan to minimize
taxes
You should have a
certified public accountant you talk to on a regular basis about tax saving
strategies.
After you have done
the above, sit back and watch your wealth account grow. Having a cushion in
your finances gives you more choices in life. There is also the added benefit
of being able to say no to jobs you don't like because you are not pressed for
cash.
Teaching
freelancers and consultants how to gain financial freedom with their business.
For more information, visit http://lifestylecpa.com/
Article
Source: http://EzineArticles.com/expert/Evelyn_Ivy/2054771
