In July we celebrate our nation’s independence. Independence is a great thing to celebrate and fight for. This month, we examine how financial independence can be something you declare! The secret to financial freedom is sound wealth creation strategies: maximizing your assets, decreasing your liabilities, and making your main priority to get debt free. Your Net Worth helps shape your financial health, and you can calculate this by subtracting your liabilities from your assets.
Maximize Your Assets
Make a list of your assets. Good assets earn a positive cash flow. They include your home or any other real estate, stocks, interest earning savings accounts and other investments. Bad assets are those that decrease in value over time. They include items like a car, boat, television and other entertainment purchases. The less of these types of items you own, the closer you will be to financial freedom.
Your list should consist of two columns: Good and Bad Assets. Next to each asset, include the amount of money invested into each. If you have not already obtained financial freedom, chances are, the bad assets column is sucking in a large portion of your income. You need to change the balance of these columns.
Building your portfolio of Good Assets is such an important step toward financial freedom that it is forgivable to accrue debt while building it. Not all debt is created equal and there is such a thing as Good Debt that will help you obtain financial freedom. Good Debt is any debt that you have accumulated while building wealth-building assets. A loan to purchase a home or other property that will increase in value is good debt. Accumulating debt to buy new televisions, for example, is not an investment in a wealth-building asset and a step away from financial freedom.
Wealthy people obtain financial freedom by funneling their investments into wealth-building assets which are key for a rich life: rent from real estate investments, stocks, IRAs, mutual funds and the like. People with financial freedom own several good assets that will help them increase their personal net worth over time.
Get Debt Free
Acknowledge the debt that you owe. Leaving bills unpaid and ignoring debt collectors will only increase the amount of principal that you owe. If the situation is bad, you may benefit from seeking professional help. Avoid accumulating any new debt until you have paid off the creditors owed. If your budget has little leeway for improvement, and your debts are still too large to be handled, then debt consolidation is a popular option that has a good chance of success. The basic idea is to combine all your existing debts into a single larger one, by taking out a loan to pay off all your other borrowings. If done correctly, by ensuring that the new loan is at a lower rate or repaid over a longer period, your monthly repayments will be reduced to a much more manageable level, even though your overall debt level will not be reduced.
Examine Your Budget
Take a long, hard look at your budget and see if any positive changes can be made. This isn’t a pleasant activity for most people with money worries, but it’s an essential step to take. Without this, any other efforts to tackle your debt problems will only be a band-aid rather than a possible solution. Are there any areas in which you can cut back spending? Is it possible to earn a little extra income in some way? Which debts are causing you the most problems? What bills need paying most urgently? Addressing these questions will put your finances on a sounder footing even if they don’t directly solve your difficulties.
Save and Invest Early
Many people invest money in the stock market as the number one way to build wealth. If you start investing early enough, your money can greatly grow over time thanks to the benefits of compounding. Compounding makes money grow at a faster rate because in addition to earning returns on the money you invest, you also earn returns at the end of every compounding period. To invest you need to have money left over at the end of the month. You can achieve this by either increasing revenue and/or decreasing costs.
IRA and 401K plans are the two most common vehicles used to save for retirement and achieve financial freedom in the later years. Take advantage of them early, and contribute the maximum amount if possible – especially when there is an employer-matching program.
Follow these steps to get debt free and build good assets and your plan for a financially independent life will be well under way. Examine your spending, pay down that debt, build additional streams of income. Invest in you and your future!