Financial Plan
Get a Financial Plan--Start by adding up your assets and liabilities
Sit down with a friend or relative and make a list of EVERYTHING you owe and EVERYTHING you own and their corresponding dollar values. The difference between what you own and what you owe is your net worth. Your net worth can be positive or negative. You might find that your net worth is $200. If you have student loan debt and no assets, you might find that your net worth is -$50,000. List EVERYTHING. List your assets in order of accessibility. Cash, stocks, mutual funds, etc. are “liquid assets” and should be at the top of your list. Real estate and retirement funds (cash you can’t get to easily without selling something or incurring tax penalties) are “illiquid assets.” After you've finished the list of everything you own, list everything you owe. Student loan balances, your mortgage, credit cards, etc. List these in order from highest interest rate to lowest. The items at the top of the list cost you the most. You'll want to pay off this debt before you allocate funds elsewhere. Understanding your net worth right now is the first step towards financial freedom.
Dream about the future -- Determine how much you can save and how you can increase your earnings.
Dream about what you would like your net worth to be 2 years, 5 years, 10 years, 20 years from now. In a spreadsheet enter the net worth you want at each point. Back into your net worth at each point, and figure out what steps you need to take to realistically reach your net worth benchmarks.
Now list what you make per month (net – after taxes), including income from side jobs, investments, etc. Add up this number – this is your monthly income. Now, add what you spend on everything from essentials to fun stuff. These are your monthly ‘expenses.” Be honest when it comes to meals and entertainment, shopping, and hair and makeup products. You might need to track your expenses if you have no clue how much you spend.
Next, figure out the largest amount you can save per month. I try to save 50-60% of my monthly income.
Finally – try to increase your monthly savings as much as possible. Consider doing anything and everything from working a second job to increasing your earnings potential through networking or going back to school for a degree that will allow you to make more money.
Take Action towards financial freedom - You can have everything you want, just not all at once, so start saving!
Now it’s time to actually live. You’ve set a strict budget. You’re setting money aside every month (after paying down your high interest rate debt), you’re eating cereal for every meal, and you need clothes.
Set aside 10% of your income each month to spend on just you. If you net $3000 per month spend $300 on a treat for yourself. (Of course, in keeping with my insistence that you live on just 50% of your net income and save the rest, using 10% to spoil yourself means you’ll effectively be living on 40% of your net income). You might go to Forever 21 and buy an entire wardrobe or get your hair colored and highlighted. Or, you might spend the entire amount on eye cream at Saks Fifth Avenue (like me). It doesn’t matter. What matters is that you do not spend more than this amount. Not one penny. This will allow you to keep your sanity and surround yourself (slowly, but surely) with things you love. It takes about 2 years to accumulate enough things that you love so that you aren’t playing catch up. But, 2 years from now – you will have also increased your net worth exponentially from where you are now. And that feels amazing.
Now, stick to your budget and you'll achieve financial freedom in no time.
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