How To Take Control Of Your Financial Future

Written on October 23, 2007 by Tezza

Tuesday’s weekly guide to Personal Finance from 4EvaYoung.com

Finding an objective financial planner is like trying to find a used car salesman who isn’t trying to rip you off. While I’m not suggesting that all financial planners are crooks the good ones are often difficult to find and your left with those whose remuneration is geared towards selling you financial products that have less to do with your financial well-being and more to do with fattening their commission checks. Thankfully, all is not lost. Here are a few steps to get your financial plan in order.

1. Decide on you and your partners risk level.
It is important to involve all the necessary stakeholders when planning for your financial future. Having everyone on board and excited about the plan is critical to it’s longevity and success. The first key to involving the stakeholders is determining where everyone stands when it comes to risk. If one person is risk adverse while another is a risk taker then the plan will need to reflect some middle ground. You don’t want one party who is risk adverse losing sleep over money, after all there is more important things in life than just money. So the all important sleep test is a vital benchmark to determine if you have a sound financial plan set up or your setting yourself up for failure.

2. Determine your net worth
In order to know where you want to go you need to have a good idea of where you are today. Your starting point will determine whether your financial goals are realistic or just a pie in the sky dream. To work out your current net worth position add up all your assets including bank accounts, stocks, managed funds, property and cars.

Next determine your total liabilities. This will include all your debts like car loans, mortgage, credit cards, student loans.

Finally to determine your net worth, subtract your liabilities from your assets. This figure represents your current financial net wealth and is a better indicator of how you are traveling along in life than your income levels. Someone with a high income but spends everything on frivolous things might be worst off than someone who is on a lower income but is a net saver.

If your net worth is positive then you are at least on the right track, if on the other hand it’s negative then this could be the wake up call you needed to get your act together.

Now that you have your net worth a great tool to determine if this figure is below or above average for your age and income level is the one designed by the authors of “The Millionaire Next Door“. It’s a calculation to determine whether you are a prodigious accumulator of wealth (PAW) or a under accumulator of wealth (UAW). Visit: http://www.banksite.com/calc/wealth and type in your details to find out if you are currently on track with your wealth accumulation strategy based on your age and income level.

3. Create a budget and stick to it
Here is the step where most people’s enthusiasm starts to wane. If this has been your downfall in the past to creating your financial wealth then either you find a good reason to get interested this time round or find someone to manage this step for you. You wouldn’t find a business blindly operating without knowing their budgetary constraints so why would you think you can achieve your financial targets without having a plan to get there efficiently.

There are some good software these days like Quicken and Microsoft Money which can make managing and keeping track of your spending easy. But if you know you aren’t a details orientated person then either give this process to your partner who hopefully is more responsible or outsource this to a bookkeeper and treat your financial situation as a business operation.

Your budget should detail your current income coming in and your expenses going out. Once you have a clear list of all your expenses determine which are fixed expenses and which are discretionary expenses. The discretionary expenses is the area which can give you the flexibility to adjust or eliminate. The idea is that you want to have a surplus of money at the end of each month so that you can contribute it towards your financial goals.

If you are in deficit at the end of the month then look at your discretionary expenses and decide which for the sake of your higher goals can you do without. If after all the cost cutting you are still in deficit then you need to determine which of your fixed expenses could be removed. Maybe you have a car loan but you could get by on a cheaper car so selling it is an option. You get the picture.

4. Agree on your financial goals
Your budget gives you a good idea of whether your goals are realistic. It’s no point saying you want to be a millionaire by the time your 30 when it’s only 2 years away and your budget is running deficits each month on a $40,000 a year salary. Even Warren Buffett would have trouble turning this ship around. Be realistic about your financial goals based on the hard facts that you have just produced which shows your current net worth and your budget situation. Set yourself a yearly target and a three year target to keep you focused and project your budget forward to show you how you can achieve this goal.

Now that you have a clearer picture of your financial goals it’s also important to work out how you can eliminate your debts. You need to think about setting aside some of the funds each month not just solely towards wealth accumulation but also towards debt reduction. If for example you have say $100 left over as surplus each month you can decide that 80% of that can go towards debt reduction, 20% goes towards the creation of a contingency fund.

What you will have over time is a reduction in your debt and you’ll also have a contingency fund that will protect you from unexpected financial shocks. Don’t be discouraged if your figures are small at the initial stages, it always seems slow going in the early stages. You’ll be thankful for your persistence and discipline in years to come. As your contingency fund gets large enough, you can withdraw a portion of it and invest it in a growth asset.

5. Invest in your own knowledge
It’s important that you maintain your focus on your financial goals and a great way to do that is to be a prolific reader of financial resources. It’s like any other activity that you found success in, it takes devotion, commitment and a willingness to invest in knowledge. While you have a debt reduction plan in place and a contingency fund being created, this is a great time to start thinking about gathering more knowledge to enable you to make smarter decisions as you start to have more assets under your control. To get started here are my 5 favourite books on personal finance.

Popularity: 13% [?]

Posted in Debt Elimination, Personal Finance