Nine simple steps to Money Mastery and financial freedom

Any planning is better than no planning. As Benjamin Franklin once supposedly said, “If you fail to plan, you are planning to fail”. So plan extensively, fill in every detail; you can always modify the plan later if things change. You can simply use a diary or excel sheets to draw your plan. Don’t forget to include a timeline in your financial plan. After you have done extensive planning, talk with your family members whose support will be crucial to the success of your plan. For example, budgeting and savings matter must be discussed with your spouse. Also, tell them benefits of financial freedom. Be soft spoken and discuss the matter incrementally, not in a one go. Give them time to understand and digest what you have said. Your plan must include all the budgeting, saving, emergency funds, debt issues, insurances, retirement plan, active/ passive incomes, investing, and asset allocation. You should have following plans:

1.       A life plan (Details should be filled later)

2.       A 5 to 10 years plan (A timeline in months and years must be included, and a few details can be written)

3.       A 3 to 6 months plan (A plan in weeks and months in good details i.e. goals, resources etc.)

4.       daily plans (Categorizing things and works in important, urgent, and waste)

·         Don’t forget to include rewards, breaks, and holidays in your plans.

·         Also, include family time in daily plan.

Saving at least 20% of your income is necessary to attain financial security. You can achieve financial freedom 1-2 year faster if you save more than 30% of your income. Initial savings are very important and can have a huge impact on your wealth in coming years.

The first step you can take to increase your savings is to create a budget. Budgeting is a very easy process but initially, can take two to three days. Use Expenses chart given in the previous post to find out what are unnecessary expenses you can eliminate from your life. Also, try to reduce the remaining expenses, but you have to be clever in this. You should not cut or reduce things that are important to you. Try to find the real value things provide. You can also read post “Materialism, minimalist living and budgeting” to improve your budget and budgeting process.

Bad debt is number one enemy of financial freedom. It is the main reason why people stuck in a rat race and face financial difficulties their entire life. Any debt taken for following things is bad debt: luxury things, depreciating items, non-income generating assets. You must cut all the bad debt one by one. Pay off debt with highest interest rate first. You can use your savings to pay this debt. After that pay off debt with second highest interest rate and so on. Paying remaining debts will be easy because you will be saving a lot more monthly after paying the first and second debt. In this way pay off all bad debts. Generally, credit card or illegal money lenders (Loan Sharks) loans have highest interest rates.

You should do at least one comprehensive life insurance of every family member. If you are only bread earner in the family, the amount of your life insurance should be sufficient to support your family in case of need arises. Family members who travel a lot or commute to work must have accidental insurances. You should search for government sponsored or subsidized loans.

Consistently increasing your active and passive incomes is one of the fastest ways to become financially free. To be very concise, you have to work continuously to earn any active income. If you stop working, income will also stop. While passive income requires little or no involvement on your part.

What will you do with all the extra money you will get from savings and budget cuts? The answer is very simple; you invest and reinvest. Most poor, debt-ridden, or 9-5 job people first spend first and save/invest later. What wealthy or financially free people do? They invest first and spend later. And if you want to be financially free fast, reinvest the income from your investments. It is very simple and straightforward way to becoming financially free. But choosing the right investments and asset allocation is a complex process, and you must learn about different investments and asset classes before investing a dime in any of them. It is not necessary to learn about various investments opportunities and options in one month or year. But you should get a general overview of all of them, and learn extensively about the investment class you are thinking of investing first. Don’t get caught in any “get rich quick schemes”. Read and learn from the people who are already successful in that particular type of investments. For example, if you are thinking of investing in stocks, learn from legendary investors like Warren Buffet, Benjamin Graham, George Soros, Ackman and Whitney Tilson.  Also get in touch with some successful stock investors (Big or small) and hang out with them. Only after you have learned stocks investing well; you should move to next investment category and repeat the learning process.

Periodic balancing of your assets and stocks is necessary to reflect the changes in market, facts, numbers, profits, and age. It will also reduce risks involved in investing. You must invest in various assets to minimize the risks of huge losses and shocks. Ideally, you should invest in stocks, real estates, bonds /treasuries, cd/fd, gold, and businesses.  I am giving ideal asset allocation charts for three age groups. I recommend customizing these charts to suit your interests and goals.

2.       Power of attorney

3.       Health care proxy/ Medical power of attorney

If you have children, setting up a college fund is one of the best gift and inheritance that you can give them. It is also a tax-free investment.  It will reduce your family’s worries. And your children will be debt-free on graduation. You should also teach them, how to get various scholarships and grants. You should also provide financial and investment education to your children. Inculcate in them saving habits from childhood. You should double their pocket money on condition that they will save half of the total amount given. And invest their savings in instruments like saving accounts, college funds, and stocks. Also, advise them to save half of their income from summer/part –time jobs. You can encourage their saving habits, by increasing their pocket money on reaching certain saving milestones. If you keep investing their money in a balanced portfolio, they will have enough money to start their business or investment portfolio after graduation.

General Medicare and health insurances do not cover long term medical care expenses. Nowadays people are living longer, and more than 70% of people over age 65 need long term Medicare at least once. So get a long term care insurance around before you turn 50. Also, customize this insurance according to your wishes. You can include home care and other several options in this insurance plan. You can also opt for hybrid insurance cover i.e. life cover + long term care cover.

Reviewing your financial health, asset allocation, and investments are must to grow your wealth and minimize various risks involved in investing and asset allocation. You should keep in mind following things while reviewing and assessing your finances.

·         They are on track. i.e. according to your plans and goals

·         Changed laws, market, and your position

·         What can you improve?

·         Legal documents represent present situation.

·         Taxes are low.

·         You have covered downsides of most of your investments.