Obtaining a credit card these days has become so easy that even a young adult just starting out into the working world may be holding up to 5-10 credit cards within a year into employment. Hence, it is no surprise that many people are depending on their credit cards for their financial needs and ending up with a debt they cannot manage. Many people are just not taking heed to the actual planning of their finances apart from paying the bills and saving or spending what is left over.
Hence, it is imperative that the young individual should be educated early in life of the necessity of financial planning so as not to fall into credit card debts and ruining their future. Financial freedom is a worthy target, the quicker you start on it, the better your life will be.
Consulting a financial advisor may be an option. But if budget is a problem, you may consider following the following steps in financial planning in ensuring that your road to financial freedom is a successful one:-
Step 1 – computing your present net worth to know your present financial standing
This include listing out your all the assets and liabilities. Assets will include your bank balance, investment in stocks, mutual funds, gold, property, insurances, vehicles etc. Liabilities are the loans to repay (home loan, personal loan, credit card debt, car loan). This will help you arrive at your present net worth. Your personal net worth statement is the personal, human equivalent of a company balance sheet. Computing this net worth statement will help to identify how much debts or investible funds that you have, giving you a clear picture of what you have and what you owe. As a first step towards correcting the financial situation it is always better to get rid of costly debts such as credit card bills, personal loans, car loans etc. as soon as possible.
Step 2 – prepare cash flow statement for monthly / yearly budget
Your cash flow statement helps you to see how and where you spend your money. It will provide you with a guideline on how to spend your money in order to plan your debt elimination and start saving for the future. With a budget, you are able to recognize the areas in which you can save money in order to improve your financial situation month by month.
Step 3 - identifying your financial needs
The first two steps above assessed your current financial positions. The next step then is to identify your financial needs. For most young couples, the most common needs would be: home ownership, tertiary education funding for their children and retirement.
This step would require you to estimate the funding and time required to achieve these goals.
Step 4 – drawing up your investment plans
Eradicating your debts and a saving problem will start you off to the road to financial freedom. But putting your savings into banks with low yield is not the wisest thing to do as over the long term as it will not hedge you against rate of inflation.
To achieve your financial these goals, you will to stomach some level of risk in embarking on a investment program. However, before embarking upon this you advisable that:-
1. To determine your personal risk tolerance and to establish the preferred asset allocation.
2. To ensure that a 6 to 9 months emergency buffer fund is in place otherwise any mishap will cause you to plunder into your investment funds too early for it to gain momentum.
3. If you are considering self managed direct investment, then educate yourself with enough knowledge before starting investing and to ensure that you have the time to monitor the dynamic investment conditions of the market. Alternatively, do engage a professional for sound advice.
Step 5 – insurance for protecting your investment program.
Any financial plan is required to be protected against any foreseeable risks. Hence, you need to have proper insurance to cover any emergencies that could suddenly pop up that will derail your financial and investment program.
Different types of life insurance meet different needs. Good health insurance and a comprehensive life insurance should be top priorities. Property insurance will help to cover all hazards in your area. If you can afford it, disability insurance is always a good idea.
Step 6 – estate planning & writing of will
No financial plan can be considered as complete without planning your estate. A comprehensive financial plan is one which includes wealth accumulation, wealth preservation and lastly wealth distribution.
The writing of a will is a prerequisite in any financial plan and is advisable. The scariest thing for any dependent survivors of an individual who passed away without a will is the agony of having the courts to decide the division of the individual estate and waiting for months for the letter of administration to be issued.