Saturday, December 16

Mantras to become financially independent.

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The road to wealth is not paved with infomercials. Those wee-hour TV staples would have you believe that you’;;ll become “Fantasy Island” rich by placing tiny ads in the classifieds, or by buying up — for no money down — distressed property and selling it for millions.

Unfortunately, the only thing you’;;re likely to get from watching those infomercials is dark circles under your eyes from lack of sleep. If you actually go to the seminar or buy the tapes, you’;;ll probably just have more debt.

The truth is, unless you’;;re lucky enough to receive a sizeable inheritance, you’;;ll need to navigate your own route to prosperity. But while Bill Gates-style megawealth may be elusive, becoming a millionaire is definitely within reach of those who start young and develop the right habits. And anyone, at any age, can develop the traits that increase wealth and decrease debt.

Here are few mantras to wealth.

1. Establish Goals

Identifying clear, achievable goals is a crucial part of anyone’s financial plan. A financial goal is the exact amount of money needed for a specific purchase or service at a definite date. Making the goal precise helps you determine how much you need to set aside each month and track your progress.

There are three types of goals: short-range, mid-range, and long-range. Short-range goals are to be met in one year or less, mid-range in one to five years, and long-range in five years or more. Vacations, gifts, and electronics are typical short-range goals. A down payment for a house is a common mid-range goal. Long-range goals may include saving for retirement and a child’s higher education.

2. Take Stock of Your Current Financial Situation

Taking stock of what your financial situation is today can help you determine what you need to do tomorrow. Are you on the right track or do you need to make changes?

Net Worth

Assets are things you own that have monetary value. They can include houses, cars, furniture, checking and savings accounts, certificates of deposit, retirement funds, stocks, bonds, and more.

Liabilities are monetary obligations to other people or companies. Mortgages, car loans, credit card debt, personal loans, and student loans are common liabilities.

Your assets minus your liabilities is your net worth. If your net worth is positive, that means you own more than you owe. If your net worth is negative, that means you owe more than you own. Complete the Net Worth Worksheet to see where you currently stand.

Your net worth is a snapshot of your finances at one point in time. It is a good idea to calculate your net worth at least once a year. Your net worth should increase over time. If it is not, either you are not saving enough or taking on too much debt. Adjusting your spending and savings plan can help you change this.

3. Create a Spending and Savings Plan – Develop a written financial plan

Saying you want to be wealthy isn’;;t good enough. You need to come up with a workable plan and put it on paper.

Calculate what you need to earn and how to invest. The plan isn’;;t just the goal, it’;;s the whole thing — the dream, the goals, the options. The options are scenario planning — all the ways you can accomplish that goal.

Once you take stock of what your current situation is, it is time to create a spending and savings plan. Your spending and savings plan should show where you want your money to go in the future. How much will you spend on clothing? How much will you set aside in your retirement fund? How much will you spend at the grocery store?

While you are creating your plan, keep in mind the golden rule of money management: your expenses (including the money going into savings) should never exceed your income. If you have a negative cash flow, you will need to make adjustments. You may still want to make adjustments even if you don’t have a negative cash flow.

4. Establish an Emergency Savings Fund – Save, save, save 

If you lost your job, would you be able to pay your bills for the next few months? If your car broke down, would you be able to pay for the repair without putting it on your credit card? Unexpected things happen, and for those living paycheck to paycheck, it can be hard to deal with them.

The end result of your financial plan should be systematic investment. Get in the habit of saving money. Build an emergency fund in a money market account so you don’;;t have to raid the rest of your savings and investments when there’;;s an unexpected major expense. Make it a point to save at least half of every pay raise. 

Establishing an emergency savings fund provides a cushion that allows you to pay for expenses should the unexpected occur. Financial experts recommend saving at least three to six months worth of essential living expenses. If you do not already have that amount in savings, determine how much you can set aside each month until you reach your goal. Since you don’t know when you will need the money, make sure that it is put in an account that is easily accessible and where there are no penalties for early withdrawal. A savings account is usually a good choice

5. Live below your means 

Don’;;t be a walking billboard for overpriced designer clothes, shoes, sunglasses or jewelry. Don’;;t allow your house or car payments to be budget-busters. Also watch out for unnecessary and small expenses.

6. Lay off the credit

Some people say that if you can eat it or wear it, don’;;t put it on your credit card. That’;;s good advice, but take it further. Try not putting anything on your cards that you can’;;t pay off in two or three months. You need only one or two credit cards. If you have a fistful, pay them off. Remember, debt holds you back. It reduces cash flow for other things, including investing.

7. Make Sure You’re Covered

Events such as a severe illness, car accident, or house fire can put a serious cramp in your financial health, even if you have savings. Having the right amount of insurance will help protect you from the financial consequences associated with many of life’s adversities.

8. Establish a Good Credit History

Your credit report and score can affect your life in many ways. Obtaining a mortgage or car loan (especially one with a good interest rate), renting an apartment, finding a job (many employers check credit reports), and obtaining insurance with low rates is usually easier with a good credit history.

Like the name implies, your credit report tracks your credit activity. There are several types of credit, including credit cards, store cards, personal loans, car loans, mortgages, student loans, and lines of credit. Credit-related legal actions, such as judgments, foreclosures, repossessions, liens, bankruptcies, and evictions, also appear on your credit report. Your credit score is a numeric summary of the information in your credit report and is designed to measure the risk you will not repay what you owe.

9. Lay off the credit 

Some people say that if you can eat it or wear it, don’;;t put it on your credit card. That’;;s good advice, but take it further. Try not putting anything on your cards that you can’;;t pay off in two or three months. You need only one or two credit cards. If you have a fistful, pay them off. Remember, debt holds you back.

It is best to never carry a balance on your credit cards. However, you may be in a position where you are already dealing with credit card, personal loan, and/or other type of debt. Having debt can not only absorb a significant portion of your income each month but also cost you thousands of dollars in interest payments. Conversely, paying off your debt can provide a feeling of relief and give you more money for other things, like savings.

10. Make your money work for you – Invest Diversely

It takes money to make money, but that doesn’;;t mean you need a lot to invest. Open an account with a mutual fund company that has no-load funds and low expense ratios. Build a diverse portfolio and you can reasonably expect to earn 8 percent to 10 percent annually on your investments over the long haul.

A good way to reduce the risk of losing money when you invest is to diversify. A well-balanced portfolio has a mixture of stocks, bonds, and cash equivalents. (What the exact percentages should be depends on how far away you are from your goals and your risk tolerance.) It is also a good idea to diversify within each type of investment class. For example, you can purchase stocks from manufacturing companies, technology-oriented companies, and financial services companies. A simple way to get diversity is to purchase shares in a mutual fund. In a mutual fund, money from several investors is pooled to buy different stocks, bonds, and/or cash equivalents.

11. Reinvest your profits.

When you first make money in the stock market, you may be tempted to spend it. Don’;;t. Instead, reinvest the profits. Even a small sum can turn into great wealth.

12. Seek Advice and Do Research

Financial matters, while very much a part of our lives, can be complicated. We typically learn very little about financial management in school and get most of our financial attitudes and knowledge from our parents, who may or may not have been experts themselves. If you feel a little lost in some areas of personal finance, call upon an expert for help. There is no shame in not knowing everything. After all, if you’re sick, you go to a doctor; if your car breaks down, you take it to a mechanic. Turning to a financial professional when you need to just makes sense.

Financial planners, investment advisers, credit counselors, and insurance agents are examples of the types of financial experts that you can get help from. Most advisers are honest and ethical, but some are not. If you are looking for an adviser in a particular field, talk to several and ask about their qualifications. Don’t be afraid to listen to your gut – if it is giving you a bad feeling about someone, that is a good enough reason to not use him or her.

13. Start your own business.

In the 1996 book The Millionaire Next Door: The Surprising Secrets of America’;;s Wealthy, the authors state that two-thirds of the millionaires are self-employed, with 75 percent of them entrepreneurs, and the remainder professionals such as doctors and accountants. The idea that most people inherit wealth is outdated. A lot is built through businesses. Business creation is the No. 1 driver of wealth. The most important thing is be persistent in what you do to achieve success in business. 

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