Most of us start the year hoping to lose 10 pounds or more, but let’s not forget the other 10, the 10% we should save every year. In the times of high unemployment and recessionary years, there is lots of stress and hardship going around. We cannot let the difficult times paralyze us and or derail us from our savings path. Here are 4 financial foundation steps to better understand your current financial condition and move toward a more secure financial future.
Step 1. Know your current Net Worth. This process includes all your assets minus liabilities. Assets are the dollar equivalent of everything you own such as cash, stocks, bonds, retirement savings, house, collectibles, valuables, business, etc. Liabilities include items such as mortgage debt, car payments, student loans, credit card balances, and other loans or borrowed money. We need to know where we are, our starting point, in the journey to financial independence before we can actually reach our goal.
Step 2. Establish your Net Worth goal for a financial independence and comfortable retirement. This magic number varies from person to person, from family to family depending on expectations and demands and should be adjusted periodically. Over the last several years many people’s Net Worth declined due to the recession. In the U.S., the average American family lost large chunks from their “nest egg” forcing them to work longer years than they anticipated. We need to define what our goal is then come up with a realistic plan to grow our Net Worth to support a retirement that currently averages 30 years.
Step 3. Understand your income and expenses. If you are spending more than you are receiving, start a plan to work on both sides of this equation. We’ll address each of these topics separately in the future blogs. The minimum recommended savings is 10% and preferably 20% if you are over 50 and need to catch up. Remember, the 10 lbs. you want to lose, well this is one instance where you want to gain. Your gain will be the act of saving 10% of your income. You need a retirement plan and or a savings mechanism that will NOT be easy to get into every time you have an urge to spend. One such difficult to access plan is a 401(k) plan, with the option to save tax free (traditional) or taxed (Roth) options. Either way investments grow tax free accumulating over the person’s working life. Take it out of your paycheck directly and adjust your spending to guarantee at least 10% savings.
Step 4. Make sure you and your loved ones are protected for the future. One way to accomplish this is to minimize the risk of loss. It is no accident that mortgage companies require a home insurance to make sure their risk is protected in case a disaster or an accident. Are your loved ones protected in case something happens to you or your home? Do you have adequate life insurance or enough savings to support yourself and your family? Have you documented your home inventory and valuables in case of fire or theft? With all the technological advancements there are lots of tools to help with this. What you need is a plan and the willpower to implement it. Whether you work with a professional or do it yourself, we will help by sharing tips and techniques going forward on variety important financial topics.