The road to financial freedom is a lot shorter than you may think. For those of us who did not start our lives wealthy because of our family, we only have 46 to 49 years of income producing – more if you want to work into your “retirement” years.
During that time, we must complete our education or training, get a job or open a business, while meeting the many demands on what income we have left after taxes.
We have to provide for food and shelter, clothes and transportation, child rearing expenses, college tuition, vacations, Christmas presents, insurance premiums and more. The list never seems to end.
How is it that some people can retire at age 50 in spite of all this while others will never retire at all. If you read the article, Get Rich Slowly , you can see how you can use the power of compound growth to amass millions if you start young. However, this is the period in most people’s lives where the greatest demands seem to be made on their income.
First of all, you’re just starting out and are nowhere near your peak earning power. You might have just married and need a home and furnishings. You might have to buy your first suits or business dresses for your new job. And you want to enjoy life, so you vacation, buy or lease new cars frequently and just basically run up debt, many times to be piled on top of your existing student loans.
But some people manage.
First they live within their means and save as much as possible. They take advantage of all the tax shelters the government allows and if possible, save even more. They invest in or start a part time business, rental properties or learn to increase their returns by smart investing.
They insure against potential risks that could ruin them financially. They use debt wisely. They don’t necessarily shun debt, but use it as a tool to grow wealth. For example, they can leverage one 20% down payment into a string of houses using mortgages. They can use margin debt to double the amount of their investment funds.
They can take advantage of tax credits, government guaranteed loans or grants offered to small businessmen or to certain minorities to fund multiple streams of income. But they don’t use debt to fill the house with things. They pay cash for their new TV’s and stereos.
They take taxes into account when planning their lifestyle and investments and use all the tricks the IRS lets them get away with.
For a little over $3.00 a day, starting at age 22, you can amass over $850,000 in an IRA.
The difference between the financially independent and most of the rest of us is that they can find that $100 a month and don’t consider it some kind of sacrifice to invest it rather than spend it.
Most people will complain they have no money left over and that they live from paycheck to paycheck. But in almost all cases this is a lifestyle choice.
There are many stories of very low income people managing to put multiple children not only through college, but also graduate school or leaving millions to a favoritecharity.
These people are special in the sense that they had a goal and stuck to it no matter what. They worked hard, saved their money and achieved what they wanted to achieve.
Everyone can do this. You just have to ignore the siren song of commercialism, and decide whether a secure future for yourself, a college education for your children or a large bequest to your favorite charity is worth skipping the daily double latte at Starbucks. That about all it takes to get you well down the road to financial freedom. The road to financial freedom is literally paved with gold, yours for the taking.
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Showing posts with label Financial Planning. Show all posts
Showing posts with label Financial Planning. Show all posts
Saturday, June 5, 2010
Tuesday, April 20, 2010
Building An Emergency Fund - A Vital Part of Financial Planning
None of us have the ability to foresee the future or predict the hurdles which lie ahead of us. This makes building an emergency fund a financial priority. Building an emergency fund is healthy for your financial well being, since you’re rarely given advance notice of a setback or an accident which will keep you out of work for an extended period. It is also a safety net that can save you from bankruptcy or severe financial hardships in the event of an unexpected change in your income or expenses.
Housing a small rainy day fund should be a vital part of an individual’s financial goals. This is of high importance if you don’t already have readily available funds in your account for covering any unanticipated expenses. They provide financial security because they give you funds to fall back on if you become ill, or if you or your spouse loses your job, you incur large medical bills, or have an unexpected large bill such as a major car or home repair. You do not want to end up in a situation where you have to buy daily necessities on credit and end up payments on groceries you bought two years back on credit, with a further 10-18% interest on it.
Saving your money in an small account for emergencies is definitely a better alternative to taking a loan or cashing in your long-term investments. If you take a loan, there is the additional burden of paying interest. Encashment of your investments before maturity means not only will you lose out the interest, but also some part of the original investment. This will also set you back significantly in your overall financial plan.
Success at building an emergency fund depends on consistency of saving money on a regular basis, and resisting the urge to dip into this rainy day fund for non-emergencies. This money should be kept separate from the general savings account. Otherwise you will be tempted to dip into these monies even if you simply run over your budget at a certain point. A substantial part of this emergency fund account should be invested in low risk funds. This ensures that your investment does not lose its value in case you need the money. Also, it should be extremely liquid, to give you access to the cash easily and quickly if you need it.
The size of the special savings account will depend on your personal situation. People often keep three to six months’ salary in the reserve. But you will have to decide on an appropriate amount based factors such as your dependants and fixed monthly expenses.
If you are single with no obligations, and have a reliable support system of friends or relatives during a financial crisis, you might not need a substantial amount stashed in this fund. This is opposed to someone who needs to pay nursing costs for his aging parents and supporting a young family. The more people you support, the more likely you are to have unexpected or unplanned costs.
While making a decision about an emergency fund, you should also take into account the degree of difficulty you'd have in finding a new job if you lost the present one. In case of a two-income household, the contribution of both parties should be weighed while calculating how much you should keep aside.
You may not be able to gather your emergency fund money together at once. Treat it as a financial goal and add to the kitty over time. If you get a tax refund, put it in your special rainy day account. Maybe a part of the bonus at work!
Housing a small rainy day fund should be a vital part of an individual’s financial goals. This is of high importance if you don’t already have readily available funds in your account for covering any unanticipated expenses. They provide financial security because they give you funds to fall back on if you become ill, or if you or your spouse loses your job, you incur large medical bills, or have an unexpected large bill such as a major car or home repair. You do not want to end up in a situation where you have to buy daily necessities on credit and end up payments on groceries you bought two years back on credit, with a further 10-18% interest on it.
Saving your money in an small account for emergencies is definitely a better alternative to taking a loan or cashing in your long-term investments. If you take a loan, there is the additional burden of paying interest. Encashment of your investments before maturity means not only will you lose out the interest, but also some part of the original investment. This will also set you back significantly in your overall financial plan.
Success at building an emergency fund depends on consistency of saving money on a regular basis, and resisting the urge to dip into this rainy day fund for non-emergencies. This money should be kept separate from the general savings account. Otherwise you will be tempted to dip into these monies even if you simply run over your budget at a certain point. A substantial part of this emergency fund account should be invested in low risk funds. This ensures that your investment does not lose its value in case you need the money. Also, it should be extremely liquid, to give you access to the cash easily and quickly if you need it.
The size of the special savings account will depend on your personal situation. People often keep three to six months’ salary in the reserve. But you will have to decide on an appropriate amount based factors such as your dependants and fixed monthly expenses.
If you are single with no obligations, and have a reliable support system of friends or relatives during a financial crisis, you might not need a substantial amount stashed in this fund. This is opposed to someone who needs to pay nursing costs for his aging parents and supporting a young family. The more people you support, the more likely you are to have unexpected or unplanned costs.
While making a decision about an emergency fund, you should also take into account the degree of difficulty you'd have in finding a new job if you lost the present one. In case of a two-income household, the contribution of both parties should be weighed while calculating how much you should keep aside.
You may not be able to gather your emergency fund money together at once. Treat it as a financial goal and add to the kitty over time. If you get a tax refund, put it in your special rainy day account. Maybe a part of the bonus at work!
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