Investment and debt payment decisions are crucial in attaining financial freedom. It is important to plan and come up with reasonable and attainable goals both in the short term, intermediate and long term. A clear financial plan enables one to make decisions based on what they want to achieve. For example, one of my current short-term goals is to start investing in assets and mutual funds even before clearing off my current debts. This is because the debt is quite flexible and allows me to pay off using the signing off bonus approach where I pay the debt's interest on a reducing balance implying that the debt does not earn interest on the outstanding balance. If I take the approach, I can invest in different market investment portfolios giving me a chance to earn interest from the current market rates. Financial planning and attainment of the goals set is a complex process that entails both an identification of the goals, an evaluation of one's income and spending as well as an evaluation of one's financial position at any given time.
Other than highlighting short-term and long-term goals and determining the duration of time within which the goals will be attained, it is also crucial for me to determine my net worth. The net worth is attained as the net of all assets and all liabilities ( Keown, 2019). Attaining financial independence is a journey that requires constant monitoring and evaluation of one's financial position. As such, worksheet 4helps in calculating one's net worth. Through the balance sheet, I am also able to make sound financial decisions on investments to increase my current and long-term assets hence increasing my net worth.
Delegate your assignment to our experts and they will do the rest.
The third step towards the attainment of financial independence for me will entail a detailed analysis of my sources of income as well as a track of my expenses. This is done through the income statement which lists all incomes from various sources including income from interest earned on investments and the various personal expenses. For one to attain financial freedom and have disposable income that can be saved or invested, they need to spend their money prudently. When expenses exceed one's income the result is often a negative figure which implies that one ends up in debt an indicator that they are not living within their means ( Kapoor, Diabay & Hughes, 2016) . Expenses higher than incomes are also an indicator of bad financial management and often show that one is not able to save or invest their money.
Some of the key areas of interest in the short term include paying off my education debt of 5,000 at 4% interest and establishing a 3-month emergency fund. To attain this in the short term, I have to decrease my spending and increase my investment. As part of the financial planning process, some areas where I could reduce costs include moving to a cheaper area of my town to cut down on my rent expenses. Moving closer to work will also enable me to cut down on transport expenses.
To create the emergency, I will put aside 10% of my monthly income into fixed savings account opened with my bank. This not only enables me to create and maintain the fund but also helps me earn interest in the process. The account allows me only one withdrawal in a month making it easier for me to access the money in case an emergency arises. The purpose of the 3-month emergency fund is to however cushion me against loss of income arising through the loss of a job. The fund enables me to pay off my bills for a minimum of 3 months before getting another job and ensures that in cases of such an emergency I do not take a debt to pay off bills.
My second goal is to pay off my debt. The approach I intend to use is instead of paying off the debt immediately I will pay off the interest and then concurrently invest 5% of my income while also paying the principal amount. Going by the current market rates, it would be prudent for me to invest in a mutual fund and use the interest earned to pay off my debt as opposed to paying it off from my salary. The 50-30-20 rule (needs, financial goals, and wants respectively) will be crucial in determining the percentage of my income that goes to savings and investments. Part of the 30% of the income that goes to financial goals will incorporate investment goals such as mutual funds.
Being financially independent also entails having in place an insurance policy that caters to health issues that may arise as well as save up for retirement. In as much as my employer deducts 6% of my income to save up for my retirement, I will increase the amount by 4% to save up a total of 10% of my income for my retirement. The fund ensures that I can maintain my lifestyle, pay bills, and access affordable and quality health care services during my retirement years.
Starting up a business later will require capital. As such, 5% of my income will be invested in a long-term fund that earns interest ensuring that once am ready to start the business I have enough capital to get started and to run the business for 6 months. Another 10% of my income will be invested in the same fund for purposes of purchasing a home in the future. My approach will be that of paying off the deposit of the home from the savings and topping up the amount using an affordable mortgage which will be paid off from the business proceeds.
References
Kapoor, J. R., Diabay, L. R., & Hughes, R. J. (2016). Personal Finance . NY: McGraw-Hill Higher Education.
Keown, A. J. (2019). Personal finance: Turning money into wealth .
