Confucius tells us that a thousand mile journey begins with the first step. However, the path to financial independence can be the journey of a lifetime involving many steps and many opportunities to go astray. You need a compass to keep you on track in the hard times, as well as in the good, and in this case a simple anagram may do the trick for you. For our path to future prosperity, let’s start with the “BASICS”. Anagrams were created centuries ago by transposing the first letter of various words or phrases in order to provide an easy reminder of some simple truth or life lesson. Our example follows:
- Budgeting: Our first step is to look backward to plan how we move forward. Preparing a personal financial budget begins by analyzing how we have spent our money in the past, the past being at least six months or more. Divide your prior payments into natural categories like household, food, clothing, entertainment, insurance, automobiles, etc. Be sure to allocate your cash expenditures accordingly, and yes, dining out and alcohol go under entertainment. These categories will provide the basis for your plan going ahead so it is important that they apply to your personal situation. Once you have completed this phase, you should have a monthly average for each category for your prior spending patterns. The next step is about setting priorities. The goal is to have money left over after deducting your monthly expenses from your monthly income. Set your goals now for each category, and now you have a plan. If you need more instruction, the Internet can help you find expert advice.
- Accounting: Yes, I know that you may not be an accountant, but you must track your monthly income and expenses, and then compare your experience to your budget plan. That is exactly what accountants get paid to do for companies. The differences between actual and plan are variances. These variances will point to areas where correction going forward may be necessary, so heed these signals, make corrections, and get back on track.
- Save: The goal of any financial plan is to save money for the future. We Americans tend to live on credit, leaving the act of saving as something to ponder about until times are better. Hopefully, you are currently employed. Many unfortunates have learned the harsh truth that you must have a minimum of six months of income stored away in a safe place in the event that your job is eliminated or you are laid off. In these tough economic times, six months may not be enough to carry you until your next assignment. Savings are also necessary to make down payments on large purchases, like a car or a house. If you use credit, do so only for large purchases. Credit cards are great for providing temporary cash flow, but the balances should be paid off in a few months. However, banks have designed their plans to keep you in debt for a lifetime, so steady as you go and avoid the credit traps set for the unsuspecting.
- Invest: Investing is another world where the books and knowledge on the topic are so numerous that one has a hard time taking all of it in, much less understanding any of it or applying it to daily use. However, it is necessary to study and learn a few basic principles before committing your hard-earned money to a bank or fund manager of your choosing. To begin with, you will never earn a return as high as any interest that you are paying on credit card debt, so the first step to investing wisely is to pay down that debt and don’t let it get high again. Second, preparation is key. There are many websites and books that will educate you on sound investing practices. The more knowledge you have, the less anxiety you will feel. Remember that if you are losing sleep at night worrying about your investments, then perhaps you are taking more risk than you can handle emotionally. Better to move on to something else than lose sleep, or something worse, your shirt!
- Common Sense: Lastly, gaining financial independence is all about common sense. The “homilies” we have heard over and over are human truths worthy of our respect. Everything in moderation. Save something for a rainy day. Never put all your eggs in one basket. If it sounds to good to be true, then it probably is. These catchphrases are the purest form of common sense passed down by our ancestors. Your “gut” is your evolutionary and biological form of common sense. If it is twisting over something, listen to what your body is telling you, and back away.
Any questions? OK, now that you understand the “BASICS”, the time to get started on your journey to financial independence is now!
