Start with the Assessment of your Current Financial State!
So as I said in the earlier post, the first step for you to take on the road to financial freedom is to take a detailed assessment of your current financial state. The way you can do that is by making a list of your monthly income(s), your savings, your assets and your liabilities.
Keep in mind that when you make this list, be honest to yourself. Trying to make a list that gives you relief is not the way to go. Being honest to yourself about your present state is the only thing that can bring the reality into perspective and will help you to take the right steps to get out of your liabilities / debts. Unless you truly realize how deep in debt you are, you will not be able to take the tough decisions to get you out of that tough spot.
Regarding your income, if you are only surviving on your 9-5 job salary, you have to understand that it simply isn't enough. With the way the economy has performed in the recent past, one thing is clear, that jobs are neither long term anymore, nor are they guaranteed. The rising unemployment level across various sectors in many parts of the world brings to mind scenes of an impending recession. A recession is not avoidable as it is a part of the economic cycle, but are you truly prepared for the next recession?? Well, you should be.
How can that be done? Simple. You just create alternative sources of income. According to a cnbc.com report (link in sources below), in a survey of 233 millionaires a common trend was observed. 65% of those millionaires surveyed had at least 3 sources of income and 29% of them had 5 or above sources of income!!! This can also be called as income diversification and it achieves the motive of diversifying the risk involved. What that means is, if there is some untoward circumstance that cuts off a source of income, the other income sources sustain your financial plan and doesn't leave you at the risk of going broke. These income sources can be classified as:
1. Active income - any income generated by your active participation like your job
2. Passive income - any income that is generated by putting in little investment of time, effort or money.
Some common sources of passive income are interest earnings, dividends (from share holdings), capital gains (from sale of assets like real estate or shares), royalties (from products you create and license), rental income (from real estate assets), payouts from insurance policies and business income, which could fall either under active income or passive income depending on the time and effort put into it. There are also multiple passive income creating opportunities available online. I intend on making a separate blog post regarding multiple passive income sources at a later stage and you may find loads of more value in that post as well.
The savings in your financial assessment pertains to your cash holdings, either cash in hand or in your bank savings account. One thing to note here is that cash left lying idle is utterly useless because, it loses value due to inflation and because liquid cash makes you susceptible to unnecessary spending. Due to this, you need to always keep in mind to have cash holdings that are just sufficient for your required purchases to avoid impulsive overspending. It would help you to practice financial discipline. Keeping cash in the savings account is also not advisable for the reasons mentioned above. It would serve you better if this cash was invested into income generating sources.
Your assets are anything that you own that has monetary value. These can be classified on the basis of cash / cash equivalents and property like real estate, vehicles, shares, bonds, gold, insurance policies, etc. There are many other types of assets and these all these assets put together will show you your net worth. Ideally speaking, if you stick to your financial plan, a periodic review of your assets would show you the progress you make by a steady increase in your net worth.
Liabilities are anything that you owe. The could be your bank debt, the mortgage on your home (home loan), car loans, credit card balances, utility bills (electricity, water, gas etc.) and personal loans from any source. Keeping liabilities to the bare minimum is something that everyone should work on. The higher your liabilities, the farther away you will be from achieving your financial goals.
Please do do follow us on Facebook, Instagram or Twitter to be notified when we post next!
Thanks for reading and hope you have an amazing day!
Financial planning should be done in consultation with a registered Chartered Accountant (CA) or a Certified Financial Planner (CFP). The views in this blog are the author's personal views alone.