Now let’s apply that same rule to a stock mutual fund (an investment in the stock of a number of companies). The average mutual fund over several years will earn about 7 to 8%. So what’s happens if we can get an 8% return on our investment in a mutual fund? (Impossible you say, but for the moment trust me). 72/8 = 9. Your same $1,000 grows to $2,000 in just nine years.
Use the rule of 72 as a guideline to help you make decisions about where to place your savings and investment dollars.
The same formula will also work to tell you how long it will take for inflation to reduce the value of your investments and savings by half its value today. Just change the above examples to the inflation rate, and you can see how long it would take for eight percent inflation to cut the value of your fixed income in half (nine years).
Managing Your Cash
A cash management program is the first step towards accumulating the wealth you desire. Millionaires don’t get rich by spending money, they get rich by managing their spending, living within their means and investing any extras into good quality investments. You need to set up a plan to manage your cash so you can find those extra dollars you need to start investing.
Cash management is a simple three-step process:
1 Account for income and expenses to get a clear picture of your financial situation.
2 Evaluate your findings to help locate extra income.
3 Allocate that extra income in ways that enable you to build financial security.
With good cash management you can be in charge of your financial destiny. Once your spending is under control, you can start to build your savings and begin to invest small amounts, while you learn more about how to manage your money. You should build your financial plans around the following elements:
A proper insurance program to provide protection for your family.
A proper savings program to provide for unexpected expenses.
A sound investment program to provide for solid financial growth and future security of your family.
Careful estate planning to pass your wealth to your loved ones rather than see it consumed by taxes.
Self-Evaluation - Are you ready for Financial Freedom
Here is how to get started. Ask yourself a few simple questions to determine if you are already started, well on your way or perhaps need a starter boost. Review each of the statements below and rate yourself. If you feel you have room for improvement, give yourself a zero or one, if you feel you had adequately covered the statement, give yourself a five. When you are finished total your points and compare your score with the rankings after the survey.
1 _____ Adequately insured in all areas
2 _____ Satisfied with yield on savings accounts
3 _____ Retirement plan is adequate for future needs
4 _____ Satisfied with investment performance
5 _____ Maximized tax-free, tax-deferred and tax-sheltered income
6 _____ Investments are well diversified
7 _____ Taking advantage of tax laws to get deductions
8 _____ Comfortable that my tax liability is as low as possible
9 _____ Estate plan designed to minimize fees, taxes and pass on as much as possible to my heirs
10 _____Estate plan reviewed within last two years
Scoring: If you ended with the following points, here’s how financially savvy you are:
40-50 You are more like a professional planner and may not need the help of professionals.
20-40 You need professionals to help you achieve your objectives
Less than 20. You need to read the rest of this book, start setting goals and changing your finances in order to be financial secure.
What Are Your Financial Goals?
First, you need to decide what your want to achieve and write it down. This of course does not need to be limited to financial goals, but writing them down means you have started to make a commitment to reaching your goals. One of my goals was to have a comfortable retirement, for me that’s at least $500,000 in retirement funds. Once that goal is written down you start thinking about things like making room in your budget to increase the contribution to your IRA or 401k account.
It’s best to have some short-term, intermediate and long-term goals, that way you will start seeing some success sooner and you are more likely to stick with your plans.
For now, let’s focus on financial goals. An example of a short-term goal might be to save enough for three to six months of expenses in an emergency fund or saving for a down payment on a car. An intermediate goal could be saving enough for the down payment on home or for the education of your children. Your long-term goal might be building your assets so you have sufficient wealth that you work because you choose to and not because you have to.
Get a sheet of paper (or do this on your phone’s memo pad/your computer). Just list three short-term goals, a target date for achieving the goal and an estimate of the cost for that goal. Now do the same thing for the intermediate goals and long-term goals. Review these with your partner or spouse. It’s important to be on the same sheet of paper, make sure you discuss everything and get alignment of these goals, so you have the support of your partner or spouse. If you are not in alignment on these financial goals, seek professional guidance so your can avoid problems or fights later on. The number one reason marriages end is fights over money, so set down with your partner and review these goals, be prepared to make changes in the spirit of compromise.
Review your goals at least annually, perhaps twice a year, but don’t be measuring everything all of the time. It takes time to reach some of these goals, you just want to make sure you are staying on the right track and moving forward. If not make adjustments.
Your Net Worth
This chapter is devoted to a discussion of your net worth. Just remember to not confuse who you are as a person, with the sum of your financial situation. Some times we get caught up with “Keeping Up With the Jones”. Who has the nicest car, home, takes the best vacations etc. Status is important to some people. But remember, “The most important things in life are not things.” Having said that, we still want to feel like we are making progress in our lives financially so a simple scorecard of that progress is your net worth. Think of your net worth then just as a scorecard to measure how you are progressing toward your goals.
What Do You Have Now
Every journey needs a starting place. Before you start off on a family vacation, you take an inventory of what all you need to bring, you then pack your bags and maybe even recheck everything before you depart.
Figuring out your net worth (what you have today) is a lot like family vacation planning. Establishing your net worth is an essential step to personal financial planning because it provides you and your family with a measurement that helps to determine your financial progress. If you get off track a bit, your goals and this measurement of your financials will help tell you if you need to make any adjustments.
Your net worth is all of your assets minus all of your liabilities. By reviewing your net worth statement annually, you will be better able to see the results of your planning efforts and the amount of funds you have to work with for future planning. Comparing your financial goals to your net worth helps you determine if adjustments or in order or if you are right on track.
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