Sunday, November 7, 2010

The 5 Step Secret to Financial Security – Taking Control of Your Money

12:45 AM |

The 5 Step Secret to Financial Security

Most people in the developed world have the financial resources to achieve financial security and in many cases financial independence. I believe that getting your finances into a position of strength is straightforward if you follow the standard process below.

Step 1 – Current State

This stage is an honest appraisal of where you are at the moment. The two simple measures that you need to create are Total Wealth and Cash Flow.

Total Wealth = Total value of all your assets* – Total value of all your debts**

*Assets include all savings, your home and any other valuables that could be sold to release funds if absolutely necessary e.g. car, antiques etc.

*Debts include all loans, hp, credit cards and mortgage

Cash Flow = Total Income each month – Total Outgoings each month

It actually doesn’t matter what the numbers are for the above measures. What matters is that you have begun to take action on your personal finances. These measures can be used each month to see the progress you will be making after taking the following steps.

Step 2 – Cash Flow balancing

You must take a critical look each outgoing and write one of 4 comments next to it.

1) It can be eliminated immediately – e.g. savings, gym membership, mobile phone, eating out etc

2) It can be reduced immediately – all utility bills and insurance products

3) It can be eliminated long term – all debts

4) It cannot be reduced or eliminated – certain tax liabilities

You must reduce your outgoings and/or increase your income until your outgoings are less than your income. Ideally the difference should be at least $100 (£75)

Step 3 – Debt Elimination

Use the cash you have freed up in stage 2 to accelerate the payment of each debt in turn until all*** of them are paid off in full.

***You have to decide for yourself whether you want to include your mortgage as a debt

Step 4 – Long term investment

Invest the excess cash you have each month in a long term investment. Seek advice from a professional financial adviser but please make the effort to understand the products, costs and risks of the advice they give you before you make any investments. If the financial advisor cannot explain clearly to you what each product they are recommending does, then find another financial advisor who can.

Step 5 – Measure and Act

You must now check the performance of your investments each month. Make sure that you are achieving the performance you expected. If necessary move your valuable financial resources to another investment

On completion of these 5 steps you will have moved from financial chaos to financial control and towards financial security and financial independence

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