Taking control of your personal finances, as with anything else worth achieving, requires taking the first step.
This subject area has so many convoluted terms and acronyms (TFSA, HSA, RRSP, 401K… the list is endless) that for anyone outside of a financial advisor or chartered accountant it can be at best discouraging and at worst head spinning. I’m here to tell you that it is remarkably simple to start your journey to financial freedom by taking the first step and putting pen to paper on a basic fundamental approach. Cut out all the technical jargon and start with the following:
- Assess Where you are now
- Determine What your financial goal is
- Plan for How you are going to get there
1. Assess where you are now – take stock of your finances today.
Determine how much you spend per month covering every recurring expense from groceries, rent / mortgage, insurance to loan payments. Separate out each group and list out the monthly dollar costs on average. Remarkably getting to this point is better than the majority of consumers out there. You know now broadly how and what you spend your money on month to month. Add on your sources of monthly income and that’s your standing from a financial point of view. You know how much your monthly expenses are, how much your monthly incomes streams are, and the amount left over (if any).That’s all there is to it… not that complicated right? This is the most important step on your financial freedom journey – but yet too few people take stock.
2. Determine what your financial goals are?
What is your goal? early retirement, investing in real estate, buying a new house or car? taking a vacation? having a safety cash blanket? it doesn’t matter what the goal is, the approach remains the same. Define a clear goal of what you want to achieve and by when.
3. Plan for how you are going to get there.
Let’s take a simplified real life example to illustrate what it really boils down to. For hypothetical sake my goal is to retire early – I’d like $1.5 million in the bank to last from the age of 45 – 80. Essentially $42k per year to withdraw annually for 35 years.
From Step 1 I know by subtracting my income from my expenses what I’m left over with – for arguments sake let’s say equates to $3k, which I can allocate to my goal. I’m 30 years of age so I have 15 years to get there. This means I would need to achieve $8.3K per month in savings to reach $1.5MM by the age of 45. This is an over simplified approach – and not factoring in investments/ returns / growth in income etc. but it doesn’t matter you now have a goal to work towards. You know the figure you need to reach per month to achieve your goal. This is a simple approach that most people don’t take the time to do, yet if done it would show on paper a tangible goal for you to work towards. It make it real, not just an arbitrary dream. Now you need to focus your time and energy on reducing your expenses and / or increasing your income you have listed out in step 1. You can utilize so many different avenues to getting there, e.g. downsizing or eating at home to reduce your expense column, finding a new job or taking on a side hustle to grown your sources of income. The simple fact is you need to tailor your approach to what your goal is.
So what are you waiting for? Take the first step now. Get in touch if you want help getting there.