Having financial freedom is everyone’s dream, but many believe that this can only be achieved by the rich and privileged. This couldn’t be farther from the truth, as anyone who earns an income has the chance to become financially independent through proper financial planning.
According to Forbes.com, building a financial plan is like building a house—it needs a strong foundation in order to support your needs for the rest of your life. Similarly, you won’t be able to put up the walls and the roof without a foundation. That being said, a step-by-step financial plan will help you build your wealth from the ground up, starting from financial education up to making diversified investments.
Step 1: Educate yourself financially
The first step in having a solid financial foundation is financial literacy. Most of us here in the Philippines believe that as long as you have a source of income and savings in the bank, you’ll be okay. Nobody’s telling us what kinds of debt are good and bad, how to protect ourselves in case of emergencies, why putting all our money in savings is a bad idea, or how we can make our money work for us. Without any knowledge of how money really works, you won’t be able to make the best decisions regarding your finances.
Thanks to the Internet, financial education is easier than ever. You can read various personal finance sites and blogs to learn more about managing your money. You can also download the Born2Invest app, which features articles on how you can maximize the use of your money. Keep on reading books about wealth building. Also, don’t hesitate to ask someone who’s more finance-savvy than you are. These people are more generous with their knowledge than you think.
Step 2: Manage income and eliminate debts
If you’re the type of person who always asks, “Where did my money go?” at the end of each month, chances are, you don’t have all your finances in order. You can remedy that by starting to monitor your cash flow for at least a couple of months. There are many budgeting apps that can help you with this, like Mint and BillGuard. Even your ol’ trusty spreadsheet can help you create a budget.
You can also divide your income into percentages. For instance, the 20-60-20 rule states that you should allot 20 percent of your monthly income to savings and investments, 60 percent to essential expenses, and 20 percent to discretionary expenses. The breakdown will depend on your lifestyle, but this is a good way to start.
Likewise, you need to manage your debt strategically. There are “good” debts like home mortgage, while there are also “bad” debts that carry high interest rates and don’t offer tax advantages. Make sure that you pay more than the minimum amount in these bad debts in order to eliminate them more quickly. You can’t afford protection and investment if you’re burdened with debt.
Step 3: Build an emergency fund
An emergency fund covers unexpected expenses during setbacks, like job loss and disasters. As a rule of thumb, your emergency find should be worth three to six months of your expenses. For example, if you’re spending P20,000 per month, then you should set aside an emergency fund of P P60,000 to P120,000. It should be placed in a savings account that can easily be accessed anytime.
Step 4: Buy insurance
Insurance offers you and your family protection against the risk of losing your earnings in case something happens to you, like a death or disability. You can get a disability insurance that will help ensure that you maintain your standard of living once you become too sick to work.
To protect your loved ones when you die prematurely, you need to get a life insurance. The great thing about life insurances is that they also accumulate cash value, which you can eventually access for emergencies. You can even use it to supplement your retirement.
You may also want to get a liability insurance, which protects you in the event you become liable for another’s injuries or damage to their properties. It also protects you if someone without insurance injures you.
Step 5: Invest
Once you have the lower levels of your financial plan in order, you can start investing in different investment channels like mutual funds, stocks, and real estate. Each of these has various pros and cons, so you should find one that aligns with your own financial goals.
Do you want to save for retirement? Equity mutual funds and stocks might be the best solution for you. Are you looking for capital protection? You might want to try fixed income mutual funds. If you have a property that you’re not going to use, maybe you should study the ropes in real estate investing. Or you can try a combination of all these things for diversification purposes.
By following these steps, you’re not only protecting yourself against financial mishaps; you are also building your wealth with a solid foundation.
This article was written and submitted by Born2Invest.