3 Step plan to financial freedom
Step 1 – Get your finances in order
Earn more than you spend
Earn more than you spend is only five words but if it was easy to do that is all I would have to say to you. Of course earning more than you spend can be a lot harder than you think. When you get your first job you’re probably still living with your parents and suddenly find you have money to go out with friends. As time moves on you may meet someone, settle down and have children. It’s then that the bills start to become larger especially if you have a mortgage for a house or flat. It may be getting harder but it’s still possible to “earn more than you spend”. You must be more careful and perhaps budget more and resist the expensive temptations you bought when you were single. Sometimes you may have to do without for a while or budget for a special treat such as a new stereo, TV or holiday.
Good debt and bad debt
One of the most important things to remember at this stage in your life is not to let bad debt take over your finances. “What’s the difference between good debt and bad debt?”, you may ask. One of the worst bad debts is a large credit card bill on which you never pay anything except the minimum repayment. This is a recipe for disaster as all you’re doing is adding to your debt and paying the bank interest at an astronomical rate of around 19 – 22%. My wife had a close friend who was single but had a large credit card bill for many years. She must have contributed a lot of money to many bank employees pension funds by increasing the banks profits. If you have a house mortgage this is considered good debt as the house is an asset that will rise in value over time whilst you are also reducing the debt by paying off the mortgage. One of the worst temptations at this stage of life is to try and “Keep up with Jones” by buying the latest gadget, holiday or car and adding them to an already large mortgage or credit card debt. These things are not assets and will only add to your worries and keep you further away from an eventual comfortable way of life and retirement.
No Credit card unless you can handle it
If you have trouble resisting a credit card and then have problems paying the bills my suggestion is to stop now and cut up the card. There is much misery in the community created by unwanted debt created by the temptation of “buying now and paying later” on credit cards. This is why the banks advertise them so often and send you unsolicited offers via the mail. The major banks make a fortune from our weaknesses and I suggest you pay yourself first rather than give it to the banks. A debit card is a good alternative if you must use a card as it restricts you to only using money you already have in the bank.
Sell off things around the house
One of the ways to help in a time when money becomes tight is to sell unwanted possessions you may have lying around. As I wrote in a previous posts Declutter, renovate and make money and also 10 ways to save money around the home, it is possible to make some extra money by selling off unwanted things around the home. When we renovated our home seventeen years ago we wanted to demolish our garage to make room for a large family room. The builder mentioned to me that the garage (a 40 year old metal garage) could be sold in the Trading Post. I was surprised he even mentioned this but low and behold someone paid $350 for our old garage and then took half the day to dismantle it. He took it away on the back of a truck and the only demolition we had to do was the brick facade that surrounded the the metal swing door.
Reduce spending (shopping etc)
I have also previously mentioned reducing spending around the house in the post 10 ways to save money around the home. Please read this post as it includes savings on shopping, eating, hot water, power, heating, garden, washing, electricity, banks, credit cards and insurance.
Step 2 – Start a savings planA savings plan should be a very important part of everyones life. I have mentioned in a post Start saving money now about how important it is to separate different sections of spending and have separate bank accounts for each.
3 bank accounts – Everyday living and bills, Savings, Fun and entertainment as in post Start saving money now.
Once you have mastered this it is also important to direct money from the savings account to a savings portfolio that has both growth and dividends. I have included below a portfolio of Exchange Traded Funds (ETF’s) with the percentage share across the portfolio to spread the risk across different sectors – property, shares, fixed interest. ETF’s are a low cost way to invest in a diversified portfolio that blend the benefits of both managed funds and shares. Like a managed index fund, they contain a diversified portfolio of securities to track specific indices. Although you buy only one ETF (ASX 200) it can include the entire market in one product including hundreds of share holdings.
To start a portfolio with these ETF’s will necessitate the opening of a brokers account and an explanation of which products are suitable. I will make this the subject of a subsequent post but anyone who is eager to start can always contact me in the comments box below.
1.ASX 200 ETF 35%
2.Small company fund ETF 15%
3. Global shares ETF 20%
4.Property securities ETF 20%
5. Fixed Interest index EFT 10%
Step 3 – Watch it grow – sit back and relax
Now comes the part everyone dreams of! Sit back relax, watch the portfolio grow and think of all the things you’d like to do when the balance is big enough.
There is still work to do every year though. Rebalancing the portfolio every year is an important task. The percentages I have included in the portfolio above should be adhered to and if one portion of the portfolio does well and grows more then some should be sold and the balance redistributed to another section e.g., if ASX 200 grows to 40%, sell 5% and buy 5% of Property if that hasn’t performed as well.
Otherwise – watch it grow! The only other thing I haven’t mentioned is you can also contribute an ongoing amount from your wages or savings monthly or yearly to also grow the account. This is entirely your choice.
Also you must understand that there is risk in investing in the share market. Although the long term prospects of the related markets have in the past been positive the path to profits is not always direct. Investors should be prepared for at least one negative year in seven as a general rule. Before investing in an exchange traded fund, you should carefully consider whether such products are appropriate for you and perhaps consult an investment adviser.