Smart Financial House. The 5 Things You Need To Know For Total Financial Freedom
By Jason Astwood & Lance Stallings
Introduction
You might think you need to be earning a six figure income or be a multimillionaire to enjoy financial freedom in your life; but that's completely wrong and here’s the way.
Financial freedom is a topic lots of people are talking about and many people want to achieve. There are many millionaires in the United States, and even more people are on the path to becoming millionaires. The truth is many other people will never achieve or even come close to achieving financial freedom.
Do you feel like you’re on track to achieve financial freedom? Or are you sabotaging your financial future?
Financial freedom means different things to different people. Some want to be debt-free whole others want to have enough savings, investments, and other income sources to leave their 9 to 5 jobs. However, we can all agree that having financial freedom means that you can live without worrying about having enough income to finance your lifestyle.
Financial freedom means that you have control over your money, whereby you can live comfortably and have choices.
Here are the 5 things you need to know for total financial freedom.
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Cash Flow
You won’t get ahead if you don't know how to handle your money. It’s not how much you make but how much you keep that really matters. Many people make a lot of money but have little to nothing as savings. Why? Because they spend almost or more than what they make. For instance, most Americans are heavy consumers, who typically spend 100% or more of what they make, and have little savings. About 25 million American households are living paycheck to paycheck. Therefore, saving is the last priority on their list. These families are just trying to get by because money is tight.
Consuming more than what you make is a recipe for financial disaster, and you’ll never reach financial freedom if you’re living paycheck to paycheck. You need to know how to manage your spending on a daily basis, as this will in turn help you to manage your money. In fact, your daily habits are key to reaching financial freedom.
This is where a budget comes in. budgeting helps you keep track of your spending throughout the month. You will be aware of where your money is coming from and where it is going. You will know areas where you overspend on so you can make the necessary adjustments, thus getting your finances on the right track.
To start analyzing your expenses, you need to go through your bank statements, and this is something we always fail to do because we always tend to focus on the amount we have and get frustrated when it’s over.
By going through your statements, you will get more insights into areas where you overspend or waste your money.
Additionally, budgeting allows you to spend wisely, especially when you’re living paycheck to paycheck. That way you will actually find yourself spending less, and you will start saving.
Budgeting will help you stop being a slave to money and start mastering it. You will start spending on things that you need rather than what you want.
Budgeting is basically creating a plan, and no matter how much money you make, you need a plan.
2. What Are Your Assets?
To build wealth and reach financial freedom, you need to know what your assets are. However, most Americans are not aware of what their assets are, and thus they lack organization. If you’re not aware of your assets, then you can’t calculate your net worth. Your net worth shows your current financial situation which is very important when it comes to working towards reaching financial freedom.
Net worth is the difference between your assets and liabilities. It’s simply the difference between what you own and you owe. Positive net worth means that your assets exceed your liabilities. Conversely, you have a negative net worth if your liabilities exceed your assets.
Your assets can be in various forms including a home, retirement accounts, savings, checking accounts, rental properties, 401K, and personal assets. All things of value that you own that can be converted into cash.
You need to know the value of all your assets as well as liabilities in order to calculate your net worth. The value that you will get could be a wakeup call if you’re completely doing badly, it could be a confirmation for staying right on track. Therefore, this value gives you an important view of your finances.
Your net worth serves as a financial report card that gives you the ability to evaluate your current financial status, and in turn, help you figure out what you have to do to achieve total financial freedom.
When it comes to assigning values to your assets, you need to rely on conservative estimates to avoid inflating your net worth. Remember, you need a realistic view of your net worth. Also, it’s important to note that if you have invested in the stock market, your net worth is subject to fluctuations.
When you're aware of your current financial position, and where you want to be, you will have the best knowledge of what you need to do to improve on your situation or head in the right direction. For instance, you’ll want to work on increasing your assets and reducing your liabilities.
You’ll become more organized and motivated to keep doing what you’re doing if your net worth is in the right direction. If your net worth indicates that you need to improve on your financial health, you will have the motivation to find better and more aggressive ways to save more and invest.
3.Understand Your Debt
As aforementioned, to be organized and know your net worth you need to be aware of your liabilities, or simply debt, or what you owe. If you don’t understand your debt, you’ll never have organized financial health. Most Americans do not understand their debt, thus they lack financial organization and end up struggling with high amounts of debt which brings a great amount of stress.
When it comes to understanding your debt, you must ask yourself these questions:
Debt is not a bad thing, and the truth is nearly every American – young or old – will have debt at some point. Debt tends to accumulate with student loans, car loans, mortgages, medical and family expenses. Too much debt can affect your life, and so you should have a plan to get rid of it.
You need to know whom you owe. Most of the time we owe banks that outline how we’re going to pay the debt. If you fail to make your payments, you know the penalty that you will incur. Credit unions also provide an organized way of paying debt and the penalties for not making your payments. You might also be owing to your friends or family members whom you agreed on how to pay the debt off.
You need to make a list of all your debts to know how much debt you owe. Many Americans are not fully aware of how much they owe on credit cards, thus they tend to significantly underestimate it, according to studies conducted by the Federal Reserve Bank of New York. It is important to be aware of how much you owe all your lenders.
By knowing exactly who you owe and the total that you owe, you’ll never miss payments. Additionally, you will be in a better position to create the most effective strategy to pay the debts off since you will have an organized view of your finances.
You need to create a list of all the creditors that you owe and obtain your statements or probably call your creditors to find out your outstanding balance, interest rate, payment due date, and minimum payment.
Understanding your debt also requires you to know how much you pay as interest. If you’re paying higher interests, then you need more money to repay your loan. You can use a loan calculator to know how much you’ll end up paying in interest based on your loan amount, interest rate, and repayment term. Having a better understanding of how much you pay in interest enables you to make a decision on whether to pay the debt off more quickly, or take new loans.
You need a plan to pay your debt off. Once you know whom you owe, all the debts you have, and how much to pay in interest, you need to adopt a debt repayment strategy based on what order to pay your debts in.
You may opt to first focus on repaying debts that have the highest interest rates. This will help you get rid of high-interest loans faster. You might also opt for another popular approach known as debt snowball method which involves paying off your smallest debt first, the next smallest debt. This approach helps you maintain your motivation when paying your debt.
Regardless of the approach that you choose, you need to assign extra money toward debt repayment. Once you have paid a particular loan off, move on to pay the next loan on your list. Understanding your debt will thus set you on a path to financial freedom.
4.How Do You Protect Your Cash Flow (Income)
Once you make money, you don’t t want to lose it, and thus you should do all you can to keep it. However, unprecedented things such as an illness or accident can happen which could leave you without enough money to finance your lifestyle. Therefore, if you want to achieve total financial freedom, you need to adopt ways to protect your cash flow or income.
Insurance is one of the best ways to ensure your cash flow is protected in case the worst happens. You need to choose the right type of insurance to protect your income in the event of a serious issue such as an illness, a lawsuit, an accident, a fire, getting hurt, lacking the ability to work anymore, or dying and leaving your loved ones behind with debt and major financial obligations.
Six types of insurance protect your income, including life insurance, disability income protection insurance, medical, chronic and critical illness coverage.
Life insurance is paid to your family as a tax-free lump sum to provide them with financial security in the event of your death.
Income protection or disability protecting insurance provides up to 70% of your salary if you’re unable to work due to a disability medical reason until retirement or till you return to work.
Payment protection insurance provides coverage of up to 50% of your salary if you can’t work due to health reasons or made redundant. However, payment protection is not a common term used in the USA.
Medical insurance is one of the protection plans that you should consider because the cost of healthcare in the country has risen significantly due to the continuous growing demand for medical services. The cost of medicine is too high and the medical bills can hit the ceiling very quickly. With a medical insurance you don’t have to turn to your savings in case of medical emergency, which most of the time can impact your financial health.
Chronic and Critical illness cover pays a tax-free lump sum to help you meet some of the financial obligations that may occur if you’re diagnosed with a serious illness or become permanently disabled. Being diagnosed with a chronic or critical illness can significantly impact your financial health, and others get into huge debt and possible bankruptcy, but with chronic and critical illness coverage your income is protected and you significantly reduce the likelihood of getting into debt or possible bankruptcy.
Other types of insurance that you can use to protect your income include auto, home, health insurance, personal liability umbrella, and disability income insurance.
These types of insurance are needed for different reasons, and none is better than the other. What you choose should be based on your circumstances.
Also, you need to know how much your protection plan will cost. Remember you do not want to be overpaying for insurance. People can buy health insurance individually instead of getting one through their employers, since sometimes employees may end up paying a lot more doing that. You must always ask about the cost of the plans before getting into one.
5.What’s Your Blueprint/Plan to Increase Your Assets, Reduce Your Debt, Protect Your Cash Flow and to Live and Retire Well
It is very important to have a blueprint or a plan to reach financial freedom and live a life that you want. You need a plan to reduce your debt or pay them off and make a plan to avoid getting into debt. You need to have a plan to increase your assets and have a great net worth, protect your cash flow, and live and retire well.
Do you have a blueprint?
Our mission at Smart Financial House is to help millions of Americans increase their assets, eliminate debt, protect cash flow, live and retire well. Money is not everything, but not having it and not having control of your financial lives can destroy marriages, families and have massive negative effects on individuals and communities.