Spring is a great time of year to clean your finances as well as your house! Yes, you can make 2011 the year you alter your financial life for a better future. Let’s look at some simple steps, with the goal of financial freedom in mind.
These are ideas in addition to writing your goals down and setting a budget.
Review your income sources, expenses and debt. How do you earn income? If you earn it from one source, is there effectively a ceiling on it or is there real potential for your income to rise in the next few years? Having income from more than one source is often beneficial.
Now look at your debts and core living expenses, the ones you can’t avoid. Can you pay off, pay down or restructure your debt? Can any core expenses be reduced?
Investing aside, you position yourself to gain ground financially when income rises, debt diminishes and expenses stay (relatively) the same.
Pay your debt first. If you are a business owner or a professional, you may always have some debt. Your ultimate goal should be to build wealth — and you can build wealth and minimize debt at the same time.
Some debt is “good” debt. A debt is good if it brings you a return in excess of the cost. If you buy a rental property and pay a mortgage, it may be considered a good debt because you receive income from the rent payments. Credit cards are simply bad debts.
Test your debts. Weigh the interest rate on each of your debts against your potential income growth rate and the potential investment returns over the term of the debt. If the interest rate on that debt looks like it will outpace your investment returns, you should think about paying that debt down fast.
Paying off your debts, paying down balances and restricting new debts all work toward achieving financial freedom.
Refine an investment strategy. You cannot afford to refrain from investing, even when markets are challenging. You do not retire on the relatively small elective deferrals from each paycheck alone; you retire on the appreciation and interest that those accumulated assets earn over time, plus the power of compounding. Consistent investing, this year and in years to come, has the potential to help you improve your financial life.
Managing your money is the way to financial freedom. Media messages seem to say “succeed and live lavishly.” Or, if you make it financially, then you have earned the freedom to spend it on cars, boats and luxuries.
This is a classic nouveau riche mistake. If you simply accumulate assets that have costs associated with them and do not generate any return, you may see your asset base diminish over time.
These types of assets expose you to risk — inflation risk, market risk, even legal risks. Don’t forget taxes — while not technically a “risk,” they are a threat to your money. The greater your wealth, the more long-range potential you have to accomplish profound things — provided your wealth is directed.
If you want to build more wealth, do not neglect risk management strategies that could be instrumental in retaining it. Your real return (after tax, cost and inflation) matters more than simply your investment return. Real returns will become increasingly more important as inflation and taxes potentially play a larger role.
Request professional guidance. A good financial professional will help educate you about the principles of wealth building. You can draw on that knowledge and guidance.
Heidi Foster is a wealth adviser and investment manager with American Wealth Management, may be reached at 775-332-7000 or email@example.com. Securities offered through Foothill Securities Inc., member FINRA/SIPC. Investment advice offered through American Wealth Management, a registered investment adviser and separate entity from Foothill Securities Inc. This information should not be construed as investment, tax or legal advice. The author is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.
This article written by Heidi Foster appeared in the Reno Gazette Journal in April 2011.