It doesn’t matter where you’re starting from – drowning in debt and struggling to make ends meet or sitting comfortably – you can improve your financial well-being.
Where do you want to be in five years? No, really. Take some time and think about it. What do you think it’s going to take to get there?
We all have dreams and goals but they’re often vague and ambiguous. Dreams of this nature often stay in the realm of fantasy because they lack the substance to transition them to the real world. The substance is the game plan.
You need a strategy: a well thought out plan that identifies where you are now, where you want to be in a finite amount of time, and how exactly you’re going to get there.
Here are four steps to take to better your financial self in five years.
Pay down your debt
There are a number of ways to go about it efficiently and effectively.
- Pay more than the minimum amount owed
Paying minimums on your credit cards, overdraft, or line of credit can really extend the life of your debt. Even an extra 50 bucks over the bare minimum payment helps and adds up over time.
- Be frugal and disciplined
We all have eyes bigger than our paycheques. While it’s easy to get whatever you want (credit is a wonderful thing), being realistic and getting only things you can afford is a much different story.
Stay within your means to keep the trajectory of your debt heading in the right direction – down.
- Go for the heavy hitters first and work your way down
Start with the debt that is charging you the most interest and focus all your efforts there. Pay the minimums on the others for the time being.
Once the big monster is out of the way, turn your efforts and resources to the next big guy on the list. Lather, rinse, repeat until you’re debt free.
- Track your spending
Even if you think you’re pretty good with money, you never know until you collect the data and have an unbiased look at things. You’d be surprised how much money you waste. For some people, tracking spending and identifying frivolous areas that could be cut out is almost as effective, financially, as getting a second job.
- Consider a consolidation loan
Your bank may be able to consolidate all your consumer debts into one loan with a lower interest rate. This can help turn an overwhelming situation into something much more manageable.
Start saving consistently
Once you’re debt free, start putting money away. Financial experts will tell you to strive for at least six-months-worth of savings for emergencies or to be able to capitalize on investment opportunities if the situation should present itself.
The hard part here is discipline.
The first two steps alone are going to put you in a way better spot than you were when you first started out.
Where do you go now that you’ve got a little extra money in the bank and want to keep carrying the momentum forward?
Start thinking about a long-term investment portfolio.
Getting the right advisor will help you with the nuts and bolts of everything. Generally, building a portfolio is a two-stage process. First, you lay the foundation with a mix of investments that aligns with your investment goals and risk tolerance. Then, once the foundation is in place, you can select other investments with a little more freedom that may be slightly riskier, but potentially pay off more in the end.
Manage your cash flow
This is a step in attaining disposable income, which I’ve written about before: here. The more effort you put into making your money from sources independent of the amount of time you have to put in to them, the more freedom you have.
Proper effort into this area of your life will ensure you’re financially independent long before retirement comes around.
Some common ways of creating disposable income are things like a personal business or real estate.
Things to keep in mind to ensure your plan works
With each of the steps outlined, be specific. Saying, “I will decrease my debt” or “I will start saving X-amount of dollars” isn’t good enough. Be specific, be precise. How much? When? How much every month? Week? Year?
If you’re going to sit down with a wealth manager or a financial advisor, having answers to these questions will help them get you exactly where you want to be. This gives you a good starting point for you and your advisor to really delve into your situation and examine it from every possible angle.
Be flexible with your expectations. Big time investors and some articles may lead you to think you need $2 million in the bank to be able to retire comfortably. That you need all kinds of stuff in place before you can even consider the possibility of not working.
But, everything is flexible. Being rich looks and takes different things depending on who you are and what you’re starting from. Figuring out what’s doable given your particular situation is what matters most. Stop listening to those other people and other advice and you’ll be able to move through your own life with less pressure, and less unrealistic expectations to fall short of.
Be disciplined. There’s no easier way to say this. There’s going to be tough spots, but a plan is only good if it’s enacted. This is what separates success and failure.
When it comes to wealth and planning, simple and detailed is best. Drop debt, save, invest wisely, and invest in yourself.
The general themes of good financial health haven’t changed much, because they work.
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Have a great weekend!