Achieving financial independence is a worthwhile goal, and many people dream of it. However, in many cases, they are not sure about how to achieve this dream, or how to track their financial health on their way to achieving success. Financial independence or financial stability could mean different things to different people.
It could be reducing or carrying zero debt to some, it could mean saving enough for a big purchase like a desired home or vacation for somebody else, or it could be building a high net worth for others. Whatever financial independence means to you, some of the steps discussed below to achieve and track financial goals apply to everyone.
The first step towards building a better financial situation is determining where you are now, what is driving your financial decisions today, and a clear idea of your income, spending, savings and debt. This step includes gathering all the relevant financial documents including bank statements, tax returns, tax payments, and other expense payments, documents relating to loans and other debt.
Once you have all your financial documents in front of you, your overall financial picture will be clear. Make a table of all assets and all debt, and another table for all income and spending. Make sure that you make allowances for unexpected expenses like a sudden illness in the family, or your car suddenly breaks down. Once these numbers are gathered and grouped together, it becomes a matter of finding your net worth, which is total assets minus debt, and disposable income, which is monthly income minus the monthly expenses (including an allowance for unexpected expenses).
Many people make the mistake of just budgeting for daily or monthly expenses but not for the sudden unexpected expense, which can suddenly throw the budget and your financial goals out of the window, and you will be saddled with a lot of unexpected expenditure.
It has been determined that 20 per cent of your gross income might be necessary to be saved for a good retirement. For early retirement, 25 to 40 per cent of your gross income might be necessary. Make sure while budgeting that these numbers are taken into account. Also, do not forget to ensure that the main income generators have adequate life and health insurance. Health costs can be astronomical if a major illness strikes unexpectedly and these expenses can derail the strongest financial plan. Getting adequate insurance, like life insurance Singapore will mitigate some of these situations.
Maintaining good credit scores and having a good credit report improves your financial standing tremendously. A good credit report can be created by paying all bills on time, keeping debt under control and by building a wide margin between credit that you can get, versus the credit that you are actually using. This margin indicates that you are not living on the edge and using up all the credit that you qualify for.
Make sure retirement contributions and other savings are building at a good interest rate. If it is determined that they are not performing well, it might be necessary to move investments around to different funds and investment vehicles. Many investors have no idea what their actual return on investment is. It is important to calculate the returns on investment after expenses and an after-tax basis. You can do this using a spreadsheet or other software tools. Keeping track of these simple savings metrics at least once a year can help motivate you to build greater financial success.
People are sometimes unaware of how much taxes they are paying. There is an effective income rate, which consists of federal income rate, state income rate, payroll taxes and so on. This tax can vary from 5 per cent of your gross income to much higher percentages, depending on your total income. It might be worthwhile to reduce the amount of taxes paid by investing in tax-deferred accounts like tax-deferred IRA or other retirement accounts, health and child care savings accounts, being aware of all potential tax deductions that are available, or moving to a state with a lower tax burden.
Another figure that needs to be tracked is a marginal tax rate. If you add $1000 of hypothetical income to your gross income, see how much your tax bill changes. This marginal rate might affect how you want to save your money, for example, save in taxable bonds or tax-free but lower-yielding municipal bonds. It may also affect the amount you wish to work. The marginal rate can be lowered in similar ways as your effective tax rate.