Who wouldn't want to be free of debt and have enough money to live a comfortable life? Unfortunately for many, they have more debts stacked up than money saved in the bank. This is the reality of life. But it doesn't mean that you just have to live with it.
No matter how deep in debt you are, there is a way out. The same is true if you have zero savings. There are solutions to achieve financial freedom, investment options that you can explore to boost your earning potential, and simple steps to get out of debt.
Check out: 4 Smart Financial Goals to Set in 2020
All these will be tackled in this article. The goal is to provide you with the knowledge to become financially independent. Financial literacy is the first step to well-managed personal finance, after all. At the end of this post, you will:
You say you're not even close to being financially secure. But your situation may be something others only dream about. Different people define financial freedom differently. How do you imagine it to look and feel like?
Which situation best describes your idea of financial independence? Is it the one where luxury is the norm or are you fine with being able to save for an emergency fund and nothing more? What you choose will dictate the level of work you need to do to reach your goal.
Obviously, you have to work harder to increase your income. You have to be brave enough to explore different investment options if you want to double or triple your money without doing the same amount of work.
There are trade-offs that you also need to deal with. For example, if you want to have enough money for an emergency fund and still spend on things you enjoy, you have to make certain sacrifices.
You’ve probably said it before, “Just you wait until I have enough money.” Given the rewards and sacrifices, think long and hard about how you see yourself as financially independent. Close your eyes and imagine. Then, think about what you’re willing to do to gain freedom and the outcome of every decision you make. This will help you better chart the path to your goal.
Let's assume for one moment that you've finally experienced your idea of economic self-reliance. But are you truly free from financial worries? How long before you start to accrue debts? It's important to know the difference between having enough money and being financially self-sufficient for life.
So, here's a simple test that will determine your level of financial independence. Whether you're solvent, stable, secure, independent, or abundantly wealthy.
The more secure you are in your financial status, the simpler the questions you’ll have to deal with. It’s true what they say, money can make a difference. So how do you become abundantly wealthy or even just in the black when you have loans and dues to pay?
Who doesn't have debts? Even the wealthiest have debts. They just have financial advisers to help them deal with their IOUs differently. Most people owe someone something, whether an individual or an institution. This is why freedom from debt is such a big deal. Some even make it their ultimate goal.
Debt-free, however, doesn't necessarily mean you're financially secure and independent. But it is the first step to getting there. The best strategy to pay off debts is to stick to the terms and then save the extra money you have.
Avoid using your extra funds to pay off more of your debt capital in the hopes of reducing it. You will end up wasting your time. What you should do is to build your cash flow.
List all your assets and liabilities to identify what you owe and your net worth. Do you have a positive or negative net worth?
Analyse your income statement and how it compares with your expenses. If you have more expenses than income, then you have a negative cash flow.
To determine your DTI, simply divide the total monthly fixed loan payments over your total monthly income.
The fixed loan payments refer to all types of liabilities you have, such as student loan, mortgage, and credit card payments. The higher your DTI, the more financially stressed you are. Creditors often see this as indicative of someone who is likely to default on their loan.
Now that you know the real score of your finances, it's time to pay off your debts. How? By paying yourself first. This may seem counter-intuitive since paying off debts is the goal. But think about it. If you pay yourself extra now, you will be able to save money to create future cash flow. This does not mean you don't settle your dues. Just don't pay extra on your debts to clear it sooner than the agreed terms.
Direct what extra money you have into savings. Doing so comes with benefits, such as having money when unexpected expenses come or when you lose your job. So, the goal now is to increase cash and not to pay off debts too quickly.
This means investing in cash value life insurance, a savings account, and other assets that will give you easy access to your money. With enough money saved, you will have the option to eliminate a liability once and for all. Moreover, you will have funds that will pave the way to economic freedom.
It's not enough to increase your cash flow. You need to secure your finances through investments, too. Doing so is the best way to earn more without working yourself to the ground. There are different investment options to choose from that run over the short-term or long-term. How is one different from the other?
Long-term investing
Short-term investing
One is not necessarily better than the other. But you need to better understand what works best for your investment needs. Below are different investment options you can explore.
Stock Fund
This is ideal for people who are interested in aggressive investing but lack the time and desire to make a hobby out of it. You get a weighted average return when you buy a stock fund, which is less volatile compared to when you hold just a few stocks.
Pros
Cons
Real Estate
Many consider this as one of the best investment options because of high commission and returns, especially when held for a long time. You can also borrow money from the bank to invest in real estate.
Pros
Cons
Dividend Stocks
From the name itself, this type of investment option pays a regular cash payout as a dividend. This means regular income.
Pros
Cons
Growth Stocks
These are mostly stocks of tech companies with high returns. Although considered the best-performing investment options over time, it can lose value quickly in a bear market.
Pros
Cons
Bond Funds
These are safer investments because one fund contains numerous bonds that come from a range of issuers. Returns are much lower compared to a stock fund.
Pros
Cons
Online Savings Account
You get better interest rates with this type of investment than you would from traditional banks. You can earn 1% to 2% per year with high-interest accounts.
Pros
Cons
Certificate of Deposits (CD)
These are deposits that have higher interest rates because of the longer lock-in period. In three years’ time, an investor can cash in on the accumulated interest. But the yield is higher if CDs are invested for longer.
Pros
Cons
Short-term Bond Funds and ETFs
These are usually managed by professional financial advisers. Expect higher earning potential with this type of investment.
Pros
Cons
Money Market Accounts
These work similar to regular savings accounts where your money is easily accessible, you earn interest on your deposits, and you can write checks when needed. It practically combines the best of savings and checking accounts. Moreover, you earn higher interest rates than you would with a savings account.
Pros
Cons
Municipal Bonds
Although one of the riskier short-term investment options, municipal bonds have higher yield potential. It is issued by the state, local or government agencies.
Pros
Cons
Make sure to weigh in on the advantages and disadvantages when choosing a product to invest in. Analyse the risk and rewards to find the best option to invest your money in.
Investing in Forex is either long-term and short-term, depending on the kind of trader you are. In the Forex market, traders or investors buy and sell currencies, with trades held for just a few minutes or weeks to years.
Pros
Cons
To maximise yield in Forex trading, it's best to use brokers with a trustworthy reputation and are credible. (Learn how Fullerton Markets helps traders earn in the Forex market through unparalleled fund safety and a system of wealth creation.)
In every investment product, there's always an associated risk. Even those considered safe investment options have some degree of risk, especially with the unpredictable market conditions. As an investor, it's important that you understand the level of risk you can tolerate. In other words, how much money are you willing to lose? Try to identify yourself with the characteristics of the following investors:
You lose sleep when investment value declines. If so, you're better off investing in a basic savings account, CDs, and Money Market Accounts.
You can handle smaller declines in value but are sure to stress out on bigger ones. You'll be much happier with dividend stocks and other stocks from established companies. Another investment option is mutual funds that maintain a balance between bond holdings and stocks.
Your primary goal is to maximise investment returns over the long term. No ups and downs bother you.
You are comfortable investing in higher-yield products, including stocks of companies that are just starting out but have growth potential.
So what kind of investor are you? By knowing how much risk you can tolerate, you can invest in the right products and better manage your expectations. No need to stress yourself out unnecessarily.
Once you become aware of your risk tolerance as an investor, it will be easier to choose the best investment options on which to build your portfolio. Just look at the risks involved for every investment option and decide accordingly. Because there are trade-offs and rewards with every investment, it would also help if you choose based on other factors:
Most importantly, take a good look at how an investment option will contribute to your portfolio, especially in terms of diversifying it.
Say you managed to pay your debts while increasing your cash flow. You also invested in products that suit your risk tolerance. Depending on the investment you choose, you could be seeing higher income and returns in two years or so. Or, you have enough savings that you've become financially secure. Time to sustain that level of financial freedom you've achieved. How do you remain financially independent for as long as possible?
What better way to stay on track than to aim to stay in the black? Your goals may include saving $20,000 as a down payment for a property or adding $100,000 to your savings account within a year.
Track your savings, spending, net worth, and whatever financial aspects that must be kept positive (see how you can start creating your own here). Before you know it, you'll have an organic investment that will help you stay financially independent.
Don't stop doing this, even if you have extra funds that provide enough cushion. You'll never know when you'll have to break the bank for unexpected expenses.
Ever heard of frugal billionaires? You would think Warren Buffett, Richard Branson and Charlie Ergen would splurge on just about anything, given their billion-dollar net worth. But they spend relatively less money. Why?
Because there's freedom in spending within or even below your means. So take a page out of their books and practise frugality.
Are you willing to give these tips a try and become solvent or abundantly wealthy? There's no harm in doing so, and you're in for major changes in your finances if you succeed.
Do you have other ideas on how to stay financially free for the rest of your life? How about tips and tricks for successful investing? Let us know in the comments below.
Looking to grow your investments and generate income in the world's largest financial market? No better place to start than right here with us! Start trading with Fullerton Markets today by opening an account:
You might be interested in: 4 Smart Financial Goals to Set in 2020