Financial Planning Funnel Approach – 5 Simple Steps to Financial Freedom

At least 70% of people do not plan sufficiently for their retirement, depending on which part of the world we reside in. One can argue that one is ill-equipped, due to lack of financial knowledge to do personal financial planning or simply has no time for it.

Truth be told, the fact is that financial planning is and can be a simple, daily and routine affair. Here’s the Secret of the 4 Simple Steps to Your Financial Freedom. It is pay day, you will be doing the following in this order:

Manage that Debt Monster – First Things First, on pay day, try to pay up not just your monthly mortgage installment, but also all monthly recurring debts such as credit card bills on time in full. Otherwise, if the debt does not “kill” you, the accrued interest will! We have many more Financial Planning Help Articles Now Available.

A more ambitious step towards living a Debt-Free life, is to bravely do what most of us dread – clear all your credit card debts and cut up all but one of your cards. This is a psychological commitment to liberate you towards your debt-free lifestyle.

In order not to over-leverage your personal finances, use 2 good benchmarks for measurement. The Debt to Service ratio measures your monthly debt payments against your monthly income. This should not exceed 35% on a monthly basis. Another ratio to note is the Total Debt to Total Asset Ratio should be less than 50% if you are over age 40. This ratio can be as high as 80% if you are at your prime earning age.

“Tax” Yourself before You Spend – Save a portion of the remaining amount, about 10 -15% monthly into a savings account or a mutual fund after you paid your monthly debts. This amount should be saved consistently on a monthly basis and in a fairly liquid account.

You will need a sinking fund for life’s emergencies such as retrenchment, medical bills etc. A rule of thumb is to keep aside at least a total of 3 to 6 month’s disposable income to tie over emergencies as contingency funds. This fund should be kept in a liquid account such as a savings account.

Cut the Fats – Now you can start spending, but not before you give yourself a daily allowance, after having set a monthly and daily budget. Spend only when you really have to.

When planning your daily allowance, use a monthly benchmark so that it gives room for day-to-day adjustments. Spend with a budget at the back of your mind. Learn to DIY a dinner or home improvements. The joy and satisfaction could be unspeakably rewarding.

Be a Warren Buffett in the making – With your remaining monthly disposable income, you should observe the following suggestion should you intend to invest your money. Your investment should be defined by your level of risk threshold. Invest with a long term view with an investment timeline of 5 to 10 years. Build a portfolio of blue-chip defensive stocks on dips for dividends in a bear market and sell into strength in a bull market. Do not average down on a down-trending market. Go for gold if you anticipate real interest rates to be lower than inflation. Invest about 10% of your disposable income on a regular basis.

Don’t Miss A Beat! – The operative word here hints of “consistency”. Repeat the above 4 steps faithfully and consistently. Very soon you will be classically-conditioned like clockwork.

When you subconsciously start picking up that checkbook to pay for your mortgage and credit cards, and start eyeing that rib-eye steak at the supermarket, you are on the road to financial freedom. We have many more Financial Planning Help Articles Now Available.