Welcome to the New Year! If one of your resolutions is to gain control over your finances, you're in the right place. Achieving Financial Independence (FI) can seem intimidating, especially if you lack confidence in your financial situation or are heavily in debt. However, there are many ways to work toward FI, and every positive step you take today can lead to bigger gains down the road.
Financial Independence (or Financial Freedom if you prefer) is one of my absolutely favorite passions. One of MY New Year's resolutions is to blog more about it. What I've learned, what's working for my family, and occasionally what others in the FI community are chattering about. It's a fun topic with rich rewards ahead - pun fully intended.
TODAY’s GOAL: Assess Your Situation
Throughout your journey toward financial independence, it's important to assess your current situation on a periodic basis. It’s really hard to get where you want to go if you don’t know where you are. This includes understanding your cash flow as well as your assets / liabilities / net worth (collectively your balance sheet). Don't let the fancy words get in your way - we'll use plain English going forward.
My point is - you must baseline where you stand in your financial life. Maybe you intuitively know you're doing OK, or that you're struggling. This is where you look at the data and the cold, hard numbers. At the highest level, there are only a few key questions to get a clear and quantified picture of your household's financial health.
Cash Flow: How much do you earn and how much do you spend? Are you earning more than you’re spending?
Assets: What do you have of value “asset”? While your skills and network are also assets, focus today on your financial assets such as savings, investments, and personal property. Which of your assets can and do produce income?
Liabilities: How much do you owe to others? Are you reducing your debt faster than you’re increasing it?
Net Worth: When you subtract your liabilities from your assets, your net worth is what’s left. Is it growing, shrinking, or stagnating over time?
The Net Worth is the MONEY question!!! Your net worth is a key indicator of your progress toward FI, and it's important to watch its movement over time. Your Net Worth is the objective, i.e., the official scoreboard in the FI game. The higher the score, the closer you are to FI.
Once you have a clear picture of your financial situation, you can identify where you want to focus on first. I’ll share some ideas in another post, but congratulations on figuring out where you stand.
Now that you've established your baseline, add a recurring calendar reminder to refresh your numbers and track your progress. Monthly is a good cadence to start, as it captures most recurring bills that folks tend to have. You certainly can do this weekly as well, but bear in mind you'll see more fluctuations in spending depending on when your rent / mortgage payment, utility bills, credit card bills, etc. are due. I recommend using some kind of software to track everything - I like both Quicken (paid) and Mint (free) though there are many other options out there. The more automated you can make this effort, the higher the likelihood you'll maintain it.
I blogged earlier about how we are teaching the Little Lennons personal finance. The kids have an online ledger whereby they track their spending and saving balances. On a weekly basis (in addition to sharing their grades with us), they need to access their accounts and let us know where they stand financially. Reviewing your current position on a regular basis is a great habit to establish and maintain ASAP, no matter how old you are or how far down the FI path you've already come.
Stephanie Brooke Lennon is the author of Family Bank Blueprint, GoldQuest, and What Would Water Do? Simple Strategies for Navigating Life's Obstacles. Her titles are available in Paperback and Kindle on Amazon.com. Follow Stephanie Brooke on Facebook, Instagram, TikTok, YouTube, Twitter, Amazon, and at BrookeLennon.com.
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