Everyone wants to be free from financial worry, and the easiest way to make that happen is to ensure you have a high net wealth and no unmanaged debts. This is easier said than done for most people, so let’s take a look at some of the moves you can make to set things in order.
1. Understand the difference between Good Debt and Bad Debt
The idea of “good debt” is probably an alien concept for most people, but it’s actually one of the strategies very wealthy people use is to create a portfolio of good debt.
Don’t fall into the trap of assuming all debt is bad. Instead, learn to tell the difference between good debt and bad debt, and try to eliminate the bad debt from your life.
Good debt is a debt you acquire that can be expected to eventually pay off in some way. In other words, you expect this debt to return to you much more than it takes from you. A good example is a student loan.
Provided you have the right stuff to make a success of yourself after completing your studies, the money you invested in your education could help to increase your wealth well beyond the cost you incurred in pursuing studies.
Real estate is another prime example, although it’s worth noting that this is not the guaranteed path to wealth that many people regard it as. Property markets can follow a boom and bust pattern.
In the United States right now, the property market is just emerging out of one of its worst busts in many decades, while in Australia the property market has been riding the crest of an enormous boom wave for a very long time and be overdue for a downturn.
When you acquire debt to purchase real estate, you need to be aware it’s a long-term game and the risks can be high. The same rule applies to real estate as to shares. You need to take a long-term view and ensure that debt that is incurred creates a profitable return on investment.
Examples of bad debt can include credit card debt that is not used to create a profit situation (some notable business successes, such as the Atlassian Corporation were initially funded entirely by credit card debt), car loans (cars always lose value unless they achieve collector status), and personal loans. These debts may give short-term pleasure, but they’ll lead to long-term grief if you’re struggling to pay them.
Your number one goal once you decide to take control of your finances should be to cut bad debt as quickly as you can. Good debt is also sensible to eliminate, but it’s not as much of a problem for you as bad debt is.
2. Once you’re out of Bad Debt, Start Saving
Everyone should save a small portion of his or her income that is reserved as an emergency fund. It can also be a good idea to have income protection insurance, but it’s not a substitute for personally setting aside a small portion of your income as savings.
Once your emergency fund hits a certain limit, instead of spending it on things, you could consider investing it in something that will return more wealth via a passive income stream. That way when you do purchase things, you’ll be able to purchase better things.
How much should your emergency fund be? A good rule of thumb is about 2 or 3 months of your income, after which it’s prudent to divert additional savings into sensible investments.
3. Consult a Financial Planner
This is a great idea if you’re seriously considering cutting your bad debts and making the move into investing your savings.
A financial planner has specialist training in helping people to plan their finances, and ideally several years of business and investment experience.
For best results you need to seek out a wealth-oriented financial planner from our team here at Wealth Built Right. Our Australian firm of “financial architects” is dedicated to helping our clients gain maximum leverage in wealth building, which is exactly the kind of planner you should have working for you.
4. Curb your Instinct to Spend
We’re constantly surrounded by advertising messages urging us to part with our money in all kinds of ways in order to gain short-term pleasures, but if you really stop and think, you’ll realise that most of your spending doesn’t really bring you as much pleasure as you expect.
Seeing your credit card statement come in every month with a zero balance, or even a healthy positive balance, is the kind of thing you can truly take pleasure in. Imagine knowing you’re free of bad debt and you’re accumulating savings and investments that will make you wealthy.
Being free from worry and free to dream is what true pleasure is built on. Not short term purchases that quickly lose their value, as “the next big thing” offered by advertisers demands your attention.
5. Keep Track of Your Spending
Knowing where your money is going is crucial to changing the habits that are doing harm. If you have a clear picture of how you are spending, you can start to reshape your spending habits so they return a more positive result.
When you know you’re spending money in ways that are not helping you, it gives you the power to turn things around for the better. Then you can start saving more money, which in turn provides more cash for your emergency fund and later investment.
This doesn’t mean you can’t occasionally splash out on something, but keeping track of what you spend when you do means you won’t end up with a serious problem as a result.