If you feel confident enough to do some basic calculations yourself you can find out. Then look at your life insurance needs. The general rule of thumb is to get enough life insurance to cover 10 times your income if you have kids under 10 years old five times your income if you have kids over 10 , plus the amount needed to pay off your debt. Go to www. At this point, it may make sense to have an agent review all your insurance policies—disability, life, auto and home—to make sure your coverage is adequate.
But be careful. If you need more life insurance, chances are renewable term is the right product for you. Action step 7: Review your coverage. Consult an independent insurance agent for a quick review. If you need extra coverage, make a note of it so you can include that in your final financial plan. Slash your taxes Most tax planning is relatively simple. To reduce the taxes you pay on your investment portfolio returns it helps to understand that the income tax system treats the various sources of investment income differently. Interest on bonds and foreign dividends is taxed at your full marginal tax rate, Canadian dividends are taxed at rates about one-third lower, and capital gains at half the full rate.
Action step 8: Consider calling a tax accountant. But a few basic principles apply. For those with low to moderate incomes, paying off debt—including the mortgage—is the best tax-planning you can do. Have these suggestions handy for your final plan.
Create an investing policy Every professional financial plan includes an Investment Policy Statement IPS that recommends how a portfolio should be invested. It puts in writing the rules that will make you a more disciplined investor. Having an IPS helps you to stick with your plan and keeps you from changing course when the market gets volatile. This ratio is determined by your time horizon and risk tolerance. The longer your time horizon and the greater your tolerance for risk, the higher the equity portion of your portfolio.
As you near retirement and need the security of more stable income from your investments, the portfolio mix will usually tilt towards bonds. Your IPS might also note the volatility you should expect for a given portfolio. Action step 9: Determine which investments are right for you. The results will allow you to zero in on how you should invest in future to meet your goals.
If you have trouble with this section, you can always leave it for now. Write up a will Every adult who owns assets and has a spouse or children should have a will. An accurate and up-to-date will is the only way to ensure your assets will be distributed the way you want them to be.
5 Steps On The Road To Financial Freedom
In most parts of Canada children trump partners. Without a will your husband or wife will get a predetermined amount of your assets—the rest goes to the kids. Action step Create or update your will. If you have an updated will it should be filed with your financial plan. Visit www. Create your final plan A typical financial plan has five main parts.
The second contains your top financial goals, or where you want to go. The third is a simple net worth statement. The fourth lists the steps you must take to achieve your goals. It includes your income and expenses, an overview of your insurance, a section on retirement planning, and a section on estate planning. Finally, the fifth section—usually a separate document—is your Investment Policy Statement, which lays out how your portfolio is to be invested. The Berglunds are a year-old couple living in Halifax. They have two daughters, Debra and Marie, ages 5 and 2.
The couple agrees to continue using the annual surplus in this way each year until their goals change. If they do this, the couple should have more than enough to cover their retirement expenses adequately. Their wills and power of attorneys are all in order. The couple wants a well-diversified portfolio at minimal expense. Thus, their policy states that low-cost index funds or exchange-traded funds are to be used wherever possible. It also states clearly that sudden market price movements are not grounds for revision.
This will help stop the Berglunds from making impulsive investment decisions out of fear or greed. Action step Create your financial plan. Worksheet 9 is a blank financial plan with all the sections already labeled for you. At this point, all you are really doing is taking information from the completed worksheets and putting it all together to form your plan. Before you proceed, it may help to review the sample plan for Patty and Walter Berglund at the end of Worksheet 9. Write a brief summary of your current status, and under Objectives and Constraints write down your risk tolerance, time horizon, any taxation strategies you plan to use, and the amount of time you wish to spend managing your portfolio—in many cases, minimal.
Under Investment Strategy Guidelines, write an outline of how your investments will be allocated, according to asset class. The next three headings—Security Guidelines, Location Guidelines and Risk Control, Monitoring and Review are fairly generic and are already filled in for you.
You now have a financial plan for the rest of your life. From this point on, as your goals change, modifications to your basic plan will be straightforward. Of course you still have to follow your plan.
What Does Financial Freedom Mean to You?
To make sure you stay on track, you should take the time to review your plan at least once a year, and update it as necessary. If you truly commit, it will be a huge boon to your emotional and financial well-being. Instead of worrying, you pay the bill without thinking twice. Paying for a car repair without stress is just a small part of the picture. Financial freedom means that you get to make life decisions without being overly stressed about the financial impact because you are prepared.
You control your finances instead of being controlled by them. Quite the opposite. Having complete control over your finances is the fruit of hard work, sacrifice and time. And all of that effort is worth it! Ready to learn how to build a life of financial independence for you and your family? Start by defining what financial independence looks like for you. When you are financially independent, you have options.
See how ordinary people built extraordinary wealth in my new book, Everyday Millionaires. That may sound too good to be true, but you can do this! Give every dollar a name before the month begins, and track your spending throughout the month. If you consistently overspend or underspend in certain areas, you can always adjust the amount in each category. No matter how much money you have, you need a plan. Budgeting is the first step to building wealth on purpose. But if you want to be financially independent, you have to clean up the mess before you can start building wealth.
If you want to reach your goal, you need your full income at your disposal, not bits and pieces that are left over after paying credit card bills and student loan payments. Paying off your debt helps you lay a foundation to build wealth that will last.
Then keep the snowball rolling! For good. Having debt undermines your ability to build wealth and puts your financial plan at risk. Steer clear of debt! Your biggest wealth-building tool is your income. So when it comes to choosing a career, there are a lot of things at stake. Finding a job that you enjoy that also supports your goals of financial security will help you enjoy the journey. Your choice of career can have a big impact on your long-term financial plan, so take it seriously! What if you had to open a credit card to pay for groceries after losing your job?
How would you ever get ahead if you kept borrowing money from your future?
How To Make Sure You’re On The Right Path To Financial Freedom
If your goal is financial freedom, you need a buffer for the unexpected life events that happen to all of us, like car repairs, broken appliances and medical deductibles. Having the cash on hand to cover an unexpected life event gives you peace of mind and is a critical part of your overall financial plan. Create a line item in your monthly budget and divide the total amount by the months you have to save. The good news is the sooner you start investing, the more time your money has to grow.
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- The stages of financial freedom ~ Get Rich Slowly.
- Road to Financial Freedom: Common Financial Misconceptions Keeping You Broke.
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Start by working with your financial advisor to take advantage of the tax-favored retirement accounts that are available to you at work, like your k or b. How much should you invest toward retirement? And if your employer offers a match on contributions to your k , take it! If you have access to a Roth k at work with good mutual fund options , great! Why is a Roth a good idea?
Income limits do apply, and your investing pro can help you know if those impact you. If you want to save beyond an ESA, talk to your financial advisor about a plan. These plans also grow tax-free! Just be aware that there are some plans you should avoid.