Financial freedom is more of a journey than it is an event. Actually it is not an event at all; it involves several continuing activities which make it a process, and a life time process for that matter.
As we said in our first article in this series, personal financial freedom is a path that has no strict rules; only conventions to guide you through. Your personal determination and effort is what will create a difference between all of you who read these articles. You need the inner motivation to get where you want to get to before you can begin this journey.
The journey is exciting and very adventurous, but also it has its challenges. During the hard times, the only thing that can keep you going is your inner motivation. That is why you need strong goals and achievable ones, if you are to maneuver through the waves of financial freedom smoothly.
And the journey begins:
First things first. Before you set-off for this journey, you need to know where you are standing as at now; so that incase you get lost, you can be able to trace your way back to the right track by looking at where you have come from. This brings us to the convention number one: know your current financial status.
By knowing your current financial status I mean you need to carry out a personal income-expenditure analysis. This simply involves knowing how much you spend per month as at now, and how much you get as income currently (monthly).
The accounting principle of prudence then comes to play here; where by you are not to overstate your incomes, and neither should you understate your expenditures.
You need to list all your expenditure each month. Leave nothing out no matter how insignificant it may appear to be. Every cost is a relevant cost when calculating your financial standing for as long as it involves an out flow of funds from your purse, wallet or account.
List all your domestic monthly cash expenditures. Other expenditures like mortgage payments, loan interest payments, insurance premiums, membership fees, subscription fees and any other outflows of cash should be included in your expenses list. For those payments made on an annual basis, you should divide them by 12 so that you get the equivalent monthly bills.
On the other hand, list all your sources of income per month. Just like in expenses, also make sure that those incomes which come in annually are divided by 12 to get their equivalent monthly amounts. Sources of incomes could be salaries, wages, contractual fees, rental income, interest incomes from investments, royalties e.t.c.
NB: When listing your monthly incomes, exclude all incomes which you are not very sure of whether they will be forthcoming like donations. Only list your regular sources of incomes.
Once you have your two total figures for income and expenditures, subtract the expenses from the incomes to get your balance. If the balance is positive, you can start by smiling, though not very much. If your balance is a negative figure, be happy too coz you will soon know how to turn it into a positive figure.
A positive balance means that your sources of income are enough to take care of all your monthly expenses and you still have a surplus. However, the sources could include loans which are not very good for you in the long run; see why you should not smile so much at first?
A negative balance on the other hand means that your expenses surpass your income sources. It therefore means that you are automatically surviving on other people`s money; either borrowed, donated or cash hand outs from relatives and friends. This piece of information is not what you want to appear on your grave when you die, or do you?
You now know how much you spend and how much you earn each month. The next thing is to know just how much you are worth currently. That is asking: What is your current net worth?
Check out the next article in this series to know how you get to calculate and know your net worth…