Whether you have broken your 2020 new years resolution by now or not, for the most of us, our finances continue to be a concern.
Here is the first step towards planning for a Secure financial future.
Take Stock of Current Financial Status, that is,
- Calculate your current NET WORTH.
- Do this at least quarterly; certainly
- do it once a year!
- Compute the current value of all your assets (what you own).
- The total of non-obligated funds (balance) at all bank accounts
- The fair market value of all real assets you own
- trade-in value of cars, motorcycles, boats, scooters, trucks, etc.
- Current fair market value of all real property you own
- house(s), farm(s), land(s), etc.
- Current trade-in value of equipment and appliances you own
- TV’s, Refrigerator, tools, computers, sound systems, etc.
- Current trade-in value of all furniture, jewelry, antiques, etc.
- Compute the current value of all financial investment instruments
- (these are the value of these instruments
- that will be available to you on demand
- after deductions of all penalties, fees,commissions etc.)
- Cash payout of all retirement accounts
- Cash payout value of bonds, stocks, etc.
- Cash payout of life and other insurance policies
- Cash payout of all other investments
- Compute your total debts (Liabilities);
- Current short term loans
- (those payable within 1-5 years)
- credit card(s) balance(s)
- total current value of all car loans/note(s)
- other short term debt(s)
- e.g. lease or rental obligations
- current value of total long term obligations
- Mortgages/house payments
- Student Loans
- many student loans have a payoff value
- attached to your total balance
- Other Long term contractual Obligations
- current value of total child support payments
- current value of alimony or divorce settlements, etc.
- current value of all other court ordered payments, etc.
- Compute the Net Worth
- = Total Current value of Assets – Total Current Value of all Debts.
- This is the foundation of all planning for a secure financial future!
- The numbers need not be super accurate.
- This is just a birds eye view of your current position
Now that you know your current financial status,
- the Next Step is to SET SOUND FINANCIAL GOALS
- That is, clarify where you want to be
- That’s in the next Post
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Scanning the landscape of your financial future?
There are about six major ways to become wealthy:
Be Born into a Wealthy Family
- It goes without saying that
- if you are the child, relative, or heir of
- Warren Buffet, Bill Gates, Sam Walton, or
- Africa’s Aliko Dangote, or Mexico’s Carlos Slim, or
- any of the royal families in Kuwait, Oman, or Dubai, etc.
- you WILL also be wealthy.
- But this path to wealth is not available to over 99% of the planet!
Marry into a Wealthy Family
- Kate Middleton, and Meghan Markle
- married into British Royalty and into Wealth!
- The wives of Rupert Murdoch, Mark Zuckerberg, and Elon Musk
- However, this road is reserved
- for only a tiny sliver of humanity.
- It also appears that
- the wealthy generally marry
- people of similar economic status.
Win a Lottery Jackpot with a Big Cash Prize
- The odds of winning the mega million jackpot in the US
- for example, is over 1 in 300 million
- that means it is ‘possible’ to lose over 300 million times
- It also means that you may never win
- if you play the lottery every day
- of a 100-year life span
- (that is about 36,600 days!)
- and never win!
- As a means to wealth,
- winning the Jackpot is therefore a ‘false hope’
- for the majority of us.
- Note: Forget about the publicity
- around those who win;
- the prize money
- (less the portion
- that goes to the organizers)
- is coming from all those who did not win,
- (that is a lot of people!)
Steal Money From Plenty of People or From a Wealthy Person
- The problem with this approach is that
- it is illegal and you may get caught,
- it is anti-biblical, unethical, and immoral; moreover
- people/the wealthy will work to protect their money, and
- therefore the success rate of achieving lifetime wealth
- through thievery is also very low.
- Therefore, this is not a viable approach to wealth
- for average person
- (some still try to make a living
- by scamming people out of their money).
Become a Successful Professional in a Well-paying Industry
- Note: “successful”
- Also Note: “well paying industry” of the economy, meaning
- star athletes, champion sportsmen, movie stars, etc.
- at the top of their profession
- (Usain Bolt
- the 100 meter Jamaican world record holder
- is reportedly worth over $30 million
- professions requiring high qualification, and
- that are in high demand
- but with low supply of workers, for example,
- brain surgeons, computer whiz, fund managers, etc.
- Also Note: Working for income in an excellent but regular job
- is not usually a means to wealth!!
- The possibilities here in my judgment are greater
- than the previous listings
- but still for most people
- it is not a feasible way to build lifetime wealth.
Start and Run Your Own Successful Business
- Note again “successful”
- Starting and running a business requires
- special skills
- which many people do not appear to have;
- willingness to take risks,
- willingness to bear full responsibility
- But with risks comes financial reward
- that can grow without limit
- into lifetime wealth,
- as long as the business continues to grow
- The proportion of people who can take this is also greater
- than than the previous options!
Get A regular career and invest wisely
- in other Successful Businesses
- over a long period of time!
- Note: you do not have to be successful at
- starting and running a business; but
- you must be good at picking successful businesses
- over a long period of time!
- This means using modest regular income, and
- saving all you can, while
- investing in businesses that are successful,
- over a long period of time,
- will generally compound into wealth!
- This is the most available route for most people!
On a final note:
- Becoming ‘wealthy’ need not be your goal, rather
- Make it your goal to become Financially Free:
- Have enough to tithe and give to the work of the Lord.
- Have enough to cover your budgeted expense
- including miscellaneous, as well as
- unplanned and unexpected expenses.
- Have enough to cover for emergencies.
- Save enough to guarantee a desired standard of living in retirement.
- Have enough to leave a legacy for the next generation!
- Have enough to be generous and make a difference in the lives of others.
- This we can all do
- If we start early,
- with much planning, prayer, and discipline!!
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In my last post, I told you two ways your loan balance can continue to increase.
Even when you are making your minimum monthly payments,
- if you miss your minimum monthly payment, and/or
- whenever you are allowed to pay less than your minimum monthly payment
- your loan balance may continue to increase.
Other scenarios in which your loan balance will continue to rise:
A ‘debt relief’ program promises you can make ‘smaller payments’
- than the standard/reasonable minimum monthly payments, and
- used by some unscrupulous lenders to trap you
- Some government and/or education loans repayment plan are also
- income driven, i.e. based on
- how much you earn not
- how much is required to pay off the loan
- in a reasonable period of time.
- Example 1: you owe $25,000, at 15% annual interest rate computed on the balance each month
- The minimum payment is 2% or $500.
- “That’s too high”, you say, “can you help me?”
- “Can I pay $200 per month please?”
- “Sure”, the lender says, “just for you!”
- What you may not realize is that
- $200 does not cover your monthly interest ($314).s
- The difference ($314 – $200)
- is added to your loan balance
- (the interest has been ‘capitalized’)
- which continues to earn interest.
- Example 2: The Education Department Income Driven Repayment Plan (IDRP)
- provides relief to people allowing them to make payments
- based on how much they earn
- on loan balances that earn interest each day
- until the to total balance is paid off.
- As above, you may be making all regular required payments
- but your actual loan balance could be increasing!!
You make regular minimum payments but
- if the interest rate is high and if
- the loan balance is continually earning interest,
- your loan balance will continue to increase; in fact
- the loan balance will double approximately
- every 70/(interest rate) years
- according to the ‘Rule of 70’:
- an amount that grows at the rate of ‘x’ per period
- will double approximately every 70/x periods.
- Example, a credit card balance of $25,000 at 15% annual interest rate
- will double every 70/15 = 4.7 years (4 years and 8 months)
- If you make every minimum required payment of 2%,
- The balance will double every 70/13 = 5 years and 5 months.
- Some credit card loans will have lower/higher interest rates.
- Some loans (some mortgages, car notes)
- have interest calculated over the life of the loan.
Final Take Away
- If possible, avoid loans
- for which the interest rate is calculated frequently
- on the outstanding balance.
- Make sure your minimum payments at least cover your interest
- Make sure your minimum payments covers some of your principal each time
- If not the make additional payment to cover
- paying down your principal.
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As a general principle, debt is bad unless
- It’s an investment debt, examples of which are,
- education loans in an area and, in an amount that makes economic sense
- a mortgage,
- a loan to purchase a house or real estate,
- for which at least you have a real asset to sell off later,
- it can be viewed as a form of saving at the least;
- you may be able to build equity over time, and thereby
- to increase your net assets position; or
- an asset that will produce returns
- greater than the cost of servicing the debt,
- i.e. your earnings on the asset is greater than interest paid on it;
- for example, a business or some form of an investment instrument
- that produces an additional and an ongoing stream of income.
Long Term Loans,
- credit cards, education loans, business loans, mortgage loans etc.
- even for ‘good investment loans’ (debt) have one trap:
- the ‘Minimum Monthly Payments’ trap.
- ‘Minimum Monthly Payment,’
- is the amount you are required to pay on your outstanding balance
- at regular periods (usually monthly, but also quarterly, yearly, etc.)
- over the life of the loan;
- meant to at least cover the interest on the loan.
- But it may not cover your total monthly interest,
- which means the amount you owe could be increasing
- even while you are making regular payments!
- When you take out a loan, your loan balance
- which is your total debt on the loan,
- continues to earn interest,
- by the day, month, etc. depending on the loan details; it may also
- increase when you fail to make a payment
- because you get charged a penalty for late or non-payment,
- which is then added to your loan balance!
If your minimum payments do not cover the interest,
- in each period,
- the unpaid interest is usually added to your outstanding balance
- (this is called ‘capitalization’ of the interest)
- that is, it’s like you took a larger loan in the first place;
- future interest payments may be calculated on
- the unpaid interest plus the original balance (‘principal’);
- which is now the new and higher ‘principal’,
- therefore your debt is growing, even as you are making
- regular payments towards it!
- Example, say you hold a balance of $25,000 on a credit card/loan
- at 15% annual interest rate computed on each month’s balance, you must pay
- $3750 per year in interest (25,000 x 0.15) or
- $308 – $312 per month (3750 /365 * 30 days; or $3750 /12 months) or
- $500 per month if the minimum payment required is 2%
- If you miss one minimum payment,
- the $500 may be added to your balance of $25,000
- at the end of the period
- to become $25,500.
- Your annual interest at 15% is now
- $3825 per year (25,500 * 0.15) or
- $314 – $318 per month (3825 /365 * 30 days; or $3825/12 months) or
- $510 per month if the minimum payment required is 2%
- Additional fees (penalties) may also be added to your loan balance.
- If on the other hand
- you are in financial difficulty and ask for reduced payment
- that is less than your interest payments,
- say you want to make a $100 payment,
- instead of the minimum payment of $500
- you will be paying less than the interest payment
- (of $308 – $312 per month);
- your outstanding interest may be capitalized
- i.e. added to the initial balance of $25,000:
- which is $208 – $212: the difference
- between your monthly interest
- ($308 – $312) and
- the $100 you paid
- will be added to your balance;
- other ‘late penalty’ or ‘non-payment’ fees
- may also be added to your balance
- other ‘finance’ or ‘financing’ charges
- may be added to your balance and
- the total loan balance will increase.
- Then what looks like a relief (less than the minimum payment)
- turns out to be bad for you in the long run
There’s more. Check back tomorrow!
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TOO MANY ‘days left at the end of your money’; the next pay check? Here are simple steps to help you manage your money!
- Know Your Spending Pattern!
- Track your every penny for 2-3 months.
- Write it down, use Excel.
- Make a list.
- Write down the Date, Place, Description, Amount,
- for every penny you spend!!!
- Who says good things come cheap?
- Plan Your Spending
- Draw from ‘1’ above.
- Make a budget.
- This is a ‘plan for spending’ based on your income.
- Use approximate numbers (averages).
- Estimate regular expenses at the higher end (Be realistic!).
- Monitor Your Spending Pattern
- There are many apps that do this.
- Most likely your Bank can also do it for you,
- if you do not mind someone else tracking your finances, and
- if you do not mind signing up ‘for free’
- (nothing is truly free) or,
- you can make your own Excel budget.
- Excel has many templates for household and other types of budgets.
- Here is one that I use:
- By George Hayward – Household Budget Template
- Keep to Your Plan (Your Budget!)
- Automate Regular Expenses:
- tithe (10%),
- bills, and
- savings and investments (10%).
- It will help your credit score.
- Keep Spontaneous Purchases to a minimum.
- They are the main source of going over budget.
- This includes ‘eating out’ on the spur of the moment.
- Make a Priority List for Spending, Mine:
- bills and obligations,
- necessities (health, food, etc.),
- emergency Funds saving,
- (six months worth of regular monthly expenses)
- savings and investments, and
- leisure, and other discretionary spending.
- Don’t hold Credit Card Balances
- The interest rate is too high (often 10 – 25%) on balances.
- Even when you make minimum payments,
- your balance is still increasing and
- your outstanding it will double in almost every 4-7 years!
- Learn How to Invest and Grow Your Wealth – More on that later!
AND YOU ARE ON YOUR WAY!
YOU CAN DO THIS!
LET’S DO THIS!