Go from financial flab to fiscally fabulous
Achieving financial fitness means being able to manage your money in order to meet your current and long-term needs; it requires awareness, commitment, self-discipline and perseverance.
It starts with understanding your cash flow - money in and money out. What is coming in each month and what does it cost to run your household, cost of insurance and extras like entertainment? Becoming financially fit means knowing your numbers. Understanding what you make, save and spend provides the basis for making good decisions. You can derive a high degree of comfort from having a handle on your finances; only then can you proceed into building muscle in your financial life.
It is tough to think of managing life's risks such as disability, health, income protection, estate planning and education of your children when one is battling to make ends meet and struggling with debt. It is an important first step to have a strategy to rid yourself of monthly debt as it clutters your mind and leave you with a feeling of desperation. Only when you have a positive mindset will the creative juices start flowing to set you on your path to financial freedom.
Ann Wilson, CEO of The Wealth Chef, a company which teaches people to become financially free, suggests the following process to break free from consumer debt within three years.
It starts by consciously making the decision to change, to commit yourself fully and be ready to make some tough choices. At times you may feel frustrated by the decision you have made and the actions it requires you to take, but you should just know that it is worth it. Being debt-free will put you in a tiny group of people who actually own their lives instead of owing it, and the freedom it will bring you in terms of choices you can make and things you can do becomes absolutely incredible.
In addition, the personal wealth habits you will be creating on this exciting journey will stay with you and help you go way further than debt-free living to create real sustainable financial security for yourself and those you love.
Create a plan to destroy your debt. Here's how:
1. List all your debts.
For each debt you need:
- A name;
- Who you owe this money to;
- How much you still owe;
- The interest rate you are being charged;
- The minimum monthly payment;
- Any special payment terms or penalties.
2. Order your debts from the smallest amount owing to the biggest.
3. Determine the total monthly minimum repayment you need to make on all your debts and commit to keep paying the minimum repayment on all these debts. Where you can, set up automatic payments via direct debit so you can relax and know it's being done.
4. Now focus only on destroying one debt at a time. Energy flows where focus goes and trying to make extra payments on all the debts will just make you feel deflated and frustrated.
Focus on the debt with the smallest amount outstanding and commit to adding a fixed amount to this debt's repayment. The bigger you can make this extra payment the better. But just commit to an amount now and keep looking for ways to increase this.
5. 100% of this additional debt destroyer money gets paid against the smallest debt in addition to the minimum repayment amount. Any extra money you get from anywhere also gets thrown at this debt.
6. Keep destroying this debt, and once it is destroyed you take the full repayment amount you were paying on this debt plus the extra debt destruction amount you committed to - and you now add that money to destroying your second smallest debt. Keep going and keep rolling the repayments to the third, fourth debt, etc as your debts are destroyed.
7. Remember to celebrate your success as you go along.
This focused approach will give you a significant sense of achievement as each debt is destroyed, and as the debts drop off, you will have more and more money to pay off the other debts quicker and quicker, accelerating your journey to debt free living, savings and investments.
Financial fitness is a daily practice that requires consistent effort and 'marathon thinking', not a sprinter's mindset. It is living in a way that does not exceed income earned or put financial strain on savings goals. It is making choices that are in alignment with your priorities, building your money muscles and setting the stage to financial freedom.
Author: Adrie Barnard