Four Steps to Financial Freedom – Part 2
Step 2: Analyzing Your Current Financial Position
In this series, discover the four critical steps you need to take to achieve financial freedom with less stress and more certainty with the financial mastermind, Willie Hooks.
Before proceeding with step two in your journey to financial freedom, make sure to read Part 1:
Download your FREE Journey to Financial Freedom Worksheet at the bottom of this post to complete each step in the Journey to Financial Freedom with your own data.
How to get started on your journey to financial freedom
If you remember what road trips were like before the commercialization of Global Positioning Systems (GPS), you will understand how much this technology has changed our lives.
As little as two decades ago, planning a road trip included buying a physical map and planning out a route with a magic marker and very little information. You would have no oversite of traffic, no live updates if you took a wrong turn, and no idea where to get help if you broke down or needed a gas station along the route.
Today, you simply punch your desired destination into your GPS system. The system picks up your current position and performs a gap analysis between where you are and where you want to be. Your GPS will then create an action plan to get you to your goal faster, with less risk, and more certainty.
While a well-planned road trip can be of enormous value, the unfortunate reality is that most of you reading this blog are still relying on outdated systems and practices to plan the most important journey you will ever undertake in your life – your journey to Financial Freedom.
You would not buy a map from 1980 to plan a cross-country trip, right? Then why would you adopt a financial planning strategy that uses outdated methods and data to get to your financial goals?
In this blog series, financial mastermind Willie Hooks walks you through the four steps to follow to bring your financial planning strategies in line with the technology and methods needed to achieve your financial goals faster, with less stress, and more certainty.
Step 2: Document your current position - your current financial results
“If you don’t know where you are financially, you cannot achieve Financial Freedom.” - Willie Hooks
When you are planning a journey using GPS technology, the first step is to decide on your desired destination. You need to tell your GPS where you are going using a specific formula, such as a specific street address or GPS coordinates.
In Step 1 of the Journey to Financial Freedom, you must decide the dollar amount you want to earn and set a timeframe to achieve your goal.
Make sure to read the Four Steps to Financial Freedom – Part 1 and complete this first critical step before moving on to Step 2. Download the Journey to Financial Freedom Worksheet below this post to document your progress.
Analyzing your current financial position
In Step 2 on your journey to financial freedom, you will need to analyze your current financial state.
The first thing that you will need to do is get all your financials in order. You should be assessing your financials every quarter, but many people avoid this process as it can be quite an anxiety-provoking experience. However, not knowing where you stand financially leaves you open to the greatest risk.
What do you need to calculate your current financial position?
Download the FREE Journey to Financial Freedom Worksheet below this post and use our calculators to establish your income vs. costs and net worth.
1. Income and expenses
1.1 Your current income
The first piece of information you will need is how much money you are making at your primary job. Collect your pay slips and calculate your annual take-home salary.
1.2 Passive income
You will then need to add all your passive income streams, such as rental income or real estate deals, dividends from stocks and bonds, and any other income sources that you may have come in on an annual basis.
1.3. Your current costs
Now that you know how much money you have coming in, you need to understand how much of that money you are using to cover your expenses. Calculate all your monthly payments, including consumables, utility bills, rent or mortgage payments, credit card payments, car payments, insurance, and health insurance costs, among others. Make a distinction between your basic needs and your discretionary purchases when you do this exercise.
2. Assets and liabilities
An asset is anything you own that adds financial value instead of a liability, which is money you owe.
Your assets are all the things of value that you own, including your primary residence (if you are a homeowner), any other real estate that you own, your vehicles, and personal belongings, such as household content. You will also want to include any investments such as retirement accounts, stocks, bonds, mutual funds, and the cash value of your life insurance. You also want to include your liquid assets, such as any positive balance in a current account, cash on hand, or short-term investments.
When assessing your assets, it’s important to do your research and assign a realistic dollar value. You can do this by looking online and determining how much it would cost to purchase a similar asset in the current market.
Now comes the scary part. It’s vital that you reconcile all your current debt. Make sure to include any credit cards, store cards, and personal loans. You will also want to include the outstanding principal amounts on any mortgage for primary and secondary properties and the outstanding balance on any auto loans.
Make sure to download the Journey to Financial Freedom calculator below this post to input your data.
Keep in mind that your income is not included in your assets. You can earn a big paycheck, but if you spend that money without accumulating assets, you can still have a low net worth. Alternatively, if you invest in stable assets intentionally with the right financial strategies, you can increase your net worth even if you don’t get a pay raise.
Knowing your net worth is important because it will give you a good indication of how your wealth-building strategy is performing. It might seem like you are doing well financially if you can cover all of your bills and have a little left over at the end of the month. However, if you are not increasing your net worth, you are not building wealth.
Facing the facts about your current financial position
Once you have completed Step 2 in the Journey to Financial Freedom Worksheet, you might face some difficult realizations.
If you have been following the traditional investing approach, you are likely to discover that there is very little space between your income and your expenses. As the cost of living continues to rise in the wake of high-interest rates and escalating inflation, the gap between your income and your expenses continues to narrow.
If this is not distressing enough, you will likely find that you have very few appreciating assets, with the possible exception of your primary property. If you have thoroughly assessed your current financial position, you will likely discover that your costs are very close to your income, and your liabilities are uncomfortably high compared to your assets. (Make sure to use the FREE calculators provided in the Journey to Financial Freedom Worksheet below this blog.)
Living in debt prison
Often, these numbers are not because you have been negligent in managing your finances. Most people work very hard their entire lives, thinking that if they do all the ‘right things’, they will be ok financially. The truth is that the financial system is designed to leave you in what I call ‘Debt Prison.’
Being in “debt prison” does not mean being incarcerated physically. Instead, it refers to the effects of the financial situation in which many hard-working Americans find themselves in our late-capitalistic economy.
Living in debt prison means having lots of debt, little savings, and no appreciating assets other than perhaps your home. When calculating your net worth, you might find that it’s low or even in the negative, which might be surprising if you have worked productively for numerous years and followed all the ‘right’ financial advice. And, as a result of your financial situation, you constantly worry about money as you live paycheck to paycheck, negatively affecting your physical, mental, and social well being.
As you describe how you are currently living, more than likely, it is not your desired lifestyle. Perhaps you will experience some pain, discomfort, and sadness, and you might even start to feel angry. If you experience these emotions, keep in mind that it can be a positive experience because you need that pain, anger, and discomfort to create the motivation, drive, energy, commitment, and focus to move toward your future state with a sense of urgency.
Taking the next step
You identified your financial goals in Step 1 of the Journey to Financial Freedom. In this step, you have evaluated your current position.
The next step is to perform a gap analysis and build a critical action plan that you can follow to get to your desired future goal, so you can start living the lifestyle you desire, which will be covered in Your Journey to Financial Freedom – Step 3.
Make sure to download the FREE Journey to Financial Freedom Worksheet below this post and keep an eye out for Step 3 in your Journey to Financial Freedom.
Make sure to WHITE LIST our email address to ensure that you receive your download.
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