Good financial habits

The Planning and setting of goals are a very important part of our daily lives. This should also be applied to our finances to accomplish financial freedom. Having a goal that is realistic as well as steps that are measurable, will allow for easy tracking of our progress.

Determine your net worth

A good starting point is to determine one’s net worth. This involves comparing the value of all your assets with the total of all your liabilities. This will provide a clear picture of where you are in relation to your goal. Periodic calculations of net worth can also be used to track progress over time. Once the assets and liabilities are listed, arrange the liabilities in descending order to determine which liabilities should be cleared first. Getting rid of the high interest liabilities should be a priority as you will be able to reduce your cost of debt more quickly. However, some of us may have small debts which are not the highest in interest but getting rid of some of these can provide a sense of achievement and motivate us to working toward paying off the larger debts with higher interest.

Note that not all debts/liabilities are bad as some can also provide you with earnings by way of income or capital gains. If the earnings from an asset purchased with debt outweigh the cost of the debt, then the positive net effect makes it good debt.

Develop good habits

As we reduce debts, we can also look at ways to increase assets. Selecting which assets to add to our portfolio should also be linked to our financial plan. Some assets provide income, some capital gains and some may have a combination of both. Where you are in relation to your goal can help with making the right choice. Speak with a licensed financial advisor if you need guidance in determining what to invest in to meet your goals.

One aspect of achieving our goals that we tend to neglect is managing lifestyle inflation. As we earn more, we tend to spend more. Rather than increasing our spending we should focus on increasing our investments. By maintaining your current lifestyle and putting more aside to help achieve your goal will allow for quicker realization of the goal. This may take a great level of discipline as it is easy to fall into the trap of lifestyle inflation without realizing until it is too late. This is not to say that you should not treat yourself periodically but monitor the shift in spending pattern to ensure you are still on track to achieving financial freedom.

Another good habit to adopt is to have an emergency fund. When unforeseen expenses arise, this will be the first source of funding. This enables you to leave your investments and assets intact so liquidating would only be necessary in extreme circumstances. When the fund accumulates, you may have a need which arises. Do not be disheartened that you have to access the fund but be happy knowing that it is available for use and can eliminate you having to liquidate assets.

Putting into practice good financial habits and a solid financial plan will help you to achieve your goal of financial freedom. Continually monitor your financial position and celebrate the small wins. The process will take time, but it can be done.

Dwayne Neil, MBA, is the AVP, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm.