This is the sixth and final post in The Budgeting Series, in which we described in detail how you should create your personal budget.
Do you remember how we described a budget? “A budget is the most important component of your plan for financial freedom”. Financial freedom might mean different things to different people, but we suggested you picture yourself in retirement, then you’ll probably consider financial freedom as being debt free with sufficient income to live without having to rely on anyone for financial assistance.
This is ultimately achieved by controlling your net worth, likely affected in a big way by your level of debt, which needs to be paid off by your retirement date (for the latest).
So what is net worth? It is your total assets (property, cash, investments, etc) less your total loans (mortgage, credit card, etc).
- Firstly, you obviously want this to be a positive number, meaning more assets than debt
- And secondly, you want this to grow over time because on retirement, this is the pool that you’ll be using to fund your post-retirement lifestyle
How does your budget relate to your net worth?
Very easy actually. If you use our 33/33/33 approach to creating your budget, you’ll be saving 33% of your take-home pay. As a reminder, you can set whatever savings % you feel is enough, but if you don’t have a target, then use ours and build up to it slowly.
The 33% saved will be used to fund and grow your net worth i.e. your retirement pool. So while you may think how much to save each year is a short-term decision, there is a very direct link and impact to your future retirement.
So hopefully now you understand how your budget leads to a targeted future net worth and financial freedom. In summary, these are the steps:
- Know your current income and expenses in detail
- Create your personal budget
- Understand your current net worth, and
- Set financial and retirement goals & determine if your projected net worth can fund your retirement
Building Your Net Worth
We’re just making a short comment about this here.
We hope you now realize the importance of building your net worth, but you are probably wondering well how do I do that?
You’ll need to do two things:
- A debt reduction plan; and
- Increase your level of assets by saving more and investing the surplus money
But we should acknowledge that achieving the goal of building your net worth takes a bit of effort, and usually this is where you need objective assistance to build a comprehensive financial plan.
Feel free to contact us if you think we can help. But this website will eventually cover these topics, so stay tuned and happy reading!