4 Steps to Financial Freedom

freedomBeing financially free for me means being in total control of your money matters. For me it means you know how to earn and spend money, and make it work for you and not the other way around. Talking about financial freedom may seem complicated, if not frustrating. Many of us are confused about where to begin. Fortunately, I can summarize it to you in four, easy steps.

Build your emergency fund

First of all, you need to make sure that you are adequately protected when unfortunate events come. If you got struck with illness, disability, or worse, death in the family, you can tap into this pool of money to provide for your needs while you are yet to get back on your feet.

Save up for retirement

While making sure you have enough in your rainy day funds, it’s also important to safeguard your future. While retirement may seem like a faraway dream, it’s important to get started early rather than catch up later. If you haven’t heard of the power of compounding yet, it proves really effective when you reap the fruits of your early efforts.

Pay off your debts

You will have a hard time focusing on savings and investments if you have yet to pay off all your dues. Additionally, you wouldn’t want to face your retirement years still paying for remaining debts. Focus on this now and enjoy later.

Invest

If you have some extra money left after savings and debt repayment, you’d want to build your wealth more by making wise investments. Choose carefully and pick a nice mix of low risk and high risk investments for balanced results.

Debt and Savings

Which is more important, paying off your debts or saving money? It’s still the never-ending debate between financial experts from all over the world, and unfortunately there is no easy answer to this.

Many gurus insist that paying off debt should come as priority, simply because the interests that debt accrues are higher than what will be earned by putting your money in a savings account. Indeed, when you reflect on this, interests from debt really negate what you will earn with savings.

On another perspective, one of the reasons why people get into debt is because they didn’t have enough savings to cover for them during times of financial crisis, thus they were forced to borrow money. This is why other experts claim that saving money shouldn’t be halted while in the midst of debt repayment.

Personally, I agree with the latter claim. For me, it could take years to ever finish repaying off all your debt, and during that time, it’s such a big waste on the money that should grow towards your retirement. While in the midst of debt repayment, you can lessen the amount you put into your savings, but I don’t advise stopping entirely. While this approach doesn’t make sense mathematically, it should benefit you in the future.

How to Keep Your Debt Under Control?

debtAs I’ve said before, debt is unavoidable in life. Mortgage loan, car loan, credit card debts, you’ll always have some form of debt in your financial life. While a healthy amount of it won’t necessary ruin you, things can get ugly if you don’t learn how to keep it under control. These are my top tips for managing your existing debt.

Pay on time- stop wasting money on late payment penalties and revolving interests. You’ll be paying anyway, so why be late? If unexpected things happen and you really can’t make it on time, call your lender so that they can find a way to help you out, some may be kind enough to extend your due date.

Pay above the minimum- as much as possible, I really recommend paying your dues in full, but I completely understand how things can get rough sometimes. If paying in full is impossible, at least pay above the minimum amount. If you make it a habit to pay only the minimum each month, you’ll never get rid of your debts.

Don’t add any more credit- if things are starting to get messy, don’t add any more fuel to the fire. Stop using credit for a while if you’re struggling with your payments. Also remember NEVER to take on a new debt to pay off the existing one.

Use cash- it could be easy to forget and go overboard if you always bring your plastic cards along. Whenever paying for your basic needs, spend only the cash that you’re meant to use.

Watch out for your credit rating- there are many perks to having good credit rating aside from the ability to borrow money. Once you see a decline in your credit score, your creditors might increase your interest rates as well, which is not good because it can take longer for you to get rid of the debt with the higher interests.

Find a secondary source of income- if paying your debts start to become a burden and you feel deprived of the things you want, getting a second job can help you pay off your debts faster and buy other stuff that you desire.

Why I took Out an Insurance Policy When I was Single?

insurance25When I purchased a life insurance policy before I had any children, and even before I got married, I had to answer and explain to my friends’ questioning faces. So I kindly explained to them why.

As we all know, a life insurance is most important if you have any dependents, and your demise will mean financial suffering on their part. While I didn’t have kids or a spouse that time yet, I sure knew that I was going to have my own family one day. Even if I didn’t, my life insurance won’t go to waste, so why postpone getting one when premiums are lowest when you are single?

Basically, when you are single and at the prime of your life, insurances have very attractive rates. I didn’t have any diseases or conditions that time. I have pretty good credit, and I wasn’t a smoker, so all the odds were in my favour. Why wait when I am already sick and old, and the premiums high?

Of course, not just because everyone else is buying insurance means that you should too. And if you do need a life insurance, make sure you buy the right amount of cover. Both over buying and under buying can mean money wasted, so make sure the term is just right for your needs.

Early Retirement Planning

I don’t know about you, but at the end of every tiring day at work, I always remind myself that I work hard because I want to retire early. It sure makes everything a lot easier to face. Still, what exactly is the meaning of early retirement?

Certainly, it’s not just about waiting for the early retirement age to receive your pension, because it’s more than that. About 40 or 50 years later, do you think the money in your retirement funds will suffice to sustain your retirement needs? By then, do you think you have paid off all your debts, and have enough to meet your living expenses and other activities you intend on doing?

While retirement conjures thoughts of vacation, catching up with your hobbies, and spending quality time with your loved ones, there are many more factors to look into. Where will you live and spend your remaining years? What do you plan to do with all those leisure time? If you get bored and suddenly miss your job, it sure wouldn’t be easy to get it back.

To help you get started on planning your retirement early, visit https://www.gov.uk/plan-retirement-income

Where to Invest Your Money?

investPart of personal finance is making your money grow through investments. The tough part, however, is how to place your hard earned cash wisely.

Savings account- definitely you need to toss a portion of your income into your savings account. This is a safe place for your money to stay, to ensure that you won’t spend it on unnecessary expenses. Unfortunately, this doesn’t yield very high returns, so it’s not wise to put everything in here.

Low risk investments- like your basic bank account, these types of investments are pretty stable but doesn’t offer very high returns. Examples are mutual funds, certificate of deposits, annuities, and treasury bills.

Medium risk investments- as the term suggests, these investments have a higher level of risk, but also with a bit higher returns. Examples are bonds and real estate.

High risk investments- placing your money at high risk investments is like gambling, but they do yield the highest rate of returns. Examples of this are stocks. Of course, while you can’t predict what will happen in the market, you can ask for advice from the experts and study the trend before making a big move.

Diversity is Key

There’s no definite answer as to where you should put your money, but rather, I advise for you to diversify your investments. Decide on how much money should go into a safe investment to ensure that you’ll be able to meet your retirement needs. Meanwhile, if you can spare a little extra, play a little with medium risk investments and aim for higher returns.

If you have a little more room for higher risk investments, it also pays to include them in the mix. Like gambling, make sure that the money you put into this is the amount that you can afford to lose. If you win though, this money can be used to treat yourself on a sudden trip or make another investment if you like.

To further know the basics of investing, read this helpful guide from Investopedia.

When Does it Make Sense to Borrow?

borrowAs I mentioned in my earlier post, there are many things in life that we don’t have any control over. During these difficulties, there’s nothing wrong to seek financial assistance when need be. Whether it’s a loan from a bank, family, or friends, there will come a time that we will need to take on debt.

Of course, so long as there’s a reasonable use for the money you intend to borrow, and you can pay back what you owe on time, you’ll be fine. Here are some ways to borrow responsibly.

Borrow for Home Purchase/ Improvement

Owning your own home is just the ultimate dream for every adult worker, and one of the major reasons why we need to take on debt at one point in life. If the cost of rent is just too much, that you’d be better off in paying the mortgage, then do take a home loan.

Borrow for an Auto Loan

Probably the second most expensive and most important property you’ll have next to a home is your car. In fact, buying a car first can be more attainable for many. Being able to drive your own vehicle is not only convenient, but is also very useful for professional improvement.

Borrow for Education

If there’s a best investment in life, that would be your education. As you finish your studies and get a degree, you’ll be able to advance career wise.

Borrow for your Business

To soar high and live your entrepreneurial dreams, you’d need to take a loan to support that planned business expansion.

Loans You Should Avoid as Much as Possible

High Interest Loans

If you’re a still a starting borrower, or you have poor credit, chances are you’ll be faced with high interest loans. As much as possible, refrain from falling for these loans unless the need is urgent and you have exhausted all means.

Secured Loans

Secured loans are those loans which are tied to an asset. This is very risky because you can lose a valued property. Sometimes, you may be required to secure collateral if you intend to borrow a huge amount or if you have bad credit rating. An example of this is a logbook loan, which are secured against your vehicle. This type of loan is meant for those with bad credit and is very expensive. There are many logbook loan providers in the UK such as JustLogbookLoan.

Why Set Up an Emergency Fund?

emergencyNo one can be assured that life is going to be smooth-sailing all the way. Life is filled with surprises, and for me, the best way to battle them out is to expect the worst and always be ready.

No matter how much we earn, and how well we manage our monthly outgoings, all of these can suddenly be ruined with one unfortunate life event. Perhaps you got laid off from work, got ill, or worse, got into a disabling accident. While these are things we do not have any control over, what we can control is setting up an emergency fund to give us a cushion when urgent needs arise.

As the name suggests, an emergency fund is a money source meant to be spent on your emergency expenses. It is recommended that all of us save up in a separate account of emergency funds to be used on rainy days.

So how much money should you put on your emergency fund? Ideally, and as many financial gurus will say, you need to save about six to nine months of your basic living expenses. If the time comes that you suddenly lost your job or become incapable of earning income for yourself, you’ll have something to live on for at least a few months. This can prevent or lessen the need to borrow money to save you from this financial disaster.

Of course, if you’re struggling, you can start with three months worth of expenses, and slowly work your way up. Of course, you don’t need to stop when you reach nine months, because you can always build this fund as much as you like.

Right now, don’t stress too much about how much you’re going to put into your rainy day fund. What matters is that you get started and remember to only use the money in real emergencies.

Budgeting 101

budgetMany of us are misled to believe that in order to save effectively, you must earn more. While it is true that a higher salary can indeed help you achieve your financial goals that much sooner, what I realized over the years is that your earnings have very little to do with how fast you can save money but rather it is your budgeting skills that matter most. In fact, when I was younger, I found that I tend to spend more whenever I earn more, and soon enough discovered where the problem lies- my lack of proper budgeting.

Budgeting is how you allocate your financial resources to meet your daily expenditures, from food, utilities, transportation, to savings and debt repayment. It’s how you set limits to your outgoings and monitor whether your every financial move is right on track. No matter how much you earn, without a proper budget, all your money will disappear quickly.

The most difficult part of sticking to a budget is the feeling of being restricted. When we’re following a laid out plan, we sometimes feel deprived and caught between giving in to our wants and sticking to the goal. More often, the result is we are often swayed.

For me, the key to combat temptation is giving room for our desires. Many individuals force themselves to comply to saving 50% of their salary, only to find themselves exhausted and unable to commit to the long term goal. When you’re working overtime every day, with most of your take home pay going only to basic needs and your bank account, I won’t be surprised if you give up.

While commitment is truly important, I don’t recommend being too hard on yourself. My friends always ask me how I remain disciplined when it comes to handling my finances and I always tell them the same thing- Leave a little room for fun. It’s really important to ward off boredom and temptation.

They also ask me how much they should save each month, but believe it or not, there isn’t a precise answer. While there are saving guidelines that you can find helpful, I always advise that there should be no rules. For me, saving 5% of your income diligently is much better than the unsustainable 50%.

For the sake of having a guideline, take these figures for example. In my first three years of work, I committed to saving 20% of my salary. Being the typical new earner in the real world, there were so many things that I still wanted to do and wanted to buy. I recognized those feelings and admitted to myself that saving 50% of my salary would drive me insane. What I did instead was use only 50% for basic needs, allocate 30% for my wants, and 20% for savings. After every few years and as I got used to managing may finances well, I increased my savings to increments of 5%.

The bottom line here- Be realistic. Consider what you feel. While it’s not right to put savings on the back burner, you can do this without feeling restricted. Adding an element of fun and excitement can go a long way to your budgeting journey. For more helpful budgeting tips, check out http://money.howstuffworks.com/personal-finance/budgeting/10-tips-for-staying-on-budget.htm

My Introduction

Hey guys, my name is Yasmin Bibi and welcome to my new blog! I am a fan of everything related to finance- savings, investments, loans, insurance, etc. and have a passion for educating readers regarding the importance of managing one’s personal finance. Life is filled with surprises, and I believe all of us need to know everything there is to know about money and investments to plan our future accordingly.

My main purpose for starting this blog is to raise community awareness regarding the importance of financial planning. I want to help, in my own little way, educate the common citizen about the value of money and its proper management.