You need to set a solid foundation on your journey to financial freedom. To do that, you need to know where you are today, and where you want to go. In this section we’ll
The Foundation Of Financial Freedom
The foundation of financial freedom is all about taking stock of where you stand now, and developing your vision for where you want to go. Knowing your “why”, and knowing where you are now, is a powerful tool to helping you move forward.
Balance Sheet – What’s Your Net Worth
In order to get where you want to go, you need to know where you are right now. You do that by compiling a balance sheet, commonly called a net worth statement. This is where you add up all the things you own – assets like savings, investments, properties, and such. You then subtract all the amounts you owe – liabilities like student loans, credit cards, car loans, personal loans, mortgages. Once you’ve done that, you know where you stand financially. You’ll want to do this again regularly – I do it every quarter, but you may do it every month. Here’s more about my quarterly net worth process here. And check out an example of my analysis from the end of 2016.
Your Cash Flow – What Are You Spending On Today?
Now that you know where you stand in terms of your net worth, or balance sheet, it’s time to get to know your cash flow. “Cash Flow” is a business term for tracking money coming in, and money going out. I recommend starting by simply tracking your expenses for a month, before creating a budget.
You may not even need to create one – many millionaires don’t. But tracking your cash flow will give you the foundation for the second tier, where you’re going to optimize your expenses.
What Do You Want Out of Your Financial Life? What Are Your Goals and Dreams?
Once you know where you stand now, it’s time to dream about where you want to go. There are no right or wrong answers here. If you’re not sure how to do this, you can use my three step process to getting to know your dreams. You’ll want to be a person with a plan. Check out some financial facts specific to women’s challenges with investing here.
Credit History and Credit Score
You’ll want to get your credit history from all three credit bureaus, using the free annual credit report tool, so you can review your credit history and make any necessary corrections. You’ll also want to get your credit scores. You can use Credit Sesame, Credit Karma, or Discover to get this information. If you discover you’ve been the victim of identity theft, we’ll cover what to do in the next step on protecting yourself.
Done With The Foundation – On To Step 2!
You’ve gotten to know where you are today, and where you want to go. It’s time to head on to the second step in your financial freedom journey: protecting yourself and your family, optimizing your spending to align with your dreams, and making plans for the road ahead.