So far:

You've learned the starting point for your journey is your current net worth and that measuring your net worth is the only way to track your progress.

You've figured out your destination when you determined your number.

Some of you even took some time to sort through and handle any excess baggage (bad debt) that may slow you down on this trip.

Now all you have to do before you set off is to determine your current pace.

This article will help you answer:

Am I moving in the right direction?

How fast am I travelling?

When will I arrive at my destination?

So how will we do that?

Two words ...

...Income and Expenses.

Many of you shy away from your own finances because you are scared of numbers. This is one of the reasons why you are not financially free. Fortunately, I understand that numbers can be intimidating so I am going to give you a step-by-step process that any elementary school student can follow.

Let's start with income:

Step 1 - Calculate the gross (it just means before taking deductions like taxes, 401K, etc.) monthly income by adding up all the money you receive.

Example:

Gross Salary: $4000

Interest from Savings: $120

Stock Dividends: $230

Rent from Tenant: $1000

Total Gross Monthly Income: $5350

Easy, right?

Now for the expenses:

Step 2 - Calculate monthly expenses by adding up all the money that you spend on average in one month. For expenses that are once a year but recurring (i.e. christmas and/or wedding gifts), just divide the one time expense by 12. Taxes should be included in your expenses as well.

Example:

Rent: $1200

Utilities: $150

Phone: $80

Gym Membership: $20

Gifts: $1200/12 = $100

Income Tax (Federal and State) = $1300

So far so good? Great!

Step 3 - Calculate the difference between the money coming in and the money going out.

To help you with this calculation, click here for an income and expense calculator from frugalvillage.com. All you have to do is input your gross monthly income from step 1 and it will give you your "monthly spendable income" assuming a 33% tax rate. Then you input all your expenses for the month. At the bottom you will get the total left over for the month.

This total will help us answer the 3 questions above:

Am I moving in the right direction?

If your total is positive (you earn more than you spend), you are moving in the right direction. If your total is negative (you spend more than you earn), you are going the wrong way. If you have a negative total, the first thing you need to do is find ways to cut your expenses ... immediately.

How fast am I travelling?

The larger your number. The faster you're travelling. A large negative number means your travelling quickly in the wrong direction.

When will I arrive at my destination?

You will arrive at your destination when your current net worth is equal to your target net worth calculated from Lesson 2. Unless you already own a home, a business or other investments, the money you have in your bank and in your retirement accounts will make up the bulk of your net worth.

The income calculated from this lesson will determine how much you can save. Use this savings calculator from Bankrate.com to see how much you need to save monthly to reach your "number" within a set number of years.

Example using Bankrate's Savings Calculator:

How much do you want to save?  $1,000,000

How many years? Play around with this number to make the "monthly deposit required" = monthly amount leftover 

Interest rate: 6% Daily Compounding

How much money can you spare to start? $1000

Do you wish to skip 2 weeks out of the month? Yes

When do you make your first deposit? Today's date

Starting with $1000 I will save a million dollars ...

in 5 years, if I save $489/day

in 15 years, if I save $117/day

in 30 years, if I save $34/day

So if I started saving when I was 20, I would be a millionaire when I became 50 and all of this assuming a conservative interest rate of 6%. This is the power of compounding interest and the earlier you start saving the better.

If you haven't already, I highly recommend that you calculate the money you have left over each month after you pay all your bills and expenses. If the number is positive, use the savings calculator to see how long it will take you to reach your target "number" if you saved everything that was left over each month.

Once you know your pace, it's time to discuss strategy.

In the next lesson, we're going to answer the question:

What can you do to get to your number faster? 

The post Be Financially Free – Lesson 4 – Current Pace appeared first on Embrace Possibility.

With that "number", you now have a destination as you begin the road to financial freedom.

If you are starting your journey with a negative net worth (click here to learn how to calculate your net worth), you have your work cut out for you. The biggest reason for a negative net worth is usually ...

... DEBT.

It is important to distinguish between Good Debt and Bad Debt.

Good debt is when you borrow money to pay for things you NEED (Home, College Tuition and/or Car Payments) but can't afford up front without using up all your cash and selling out of your investments.

Bad debt is when you borrow money for things you don't NEED (IPad3, Trip to Tahiti, Luxury Goods, etc) and can't afford. Most credit card debt falls under this category.

No matter what type of debt you have, you should work to get out of it as fast as you can.

If you have a spending problem, the very first thing you should do is remove easy access to credit by cutting up all credit cards and closing any lines of credit. For those who only have good debt and can control spending, there is no need to cut up your credit cards.

If you don't have a plan to get out of debt, then most likely you are not going to get out. Fortunately, here is a simple and effective 7 step process that will help you eliminate your debt:

Step 1 - Organize all your debt by creditor, interest rate and minimum payment amount and sort by interest rate from highest to lowest.

Step 2 - If you are late on any payments, IMMEDIATELY call your creditor (personal or institutional) to explain. In many cases, the interest rates and loan terms can be negotiated.

Step 3 - Review your income and determine the LARGEST monthly amount you can use to pay off your debt. Remember to make sure you have an adequate emergency fund (1 year's worth of expenses).

Step 4 - Add $20 to every minimum payment on your list of debts and add up the final total monthly debt payment. You want to always pay more than the minimum if you are serious about getting out of debt.

Step 5 - Subtract the total monthly debt payment from the amount you allocated to pay off debt. If you have extra money, apply that to the debt with the highest interest rate. If you can't make the minimum payments, consider consolidating your debt to lower the minimum payments.

Step 6 - Make your payments according to your plan in Step 5 and adjust if income or situation changes.

Step 7 - Repeat Step 1-6

Although not advisable, you can take out a home equity loan to pay off your debt since the interest is tax-deductible and you can usually get a much lower interest rate than your credit cards. Of course, if you end up spending the money from your home equity loan on a trip to the Maldives and can't pay it back, you can lose your home.

Getting out of debt is never the solution. You must look at the specific habits that got you into trouble. Only by changing those habits can you truly take the next step towards being financially free.

"Think what you do when you run into debt; you give to another power over your liberty"

- Benjamin Franklin

Now that have made arrangements for your debt, let's get back on the journey with our next lesson.

The post Be Financially Free – Lesson 3 – How to Get Out of Debt appeared first on Embrace Possibility.

Most people don't get into a car and just start driving. They usually have a clear idea about where they want to go before they even leave the house. The road to financial freedom is just that - a road. Before you take that road, it is important to know where you are and where you want to go.

If you ask most people who want to be financially free what it means to be financially free, they rarely describe it in a measurable way. The usual responses are along the lines of "I don't have to work if I don't want to" or "I don't have to worry about money". With such vague destinations, it is no wonder why most people are not financially free.

In Lesson 1, we learned that the only way to keep score is by calculating your net worth (click here if you want a review). By now, you should all know your current net worth (if not, click here for the net worth calculator). Just like planning a trip, once you know your starting point the next step is to determine your destination.

So where do you want to go?

Think about the lifestyle you want to lead and what the average monthly expense will be when you retire. Also you'll need to decide when you want to retire and how long you plan on living. Of course, the longer you continue working, the less you'll need to save per month.

If you want a quick rough calculation of your target net worth, ING has a Find Your Number Calculator that is quick and easy to use (note: I don't use ING and I am not endorsing ING and any of its products and services).

Once you have your desired number, you can use the retirement calculator at the bottom of this article to see what you need to save per year depending on your current net worth (current savings), your target net worth (desired retirement savings) and the time you want to retire (years until retirement).

Now that you have an idea of where you want to go, we need to begin planning for your trip to financial freedom.

In the next lesson, we're going to take a slight detour and discuss good and bad debt and the best way to get out of bad debt. This way you can unload any unnecessary baggage that you have before we begin our journey. This will be a must read for anyone with a negative net worth.

If you are part of the lucky group that is debt-free, you can continue your journey by going straight to lesson 4.

The post Be Financially Free – Lesson 2 – Do You Know YOUR Number? appeared first on Embrace Possibility.

For those who do agree or would like to become financially free anyway, read on.

Most people are not financially free for one simple reason:

They don't know how to keep score.

People tend to equate financial success with big homes, fast cars and luxurious lifestyles. It is this "consumption thinking" that holds people back from attaining their financial freedom. In Thomas Stanley's two books, The Millionaire Next Door and The Millionaire Mind, most of the millionaires profiled don't drive expensive cars nor lead extravagant lifestyles. They tend to value frugality.

There is only one way to keep score and it is ... (drum roll please)

...keeping track of your net worth.

Net Worth = Total Assets - Total Liabilities

Assets are things of value such as cash, investments (e.g. stocks and bonds) and the value of your home. Liabilities are the obligations that you owe such as credit card debt, student and bank loans and mortgage.

If you already know what your net worth, then all you need to do is make sure it stays positive and keeps going up. The faster it goes up, the better you're doing. In a future post, I will talk about how to decide what your target net worth is.

For those of you who don't know your net worth, get your financial information ready because you should calculate it right now. Stop whatever else you're doing because this is the most important number you'll need to know if you want to be financially free. It won't take too long and all you need to do is plug your numbers into the calculator below:

The post Be Financially Free – Lesson 1 – What is your Net Worth? appeared first on Embrace Possibility.