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.

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.

I thought I was free but really, I'm not.

To be free, I thought it was enough to live in a free country like the United States but it's not.

I thought it was enough to have a loving family but it's not.

I thought as long as I had my health, I'll be free but I'm not.

What I am missing to be truly free is ...

... money and lots of it.

I have come to realize that without financial independence, I don't have any freedom. I am unable to do what I want when I want to so I have begun educating myself on how to become financially independent. I have begun applying some of the most important examples from my research (click here for my recommended reading list, which includes books on financial freedom) and it is working.

The first step that I recommend is to get into a habit of saving at least 10% of your income and putting it into a savings account that you don't dip into until you reach your retirement age (Note: You can retire as soon as you hit your retirement number. No one says your retirement age has to be 65 or over.)

That's it.

That's the first step to freedom.

No matter what happens, take 10% from any income you get.  Automatically deduct it from your paycheck. Trust me, you won't miss it.  You'll be just fine with what you have left to spend.

The post The First Step to Freedom appeared first on Embrace Possibility.