Financial Freedom Action Plan For January

Financial freedom in 12 months is something that anyone can do if you put your mind and focus on this type of project. Imagine how you would feel if this time next year you were completely out of debt and on the road to complete financial independence?

In order to achieve that kind of accomplishment you must have a roadmap, a blueprint or an action plan. Getting to financial freedom or independence is a journey. For every successful journey you have to know where you are starting, what the route is and where you want to end up.

This Hub is the first of a twelve month action plan to help you along your journey to financial freedom, however you define that.

Each of the 12 Hubs will correspond with a month of action. You can do the action steps in any order but I recommend you start with January's action steps.

Throughout the Hub you will find tips and resources for accelerating your journey to financial freedom. No matter where you are on your own personal finance journey, these 12 Hubs will help you lay a solid foundation for financial success. Bon Voyage and have a great 12 months.

January First Steps

What you’re going to do in January is take stock and make a plan. Here’s what you’re going to do.

Get a calendar out and set aside an entire day that you (and your spouse if you have blended your finances with a partner) will devote to taking stock and understanding where you stand financially.

Collect what you’ll need. Before that Taking Stock Day arrives collect the following information.

• Credit Card Statements

• Bank Statements

• Loan Documents

• Mortgage Information

• Cancelled Checks or Check Registers

• All of your receipts from the previous year

• Investment statements

• Pension fund statements

• Last year’s tax documents

• Any charts and printouts if you use any money management software

• Paycheck stubs and any income records

• Legal pads or notebooks

Once you have all this information collected you'll be ready for the day you've set aside called "Taking Stock Day."

On this day you are going to do a few tasks. Because you’ve set the day aside for these activities, turn off your phones, lock your doors and draw the blinds if you have to. You don’t want any interruptions.

Step One: How Much Money Came In Last Year

The first thing you’re going to do is to add up all the money that came in during the previous year. Calculate your gross income from employment, any other income from selling stuff, gift income if anyone just gave you money, etc.

Step Two: Where That Money Went

This step will take the most time. This step may be the most painful. If you are doing this with a partner/spouse you must both make a promise to keep your comments and accusations and judgements to yourself. You must promise to pretend that you are doing this for someone else and not take anything personally. You want to pretend as if you are an accountant for a business and you have to prepare a report for your boss showing where all the money went last year.

Start sorting all the receipts, going through all the statements, etc. Look at your paycheck stubs and see how much money went to taxes, health insurance, etc. Make lists and lists. Don’t be neat. Just get all the lists made. I suggest you just do this by hand at first and then if you want to get it all into a spreadsheet you can do that later. If you’ve meticulously used a money management software this step will actually be accomplished really fast as your software can create all kinds of reports.

Once you have accounted for every penny add up all the categories. If you’ve been a lousy record keeper so far, you may have to estimate certain things, like if you paid cash for those coffees on the way to work, you may have to make an estimate, like $3.00 a coffee times 3 times a week for 40 weeks of the year. You know what to do.

Now put these lists aside because now you are going to figure out your net worth.

Step Three: How Much Are You Worth?

Now you’re going to calculate your net worth. This is how rich people think and how you want to start thinking about your financial life. Here’s what you do:

Determining Your Assets

1. List all your fixed assets and estimate what they are worth if you sold them today. Like your car...Google "Kelly’s Blue Book" and pick the conservative worth of your car. For your house (if you own a home) go on Zwillow.com and get a ballpark estimate of what it’s worth.
2. Now list all your liquid assets and what they are worth if you cashed them in today. This is your checking account, investments, retirement plans, IRAs, 401k etc. When you figure out what your investments are worth deduct any penalties and taxes you would incur if you cashed them in today. Pretend like you have to come up with someone’s ransom in 5 days....how much money can you liquidate?
   
3. List personal assets like jewelry, coin collections etc. Want to know what the sterling silver is worth? Do an advanced search on eBay and search for your items in “Auctions that ended” and see what your stuff is actually worth out in the real world. Warning, this can be a little depressing. This may take a little bit of time, but only research items that you think will be worth more than $500.
4. OK now add all that up.

Determining Your Debits

Now you will figure out what you owe.

1. Add up all your debt, mortgages, student loans, personal loans, credit cards, revolving payments, everything. Again, promise not to make any comments or accusations at this point. It is what it is.
2. Subtract what you owe from your asset total. If it’s a negative figure, don’t freak out.
3. Get a sort of large piece of paper and write this figure on it in big font. You’re going to hang this sign up somewhere where you can see it every day. The reason you want to look at it everyday is that your goal is to increase this number by the same time next year, and looking at it everyday will keep your goals fresh in your mind.

Step Four: Making The Annual Plan To Increase Your Net Worth

Now you’re going to make a plan. Go get the spending lists. Tidy them up if you like. Now make some decisions. What are your obligations. What do you have to spend your money on.

You’re going to make some categories:

Step A

Expected Monthly Payments: Make out a list of what your absolute monthly payments are and when you pay them. This will be a list of your rent or mortgage, utilities, phone, food, insurance, loan payments, debt payments, etc.

Step B

Add all your expected monthly payments up for one amount you pay each month.

Step C

Expected/Unexpected Annual Big Ticket Items: Look back over your lists and see what one time big expenses you had last year. This could be tires for the car, car registration, tuition, insurance payments if you pay quarterly or annually. Maybe you had to go to the hospital or had an unexpected prescription, or a dentist bill.

Step D

Add all those unexpected and expected expenses up and divide that number by 12.

Step E

Now take that number and add 10% to it.

This is the amount you will set aside on the first of each month. You are going to treat this payment like a monthly obligation.

Step F

Now add this monthly payment to the monthly total from Step B.

Step G

Now subtract that grand total amount from your monthly net income.

Hopefully you have a remainder and this result is not a negative number.

If you have a negative number you’ll now have to start thinking of ways to bring your monthly obligations in under your monthly income.

Some typical ways of doing this is to get an extra job, refinance the house and reorganize your debt. You can call your creditors and try to get the terms of your loans restructured. But you’re not done yet.

Step H: If you have money left over after you do A through G calculations you now need to do the following:

Subtract another 10% of your monthly income and put this amount on your list of absolute monthly expenses. This is the amount you are going to save each month. Depending on your situation you can make this amount more if you like but 10% is the bare minimum.

Final Step: When you are all done with steps A through H, if you have anything left over, you can now make your decisions about how you will spend this money. It doesn’t matter what you choose to spend this money on, saving for a trip, weekly movie night, video rentals...the point here is to plan ahead of time what you’ll use it for, based on your spending patterns from the year before.

Set Up Your Money Funnels

After you do steps A through I above, you should have four amounts. They are:

1. Your monthly payments grand total.
   
2. Your monthly payment (with 10% added) from Step E.
3. Your other 10% amount (Savings)
   
4. Your left over funds.
   

What you'll do now is open up auxiliary accounts to deposit the amounts 2-4. Amount 1 will just go in your checking account as that is the amount you have to send out each month. 

So that’s all for January. Now that you’re all organized you know exactly what money is coming in and where you are sending it.

If you do just this part of the annual action steps, theoretically your net worth will increase substantially in 12 months.

You can go on to February's action plan by clicking here or you can take a break and enjoy your feelings of accomplishment. Congratulations on taking this first step.