A few days back, I was having a scintillating conversation with my close friend who was very much interested in frugality and financial freedom.
I was explaining about the financial illiteracy that is prevailing among youngsters.
She silently listened to the complete lecture that I was giving, and raised a million dollar question “Alright, youngsters including me know nothing about money, but where should we start to be financially aware?”.
This post is to answer her question, and I thought sharing this would also help other youngsters like her!
Step 1:Know how much you’re worth financially!
Here is a video with a simple story on calculating net worth of a person or family
Here is a simple excel sheet to calculate your own net-worth
If your Net worth is positive value, the you are in less risk. Or, if it is negative value, then try making it positive by fixing liabilities first.
Step 2: Start Analyzing your Spending Trend!
Start tracking your monthly expenses- be it your groceries, credit card bills, phone bills, log them somewhere and see where you are over spending.
Spot out where you’re overspending, cut down the unwanted expenses, and save at least 10% of your income every month to invest in your assets
“I am using the software Toshl Finance – I enter my daily expenses every day using the mobile app, it syncs with desktop app, and generates a monthly expense chart where I could easily spot out over spending”
Step 3: Sketch your own Balance Sheet!
A balance sheet clearly gives you an idea of what you own and owe.
List your income, expenses, assets and liabilities in the appropriate boxes in the diagram below. Assets are the ones that put money in your pocket, and liabilities take money out of your pocket.
Once the data is filled inside the boxes, see how the expenses are going out, and draw appropriate arrows by seeing the samples below.
In the first diagram, the income just goes as expenses without any liabilities, there is no asset creation at all.
In the second diagram, the income is spent mostly on loan payments and debt, but few assets like home and car are created. So the second diagram is far better than the first one, see where you’re fitting in.
The Rich’s Secret Formula
Create assets that generate income without you working for it!
The following is the balance sheet of the rich. Did you notice how the income stream is generated? The income is generated from the Assets.
Inspired by the book “Rich Dad Poor Dad”
The money that you’re investing in the assets should give returns, and this is called as Return on Investment (ROI). When the ROI is generated as income, you don’t need a full-time job :).