Build Wealth Fast with a Powerful Personal Financial Plan

Apr 1st, 2008 by Kenny

Accounting for your own personal finances is the first step toward building lasting wealth. It is essential to know the amount of your Owner’s Equity before you can start to develop a good financial plan.

Once you know what your assets are, and you know what your liabilities are, then you can calculate your Owner’s Equity. Then you can develop a financial plan to reduce your debt and achieve your financial goals.

Here is the Generally Accepted Accounting Principles (GAAP) accounting equation:

Assets = Liabilities + Owner’s Equity

Let’s start with the right side of the equation. First, you must calculate the amount of your outstanding liabilities. This means you write down in a list exactly how much you owe right now on your mortgage, credit cards, and any other bills or loans.

Next, let’s go back over to the left side of the equation where the assets are. Make a list of every asset you own. Examples would be your cars, home and cash you have in the bank. List all of your major assets.

Now we will determine your Owner’s Equity. Simply use this variation of the preceding equation to arrive at your present Owner’s Equity (how much you really own):

Assets – Liabilities = Owner’s Equity

If you want to increase your Owner’s Equity you must pay down your liabilities and avoid borrowing more money to buy more assets. Responsible saving, investing and proper paying down of your debts is crucial to your financial success.

Most experts agree that you need to allocate money every month for all these areas of your financial plan. It is not enough to just save some money in the bank. Because if you are carrying a credit card balance at the same time, you are losing all the benefits of the interest coming from your savings account.

Here is an example of a good financial plan:

1. Take the money that you are presently putting in your savings account every month or investing in other places and divide the total amount by 3.

Then,

2. Pay down your outstanding debts with one third of this money every month.

3. Take one third of this monthly allocation and simply place it in your savings account at your bank. This will be the pool of money you can use to balance out your monthly needs. As this money grows over time you can use it to finance your family’s future needs or apply it to the goals of your financial plan.

4. Use another one third of this money and buy 1-5 year Certificates of Deposit. It is best to save up enough money to buy a CD of $1000.00 every time you invest. A good rule of thumb is to buy one CD every three months to six months. Remember to keep enough cash in your checking and passbook savings for any emergency.

By adhering to these tips you will pay off your liabilities in a timely manner. When you invest in 1-5 year CDs you will be earning interest and compounding your money by purchasing more CDs at specific intervals.

The biggest roadblock to financial success is accumulating a large credit card debt and not paying it off as fast as possible.

It is also recommended that when you have enough money saved up in your regular savings account, you begin to accelerate your mortgage payments every month. Check with your mortgage lender to see if your mortgage allows you to pay more per month than your regular payment. If so, start to pay more every month on your mortgage than you are required to. You will build equity in your home faster, save on interest charges and retire the mortgage much sooner.

By using a proven financial strategy such as this one you can reduce your debt faster, and build wealth for your family quickly. The above steps are by no means the only way to build wealth. These principles are basic and necessary though. Your family can be on the way to a brighter financial future when you prioritize your spending, saving and investing habits. After all, it’s your money; why not put it to its best use!

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Comment by brice hogan at financial independence

2008-05-09 20:37:02

This is a really good article. I think paying attention to what your net worth is doing is in good measure the only way to know where you find financially.

The more people that are aware of how this affects their wealth I believe the more people will do it.

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