Debt Free

There's no time like the present to turn over a new financial leaf. You've probably broken your “I'm going to eat better” resolution already. Unfortunately, prawns in butter and pan fried scallops don't really count as eating better. You can do better when it comes to your finances. There too, you can make statements that can be misconstrued and twisted a bit. “I'm going to spend less” is a noble thought, but what does it really mean?

If becoming debt free or substantially debt free is your goal, that's fine as far as the big picture, but what exactly are you going to do this year to achieve it? Maybe your goal is to retire rich. First of all, you'd better define “rich”. After you've gotten that out of the way, you'll know where your target is. After all, it's hard to meet a goal you haven't really set yet.

It's been proven you can retire with over a million dollars in your investment account(s) by only saving a single dollar every day. The downside is that it'll take 65 years and, if you'd like to retire at that age, you'd better start by picking the OB/GYNs pocket as you're born, and never letting up. To make it even more tricky, you have to maintain an 8.7% rate of return and compound your savings daily. So, if your goal is to retire rich, and you've defined rich as having $1 million in liquid assets, you know it can be done.

The point is that you should have at least two things in order to reach your resolution.

1 - A well defined goal. “Get debt free” is fairly specific, while “spend less money” is not. In order to achieve any goal, financial or otherwise, you must define it first.

2 – You need a specific plan to attain the goal. It should include all the steps and the math necessary to make sure you stay on target to reach the goal you've laid out for yourself. Break the problem of reaching your goal into smaller parts and attack each one individually. You should know exactly how much money you need to contribute, when, and to which account, in order to reach your goal. You should also be well versed in the assumptions you made in order to make the plan valid. If you assumed an 8% return in your plan, but in reality, the account is only returning 6.5%, you need to make some revisions. Keep on top of it.

Happy New Year! Make that financial resolution, whatever it may be. That'll be one more tool you can use to get yourself in the financial Disneyland you wish for. After you've made the resolution, just do it, and don't stop.