Saturday, October 15, 2016

How to Achieve Financial Freedom ....

Courtesy : WikiHow

Financial freedom is the ability not to be limited by money concerns. With some careful planning, financial freedom may not be as difficult as it seems. In order to achieve financial freedom, form a plan for yourself. See where you are now money-wise and find ways to cut back on frivolous spending. From there, find ways to eliminate unnecessary expenses. Make some plans for the future by thinking about your retirement and setting up a fund in case of emergencies.

Forming a Financial Plan


1) Figure out your finances at the moment. The first step towards financial freedom is determining where you stand now. You'll have to take stock of your finances and assets to get a sense of where you need to go from here to have more financial security. Figure out your net worth, which is essentially an honest assessment of your current wealth.
  • Tally up everything you own and its value. This includes obvious things, like your house and your car, but think outside the box as well. Do you have any valuable collectables? Do you own any property? Once you've tallied up your assets, add your annual income, as well as any additional money you make each year through side work or investments.
  • List anything that is losing you money, and figure out how much you're losing per year. This can include credit card debt, your mortgage, and any loans. Subtract this number from the first number. The number you have now represents your net worth.

2 ) Track your current spending. You'll want to figure out how much you're spending each month. This will give you a sense of where you could cut back on expenses. If you're vigilant about tracking expenses, you'll be surprised at how much money you spend extraneously.
  • Keep a small journal for a month and write down where you're spending your money. Keep track of any bills you pay, monthly rent or mortgage, insurance payments, and so on.
  • You should also add any extra expenses. Do you subscribe to any magazines or online services? Add that to your list. On a day-to-day basis, write down how much money you spend on things like shopping, eating out, recreational activities, and so on.
  • You may be shocked when you tally your expenses by category at the end of the month. You may be spending a lot more money on things like eating out and going out for drinks than you anticipated.

3) Make a budget. Now that you have a sense of where your money is going, develop a budget. A budget can help prevent you from overspending in certain areas. Make a strict budget regarding how much you can spend on things like groceries, eating out, recreational activities, and so on.
  • Figure out where you could stand to cut back. Say you realized you spend $350 eating out each month. Do you really need to eat out that often? You could cut that back to $150 and save $200.
  • Figure out what things you really value, and what you could stand to go without. Do you really read your monthly New Yorker or Time Magazine anymore? If not, maybe you could cut those subscriptions and save some money.

4) Set a series of financial goals. You'll want to set some financial goals for yourself. You need to have a clear cut plan for the future if you want to become financially independent.
  • Try to think ahead. Where do you want to be in 10 years? 15 years? How can you go about investing and saving your money to make sure you can achieve these goals? Keep realistic goals. For example, you can strive to have a job that pays well and has benefits. You can also strive to maintain your current standard of living into retirement.
  • Write down a series of goals, ranked in terms of important. Include both short term goals ("I want to cut down monthly spending by $300 this month) and long term goals ("I want to start a retirement fund so I can retire comfortably in the next 20 years.")
5) Aim to save 10 to 15% of what you earn. When it comes to saving, you should start right now. A good goal is to set aside 10 to 15% of what you earn each month in savings. Getting into the habit of saving money can really help your long term financial prospects.
  • You can do this either on a weekly or monthly basis. If you have online banking, you can put away a certain amount of each paycheck in savings. You can also talk to your bank about automatic transfers and have 10 to 15% of each paycheck automatically transferred to your savings account each month.
  • Automatic withdrawals are a good idea. Many people struggle to set aside money and feel tempted to spend everything they have.

Eliminating Expenses

1) Review your bills and cut out unnecessary expenses. Take stock of your monthly bills. Look over all the payments you have each month, and see where there's room to cut back.
  • You may be able to consolidate some services. For example, maybe you can put your family's cars under a single insurance policy instead of paying for three separate policies. In terms of cell phones, family plans are often cheaper.
  • Call and ask for a discount or a reduced rate. If you've been a customer for a long time, you may be able to negotiate a lower rate. Also, check for any rewards systems or loyalty policies. You may be missing out on potential savings.

2) Work on eliminating debt. Debt is a huge burden for many, and in order to become financially secure you'll need to eliminate as much debt as possible. Make a list of all the existing debts you have, and figure out how much you can reasonably pay each month towards eliminating these debts. You may have to make some sacrifices, like skipping the family vacation this year, but it'll be worth it to live debt free.
  • Prioritize your debt. Not all debt is created equal. You should aim to pay off high interest debts first, as they'll become much more expensive with time.
  • If you have to, see if you can find a side job so you'll have money to exclusively put towards a debt. If you can work an extra 20 hours a week, even doing freelance work for private clients, you could end up with a few extra hundred dollars to put towards that mountain of debt.

3) Pay your credit card bill in full each month. You should make sure you're not overusing your credit card, as this can lead to big debt. Credit cards accrue interest over time, and having debt over the long term can damage your credit score. Make sure to pay your credit card in full each month. Mark when the bill is due on your calendar.

4) Slash wasteful spending. Money you spend on unneeded goods and services could go towards savings and debt elimination. Therefore, it's a good idea to work on cutting out wasteful spending. Even small tweaks can result in big savings over time, eventually resulting in financial freedom.
  • Do you stop for coffee every day on your way to work? Maybe you could make coffee at home, saving yourself a couple bucks each day.
  • Think about any services you subscribe to. Do you really use your Netflix account anymore? Do you watch a lot of cable? Such services could probably be cut. How often do you use your gym membership? Couldn't you find ways to work out at home?

Planning for Your Future

1) Set up a retirement fund.. A retirement fund is vital to ensure a stable financial future. It is never too early to start putting money away for retirement. Take advantage of any program your employer offers, such as a 401K, and start putting money away as soon as possible.
  • If you're unsure if your business offers retirement benefits, make an appointment with a person in human resources to ask. If you do not have a job that offers retirement benefits, consider looking for work elsewhere.
  • You should also talk to a financial planner at your local bank. Your bank may provide free consultation, or offer you advice for a small fee. You can look into starting something like a Roth IRA to save for retirement.

2) Teach your kids about financial independence. You want your children to be financially independent. Even if they're young, start teaching them about how to handle money. Make a trip to the local bank and have your kids open a savings account. Encourage them to put money away so they'll see how money grows over time.
  • You should also talk to your kids about managing money. Tell them how to budget and spend wisely.
  • Think about setting up a savings account in your local bank where you can put money towards your children's college education.

3) Create an emergency fund.. If you want financial freedom, you do not want an accident or unforeseen circumstances to push you into debt. In addition to having solid insurance policies, you should strive to have an emergency fund just in case anything unexpected goes wrong.
  • Talk to your bank about opening a separate account to start building your fund. It's a good idea to have a year's worth of expenses set aside, but it can take a long time to gain this much capital.
  • Consider doing automatic transfers to this fund. The 10 to 15% you're taking out of your paycheck each month for savings could go into this account.

Saturday, October 1, 2016

Buy-And-Hold Investing Vs. Market Timing

Courtesy : Investopedia

If you were to ask 10 people what long-term investing meant to them, you might get 10 different answers. Some may say 10 to 20 years, while others may consider five years to be a long-term investment. Individuals might have a shorter concept of long term, while institutions may perceive long term to mean a time far out in the future. This variation in interpretations can lead to variable investment styles
For investors in the stock market, it is a general rule to assume that long-term assets should not be needed in the three- to five-year range. This provides a cushion of time to allow for markets to carry through their normal cycles. However, what's even more important than how you define long term is how you design the strategy you use to make long-term investments. This means deciding between passive and active management. 

Long-Term Strategies
Investors have different styles of investing, but they can basically be divided into two camps: active management and passive management. Buy-and-hold strategies - in which the investor may use an active strategy to select securities or funds but then lock them in to hold them long term - are generally considered to be passive in nature.

Active Management
On the opposite side of the spectrum, numerous active management techniques allow you to shuffle assets and allocations around in an attempt to increase overall returns. There is, however, a strategy that combines a little active management with the passive style. A simple way to look at this combination of strategies is to think of a backyard garden. While you may plant different crops for different results, you will always take the time to cultivate the crops to ensure a successful harvest. Similarly, a portfolio can be cultivated along the way without taking on a time-consuming or potentially risky active strategy. 

A good example of this method would be in tax management for taxable investors. For example, a security or fund may have an unrealized tax loss that would benefit the holder in a specific tax year. In this case, it would be advantageous to capture that loss to offset gains by replacing it with a similar asset, as per Tax rules. Other examples of advantageous transactions include capturing a gain, reinvesting cash from income and making allocation adjustments according to age. 


When it comes to market timing, there are many people for it and many people against it. The biggest proponents of market timing are the companies that claim to be able to successfully time the market. However, while there are firms that have proved to be successful at timing the market, they tend to move in and out of the spotlight, while long-term investors like Peter Lynch and Warren Buffett tend to be remembered for their styles.

This is probably one of the most commonly presented charts by proponents of passive investing and even asset managers (equity mutual funds) who use static allocation, but manage actively inside that range. What the data suggests is that timing the market successfully is very difficult because returns are often concentrated in very short time frames. Also, if you aren't invested in the market on its top days, it can ruin your returns because a large portion of gains for the entire year might occur in one day.

The Bottom Line

If volatility and investors' emotions were removed completely from the investment process, it is clear that passive, long-term (20 years or more) investing without any attempts to time the market would be the superior choice. In reality, however, just like with a garden, a portfolio can be cultivated without compromising its passive nature. Historically, there have been some obvious dramatic turns in the market that have provided opportunities for investors to cash in or buy in. Taking cues from large updrafts and downdrafts, one could have significantly increased overall returns, and as with all opportunities in the past, hindsight is always 20/20.


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