The Importance of Knowing Your Financial ‘Why’
Do you have a ‘Why’ to live for? A ‘Why’ brings a purpose to your life, and is a pre-cursor for ‘How’ to live. It makes your goals more achievable and real. People go to college for an education that can get them a good job, they eat more vegetables to maintain good health, they travel because they want to see the world; there is always a purpose behind the things you do. Financial planning is no different. To achieve your financial goals, you need to know the purpose behind them, or else you can easily lose interest in the entire process. Your purpose could be anything, right from saving for a child’s education, to wanting to buy a dream house in the Hamptons. But as long as you have purpose, you will stay focused on your financial journey.
How Can You Find Your ‘Why’ On Your Path to Financial Freedom?
Finding your ‘why’ or financial purpose is simple. All you need to do is think of all your goals (both short-term and long-term) and your spending habits, and write them down on a paper. These goals will help you orient your efforts in the right direction. Here’s how you can start:
- Analyze Your Personal Thoughts: Are you constantly thinking about upgrading to a new car, or buying a new smartphone? Do you frequently find yourself dreaming of living in an urban penthouse or craving a secluded life in the mountains? Make a list of all your thoughts to understand what you aspire to achieve in life. These thoughts are nothing but your purpose or reasons for why you work so hard to earn money. Once you know your purpose, you can invest your money in appropriate accounts or stocks and fulfill all of these dreams.
- Examine Your Family’s Goals: Do you have a child that aspires to go to college someday, or a spouse suffering from an expensive medical condition? How many people in your family are financially dependent on you? How many of these expenses are recurring in nature? The answers to these questions will help you understand your family’s requirements and what you need to do to accommodate them with your personal goals.
- Study Your Spending Habits: Now that you know your future goals, and that of your family, look at your spending habits. How much money do you spend on rent, groceries, insurance premiums, and gas? How good or bad is your credit score? Have you paid off all your debt? You can get your last 6 months’ financial statements from your bank and go through them to see where you spend your money. Identify the unnecessary, extravagant expenses from the bare necessities.
After closely examining these three, try and analyze your current financial standing. Ideally, you should have enough savings to achieve all your goals. If you find yourself falling short, try to add more to your savings fund each month or invest in more high yielding stocks and bonds so your money can grow over a period of time. This activity will also help you understand your risk capacity, so you can diversify your portfolio accordingly.
Ponder over your expenses as well. Your spending should be within limits and not hamper with the progress of your goals. If your expenditure is high, you may want to find ways to reduce unnecessary expenses or find alternative sources of income. For example, a side business or freelance work.
Why Should You Know Your ‘Why’ to Attain Financial Freedom?
Having a purpose can simplify many things and clear your perspective. Here are some reasons why you need to know your ‘financial why’.
- Brings in Focus: Knowing where you are headed in your journey makes you more focused. If you know that your goal is to buy a house, you will actively go out looking for schemes, investments, and loans that can help you buy your dream house without impacting your other goals.
- Increases Savings: When you know your ‘why’, you align all your other expenses to your purpose, which helps you save more and spend less. For example, if you are contributing to a 529 plan for a child’s college education, you will look for ways to reduce your other expenditure so you can comfortably contribute to the 529 account.
- Makes Goals Achievable: Just having a vague thought in your mind will probably not take you to your desired goal. Saving money without a purpose can be a mundane activity. But when you have a fixed aim in life, you go out seeking more information on how to reach that aim. You are then passionate about not just earning money, but also saving it wisely.
- Reduces Debt: Knowing your ‘why’ will also fuel you up to invest your money optimally so it can grow over the years. This way you will not be burdened with rising debt.
To Sum it Up
Going through life without a purpose can be boring. The same goes for your financial journey too. When you have a purpose and fixed goals, you can draw yourself a suitable path to achieve them. Without a purpose you will probably go through life, working robotically to earn more money, and then spend it mindlessly.
Knowing your ‘why’ is essential. Do you think you know yours? You can reach out to financial advisors to know if you are on the right path to financial freedom.