You need to determine if you have the spare cash to make investments in shares. The easiest way to do this is to make sure you have your financial ducks in a row. You can see just how straight this row is by drawing up mini financial statements – a personal balance sheet and cash flow statement (see tables).

A balance sheet gives you a snap shot of what you own and what you owe. A cash flow statement is a budget, showing what goes in and out.

These calculations will determine how much money you have available to invest. It is prudent advice to only consider investing in shares once you have paid off all your short-term debt. It makes no sense to borrow money to buy shares.

By looking at the first table, you can see the assets are listed in the order of liquidity. Depending on how liquid an asset is determines how quickly you can convert it to cash. Your property investment, for example, is not very liquid. You can convert it to cash but it won’t be as quick and as easy as drawing money out of your bank account.

Liabilities are amounts of money that you owe to someone else. Interest is charged on these outstanding accounts and eventually, you have to pay them back.

After doing all this, you end up with your net worth or net asset value. Growing your assets and shrinking your liabilities will take you one step closer to financial freedom.

The second table will determine how financially healthy you are and can answer your “show me the money” question.

Another step closer to financial freedom is making sure that what comes in is more than what goes out.

Once the financial ducks are in a row and you have worked out that you have money to invest, the spotlight turns to you, the investor and your plan of action.

Your appetite for risk plays a big part in deciding what shares you want to invest in and how much you want to allocate to each. Going for the conservative approach may appeal to someone with retirement around the corner while a spring chicken may prefer a portfolio of shares with a sprinkling of risk.

Consider job security and a reliable income. Someone with a generous salary and self-employed businessman and a pensioner all view the stock market differently.

Your plan of action must always include being in control of your finances. Keeping a constant finger on the pulse and budgeting on a daily basis helps keep you on top of your game.

Set your sights on financial goals and jot down what you would like to achieve. Shares are the long-term tools you are going to use to reach financial freedom. The aim is to build your wealth slowly and spend it wisely.

Source: MoneyWeb - Gaylyn Wingate-Pearse