FREE123: “Freedom In Less” October Update

Freedom

FREE123: Freedom In Less” is a monthly step-by-step account of pursuing financial freedom by pursuing less: Less stuff, less complexity and less spending. The purpose is not deprivation but to achieve more financial goals while experiencing contentment and purpose. Take a look:

Less Is More

Every month in this series I reference that happy place we all have where just being there is enough. For me that is in Kauai Hawaii, on a beach, with a 84 degree sunny day (every day seems 84 degrees and sunny to me there). When I am there, just experiencing the beauty, I am content, happy, joyful and grateful. To say the least, when I am there, I want nothing else. It is simple and I am content. Then I got to thinking: Why can’t I experience that simplicity and contentment more often? Like at home? In my everyday life? The answer is I can. And a simple contented life would greatly enhance my goal of financial freedom.

The Goal: Purposeful Simplification

For the next season in life, I am going to purposefully simplify my life by finding freedom in less. Less stuff, less complexity and less spending as a means to reaching my financial freedom goals and find more contentment and purpose. The hypothesis is that living on a frugal budget with clear goals and a renewed focus on reducing consumption will lead to more contentment and true freedom.

What I learned in October 2015

This month I simply put my credit card away and used an all cash system for discretionary spending. So simple. One benefit of this action was some savings in my discretionary spending (shown below). No surprise there, right? But the primary benefit, that I did not anticipate, was how comfortable I became to walk away from seemingly important expenditures when I did not have the cash. As it turns out, things I thought I NEEDED were really not that important. And when I did not get them due to lack of cash, I did not miss them. Take a look at each area of savings with brief commentary:

  • Saved $360 this month just by not eating out as much or cutting back on healthy snack purchases. Found out that many (most) of the time I think I am hungry, I really am just thirsty and water does the trick!
  • Saved $220 this month JUST NOT BUYING STUFF from our discretionary spending budget. This is similar to my experience in September. By consciously avoiding going into retail store for certain items lead to less “add-on” or impulse buys. You know, go to Home Depot for fertilizer and come home with a new shovel and rake too!
  • Saved $125 in family activities. We switched out football games, going to the movies frequently and book fairs for walks in the park, frozen yogurt instead of a meal and simple family fun around our favorite reality show!

October’s FREE123: Freedom In Less Summary

This month we experienced the shift in thinking from “buying” our entertainment and family time activities to making our entertainment with what we had. In this case, with cash or not at all.  By purposefully reducing spending to the amount of cash on hand, we saved a lot of money and found more contentment and freedom, not to mention we proved to ourselves that many things we thought we needed were actually not. I did not track our hours saved like I said I would last month because I couldn’t figure out how to quantify it easily. But I still feel our savings (and freedom) in less includes both money savings and time savings. Maybe I’ll try to measure hours next month. In the meantime, I am going to enjoy living more purposefully with less so that I can experience more!

The Working Backwards Series: How Much Car Can I Afford?

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The Working Backwards Series?

The Working Backwards Series takes a look at budgeting in each spending category from the standpoint of “what money is available given our lifestyle and choices?” In this case,  we are talking about a family of four living in Austin, Texas and making $74,000 a year (the average household income in Austin).

What are we trying to accomplish? We want to show what a balanced, sustainable budget looks like, and one way to do that is to “back into” the dollar amount for each budget category given life choices: Raising two children in a two income home. While we understand we can spend more in categories that mean a lot to us, and each family is different, we want to set expectations that the discipline of a balanced budget, (spending and saving less than we make), requires conscious decisions, sacrifices and tradeoffs to meet our long term goals and desires that include financial freedom.

Topic For This Post: AUTOMOBILES

How much automobile(s) can we afford in our balanced budget? It is a tricky and emotional question. Americans are passionate about their cars. The question has many variables too: If we own our cars outright, then our auto expenses are just operating costs like gas, insurance, repairs, etc. But if we have an auto loan(s) or worse, lease(s), we have monthly payments that must be factored in as well. For the purposes of this exercise, we will look at the budget with and without auto loans on each car. Ouch! I know, having two car payments is expensive, but sadly, two auto loans (or leases) in a family are more common than not.

What percentage of our budget is allocated to autos? If we own your cars, the operating costs of those autos can be less than 5% of your net spendable budget (after taxes and charitable donations). With auto loans, it can be three times that. For today, we will assume that our budget percentage for autos in 14% of our net spendable budget.

What Does That Look Like – The Math

A $74,000/year household income equates to roughly $54,750/year after taxes and charitable donations, or $4,563/month. At 14% of our budget going to autos, that’s roughly $639/month for auto costs. Total. I know, that is not very much when you figure the operating costs of gas and insurance eat up a large part of that budget. Let’s take a look, assuming each well-running car, that are insured to good, safe mature drivers does 10,000 miles a year

Monthly insurance for two autos:                $125

Monthly gas:                                                     $150

Repairs/Misc (Register, etc)                             $ 50 (Optimistic)

What’s left in the budget:                               $289

What does this say? It says that IF we have two well running cars with limited repairs, good gas mileage and limited monthly mileage, we only have $289 to service any auto loans or leases. That could be either one loan up to $289/month, or two $145 auto payments. Have you heard of an auto loan as low as $145/month? Not me. Furthermore, what does that mean? It means we are not driving brand new BMWs. It means we are probably not driving new cars at all, but used cars. I think it really means that a family of four with two cars needs to own AT LEAST one of the two cars in order to make their budget work.

So What Is The Fuss?

The point is that a balanced budget for a family of four on an average household income and with many essential budget categories like housing, food, children’s needs, etc, does not have much room for auto loans or leases. Plain and simple. While the vast amount of cars on the road today have some form of loan or lease associated with them, most of us can’t afford them. Ouch. But true. We certainly can’t afford most of the high priced sports cars, custom trucks or expensive people movers (think supersized SUVs) on a loan or lease. Yet most of us are trying to do just that. And I believe that is one of the major reasons we have more than 75% of households in America living paycheck to paycheck with no savings or funds for emergencies.

What’s The Solution

There are several. We could end out fascination with cars, but that’s not going to happen. We could end our fixation on new cars and buy used to make our budgets balance. We could try to be one car families although that could be tough in a two income household. We could save our money and buy our cars with cash. That is really the answer. Each month, save an amount of money that, over time, allows you to purchase a car with cash when it is needed. How do we do that on a tight budget? First, get rid of all your consumer and auto debt that you currently have. Do everything possible to get out of debt so that all your money could go towards your needs and not your loans. Let’s face it, borrowing money is expensive. Next, each month, set aside money in a savings account or investment. If you need a car in five years, that’s 60 payments to your savings to go toward your next car. How much do we save? Well, if the budget for the next car is $12,000 (think used car), that would be $200/month. For two cars that would be $400/month which sounds like a lot. But when you consider that the average household spends $499/month (source: Experian) on loans/leases alone, it is considerably less AND you own the cars outright!

Final Word

Auto expenses are one of the three biggest budget busters (home and entertainment) and the main culprit is our auto loans and leases. The best way to control your auto expenses is to own your vehicles and not have outstanding auto loans. If you must finance your autos, be careful not to “break the bank” on financing that prevents you from maintaining a balanced budget and living in financial freedom!

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What Are We Saving For? Top Four Reasons We Should Save

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“The faces all around me they don’t smile they just crack
Waiting for our ship to come but our ships not coming back
We do our time like pennies in a jar
What are we saving for”

(Believe by The Bravery)

What Are We Saving For?

What are we saving for? It helps to know why we are socking money away each week. It motivates us to keep going when life’s obstacles or temptation gets in our way. That new pair of shoes. That incredible new car deal. That opportunity to travel the world on a whim. All of these situations vie for our precious dollars so it helps to list, specifically, what we are saving for. Here are the top four reasons to save money in our budget.

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Emergency Fund

First and foremost is an emergency fund. This is money set aside for true emergencies. An emergency fund is the number one way to keep out of debt. The most successful people I know have the rules written out that both define what an emergency is and how much can be used toward that end. Emergency to me means something that threatens my family, my health or my method of providing for my family. Nothing else.

How much emergency fund is enough? Where do I keep my emergency fund? These are both good questions and the right answers depend on the temperament and situation of the family in question. Most pundits agree that somewhere between three months and twelve months of expenses is the right range for an emergency fund, depending on your risk adverseness. Location of the emergency fund can be anywhere from inside your mattress to secure investments, but key to the location is that the money needs to be accessible and have low risk of losing its value. When you have an emergency, the money must be there.

I won’t leave you here with no specifics. For me, that looks like $60,000 in a combination of savings, mutual funds and very stable dividend stocks in an account that is accessible immediately.

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Retirement Savings

The second reason to save is for retirement. There are many theories about how much and where you should save for retirement but the fact remains that we must prepare for life after full time work and/or old age. It is not our children’s responsibility to take care of us when we are old but our own. How much do we save? As a general rule, target 25 times your annual expenses as the amount you want for retirement. And though this amount varies for each individual, there are some smart rules to follow:

  1. Start saving for retirement early, letting compounding help you meet your number.
  2. Take advantage of tax preferred accounts like 401K, SEP and IRA accounts to minimize taxes
  3. Take advantage of employer matching plans and/or other employer retirement benefits

For me, that’s $1million, in a company matching 401K program with a 2% employer match on contributions.

images-3Generational Savings

For those raising families or expecting to raise families, we need to be saving for known children expenses, including school, marriage, cars and other events (think travel abroad) that are assumed to occur. For most of us, this can be done over many years so a slow and steady savings can meet your needs. Why not start savings accounts for each child on the day they are born? I recommend putting $75/month aside for each child from birth. Easy and by using auto-drafts between my bank and investment accounts, I don’t even see or feel the money leaving my account. Where should we save this money? 529 Plans come to mind. Also trust accounts. But they should be separate from our day-to-day funds and take advantage of tax preferred accounts if we know the money will be used for higher education.

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Short Term Life Savings

Life happens and it can be expensive. All of us have autos, furniture, appliances and other items that wear out or need upgrading over time. We need to be saving for these eventualities. Since these savings are short term in nature, less than 10 years, the money needs to be invested in something that is safe but hopefully returns more than the cost of inflation. Maybe a safe low cost, low turnover mutual fund or an ETF. I found for me that saving $450/month in an index mutual fund allows me to have sufficient money available when the refrigerator breaks, (it did last month), or the air conditioner goes (it did in July).

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Total It All Up

What are we looking at when it comes to savings as a percentage of net income? When you add it all up, it really is between 15-30% of our net pay. Wow! Some people even suggest it should be 50% of our net pay. That’s a lot. But is pales in comparison to the debt, worry and anguish that comes when “life happens” and we don’t have funds set aside to deal with them. What is the alternative? Student debt? We know how that is not working out. Buying cars on credit? Ouch. Working forever? That might be your desire but it would be nice to do it because you want to and not because you have to.

Going Back To The Song: “What Are We Saving For?”

Having focused savings to meet our life needs gives us direction and purpose. Seeing progress in each account each month motivates us to keep working toward the goals. What are we saving for? We are saving for emergencies so we don’t go into debt. We are saving for retirement in our old age. We are saving to put our kids through school and set them up for life and we are saving for those things in life that matter, like air conditioning, autos and a microwave oven (mine broke in May). This dedicated savings approach allows us to direct our money to our goals instead of wondering where our money went when we need it!

 

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“FREE123: Freedom In Less” Monthly Update

FreedomFREE123: Freedom In Less” is a new monthly step-by-step account of pursuing financial freedom by pursuing less: Less stuff, less complexity and less spending. The purpose is not deprivation but to achieve more financial goals while experiencing contentment and purpose. Take a look:

 

Happy Place

You know that happy place we all have where just being there is enough? For me that is in Kauai Hawaii, on a beach, with a 84 degree sunny day (every day seems 84 degrees and sunny to me there). When I am there, just experiencing the beauty, I am content, happy, joyful and grateful. To say the least, when I am there, I want nothing else. It is simple and I am content. Then I got to thinking: Why can’t I experience that simplicity and contentment more often? Like at home? In my everyday life? The answer is I can. And a simple contented life would greatly enhance my goal of financial freedom.

The Goal: Purposeful Simplification

For the next season in life, I am going to purposefully simplify my life by finding freedom in less. Less stuff, less complexity and less spending as a means to reaching my financial freedom goals and find more contentment and purpose. The hypothesis is that living on a frugal budget with clear goals and a renewed focus on reducing consumption will lead to more contentment and true freedom.

What I learned in September 2015

This month the total dollar savings by consciously living a simpler, more contented lifestyle was over $730. And frankly, it was quite easy. Take a look at each area of savings with brief commentary:

  • Saved $36 this month just by making my own delicious coffee as opposed to Starbucks. My coffee is from Hawaii, happy place, is more convenient and on demand. Why wouldn’t I do this all the time?
  • Saved $125 by being smarter on date nights. My wife and I try to date every week. Her happy place is a local movie house and eatery that includes a cold drink after the movie to discuss what we saw. Why do the expensive restaurant thing all the time when for far less we can spend quality time doing what she loves. Let’s face it, when she is happy we are ALL happy.
  • Saved $125 driving less! Gas money saved! Being more efficient in my errands, business travel and being more home entertainment focused saved us almost four tankfuls of gas.
  • Saved $320 this month JUST NOT BUYING STUFF from our discretionary spending budget. Spent just $150 on school supplies, batteries and a dance outfit for our daughter’s dance class at school. No shoes, clothing, drinks, Amazon impulses, etc, etc, etc. Guess what? I don’t miss a thing! We are doing just fine.
  • Saved $125 in family dining (eating out) by leveraging our daughter’s passion for cooking. Instead of going out for comfort food or splurge on something because we don’t feel like cooking, we asked our 12 year old daughter to make one meal a week and it was awesome! First, our daughter loves it, second, the food is great, she is quite a good cook, and third, we saved easy money even though we ate like kings, and queens.
  • Last, let me tell you what we DID do instead of spending the money. We entertained at home (puzzle, game night, crafting), we had friends come over for conversation and laughter, we enjoyed time reading on the back porch now that the furnace known as the Texas summer is over and we just spent some time together as a family. It was awesome and easy. I can’t wait for more next month.

January’s FREE123: Freedom In Less Summary

I think we are on to something. By purposefully reducing spending and busyness we have actually gained time, contentment and freedom, not to mention saved money toward our financial freedom goals. There is a catch. I can see that it is possible to go too far and become isolated or anti-social. So the quest will be to balance the freedom lifestyle with involvement in our community. I am up for this challenge! And next month I may track hours saved as well as money so we can share both components of true wealth!

Parents, Get A Cup And Wake Up! Top 5 Financial Actions To Take Right Now!!!

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Parents: Is It Too Late?

I frequently hear parents tell me it is too late for them to start working towards their financial dreams for their families. And I say, parents, get a cup and wake up! It is not too late and the sooner you start taking action the sooner your goals can be reached. The fact is, time is most beneficial the sooner you start.

Top 5 Financial Actions For Parents To Start Right Now

1. College Savings Plan. Did you know a four year degree can largely be financed by putting just $75/month away in a 529 Plan from the time of your child’s birth? Eighteen years, later you have the college fund. Most of us can find $75/month, all it takes is an early start to saving money.

2. Planning a special wedding for your baby girl? Why not start a Wedding Savings Fund with $25/month from birth and watch the compound interest accumulate!

3. Planning to leave a legacy for your children? Why not get some Term Life Insurance that not only covers the family in a time of need and/or can be the basis of the generational wealth you plan to pass on?

4. Want to be a good example to your kids? Of course. So right now, exemplify responsibility by Making A Budget and living within your means. Remember, kids learn much more by watching our actions than listening to our words. A budget shows our kids discipline and responsibility.

5. Sounds funny, but one of the best things you can starting doing for your kids right now is Saving For Your Retirement. I don’t mean for the kid’s retirement. I mean for your retirement so that your kids do not have to worry about supporting you in your latter years.

Continuing the coffee metaphor, start these simple actions early, when the children are being born, and let them brew, (compound and accumulate), into sizable accounts that are ready when you need them. Getting started later in life? It is harder but it still makes sense to start these actions. With the price of raising children rising faster than most family incomes, the power of compound interest over time can help overcome the expected future expenses and allow you to realize your family’s future dreams!

 

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The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness