The Secret Sauce For Financial Freedom

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Financial Freedom – Huh?

Financial Freedom is about having choices. Having the liberty to chose without restraint. Since our finances (money and possessions) are simply tools for us to use to meet our life’s goals, financial freedom is defined as having the attitude and resources to live abundantly in each stage of life, free of worry, to completely live out the full purpose of one’s life. 

Financial freedom goes far beyond having a few bucks. Sustainable financial freedom enables us to reach our potential as people. This freedom has five key components. The first four are things we DO. But the last one is key, it’s the secret sauce, that allows us to STAY in financial freedom:

  1. VISION for how you want to invest your time, talents and money
    • Answers: Where am I going and for what purpose?
  2. PLAN (budget) that supports your vision and quality of life you want to maintain
    • Answers: How will I get there?
  3. DEBT-FREE approach to everything we purchase
    • Eliminates the burden of obligation and provides a sense of security
  4. A bias toward SAVING
    • Provides a safety net for future needs and unplanned emergencies
  5. An ATTITUDE of contentment with where you are, and gratitude for what you have
    • Here’s the secret sauce…let’s unpack it some more

Secret Sauce To Financial Freedom

Contentment and gratitude are the secret sauce? What do you mean? Let’s break it down: Contentment, being satisfied with what one is or has; not wanting more or anything else, generates an ease of mind that is so essential to financial freedom. Contentment eliminates the need to compare  yourself to anyone or anything else.  Contentment also brings peace and peace is a large component of freedom.

The second component of the secret sauce to financial freedom is gratitude.  Gratitude, defined as a feeling of thankfulness or appreciation,  focuses our mind on what we have instead of focusing on what we do not have.

Combined, contentment and gratitude allow us to live financially free at all stages of our financial journey. And this is the key: Financial freedom is a journey and not a destination. If done right, we can experience financial freedom at all stages of our finances because we can choose contentment and gratitude. Whether you are just starting your career and making a minimal salary, or you’re a wily career veteran and make a large salary, you can live in financial freedom if you DO the four Do’s listed: Define the goal (Set a vision), budget, eliminate debt and save. Contentment and gratitude allow us stay in balance and not stray from feeling free while at the same time building wealth which allows even more choices.

The Takeaway

Commit yourself to being content with your current situation and grateful for what you have. Combined with being disciplined to set the direction in your life (vision), living within your means (budget), eliminating the burden of debt and saving for future needs and emergencies, we can live in the moment, free to pursue our dreams without worry or anxiety. You don’t have to be rich to be financially free, but over time, with discipline, contentment and gratitude, we can have that too.

 

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

5 Things To Do To Stop Stressing About Money!

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Stressing?

Have you ever stressed about money? Me too. I think we all have stressed over money at one time or another. Many of us stress over money constantly. It can be horrible and lead to health problems if not kept in check. So in this little post, I want to review five effective actions to take that not only help achieve financial freedom, my favorite topic, but alleviate stress that sometimes comes with managing our money. With no further ado:

Stress Reliever #1: Have A Budget

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A budget is simply the most effective way to allocate your money instead of wondering where it all went. In our budget, we must allocate money each month to cover all our needs, like housing, food, utilities, savings, debt payments, etc, and then allocate the rest for our wants like entertainment and recreation. There are just a couple finite rules that each budget must follow:

  • The budget must balance: Spend only what you have.
  • The budget must account for savings and investments too
  • The budget must cover all NEEDS completely. Can’t skip the house payment to pay for fun!

To reduce stress even more, the budget should take into account seasonal and infrequent costs as well, like Christmas presents and vacations. Wouldn’t Christmas be even sweeter when you have no credit card debt after the holiday?

The role of the budget is to allocate money according to your goals and priorities and ensure there is enough money to meet all needs throughout the entire budget period.

Stress Reliever #2: Have An Emergency Fund

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An emergency fund is money put aside and available for any emergencies in your life. A lost job, an accident, medical issues and legal issues all qualify as emergencies that an emergency fund can provide for. The emergency fund alleviates stress by being self-insurance for life challenges and eliminate the need to use debt to cover immediate needs.

Some people can an emergency fund “Sleep At Night Money”, because knowing you have that cushion available allows you to sleep better at night knowing you have money available at a moment’s notice.

Stress Reliever #3: Eliminate Debt. All Debt Really But Credit Card Debt For Sure!

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Owing money to others causes major stress in our lives. Sometimes, the debt hangs over our heads like an anvil ready to crush us. Others have described debt as bondage or slavery. The bible says “The borrower is slave to the lender” Proverbs 22:7. And debt is very expensive too. That $2,000 couch you bought on your credit card with a 14.99% interest rate and paid back using minimum payments will cost you $2,925 in total and take over five years to pay off. Another way to look at that is that it cost you $925 to use the credit card company’s $2,000. That’s a 46% premium. Now that is stressful! Eliminate stress by retiring all your credit card debt. And don’t stop there. Keep going. Eliminate all your debt and watch the stress due to debt just melt away.

Stress Reliever #4: Automate Savings and Bill Pay

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Why worry about on time bill payment and making sure you put money away for savings when you can automate it to ensure consistency and on time delivery? Go one step more and pay yourself first (save) BEFORE you see you paycheck so you get used to not living with that money. Some people have money immediately moved to savings at the instant their paycheck reaches their bank account. They also set up autopay for regular bills to ensure on time payment. Fixed cost items like car payments, rent and cable TV are prime candidates for autopay. If handling money stresses you out, use bank automation to handle savings and payments automatically and lessen your stress.

Stress Reliever #5: Build A Retirement Savings 

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People today live an average of 24 years in retirement and yet the average American has less than $50,000 saved for retirement at the time of retirement. Now that is stressful! How can a person live two plus decades on only $50,000? Not very well. Relieve that stress by starting a retirement account early, contribute to it regularly and use a tax preferred account and company match to build up a retirement savings that provides for all your needs.

Bonus: Stress Reliever #6: Be Generous

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Ok, I am going to add one more. A great way to reduce stress regarding money is to be generous. Generosity, helping others meet their needs, does a number of things to reduce money stress:

  1. Helping others takes the focus off ourselves and onto others
  2. Generosity breaks the bondage of selfishness and entitlement
  3. Helping others gives a sense of purpose and achievement

Stress Free Money Management Is Financial Freedom

All of these benefits of being generous alleviate the stress of managing money and assist in obtaining and maintaining financial freedom. Freedom from worry and anxiety and freedom to pursue our goals and objectives. Managing money is hard enough by itself. There is no room for dealing with constant financial stress. Hopefully, these five, no six, actions will reduce your stress and help you to live in financial freedom!

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

The Working Backwards Series: How Much Debt 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 “how much can I afford given our income, lifestyle and choices?” In this case,  we are talking about a family of four living in Austin, Texas, working toward living in financial freedom, 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.

To see more from the Working Backwards Series, read this previous Working Backward Series post:  Working Backwards Series: How Much Auto Can I Afford? 

Topic For This Post: DEBT

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The rich rule over the poor, and the borrower is slave to the lender. Proverbs 22:7

Debt payments are innocuous. Each individual payment is very small in relation to the value or cost of the item purchased. But over time they add up to costing far more than the actual item purchased.  Yet, for many of us, debt seems to be the only way we feel able to have important items like autos, homes, education, vacations and other expensive items. But, the question still stands: How much debt can we afford in our balanced budget?  We have to take a shot at properly budgeting for our debt. To do it right, we need to budget so we can aggressively pay down and eliminate our debt.  For the purposes of this exercise, we will look at a debt budget for consumer debt only. Meaning: credit card debt. You can see from previous “The Backward Series” posts, we have allocated money for other forms of debt payments in their respective budgets, ie. cars, homes, etc. Also, we will assume that this family is trying to eliminate consumer debt completely from their lives while at the same time enjoying themselves in their beautiful city.

What percentage of our budget is allocated to debt payment? In our balanced budget, the total debt budget varies from home to home, depending upon how much debt the family has. For today’s budget exercise, we will start at 5% of our take home total income, or net spendable budget (NSB), to service credit card debt.

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 5% of our budget going to debt payments and elimination, that’s roughly $228/month for debt payments or, $2,737/year. That is not very much when you figure the costs of interest and fees eat up a large part of that budget. Let’s take a look at our budget by “backing into” the debt budget to see if we can meet our balanced budget objective:

Let’s take a look at a balanced budget to see if 5% is reasonable: (% of NSB by category)

Housing (All Expenses)           30%

Autos                                       14%

Food                                        12%

Insurance                                  4%

Medical                                     2%

Debt Service                             5%

Savings/Investments              15%

Misc.                                          5%

Entertainment/Clothing           5%

Vacation                                     8%

Total:                                           100% of NSB

So from a budgeting standpoint, we can make a balanced budget with 5% of Net Spendable Budget going toward debt payment, without jeopardizing important budget items like savings, vacations and entertainment, (15%, 8% and 5% respectively), which is healthy.

But the real question is: How much debt can we take on in a given year and still eliminate it by year end? In this case, that is $2,737 for the entire year going toward credit card payments and elimination. The short answer is it is going to be very little. If we assume an average but expensive credit card interest rate and other simplifying assumptions, we find that $2,737 in total debt payments a year equate to roughly only $2,100/year in actual charges on our card. The rest of the money is for interest payments. That’s only about $175/month on our card balance each month. Not very much. So, what does that mean?

What Does That Mean?

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Although credit card debt sometimes seems like the American way, it is not a good use of our money. The point is that a balanced budget has little room for servicing credit card debt. Plain and simple. We can’t, and shouldn’t, incur credit card debt month over month. If we have to use a credit card, we should really use it as a debit card where the balance is fully paid off each month. Yet most of us are carrying credit card debt because we are impatient or imprudent.  In fact, the American household average 2015 credit card debt is $15,355! (Nerdwallet) 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 for emergencies, retirement, college (for the kids) or any money for dreams like new homes or cars or special events (think vacations, weddings or cars).

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What’s The Solution

There are really only a couple acceptable credit card actions to keep us within our budget for debt elimination: 1) Pay cash instead of using a credit card.   2) Use a debit card instead of a credit card. 3) If we use our credit card, use it like a debit card and pay the balance off each month. 4) If we do get a balance on our card, make it a priority to pay the debt off within the year so it does not accumulate into something that becomes insurmountable, (And break the budget).

Final Word

Living in financial freedom does not allow for carrying credit card balances that drain our bank accounts and ruin our budgets. We found here today that a family of four living in Austin Texas can only handle about $228/month in credit card payments, yet, the average American today pays almost six times that amount each month!

Fight to be credit card debt free. Use cash or a debit card. Work hard to be patient and only spend money that you have instead of using the credit card company’s money. If you must use your credit card and develop a balance in your account. Strive to pay it off quickly so that the exception (credit card debt) does not become the rule. Financial freedom is not easy, but it is worth it. Because that money we are not paying credit card companies in the form of interest payments can be better used to fund our goals and dreams.

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