Another (Different) Budget Example Of What Financial Freedom Looks Like!

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Back in May 2016, I published a blog post called: “Budget Example Of Financial Freedom” that looked at one couple’s budget and the freedom and options that resulted by eliminating debt, having a balanced budget and having savings that covered an emergency fund, retirement and savings for future purchases. This blog post sparked a number of discussions around one main topic: Is there ONLY one way to get to financial freedom?

The answer is NO, there are many ways to get to financial freedom, BUT all paths to financial freedom are built on the same foundation:

  • They have clear, shared goals
  • They spend less than they have.
  • They account for saving toward their goals
  • They eliminate debt and other non-essential expenditures to reach their goals

This blog post looks at a different couple who came to financial freedom in a different way from the couple I wrote about in May. But before we go any further, let’s talk about what financial freedom really is.

Financial Freedom – What Is It?

Financial freedom is defined as having the attitude and resources to live abundantly in each stage of life, free of worry, anxiety or money concerns, to completely live out the full vision and goals of one’s life. Many people have heard about the concept of financial freedom, but what does it really look like?

Financial freedom goes far beyond having a few bucks.  This freedom has five key components. Let’s take a look at those components and how they fit into your life

  1. VISION for how you want to invest your time, talents and money
    • Answer the questions: Why am I here? What am I passionate about? What does my life plan look like? The purpose of this Vision is not to rigidly plan your entire life, but to form a direction and plan of action to focus your efforts. Freedom to pursue one’s passions and goals is worth the effort to define one’s vision. How can you pursue your dreams when you don’t know what they are?
  2. PLAN (budget) that supports your vision and quality of life you want to maintain
    • A budget is simply a plan for spending your money that is consistent with the vision you have for your life. It’s making a plan for using your money instead of wondering later on where it all went. Good budget meets a couple criteria:
      • You live within your means: Only spend money you have
      • It includes savings for your goals
  3. DEBT-FREE approach to everything we purchase
    • A debt-free approach doesn’t mean we NEVER use debt, but that we use money we have whenever we can and when we use debt, we prioritize the elimination of debt in our budget. A wise man once said: “The debtor is slave to the lender.” There’s no slavery in freedom.
  4. A bias toward SAVING
    • Savings must be a priority in your budget. How much do we need to be saving? Let’s start the conversation at around 15% of our take home pay. Why? Because we need to have three types of savings for future needs: We need an Emergency Fund for when life throws us a curveball. We need savings for Retirement and we need to be saving toward known future expenses, like cars, furniture, kids, etc. Adequate savings allows us freedom to act when we want to.
  5. An ATTITUDE of contentment with where you are, and gratitude for what you have
    • Don’t compare yourself to anyone else, but be content with where you are. Contentment brings peace and peace is a large component of freedom. Gratitude focuses our mind on what we have instead of focusing on what we do not have. Be grateful, always.

Budget Example Of Financial Freedom

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Let’s take a look at a very good actual budget that allows for financial freedom. The difference between this budget, and the one I wrote about in May, is that this budget not only eliminated non-essential spending, but also included taking on side jobs to increase income in order to experience financial freedom.

On the income side, this husband and wife couple wanted to have more room in their budget for their dreams of traveling and experiencing foreign cultures. So they both decided to add small side income streams to give them some breathing room. He started some multi-level marketing for a health products company that comfortably brought in an extra $500/month and had the possibility of being a passive income stream even when he was traveling. She started a dog walking business that added $200/month. Combined they added $700/month of income to their budget, agreeing to save at least $500/month, or $6,000/year to go towards their dream: international travel.

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On the expense side of their budget, the couple had a real breakthrough. They realized they spent money on things just because they always had, or just because their friends did too. Realizing that international travel was their passion but was never funded in their previous budgets, they put all of their expenditures through one quick thought process: Does this cost we incur add to our lives as much as foreign travel will? If the answer was yes, they kept it. But if the answer was no, they cut it, knowing they could add it back in later if their quality of life suffered. This is what they decided to do:

Note: The budget is shown as a percentage of Net Spendable Income (NSI). NSI is your total income, minus taxes and charitable giving, usually represented on a monthly basis.

Category                              Budgeted $            Includes                                                                         

Housing                                    25% of NSI           Includes rent/mortgage, taxes, insurance, HOA

Utilities                                       5%                        Electricity, water, gas, trash, internet, cell

Autos                                            8%                       No car payments, insurance, gas, repairs

Food                                            14%                       Groceries, toiletries, beauty items, eating out

Insurance                                   0%                        Medical and life insurance through employers

Medical                                       1%                        Prescriptions

Retirement Savings                12%                      401K plus company match of 3%, totaling 15%

Savings for upcoming needs  10%                    Saving for new (used) car, furniture, etc

Travel budget                                15%                    At least two international trips a year

Entertainment/Clothing           5%                    Clothes, eating out gifts, pets,  misc.

Misc                                                 5%                    Cash, Christmas, laundry, beauty, etc

Total:                                           100% of NSI

This is a very good budget, with ample savings and no consumer debt. This budget is sustainable and takes care of the family’s goals, namely:

  • Saving aggressively for retirement
  • Saving for their dream: international travel
  • Balanced budget: Spending less than they have each month to fund savings
  • Ample (6 months of expenses) emergency fund – not shown in budget
  • No car or consumer debt! They determined it was better to drive an old car than a new one with a car loan on it

To Each Their Own…Budget

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Each budget should reflect the goals and priorities of that particular person or family. In this case, they were willing to do extra work (to add additional income sources) and do without a bunch of things (cable TV, new cars and meager eating out, clothing and entertainment budgets). But every budget must make room for savings, must eliminate debt and must never allow expenses to exceed income in order for it to be sustainable. And a  sustainable budget is a large part of the puzzle to live financially free.

After one year of living on this budget, this couple made a couple modifications, but they were sure they made the right decision to add some income and omit some expenses in order to fulfill their dreams of travel. As such, they didn’t view their budget cuts as sacrifices but as blessings for them to experience their dreams and live financially free!

Do you have a financial freedom story to share? I’d love to hear it!

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

Two Years In The Life Of A Contrarian Dividend Investor

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Two years ago I wrote a post called “A Contrarian’s Top Five Dividend Plays” that looked at investing in some out-of-favor stocks with great dividends and some long term stock appreciation upside, based on five large contrarian view (at the time) assumptions. As such, I purchased those five dividend producing stocks. Here,  I look at those stock purchases, the assumptions that got me there, and compare their actual performance to my expectations. Wise guy comments are in red! Revisions highlighted by strikethrough.

First, The Assumptions

On September 29, 2015, after a substantial late summer stock market correction that saw the Dow drop from 18,086 in late July, to 16,314 in late September (a 10% drop), I wrote that a person could make some money by investing in stocks that were beaten down by nervousness in the market at the time, but that had real long term potential if you could look past the current issues.

The five assumptions I based my buying decisions on were very clear in direction but a little bit vague in timing. I could do this because I was buying stocks for the long term, so specificity was not necessarily needed for my stock picks to generate value. Here are those assumptions and how each faired over the past year:

  • The oil industry in America will eventually recover
    • $49 a barrel late September 2015, $50 now but went to $28 in between
    • Boy, how little things have changed. Still $50 a barrel
  • Interest rates will eventually go up
    • Only one small rate hike in December 2015 but no real direction yet
    • I still believe this and they have somewhat, but slower than expected!
  • Health care demand will continue to grow
    • Yes, but strong political headwinds on pricing in past year
    • Still YES, but still headwinds
  • Real estate, over time, will continue to grow in value
    • This is true. Prices up a full 14-20% where I live: Austin Texas
    • Commercial and residential building has intensified, thus more demand for power, supplies and construction labor
    • The ONLY assumption that has held completely true!
  • Autos will continue set sales records due to the pent up demand since 2008
    • 2015 was a record year and 2016 will be close but perception is we have peaked
    • We have peaked and some trouble ahead with loan defaults and incentives going up!

By my own admission, most of my assumptions have not really played out…yet. Only real estate appreciation has really been dependable. All the other assumptions have either not yet been realized or are perceived as gone by (auto sales).

In the long term, however, I stand by my assumptions. I think oil will continue to go up over time. I originally said the price would go up within 18 months and I might have been a little hasty. But with consumption going up around the world, I think prices will eventually go up and stay up.

I also think interest rates will eventually go up. June 2017 seems to be the likely target for the next interest rate hike. I don’t know when they will go up but I am sure they will eventually. As for health care demand, I think this will stay tepid until after the presidential elections but the fact is, Americans are getting older and need more medicine. Last, auto demand may have  has peaked, but the simple fact is that the average car on the road is over 11 years, so I think demand will stay high for years to come. Also, I think auto makers are better prepared for the eventually demand downturn. Both Ford and General Motors have said they can be profitable at 75% of current demand.

The Contrarian Dividend Stocks

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The five stocks that I picked each lined up with my assumptions mentioned above. Let’s see how they have performed since my purchase one year ago:

Stock             Purchase Price      Current Price     Current Dividend     Dividend % Change

KMI                $29.41                       $20.43                   $.50                              -65%

MPW              $11.55                       $12.81                   $.96                              +5%

GM                  $29.40                      $33.55                    $1.52                             +10%

WFC                $51.40                      $54.60                   $1.52                              +5%

SO                    $43.41                      $49.58                    $2.32                             +5%

Let’s face it, my stocks did not perform well. The only stocks that did well, SO, did so because the underlying assumption did well (real estate/power demand would appreciate/increase). All the other stock picks were based on assumptions that have not come true yet. But I am not discouraged! I still believe my assumptions will come through and my stocks will, eventually, perform well. In the meantime, I will continue to accumulate shares of each to build a better base. In the meantime, I am collecting $725/year in dividends. Essentially being paid to wait.

Going Forward – The Upside

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Because I still believe my five assumptions will eventually come true, I am expecting both dividend growth and stock price appreciation with my five stocks. In order, I believe:

  • KMI will increase its dividend as oil prices return to historical prices and as more and more of their capital investments start making profits, especially in natural gas.
  • MPW will continue to increase dividends as their medical facilities accumulate.
  • GM will increase profits and dividends as their trucks and SUV’s, their most profitable products, increase in sales.
  • WFC will increase profits and dividends with the increase in interest rates.
  • SO will continue to increase profits and dividends with continued power demand.

Here’s another view of my stock picks and their potential:

Stock            Dividend Yield          Payout Ratio           

KMI                2.44%                          80% of free cash

MPW              7.40%                          88% of free cash

GM                 4.58%                          25%

WFC               2.79%                          38%

SO                   4.69%                         88%

I think WFC and GM have a lot of room to increase dividends for the foreseeable future. I think KMI needs oil prices to recover to increase dividends back to its previous levels but I don’t think that is out of the question. MPW and SO will continue to grow dividends slowly and pay out 7% and 4.7% respectively.

In The End…

My 18 month estimate for my market/business assumptions to play out was too aggressive, its been 24 months and it still is no where near playing out, but I still hold that they will eventually come true. In the meantime, I am being paid over $700/year to wait for that to happen. In fact, I am still accumulating more of each of these shares to build a larger base. My goal is to build up the base that by 2020 I am receiving $250/month in dividends from these five stocks, with the potential to increase 4-6% each year thereafter.

 

A trusted source for investing information for your financial future: The Street

 

What do you think of my contrarian dividend investment plan?

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Need help investing as part of your goal of financial freedom? Start here:


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

An Unconventional Path To Financial Freedom

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Financial freedom is frequently associated with making enough money to independently afford the lifestyle of our dreams. But this family approached financial freedom from a totally different perspective: How a quick series of disasters and bad luck forced a family to reconsider their lifestyle and make the tough decisions that ended up in a “Less Is More” financial freedom success story. Read on to be inspired by an unconventional path to financial freedom!

The Worst Day

The day started out well enough: This couple (We’ll call them Bill and Jeanette) in their forties had two well-paying jobs, he was an engineer and she was an accountant. They lived in a large four bedroom home, even though their last child had finally graduated from college and was out of the home. Their finances seemed solid but they had some debt: a mortgage, two car loans and some credit card debt. They were saving some money towards retirement but it was not a priority. There emergency fund was small. It was a pretty normal American financial scene in their household.

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

Then one hot August day it all got startlingly shaken: First, on the way to work, Bill got into a car accident (no fault of his own) that ended up totaling his car. If that wasn’t bad enough, when he finally arrived at work, he was informed that his good paying job was being eliminated and he had a twelve week severance period (25 years on the job) to find new work. In the meantime, Jeanette also encountered some unexpected trouble. She fell while on the job and broke her right (writing) wrist. The wrist injury would require surgery and at least two weeks out of work. In an instant, their somewhat stable work and home life was upended, putting strain on their marriage and finances.

The Situation

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The situation seemed pretty dire: Down to one income, one car and one healthy worker between the two, this family had to make some big decisions. They summarized their situation as so:

  • The large house and debt was too much for the one income
  • Medical bills compounded the financial strain
  • Their savings was woefully inadequate, maybe a month’s worth of expenses at best
  • They already knew they were not set up well for retirement
  • Bill had no job and little enthusiasm to find a new one like his old one
  • Significant strain on their health and marriage

The Big Decision

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Fairly quickly, this husband and wife team made some big decisions: First, before Bill even found a new job, they would downsize their home and lifestyle. This downsizing would have three main goals:

  • Lower expenses which would free up money to eliminate debt
  • Start seriously saving for retirement and building an appropriate emergency fund
  • Attain and maintain financial freedom

They asked some hard questions of themselves, like:

  • Do we need this much house? Clearly not
  • Do we need two cars?
  • Do we need these high lifestyle expenses: big cable TV bill, lots of eating out, lots of discretionary purchases, unused gym, Hulu, wine club memberships, etc
  • Can we thrive on only one professional income?

The breakthrough came once they realized that these things (house, jobs, cars, etc) did not define them individually or as a couple. They realized, too, that this situation was a real opportunity to re-think who they are and what they are working towards.

The Plan

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With much excitement and anticipation of a better future, the plan came together quickly. Immediately they made financial freedom their purpose and being able to retire in less than 10 years their goal. This is what they decided to do:

  • Sell the four bedroom, four bath house and downsize to a two bedroom, 2.5 bath house about 30 minutes further away from the city they lived in to get a better value.
  • Aggressively eliminate total credit card debt with existing savings and some of Bill’s severance money.
  • Take the insurance money from the totaled car and pay off the totaled car auto loan. Try to live with one car.
  • Live by a budget. This budget was targeted to be 40% of the previous spending level
  • Reduce their lifestyle. No more cable, gym membership, endless eating out and mindless spending.
  • Fully fund their retirement funds each year

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They met with their realtor (after the successful wrist surgery) and after a while put up their home for sale. It took three months to sell, but at a nice profit. With the house sale proceeds they paid off their credit card, paid off the first car loan and funded their emergency fund (also using a portion of the severance package). They also set up automatic (full) funding of their retirement accounts and made a new family budget. As a result of these financial moves, they realized they had a new opportunity: With the new budget, only one car and no debt, they learned that Bill did not have to go back into a full time professional position. Bill could, if he wanted to, be the artist/craftsman/amateur farmer he had always wanted to be! After much thought and prayer, they decided to make the big move and Bill began setting up his new career(s).

The Math

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It took another month after the house sale (four months after putting their house on the market) to move into a comfortable (1,800 s.f.) home. The previous home was 4,500 square feet. Not only were they able to take their home downsizing profits to pay off debt and supercharge their retirement fund, their new monthly operating costs of their smaller house dropped more than $1,800 between the mortgage, taxes, HOA and utilities! Between those savings and the savings from reducing cars and their lifestyle they were able to take out more than $3,40o of expenses per month! See the budget below.

Bill and Jeanette’s New Monthly Budget

Income:    $7,200 ($6,400 Jeanette, $800 Bill…and growing)

       minus ($1,900) for taxes and tithing

Net Spendable Income: $5,300

Expenses:

Total Housing:    $1,450 (Small mortgage, utilities, taxes, insurance, no HOA)

Auto:                      $ 285 (Gas, insurance, minor repairs – newer car)

Debt:                       $ 0 (Hurray!)

Savings/Retire:   $2,300 (401K, SEP, investments, etc)

Food:                     $ 425 (Includes eating out)

Entertainment: $ 300

Medical:               $ 250 (Prescriptions and HSA funding (savings))

Misc:                     $ 290 (Toiletries, gifts, etc)

The result is a balanced budget, with more than $2,400/month going into savings (45% of budget). There is no debt, a fully funded emergency fund (six months of expenses) and ample financial peace. In addition, Bill’s new artist/craftsmen venture not only feeds his soul but continues to grow slowly, with upside to add more to their monthly income.

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From Tragedy To Transformation

Bill and Jeanette turned a tragic day into a transformation to financial freedom. By looking at the abrupt disruption thrust upon them as an opportunity to break out of their rut and take action, they were able to achieve financial freedom. Here’s a short list that describe’s their financial freedom:

  • Balanced budget on their combined incomes
  • 45% savings rate
  • No consumer debt. Only small mortgage on house, to be eliminated in 8 years
  • Full emergency fund
  • Aggressive retirement savings to support retirement in 10 years
  • Bill was able to change his career to pursue his dream
  • Smaller house, simpler lifestyle, more peace, more contentment

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Truly, Bill and Jeanette turned tragedy into a contentment-filled, simple lifestyle that allows for current and future dreams to be realized and opens the door for more freedom and options. Now that’s financial freedom!

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