Financial Freedom: No Goals, No Plan, No Measurement, NO WAY!

Financial Freedom?

There are many definitions of financial freedom, but I particularly like this definition quoted from Kim Kiyosaki several years ago:

Financial freedom is much more than having money. It’s the freedom to be who you really are and do what you really want in life. And many of us… lose site of this by putting others first and playing many different roles such as parent, spouse, employee, friend, and more.” Kim Kiyosaki

I like this definition because it goes beyond money and possessions and focuses more on the freedom to pursue the vision, goals and passions in your lives. Who doesn’t want that freedom? But to be financially free, we need to have a clear view of what we want to be free FROM and where we want to be free TO GO. So we need to have a goal(s), a plan and some measurements to make financial freedom a reality.  Unfortunately, the converse is also true. If there is no goal(s), no plan and no measurement it is very hard, some would say impossible, to reach financial freedom. Thus, I give you Financial Freedom: No Goals, No Plan, No Measurement, NO WAY! to help us think through the basic mechanics to achieving financial freedom.

Financial Freedom Goals

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Where to start? Let’s start with some sound financial freedom goals. If you already have yours, then skip to the next part. But if not, take a look at these fundamental financial freedom goals:

  • Become and stay debt-free (consumer debt at least) 
  • Adequate emergency fund to handle life’s financial challenges
  • Savings and investments to fuel future goals, needs, passions and obligations
  • A financial system to eliminate the stress and anxiety of financial management

Do these goals make sense to you? The list starts with being debt free, primarily because debt is an expensive obligation that presumes that you can control the future in the form of future payments and that is not always the case. For instance, right now in America, roughly 6% of all car loans are delinquent or in default. That means that roughly one out of every 16 cars on the road are not being paid for, which could result in forfeit of the car. Those people who took out those loans to buy those cars didn’t intend to default on those loans. But for one reason or another they can not make their payments and will risk losing their cars. There’s no freedom in owing other people money, so we must have a goal to eliminate our debts.

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What about an emergency fund goal? Each of us pursuing financial freedom must have some sort of emergency fund to handle the expenses of unexpected, but inevitable, challenges and troubles in life. People get sick, get in an auto accident, get a leak in the roof, or have some other unexpected emergency.  The list goes on and on. We need to have money set aside for such occurrences. How much is enough? The traditional answer is three to six months of expenses but the actual amount depends on your situation and personal risk aversion. The emergency fund is the single biggest insurance of financial freedom. Why? It prevents debt and it gives emotional comfort in knowing that it is there. Some call this “sleep at night” money.

Savings and investments, what’s the right amount? The answer to that is based on your goals and objectives. For most people there are at least three goals to achieve with their savings and investments: 1) Retirement needs. Most people want to retire and the best way to do that is to start saving early in a tax-preferred plan, like a 401K. 2) Household needs. Cars, furniture and homes, among other needs, either become too small or wear out and need replacing. Money, properly invested producing compound interest, will provide the means to purchase these needed items at the proper time, without debt.

What financial system goals are needed to ensure financial freedom? Let’s start with a system to automate our payments and savings. If possible, isn’t it liberating to have a system that ensures your bills are fully paid, on time, every month? Just as important, or maybe even more so, is having a system that automatically moves money each month into your savings and investments to ensure you are funding your future needs and passions. Automated savings also has the added benefit of being done before you even see your net paycheck, so you don’t “miss” the money or be tempted to re-direct it toward other pursuits.

Take a moment and define what financial freedom means to you. Then, write down your financial freedom goals for your life. It is important to know what we are striving for so when the process gets bumpy, we can stay focused on the goals.

Freedom Plan

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What should a financial freedom plan look like? It should contain a set of coordinated actions that allow you to reach your financial freedom goals in an acceptable timeframe, that usually culminates in a detailed budget. Say, you want to be consumer debt free in 14 months. You would prioritize in your budget the debt payments that would allow that. Say you want to have a fully funded Emergency Fund in 12 months. You would prioritize a savings line in your budget that would make that a reality. In these two examples I used the word “prioritize” because the plan to meet your financial freedom goals must take precedence over daily living expenses. What does that mean? It means that if debt elimination is a true goal for you, you must ensure you make those debt payments BEFORE you allocate money in your budget for discretionary things like entertainment, eating out or clothing. It means you may have to forego some entertainment or cable TV for a season to fund your financial freedom goals. It is a small price to pay for freedom. In the case of debt elimination and savings to meet your financial freedom goals, we can adapt a quote from Warren Buffett that says “Don’t save what is left after spending, but spend what is left after saving and debt-reduction.”

I would suggest your financial freedom inspired budget should have four prioritized allocations before you spend anything on discretionary spending: 1) Debt elimination, 2) Savings for the emergency fund, retirement, kid’s needs and future purchases, 3) Basic living needs including shelter, food, needed clothing and transportation, and 4) Generosity of some kind to keep us humble, grateful and generous. I would also suggest that savings would be automatically withdrawn from each paycheck, BEFORE you see your balance for bill payments and that bill payments would be automated to ensure prompt payment and to lessen the need to think about and stare at your obligations. Last, I suggest reviewing the budget periodically, to ensure it is still accurate and it is still supporting the achievement of your financial freedom goals.

Measurement

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Measurement, what does that look like? Most people I know prefer to measure their financial freedom progress with a Net Worth Statement that compares your net worth (assets minus liabilities) over time, usually month to month. Take a look at this sample net worth statement:

Net Worth Statement
Assets Current Month Last Month Difference
Cash/Savings $3,000 2800 $200
Emergency Fund $24,000 22500 $1,500
Investments $95,500 95000 $500
Home $217,000 217000 $-
Car $21,000 21300 -$300
Total $360,500 $358,600.00 $1,900
Liabilities Current Month Last Month Difference
Mortgage $180,000 180550 -$550
Car Loan $12,000 12300 -$300
Credit Card $2,500 2750 -$250
Student Loan $11,000 11150 -$150
Total $205,500 206750 -$1,250
Net Worth $155,000 $151,850 $3,150

This net worth statement gives you instant measurement on all but one of your financial freedom goals: It shows you your debt elimination progress, it shows your savings and investment progress and it shows specifics on your emergency fund. It also shows your the overall progress in growing your net worth. In this example, the person increased their net worth by $3,150 in the last month. What it does not show is if you are on schedule to meet your debt elimination and savings timeframes. For example, the net worth statement shows reductions in debt: The car loan amount by $300, the credit card amount by $250 and the student loan by $150. But the question arises, is this the right amount of reduction to meet the debt elimination timeframe? For this, you would need to keep a debt reduction schedule. Maybe something like this:

Debt Reduction Schedule Goal: All consumer debt gone in 4 years
Loan Amount Owed Payoff/month # Months Goal Met?
Car Loan $12,000 $300 40 Yes
Student Loan $11,000 $150 73.3 No
Credit Card $2,500 $250 10 Yes

In this example, the debt reduction amounts DO NOT meet the goal because the student loan will not be paid off in the desired time of four years. So an adjustment would have to be made in the budget to increase the amount paid each month toward the student loan debt from $150/month to about $230/month in order to meet the desired timeframe.

Financial Freedom Final Word

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Financial freedom is much more than having money. It is having the resources to pursue who you really are and your passions in life, while being free of worry and anxiety about money in the process.  Financial freedom is not easy, but very worth it! And the best way, the only way really, to achieve the goal of financial freedom is to have set goals, a plan to achieve those goals in the form of a budget and clear measurements to ensure your are making progress towards those goals, in an acceptable timeframe. Over time those goals, plans and measurements may change or adapt, but without them and the direction they provide, we are running aimlessly and run the chance of failing to achieve true freedom. I think Benjamin Mays said it best when he said: “The tragedy in life doesn’t lie in not reaching your goals. The tragedy lies in not having goals to reach.” Take the time to define your goals, plan your approach to those goals and measure your progress to ensure your achievement of financial freedom!

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Three Common Budget Leaks & How To Prevent Them!

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Here’s the setting: You’re committed to living in financial freedom. You’ve got big dreams and goals. On paper, you have a balanced budget, meaning, your expenses are less than your income each month, so there is money for savings and investments that support your goals. You’ve got an emergency fund. You’ve got no consumer debt and you are working toward paying off your mortgage. You’ve got a great plan to realize your dreams but there’s just one problem: At the end of each month, there’s not much money left to meet your savings and investment goals. You are trying to do everything right but you are leaking money somewhere. A little over budget here, a little over budget there and next thing you know, there’s little money to save or invest for the future. Help!

Three Common Budget Leaks…

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Budget Leak #1: Eating out

What is the biggest discretionary expense budget leak? Eating out. Eating out has become a bigger and bigger percentage of the American family food budget to the point where in 2015, the cost of eating out surpassed the cost of groceries in the average American food budget. And eating out can quickly become a budget buster! By the numbers, a home cooked meal averages about $2.45/meal whereas the average purchased meal is $7.55/meal. That’s almost three times as expensive as eating at home! All told, the average American family spends around $2,650 a year eating out, or $50/week. How does your eating out spending compare?

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Budget Leak #2: Paying for Convenience

The cost of convenience can cause several leaks in your monthly budget. Whether it is food, coffee, getting cash, mowing the lawn or getting our entertainment, the issue is usually paying money to save time. So we do things like buy food or a snack at the convenience store attached to the gas station while we are getting gas. Or we buy our coffee on the way to work instead of making it ourselves. Sometimes it is as simple as hiring someone to cut our lawn on a regular basis so we don’t have to do it ourselves. One type of convenience option that is popular but mostly forgotten are the entertainment subscriptions: Most of us have Netflix and/or Hulu, cable on demand or premium cable channels. In each of these cases, we pay a premium for convenience. The question is, are we using them and getting the value out of them?

By the numbers, convenience food and drink is roughly 50% more expensive than that from the home. The average lawn service is $150 a month and average monthly entertainment subscriptions are $83/month. Don’t forget about other convenience costs too like ATM and other banking fees, home cleaning and valet parking. All told, we have hundreds of dollars of convenience spending each month. Is it worth it?

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Budget Leak #3: Impulse buys

Impulse buying is a huge budget breaker. Everyone does it, right? Well, yes, according to a 2015 report, over 84% of Americans admit to impulse buying. And most of that impulse buying is done in the store (79%). In fact, department stores, grocery stores and more recently, online stores focus their displays to promote impulse buying. That doesn’t come as a surprise. What may be a surprise to most of us is that a recent report it was calculated that each American family will spend more than $114,000 in their lifetime on impulse buys! In the long run, is it worth it? Most times, no. But we see that pretty display or see that sign that says “Sale” or “For a limited time only”, and we just have to have it. This is what I know, most of us can’t recall that impulse buy we made last month or last week, but we would remember anything we did with $114,000 if we used it to fund a life goal and dream with! That would be a really big life goal(s)!!!

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…And Four Ways To Prevent Them

Budget Leak Prevention Tip #1: Get The Budget Order Right

Warren Buffett is credited with this quote about the proper budgeting order for savings and spending: “Don’t save what’s left after spending, but spend what’s left after saving!” This quote sums up the proper approach to determining our starting point for budgeting our expenses. The dollar amount we have to spend each month is determined AFTER we pay ourselves (and fund our dreams) first. Fund your emergency fund, retirement fund, college expenses fund and future purchase fund first. Then allocate the money that is left for spending. This is the first, and most important (arguably) action to prevent budget leaks.

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Budget Leak Prevention Tip #2: Know The Value Of Your Time

The value and convenience of using services to gain more time in our schedules is frequently worth it. But not always, so we need to know the value of our time so we can answer the question: Is the cost of this service worth it? We want to spend money when it is worth the cost in our lifestyle and budget. But we have opportunities to save money (and stop budget leaks) if we can eliminate unnecessary and cost prohibitive services, or services we have just because someone you know is doing it. For me, I use $50 an hour as the value of my time. So if there is a task that costs more than $50/hour, I try to do the task myself. For each person and each task, this value varies. But it is good to review the value of each service you are using to look for ways to save money (or stop leaks) in your budget. Here are some personal examples: Cutting the lawn, cleaning the house and small painting jobs are all jobs I choose to do myself in order to save money in my budget. Why? Because these tasks cost more than $50/hour to have someone else do them. But things like changing the oil in my car ($24) and weekly trash service ($4) we have others perform because it is not worth our time to do. Know the value of your time and know what you are willing (and not willing) to do to save money for bigger purposes like funding goals and dreams.

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Budget Leak Prevention Tip #3: Maintain Short Term Goals

Having short term goals to work towards keeps us motivated to stay on our budget. In Tip #2 listed above, I mention that I chose to mow my own lawn and clean my own house. Why would I do these dirty jobs? The answer is simple: Because the cost savings of those two actions alone, over the course of a year, completely pay for one of the vacations we take every year! That’s right, a little bit of dirty work each week (under an hour each) provides us with a debt-free vacation to our happy place. To me and my wife, it is worth it. Having that short term goal also motivates us when we don’t feel like cleaning and mowing the lawn.

We have made other short term goals that help keep us on budget to achieve bigger goals and dreams, like retirement, the children’s education and, someday, a new, smaller home, paid for in cash. For example, the goal to fund retirement requires a very bigger number, seven digits. Seemingly almost unachievable. But breaking down that goal into monthly savings amounts makes it seem doable and motivates us to stay on our savings plan.

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Budget Leak Prevention Tip #4: Practice Contentment

Practicing contentment helps us prevent budget leaks because it reduces our need for spending, impulsive or otherwise, that comes from the need for instant gratification or from envy of the neighbors. Contentment helps us keep our eyes on our bigger dreams and goals, and away from the immediate wants in front of us. Sometimes contentment gets a bad rap, and is viewed as being complacent or staid. But that is not contentment at all. Contentment is being joyful and having ease of mind where you currently are (and maintaining the budget), on your way to where you are going (dreams and goals). And we need to work at (practice) contentment because it doesn’t come to us naturally as we are bombarded with commercials and advertisements telling us that we need more (spending) to be important, successful and happy. In essence, contentment helps us prevent budget leakage from seemingly “good” ideas at the time, to save up for “great” dreams and goals in the future.

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The Final Say

U.S. News and World Report did a study that found that the average American spends 22% of their discretionary money on things they can’t recollect. That’s almost one out of every four dollars spent that has no lasting value! That’s a lot to pay for forgettable stuff! The purpose of making and using a budget is so that every dollar is allocated according to your dreams, goals and plans. Thus, budget leaks are dream stealers and should be prevented or corrected. I hope these tips help you prevent budget leaks and I hope you achieve everyone of your dreams and goal!

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