Should Financial Independence Enrich Our Lives Or Define It?

Recently, I was sitting amongst a group of thrifty friends discussing financial independence (FI) and how important it was to each of us. Some of the discussion was around the definition of FI, and I learned that the definition of FI differs from person to person. Some of the discussion was around dates and amounts of money needed to meet FI. Most of the discussion focused on how important FI was to the group. After about an hour or so of discussion, it occurred to me that FI was the only topic we discussed. There was no discussion of life goals (beyond FI), family, friends, work, sports (Go Astros!) or recent adventures. I found that a bit interesting. On the one hand, FI was a central theme to everyone there. That’s no surprise. Clearly, FI was a top goal for each of us. But on the other hand, is that all there is to our interests and pursuits? Don’t get me wrong, the conversations were interesting and spirited. I really enjoyed it. But it left me asking: Is there more to our lives and our friendship than financial independence?

Which precipitated the topic question in this post: Does financial independence define our lives or does it enrich our lives with the freedom to pursue the goals and dreams in our hearts?

Financial independence: What Is It?

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Financial independence (FI) is a term often used without consistent meaning. Typically, FI means having enough income to pay your living expenses for the rest of your life without having to work full time or be dependent on others.  It also usually includes being free from debt, worry and anxiety about money. Some simplify the definition and see it as simply being self-sufficient. While each person might define it differently, it was obvious that FI was the primary focus for each of us. But in this particular conversation, FI was the only thing being discussed. Aren’t we more than the pursuit of financial independence?

A Case For FI To Define Us

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Starting with a little help from Webster’s Dictionary, being defined by financial independence means to be described or identified with the nature or essential qualities of financial independence. In this case, that means, identified as being frugal (living below their means), having ample income outside of a regular full time job to meet all money needs, dependent on no one other than themselves, free of debt, free of worry and free to pursue one’s goals or dreams. Sounds worthwhile so far!

People pursuing financial independence are passionate people in their pursuit. Usually focused, committed and goal orientated, or obsessed. Saving and investing, combined with the magic of compound interest, is intoxicating and satisfying. Each goal met just increases the desire for the next FI milestone. In addition, FI can be viewed as a great way to provide or support your family, so it is easily perceived as honorable, wholesome and worthwhile. Still sounds pretty good to be defined by our pursuit of FI!

Sometimes, it helps to find answers by looking backward on life decisions, so it begs the question: On my deathbed, will I be satisfied that my life was worthwhile and all that it could or should be if I defined success as being financially independent? Does my pursuit and ultimate achievement of financial independence completely define me and my purpose on earth?  This view of the topic question starts to shed doubt in my mind that FI should define us because it seems too narrow. Why? Because it seems to me that life should be so much more. I can’t image my tombstone saying something like “Here lies Mike, who pursued and achieved financial independence.” I’ve never seen one of those tombstones. But I have seen tombstones that have listed many other attributes to define the deceased: father, husband, Christ-follower, man of integrity, leader, brother and son, to name a few. This leads me to believe there is more to life than just being financially independent.

 

A Case For FI To Enrich Our Lives

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There is no doubt that money is absolutely necessary to live and the more you have of it, the more freedom, and choices, you have. So having money is very important. And making or getting money independent of full time work is extremely desirable. But money and financial independence do not define us, but enhance  our lives and the possibilities.

Money is just a tool for us to use to meet our goals and obligations. Whether those goals are to raise a family, travel, buy a home or eat dinner, money is just a mechanism to achieve those goals. So to define ourselves by being able to meet those needs, independent of full time work or any dependence on anyone else, seems to be too limiting. I’m not defined by other tools that I have, like a computer, a hammer or a pencil, so why would I be defined by the tool of money independently obtained from full time work?

 

Means To An End

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We are so much more than our money or possessions. Which means that we are so much more than our pursuit and achievement of being financially independent. We are (in my case) a husband, father, Christ-follower, businessman, leader, neighbor, friend, a brother, an uncle, a son, travelers and so much more. The financial independence we pursue is a better way to be all those things. But FI doesn’t define us. To let FI define us is to sell ourselves short. The faster we get to FI, the better, because we can spend more time doing what we want or are called to do, and less time working full time to make money. So financial independence enhances our lives.  It does not define us.

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So, going back to that conversation that started of this post: There’s nothing wrong with talking about something you are passionate about, like financial independence. And having deep conversations with friends and family about FI is encouraging, invigorating and informative. But since money is just a tool and being independent of full time employment is just a better means of making it, it stands to reason that financial independence is simply a means to an end. A means to achieve one’s goals in the best possible way. A means to freedom.

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I Think I Have A Better/FASTER Way To Financial Independence! Fact or Fallacy?

I’ll get right to the point:  I think there’s a better and faster way to grow passive income in order to achieve financial independence! We are committed dividend stock investors looking to build wealth through stock market investments. But I’ve been learning/studying for the past two years and implementing a new investment strategy the past nine months and the results are promising. Let me run this income producing investment strategy by you and help me figure out if this is sustainable or just a short term phenomenon that can’t be maintained to and through retirement from full time employment.

Path To Financial Freedom

We’re not much different from your average FI enthusiasts. My wife and I live below our means, have eliminated all debt except the home mortgage, have a six month emergency fund and invest aggressively, including in retirement and taxable accounts,  to develop long term wealth. We have set aside money for our last child’s college fund (two are already out of the house) and we invest in our Health Savings Account for current and future medical expenses. In terms of investments, we are deeply invested in dividend producing stocks and our account is equally dividend between stable, high dividend yield stocks and faster growing dividend growth stocks. Our stocks produce an average 2.8% annual dividend yield, growing about 11.5% annually. All in all, our stock portfolio has averaged a total annual return of 18% including dividends and appreciation over the past eight years. Everything mentioned so far is pretty straightforward and consistent with most FI practices.

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Also consistent with standard FI practices, my wife and I have been planning to develop wealth that is 33 times our expenses (assuming a 3% annual drawdown in retirement to be conservative). While we are well on our way to meet that goal, a new (to us) passive income path presented itself a couple years ago that I have studied and now implemented for the past nine months with incredible (to me) results. The results have been so good that we are re-thinking our FI goals, amounts and timeframes. In addition, the new (fairly) passive income stream seems to be sustainable into retirement.

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Conservative Options Trading As A Significant Passive Income Source

Hear me out. Monthly dividends are and have been a consistent income source. If we didn’t invest another dollar in the stock market and retired in a couple years from now, dividends would produce one third of our income needs in retirement. But its not enough to be safe as the rest of our financial needs would need to come from asset (stock) appreciation and sales. So two years ago we started studying option trading, focusing on a fairly conservative approach to produce additional monthly income. Then, nine months ago, we implemented the following monthly options trading plan:

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  • Each month, we sell out of the money (OTM) puts on premiere dividend and dividend growth stocks to produce immediate income and give us the chance to buy well researched, desired stocks at a discount. If the option expires OTM, then we keep the premium. If the stock price falls and the option is in the money (ITM) then we get the premium and we “get to” purchase a dividend producing stock on sale. Both are wins to us. (In general, we target to earn 1% or more on the monthly option premium each month and use an OTM strike price that is at least 5% lower than the stock price.)
  • Each month, after much research and analysis, sell OTM covered call options on the dividend stocks we own at strike prices that meet or exceed our researched sell price target. If the option expires out of the money, we keep the premium as income. If the strike price is met, we get the premium AND a nice profit from the sale of the stock. All proceeds from the sale of stock are then reinvested in more dividend producing stocks. (In general, we target to earn .5% or more on the monthly option premium each month and use an OTM strike price that is at least 10% higher than the current stock price.)

That’s it. Each option has a one month duration. If the option expires OTM, the money is then reinvested in options for the next month. Some call that “Stock Option Rinse and Repeat”.

The Results, So Far

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Thus far, the options trading income nearly quadruples the monthly dividend income. Take a look at these results:

  • We are averaging a monthly return of 1.79% (or over 21% annually) on the sale of put options. We have made over 250 put option trades in the nine months, with 236 expiring out of the money and 14 put options being assigned. We have purchased great dividend champion and dividend growth stocks on sale, such as ABBV, LOW, QCOM and CSCO.
  • We are averaging a monthly return of .99% (almost 12% annually) on the premiums of covered call options! We have made over 100 covered call option trades in the nine months, with 94 expiring out of the money and 6 call options being assigned. We have sold some great dividend stocks but got a large premium for the sale, at least 10% higher than our target sales price. Usually these sales result because of a higher than normal run up of the stock price. So our covered calls allow us to cash in profits on unusual spikes in price. Then all proceeds from the sales of stocks are reinvested into other dividend stocks. Sales have included stock in CSCO, STX, SBUX and ETP.

Summing up the performance of this income strategy over the past nine months we find that the total income return by adding the monthly option trading premiums to the monthly dividends equals 18.15% on our entire stock portfolio not including stock appreciation. (The stock appreciation during that timeframe was 19.1%) After taxes, fees and other costs, the net return on trading and dividends, or net income, was slightly over 12%.

 

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So, Working Backwards, Doesn’t That Mean…

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Let’s take that 12% net annual income return and reduce it by a small safety factor to 10% to be conservative. And let’s assume we do not want to spend any of the stock assets nor any of the stock appreciation. Just keep letting that build. Let’s also ignore social security and any other side income. Where does that leave us? I think that leaves us needing an investment base of 10 times expenses to meet our total retirement needs. Let’s take a look at some actual numbers to this situation: If we need $7,000/month to live comfortably in retirement, or $84,000 a year, doesn’t that mean we will need $840,000 of investable assets to produce that income ($840,000 X 10% = $84,000)?

But let’s continue to make the case more conservatively. Let’s assume that you trade options on only a portion of your investments, say only half of your investments. So, for option and dividend income to cover $84,000 in annual expenses, you would need roughly $1.2M of investable assets (This assumes dividends from all of the investments but options trading on only half of the investments).

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The net result: I don’t think we necessarily need an investment account that is 33 times expenses to retire comfortably. I think with conservative options trading in conjunction with a stock portfolio of dividend and dividend growth stocks, that a couple could retire with an investment account that is only 15 times expenses.

Fact or fallacy ? Set me straight…

 

Now for something different: A look into the life of the most polarizing president of our time:


Understanding Trump

And Then There Was One

 

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On The Path To Financial Freedom

To this point, the path toward financial freedom has been straight forward. The budget is in place. All consumer debt has been paid off, including cars, student loans and credit cards. Emergency fund is all set. Same is true with college savings for our last child in the house. We are saving and investing 15% toward retirement and tithing 10% to our church. And any left over money gets invested in a taxed account that will be used for future purchases.  Last, everything is automated so it “just happens”. Now, time and compound interest should produce results that lead toward freedom freedom. So far, so good. Now there’s only one debt left to deal with, the home mortgage, so the big question is: Do we pay off the mortgage, our last debt,  or do we invest that money to meet future needs?

Two Choices, Is One Better?

I think the choice between paying off an existing mortgage on a primary residence or investing that money to growth wealth is a matter of priority between financial freedom and financial independence. They are the same thing, you might say? I don’t think they are. Financial freedom puts peace of mind at a priority, including freedom from money worries and anxiety. So that would favor paying off the mortgage, because a debt, any debt, is an obligation that presumes we know and can control the future. Unknown-3It presumes we can make all the payments, but that is not a sure thing. Because in a 30 year mortgage, (15 year mortgage if you are really savvy), a number of things can go wrong that are out of your control and could prevent you, or hinder you greatly, from paying the mortgage like job loss, physical injury or other family health related issues. Yes, an emergency fund certainly helps in these circumstances, but if peace of mind and total freedom from money worry is the top priority, you probably would pay off the mortgage as soon as possible to ensure you always have a place to live.

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

Financial independence, on the other hand, prioritizes choice over freedom. And it is quite possible that investing the money, instead of paying off the mortgage, can provide more choices. Choices like work (or not to work) choices, location choices and purchase choices. The assumption here is that the return on the money invested is greater than the savings in interest paid on the mortgage. And for the last ten years, including the financial recession of 2008-2009, that has clearly been the case. First, let’s look at the math.

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The Math – The Easy Part

Simply put, the cost savings by paying off the mortgage in the last ten years has been significantly less than the return on investment if that money was put into any S&P500 Index Fund for investment. This is how it works out for me: Mortgage interest rate of 3.875% minus the mortgage interest tax break (use a conservative tax rate of just 10%) gives you an effective cost of the mortgage money around 3.5%. Another way of saying this is that the financial benefit of paying off your mortgage is roughly a 3.5% return on your money. Compare that with investing that same money in a simple S&P500 Index Fund for the same time period, ten years, which according to Fidelity Investments, returned 7.5% annually, not including dividends. Minus out the taxes on that return and you have an after tax return of roughly 6.7%, or almost double the return when compared to paying off the mortgage!

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But There’s More

The math between our two choices is the easy part. Clearly, investing money instead of paying off the mortgage will generate more value. In my example, investing produces almost two times the return as paying off the mortgage. But there are several other factors to consider:

  • Peace of mind – Clearly paying off the mortgage will give you great peace of mind but it will cost you. In my ten year example, the investment difference of investing the money instead of paying down the mortgage is worth over $115,000! That is a high cost for peace of mind but for those that are truly risk adverse, it may be still worth it to pay off the mortgage.
  • Cost of the mortgage – If your mortgage interest rate is over 5%, the financial freedom of paying off the mortgage may be worth it, since the financial benefit of investing the money is much smaller. But, something else to consider, if your mortgage interest rate is that high, consider refinancing your mortgage. Today’s rates are much lower.

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It’s A Personal Decision, Possibly An Expensive One!

For me the decision is simple, because my investments actually did far better than average over the past ten years, (10% including reinvested dividends) and my mortgage rate is fixed at 3.875%, I choose to continue to invest our money instead of using that money to pay off the mortgage. Our six months of expenses emergency fund gives us peace of mind as far as making the mortgage payments, as does our long term disability insurance. Worst case, I can change my mind any time and pay off the mortgage with a portion of the investments. But the priority is to invest the money for a greater return. Assuming my wife and I live an average life span and we keep the money invested in the market, we can expect to earn about $400,000 more dollars by this decision than if we decided to pay off the mortgage. That certainly helps calm the nerves about having a mortgage!

What do you think? This is what I think: Financial freedom (or independence) is hard work, but it is worth it!

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Free Money! What Do I Do With It?

Free Money!

Maybe its money from a long lost relative. Maybe its a business deal or stock trade that went far better than planned, or maybe its a big tax return check or a bonus. We all LOVE getting money we weren’t expecting. I call that free money! Boy, the possibilities start to enter your mind on how to enjoy that money! I’m not talking about the dollar bill you found on the sidewalk or the five dollar bill folded up in a pocket. Those finds are sweet, don’t get me wrong, but I’m talking about some serious money that could afford something big, like a vacation, a new car or a whole lot of fun! If you’re like me, my head can get filled with ideas on how to use the money real quick. So years ago, when I was in one of these sweet situations, I had to stop for a moment and come up with an approach to dealing with large amounts of unexpected money so that I would make the best use of this new windfall. I call it the 30/50/10/10 plan. Here’s my approach:

Before We Get Started

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Before we get started let’s do two things: First, take a moment and list your overall financial goals and objectives. It helps to look at the big picture before we get into the details. For me that’s pretty simple: 1) Live in complete financial freedom, 2) Provide for my family, 3) Responsibly help in my community, 4) Pursue our passions. What does that look like practically?

  • No debt, no money worry or anxiety, no dependence on others for our needs
  • Ample savings for emergencies, retirement, family/house needs, and college expenses
  • Live on a balanced budget and teach our kids to do the same
  • Tithe to our local church plus support some local charities
  • Travel!

Second, before we use the free money, subtract an amount for taxes and (in our case) our tithe so that we know the real amount available for use. Typically, that totals about 30% of the free money. This is the 30 in the 30/50/10/10 plan, meaning the first 30% of the free money. In other words, if we received $10,000 of free money, we would put aside about $3,000 for taxes and tithe, ( giving thanks to God and giving Uncle Sam his portion), then plan to use the remaining $7,000. By doing this, we eliminate a nasty surprise come tax time at the next of the year when the money is all spent and we have nothing to pay the taxes with. Now we are ready to use the rest of the free money. But what do we do with it?

Step #1: Pay Yourself (The “50”)

Since financial freedom is our top priority, always, we need to pay ourselves first, in the form of eliminating debts and/or adding to our various savings and investments. At least half of all free money goes to paying ourselves first. This is the 50 (50% of the free money) in the 30/50/10/10 plan. First step: pay off any outstanding consumer debt. Is there a credit card with a balance still on it? Pay it off first. No questions asked. If there is no credit card balance but there is a car loan balance or a student loan balance, we make payments to pay down that debt. Next, if we paid down our debts and we still have some of that half left, we pay ourselves by adding to our savings and investments in this prioritized manner:

  • Top off our emergency fund, if it needs it, which when full, stands at three month’s worth of expenses
  • Extra savings for upcoming household needs: replacement used car, replacement washer and dryer, etc
  • Money towards the kid’s needs: College 529? Summer camp?
  • Add to long term investments
  • The retirement fund already gets maximum contributions from the budget so it gets a lower priority for any free money allocation.

Again, about half of the available free money goes to paying off any debts and/or savings, with the hope that we can achieve a milestone of some sort that we then can celebrate as a family.

Step #2: Celebrate!

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Celebrate! Take some of the free money and take time to celebrate 1) the free money and 2) the debt reduction and savings milestones you achieved in step #1. If the free money allows us to completely pay off credit card debt. Awesome! Let’s celebrate that. If the free money allows us to purchase, with cash, a good replacement washing machine because the old one died, great, let’s celebrate. If we can put some money away for that next vacation, celebrate! You get the idea. Most people don’t celebrate saving money or paying off debt, but most people will get excited about achieving a milestone. Take the family out to dinner, or go to a movie, or something that everyone gets excited about.

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Let your kids know what you are celebrating so they connect the fun with the milestone. The celebration doesn’t have to be big. Just big enough to make the point that the free money is an unexpected blessing that allows you to obtain or maintain your financial freedom as a family. The money to celebrate is a portion of the first 10 in the 30/50/10/10 free money distribution plan. In fact, step #2 and step #3 (explained next) combined make up the full 10%.

Step #3: Meet Family Needs

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Now’s a good time to put some money aside for upcoming family needs. These are things like kid’s school expenses, clothes, a delayed car repair or shoes. This money can also go toward a date night with your spouse or attending a special event. This money allows us to catch up on “want” expenses. Those purchases or experiences that make you feel special but don’t qualify as a “must have item”, like an emergency fund or putting money towards retirement. As mentioned in step #2, the combined total of money spent in steps #2 & #3 is not to exceed 10% of the free money.

Step #4: Be Prepared…And Generous (The Last 10)

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Want to really experience financial freedom? Try taking 10% of your free money, after you have tithed, paid Uncle Sam, saved, eliminated debt, celebrated and bought something special for that someone special, and set it aside…for what comes your way. That’s right, set aside money for living, and helping, in the moment. Do you have a friend that needs a little help? Maybe that friend just lost her job and you feel like you’d like to bring over some groceries. Use this money! Maybe you get an opportunity to help a local charity. Use this money. Maybe you’ve got wedding/birthday/Christmas presents you want to purchase, outside your regular budget. Use this money. Take 10% of your free money and set it aside as a contingency to help and/or bless others as you feel moved to do so. You may be surprised how freeing this money makes you feel, because it gives you the freedom to act in the moment. This is the final 10 in the 30/50/10/10 plan.

Financial Freedom Is Better

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Coming into free money, that is, a large amount of money that you did not expect to get, is wonderful in and of itself. But free money that is allocated in a way that supports your financial goals following financial freedom principles is even better. Why is that? Because the money is allocated consistent with your long term dreams and priorities. Let’s recap the free money allocation discussed here:

  • We gave thanks to God for the free money (Tithe)
  • We set aside a portion for taxes so that there would be no “gotcha” come tax time
  • We paid off debt
  • We saved and invested money for future needs, emergencies and dreams
  • We celebrated the blessing of the free money
  • We invested in some family  wants
  • We set aside money for opportunities that come our way

That is great use of money we never expected to get. It is invested in both our present and future needs that the whole family will benefit from. This distribution of free money is also generous, grateful and opportunistic, which goes a long way in our quest to live in financial freedom. What do you think of the 30/50/10/10 model? Let’s us know what you think! However you use your free money, I hope you achieve and maintain financial freedom.

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How Much Should I Be Saving? a.k.a. Prior Planning Prevents Poor Performance

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Knowing What To Do, And Doing It, Are Two Different Things

In January of this year, Fidelity Investments published a report that said we need to be saving at least 16% of our net spendable income (total income minus taxes and charitable giving). It went on to say that we really need to be saving closer to 23% of net spendable income if we want to be sure to have enough money to fund most of our dreams and plans. Yet, in that same article, Fidelity reported that the actual American savings rate is actually in a range between 4.5% to 7% of net spendable income. That’s right, Americans are saving roughly one third of what we should be saving. So what does that mean? Does it mean we only have 4.5-7% of our money left after paying our bills to go towards savings? Or maybe it means that we aren’t serious about the American dream, including retirement, travel and helping our kids with college. In any case, let’s take a look at what we should be saving for, how much we should be saving, and why it matters.

Categories Of Savings

Before we discuss the categories of savings, we should determine WHY we need to save. We save money from each paycheck to 1) build wealth to fund our lifestyle, dreams and goals, 2)self-insure against disaster, 3)  raise our families and 4) to help others through generosity. When there is enough savings to cover all four of these areas, we are well on our way to financial freedom. If that is the case, then there are four types of saving we need to maintain:

  1. Emergency Fund
  2. Retirement
  3. Family/Kids Savings
  4. Future Needs Savings

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Emergency Fund

First and foremost is an emergency fund. This is money set aside for true emergencies so that we don’t rely on debt when an emergency strikes. In fact, the emergency fund is the number one way to keep out of debt, as it is the most cost-effective self-insurance. How much emergency fund is enough?  Most pundits agree that somewhere between three months and six months of expenses is the right range for an emergency fund, depending on your risk adverseness. Once the emergency fund is fully funded, we do not need to continue to fund it. But every time we dip into the fund, we need to re-fill it to prepare for the next emergency.

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Retirement Savings

The second reason to save is for retirement. Let me say it another way. Once we have funded an appropriate emergency fund, we need to start saving for retirement, and the earlier we start the better because of the power of compound interest. 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 to have for retirement. And though this amount varies for each individual, there are some smart rules to follow:

  1. Start saving for retirement early, letting compound interest work over decades of savings.
  2. Take advantage of tax preferred accounts like 401K, Roth, SEP and IRA accounts to minimize taxes
  3. Take advantage of employer matching plans and/or other employer retirement benefits

How much should we be putting away for retirement each month? Experts suggest we save 15% towards retirement.

images-3Family/Kids 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 summer camp and travel) that are assumed to occur. For most of us, this can be done over many years so slow and steady savings can meet your needs. Why not start savings accounts for each child on the day they are born? Where should we save this money? 529 Plans come to mind for their education. Also trust accounts or ESA’s. 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. How much should we be saving each month? Experts suggest  3-5% of our pay.

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Future Needs Savings

Life happens and it can be expensive. All of us have autos, homes, 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 returns more than the cost of inflation. Maybe a safe low cost, low turnover mutual fund or an ETF. How much each month? Again, 3-5% of pay.

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Total It All Up

Savings must be a part of the monthly family budget. Savings is as important as the rent, food and clothing. Why? Because savings, when invested correctly, generates the wealth needed to fulfill goals and dreams. Want to retire some day? Invested savings is the answer. Want to send your kids to college? Savings is the key. Want to stay out of debt? Saving, in the way of an emergency fund, is the only way to prevent credit card debt when (not if) an emergency occurs.

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 16-23% of our net pay. Wow! Some people even suggest it should be 30% of our net pay. That’s a lot. But it pales in comparison to the financial and mental cost of debt, worry and anguish that comes when “life happens” and we don’t have funds set aside to deal with the emergencies. Or don’t have the money when a car of some other piece of equipment wears out and we can’t replace it. What is the alternative? Credit card debt? Student debt? Auto loans? Line of credit? All of these option are expensive and ultimately steal away financial freedom.

Here’s the mindset we must have as stated by Warren Buffett: “We must spend what’s left after saving, not save what’s left after spending.” Instead of trying to save what’s left after spending, we need to make savings a priority and right-size our lifestyle to live comfortably on what’s left after saving.

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

Financial Freedom Gone Wrong: How To Loose Freedom Fast!

The Start Of Our Story

Our story is a classic one. In some ways we snatched defeat from the hands of victory! Let me explain: After five years of marriage, lots of learning and a commitment to living financially free, my wife and I built a financial freedom lifestyle that looked like this:

  • Eliminated all debt except the mortgage: no car or credit card debt
  • Moved into a small but comfortable home with a small mortgage
  • Built up a 3 month Emergency Fund
  • We tithe at church and support several small non-profit initiatives
  • Contributing 15% toward retirement (including company match)
  • Invested money for future known purchases (cars, furniture, etc)
  • Lived on a balanced, sustainable budget that met our long term financial goals:
    • Live debt free, hoping to retire the mortgage in 10 years
    • Continue to grow our generosity
    • View wealth from the standpoint of freedom and options, not just money
    • Retire by age 60

It wasn’t that we were wealthy, far from it. But our cost of living was so low when compared to our income, we had lots of freedom and options! At the time, we were enjoying a simple but rewarding lifestyle. One of the major benefits of this lifestyle was that we knew each of our financial goals would be met IF we just stayed the course with our savings and discipline. But that is where the story started to go wrong…

Poor Influences, Poor Decisions

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The two biggest components to our balanced budget were our commitments to living in a smaller home and living credit card debt free. Our housing expenses were really low, less than 25% of our take home pay and that included the mortgage, taxes, HOA and utilities. Combining that with no credit card debt, we had a lot of money to save or be generous with, and we did both.

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But after watching many home remodeling shows and thinking way too much, we started discussing remodeling our home. What started out as some new paint and some small repairs, turned into all new furniture and some kitchen appliances. The remodeling isn’t bad in itself. Many times it can add value to your home and it is far less expensive than buying a new, bigger house. But the issue was we did not have a good plan or a good budget, which means we just kept spending. Pretty soon we used up all the money we had saved for home improvement  and started to load up on the credit card.

We rationalized the use of the credit card because 1) it was less expensive than buying a new house and 2) we needed the points on our credit card to earn miles for travel. We always wanted to travel and since we started the discussion about raising a family, maybe we should go sooner than later. Again, not necessarily all bad, travel and home improvement were good things. And besides, we told ourselves we would pay off the credit card later this month. Next month at the latest! But it got worse…

After $20,000 and 3 months of home improvement and new appliances that included $10,000 on the credit card, we made a really bad decision that put our financial freedom into a tailspin. First, we let the credit card debt remain on the credit card for several billing cycles because we were a bit lazy and didn’t want to tap into our emergency fund. Second, we talked ourselves into considering selling our currently refurbished home and buying a newer, bigger home. We decided we would only go forward and buy the new home if we did two financial things: Take emergency fund money and pay off the credit card debt and cut back on our generosity for a while, until expenses settle down. So we sold our house and bought a bigger home that ended up increasing our mortgage and expenses by $1,150/month. We knew that was a big increase but we justified the increase because this new house would easily handle our future plan to raise a family. What we didn’t realize until it was too late, was that there are a lot of house selling expenses. We ended up reaching deeper into our emergency fund until it was depleted and even had to finance some of the costs. Couple that with the fact that the home sold for slightly less than we expected, resulted in more credit card debt and a bigger than planned monthly housing cost increase.

About this time, one of our two cars started to have issues. It was old and reliable up until this point, but now it was becoming a pain in the neck: First, the muffler rusted out and needed to be replaced. Then a failed state inspection required new front tires. The final straw, so it seemed, was that two electrical parts, a window switch and a rear light needed replacement. Not realizing most of these issues were normal maintenance type items that we should expect, we talked ourselves into trading in our car and getting a better used one. We justified the purchase because we were 1) buying used and 2) we had some money set aside for a replacement car. What we could’t justify was getting a luxury used car that cost four times what we had saved for the car. Meaning we had to take out a car loan to purchase the car. It was small by car loan standards but it was $400/month for the car loan and extra insurance and gas costs added another $150 to the monthly expenses.

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Summing up the financial decisions we made:

  • Monthly housing increased $1,150
  • Monthly car costs went up $550
  • Depleted emergency fund
  • Credit card debt around $7,500
  • Stopped being generous to some non-profits
  • All savings gone except the retirement savings

All told, we added over $1,800/month in expenses and depleted most of our accessible savings, including all of our emergency fund. In addition, we were not nearly as generous as we once were. Needless to say, we were no longer feeling financially free! But we thought that with our two good jobs and some spending discipline, we could absorb the expenses, rebuild the savings and restart the generosity. We estimated that within three years, we would be back where we wanted to be. Bad assumption. First, with a bigger house, you have more rooms that need furniture. So we bought more. Then, even worse, some of our new furniture that we purchased when we lived in the old house did not match or work in the new house. We ended up selling some of it at a substantial discount and buying still more furniture. Ouch! Add another $3,300 to the credit card debt!

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The Next Shoe To Fall

About two months after moving into the new house, the unspeakable happened. I lost my job. Since I am about 60% of our combined household income, we now had a major budget problem: We could not afford all the new housing, car and credit card debt expenses without my income. In fact, we calculated that our budgeted expenses would exceed our one remaining income by over $2,200/month. And with no emergency fund or savings, we were exposed to taking on more debt that would only worsen the problem. This was the opposite of financial freedom. It produced worry, anxiety, stress in the marriage and uneasiness when we went to the mailbox! Living in debt, with no savings and having a budget that does not balance each month is pressure packed and confining. We felt enslaved to our stuff. We realized that we had focused on stuff and away from freedom, and that the freedom was much more valuable to us than all the stuff! Financial freedom made us feel rich, stuff made us feel stifled, enslaved and vulnerable.

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What To Do?

First and foremost we had to make a plan that both of us were committed to, and it included:

  • I had to find a job, fast, as my top priority. My job was to find a job.
  • Cut back all non-essential spending. Cable TV, gym memberships, etc. gone
  • We considered tapping into our retirement money but the fees/penalties we too high at this point. We did stop 401K contributions for the time being.
  • We made a big decision: We had extra bedrooms in this big new house. At least for the short term, we decided to rent out a bedroom, or two, if we could find the right people who needed to rent.
  • We agreed to sell the newer used car, if we could get a good price for it. Luckily we bought the car at a good price so we were hopeful we could sell it and break even on it or maybe even make a small profit. For a while, we would make do with only one car. Then purchase a less expensive car that met our basic needs.
  • We approached our parents and family, told them our predicament, and asked them to consider foregoing presents at Christmas and birthdays and possibly helping with cash instead. We were desperate. They readily agreed.
  • We tightened the budget in other areas: Cut back on food and gas. Even though these are considered essential, we would find ways to limit expenses.

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Recovery

It took one month to find a renter, a family friend, and two months to find a job that almost paid at the same level. We sold the car at a small loss and was able to use a sibling’s extra car for about three months after which time we purchased a very simple, inexpensive car that met our needs. Also at the three month mark, we rented another room to another younger family friend who needed a place to stay while attending college in our area. We found out during this time that we COULD live without cable TV and we could live very well at the reduced expenses level and chose to stay there. One more thing, when we moved to the new house, we realized we had accumulated more than a garage’s worth of stuff that we no longer wanted or needed. We held a huge garage sale and even though we only made back a small portion of the prices we paid for it all, by selling it we experienced a huge relief by not having all that stuff clogging up our new garage !

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By The Numbers

By the end of this period of time where we went from financial freedom, to financial distress, back to financial freedom, which took about eleven months, we did the following (on an annual basis):

  • Our combined work incomes declined by $3,000/year with the lower pay of the new job, but…
  • Our rental income increased to $8,400/year by renting bedrooms to two people
  • Our housing related costs increased about $14,000/year due to higher mortgage and house costs, but…
  • We reduced our living expenses by $6,000/year by permanently eliminating expenses like cable TV, reducing cell phone plans, less eating out, less shopping for “stuff”
  • We took the garage sale money, $2,000, and applied it toward our credit card debt. We will be credit card debt free in three months
  • We will rebuild our emergency fund to 6 months of expenses because unexpected things happen. More importantly, we agreed to limits as to when this money can be used!
  • We will return to being generous in helping others. Although we never stopped tithing to our church, we did stop helping others and it placed a hole in our hearts during that time. Full financial freedom requires us to be generous. We are more contented and grateful when we are generous
  • WE WILL BUILD & DEFEND FINANCIAL FREEDOM BECAUSE THAT IS MORE IMPORTANT TO US THAN MORE STUFF!

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WHAT DID WE LEARN?

  • Financial freedom is more about living in contentment and gratitude, within a balanced budget budget that supports our dreams and goals, than it is about having lots of money and possessions
  • Financial freedom is far more important than having more stuff
  • Emergency funds are only for emergencies, not for wants
  • Credit card debt is expensive, enslaving and addicting. Stay away from credit card debt
  • Live within your budget at all times. Do not let your neighbors or the culture dictate your lifestyle and spending
  • Driving an older paid for car is far more satisfying than driving a luxury car with a big monthly payment tied to it
  • Less is more: Less distractions like cable TV allowed for more quality time with my spouse!
  • Learn from the past, plan your best for the future but live in the present, enjoying what you have instead of coveting what you don’t have
  • Achieving our goals is far more important than instant gratification!

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I hope this post helps you. I hope lessons can be learned so that our poor decision making and recovery can prevent others from experiencing the same consequences. There is no one path to financial freedom, but there are basic rules that must be followed: Kill your debt, save for future needs, live within your budget and learn to live with contentment and gratitude.

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Financial Freedom: What I Would Do Differently If I Could Do It Over Again

A Good Start

I’ve been an adult for almost 40 years and the primary bread winner for most of that time. I had a great education, I was taught well by my parents on how to handle money, and, I had strong leadership in my life. As a result, I learned to handle money and possessions well: save money, live on a budget, limited use of debt and didn’t compare myself to neighbors or friends. As I look back, I had a good head start toward sound personal financial management. And I built off that foundation to develop personal financial freedom.

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And still, there are so many things I would do differently if I did it all over again!

To start, I would be more receptive to the wisdom and advice of “smart old guys” who gave me advice because they loved me and wanted the best for me. Second, I would have slowed down to speed up: Slowed down my lifestyle and lifestyle inflation as a means to speed up the attainment of my financial goals and dreams. Third, I’d trust the math more and my feelings and emotions less.

What Does All This Mean?

It means that although I did pretty well in obtaining and maintaining financial freedom in my life, there are a bunch of things I want to tell everything young adult so that they could do even better. I want to scream: “Trust me in this! It may not sound fun right now, but boy are you going to appreciate it a little later.” So here it is. Here is a list of things I would do better to reach financial freedom faster, if I could do it all over again.

“Begin With The End In Mind” Stephen Covey

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The first thing I would tell every young adult who is just starting out is to take a moment to define their life dreams and financial goals. Before they get their first big paycheck, think about what it is you want to accomplish. For some people, this may be very hard because they really don’t know where they want to go. But at a minimum, try to answer some general questions:

  • Do they want a family? children?
  • Want to retire at some time?
  • Want to have a home, cars, travel, etc?

Having at least a vague idea of dreams and goals does two things: It helps PRIORITIZE our thinking and decisions, and it provides the MOTIVATION we need to keep moving forward toward financial freedom when the clutter of daily life weakens our resolve.

“Don’t Save What’s Left After Spending. Spend What’s Left After Saving.” Warren Buffett

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Once we have some basic dreams and goals in place, I would encourage people to set up automatic savings directly from their paychecks towards those goals. I would suggest setting up the savings to come out of the account on the day your paid so you don’t even see, or miss, the money.

  • Immediately start saving money into an Emergency Fund. Start with a goal of having $1000 available for any emergency, working to build that total up to 3-6 months of expenses. Why? Because an emergency fund is self insurance against disaster, including job loss and medical issues.
  • Want ot retire someday? Immediately contribute the maximum toward your 401K/IRA and make sure you get the company match. This is one of the biggest wealth creation moves a person can make. Why? Because 1) Most companies match a portion of your savings, giving you instant return on your money. 2) Retirement accounts have tax advantages. Paying less taxes is a good thing. 3) Compound interest over time is what creates the wealth!
  • Immediately set up automatic savings for vacations, future cars and any other big ticket items you know you will be needing in the future.
  • Once the emergency fund is fully stocked, money can start going into investments, which will be covered later.

“A penny saved is a penny earned.” Ben Franklin

By setting up all automatic savings, you fund your goals and dreams before you even see your paycheck. Over time, you will get use to the amount that is left over and have a better chance of living within a budget based on the remaining money.

“Rather Go To Bed Without Dinner Than Raise In The Morning With Debt.” Ben Franklin

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Debt; paying money to use other people’s money, is a wealth stealer. Debt eats up precious dollars fast. For most of us, buying a home cannot occur with debt, so for this discussion, by debt I am referring to consumer debt: credit cards, store loans, car loans, lines of credit, etc. Debt steals away financial freedom because it compounds, so the longer you take to repay it, the more it costs you. It also puts the borrower in a form of bondage, in that, the repayment of the debt is an obligation regardless of your ability to pay. It assumes we know and control the future when we don’t. Things like medical issues, job loss and other tragedies can prevent a person from paying their debts, yet the debt is always due. What would I tell the young adult just starting out?

  • If you have credit card debt, eliminate it as your top priority, then stay out of debt. Pay off your total credit card bill every month.
  • Get patience and use cash for everything. Don’t have the cash? Don’t buy the item.
  • Only consider debt to purchase appreciating assets, like a house or for business. But even then, the more cash the better.
  • If the temptation of using a credit card is too great, cut up the cards. Use a debit card.

One more thing about debt. Excessive use of consumer debt is a sign of even bigger things in your life that may steal wealth from you and prevent you from living in financial peace. Using cash requires you to earn it before you spend it. Debt is instant gratification, but at a very high cost. Cash requires you to be disciplined, requires you to prioritize and allocate scarce resources (cash). Debt doesn’t have to wait, requires no discipline nor patience, and since the bill usually comes later, the absence of immediate payment promotes overspending. Develop patience when spending your money to prevent impulse purchases and overspending.

“How Many Millionaires Do You Know That Become Wealthy By Investing In Savings Accounts? I Rest My Case.” Robert Allen

Investing money to realize a gain is risky, but it is the best source of creating wealth. If we are working toward financial freedom, we must let our money work for us and that requires investing our money. The only money I would keep in a savings account would be a portion of the emergency fund. All the rest of the money should be invested in an income producing investment, and there are many types: stocks, bonds, mutual funds, ETF’s, real estate, CD’s, annuities, and the list goes on. What would I tell a young adult?

  • Invest, invest, invest and let compound interest generate wealth
  • The investment must produce income greater than the rate of inflation for you to generate wealth
  • The younger you are, the more aggressive I would suggest. Stocks have provided the greatest return over time. Don’t know what to do? A safe long term investment is a low cost equity index fund from a reputable company. Think Vanguard or Fidelity to name two. Still need help, engage a trusted investment professional.
  • Invest in timeframe appropriate investments: Need the money in less than 5 years, think conservatively. Have a longer timeframe? You can be more aggressive
  • Pick quality investments, always
  • Slow and steady wins the race. It is better to produce consistent slow gains than deal with investments with wild profit gyrations up and down and hope the timing is right when you need to take the money out of the investment. It never seems to be good timing.
  • “Compound interest is the eighth wonder of the world.” Albert Einstein

“Money Never Made A Man Happy Yet Nor Will It. The More A Man Has, The More He Wants. Instead Of Filling A Vacuum, It Makes One.” Ben Franklin

Most adults, young and old, know that money brings options and choices. But too many adults view having more money as the only answer to financial freedom and solving financial issues. The fact is, having more money CAN be a solution for financial freedom but without discipline, contentment and gratitude, more money will never be enough. What would I tell a young adult?

  • Money is only a tool, that if used correctly, can help you obtain and maintain financial freedom. But keep money in proper context. It is not to be worshiped nor the sole object of our desire.
  • Learn to be content and happy in any and every circumstance. Building wealth is a journey. Sometimes a very long one. Enjoy every minute because life is short.
  • Be grateful for what you have, never letting envy of what others have steal your joy.
  • Use discipline in the use of every dollar. Later on we talk about following a budget, but here I would say this: Be diligent with what you have because seemingly small wasteful spending can lead to large regrets later.

“It’s Not How Much Money You Make, But How Much Money You Keep.” Robert Kiyosaki

A spending budget is the single best way to allocate your money according to your goals and objectives. A budget simply tells our money where to go each month instead of wondering where it went when its all gone. Yet less than 25% of adult actually budget. So what is the result? How about the fact that 88% of adults live paycheck to paycheck or worse! So what would I tell a young adult?

  • Make a budget to guide your spending to support your goals and dreams!
  • The budget can be as brief or detailed as you like, but follow it, and check actual spending regularly to make sure you are following it.
  • Marry a budget with a good cash management process. Some go old school and use an envelope system. But most use technology to automatically pay bills and transfer money to savings. This is the easiest way to make sure your money goes where you want it.

Financial Freedom Is The Goal, Starting Early Is The Key

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Financial freedom is 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.

Everyone can obtain and maintain financial freedom. Maybe not everyone can be rich, but everyone can have financial freedom. Start now! The key is to start toward financial freedom as early as possible to let compound interest and time build your wealth. Starting early also helps us prevent bad spending habits from forming in the first place. Key, too, is understanding money, and the amount you make, is only half of the financial freedom equation. The other half is spending and investing wisely. I hope this personal finance  wisdom listed above encourages all young people to start early, save aggressively, spend wisely and view debt with contempt…to allow each and every person obtain and maintain financial freedom!

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Three Financial Lessons For My Soon-To-Be College Graduate

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May 8th Is The Big Day

May 8th is a big day for our family as our son graduates from college with a Bachelors degree in Business. He has been an excellent student and he will be an excellent employee working for a Fortune 500 company in their business planning division, starting in June.

As I thought about preparing him for his step into the “real world” I realized that he has been taught proper budgeting and money management. He knows the value of compound interest and investment over time when it comes to investing and retirement. So he is prepared for the “blocking and tackling” of managing his finances. But I felt there was a couple missing pieces of good personal finance management that I have yet to share with him. So, after some thought,  I came up with three pieces of advice that will help him become a valuable employee and as a result, help him meet his personal finance goals.

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Become A Man Of Value

Teddy Roosevelt once said: “It is not the critic who counts…The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood…who actually strives to do the deeds…” This is just a portion of his famous quote that so accurately focuses on getting into the arena and becoming a man of value. To this end, the first encouragement I want to give my son is to strive to be a man of value. Focus on creating value for your company and your customers. If you are working for a good company with good management, and he is, they will identify that value that you are providing and value you all the more. That value will provide you options, like promotions, and opportunities, like salary raises, which feed into meeting or exceeding his personal finance goals.

The focus on value will also apply to your investing. Find great investment vehicles of value, that can provide a decent return. You’ve got time and compound interest on your side, so you don’t have to take huge risks or gamble with your money. If you focus on value, success will soon follow.

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Choose Wisely

Up until this point, my son has led a fairly charmed and successful life. Good grades, good choices, good experiences with very little trouble or distraction. Now that he is going out into the working world, I want to prepare him for trouble, disappointments and change. Trouble happens, sometimes when you least expect it. Many times due to circumstances completely out of your control. Same is true with disappointments. Probably the most impactful thing he will experience, though,  is change, because up until now, everything has been fairly regimented and predictable: Elementary school to middle school to high school to college. Next he gets his degree and he starts his job. But in the working world he will experience substantially more change: work changes, bosses change, business changes, etc. In all these cases: trouble, disappointment and change, I want him to understand that it is normal and encourage him to grow from it. Learn how to adapt and prosper in the new circumstances. Embrace change and expect trouble and it won’t detract you from your personal or professional goals.

This applies to his finances as well. There will be bad investment years. There will be scandals, new politics and new laws that will cause financial trouble, disappointment and change. Learn from it, adapt and move on toward your goals. Do not let this trouble, distraction or change keep you from taking the right financial actions.

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The Secret: Enthusiasm

Last, there is a key to being successful in your career and your personal finance, and that is to be wildly enthusiastic at what you do. Get after it with energy, focus, passion and effort. Not only will it open doors for you, it will motivate others in the process, making you that much more value. Set huge goals. Give it maximum effort. What’s that Norman Vincent Peale quote: “Shoot for the moon. Even if you miss, you’ll land among the stars.” It will be obvious to him how this applies to his career. But it also applies to his personal finances: Set big financial goals. Want to retire by age 45? Want to afford international travel? How about give away one million dollars to charity? Whatever it is, go after it with all you got, and watch how it effects both the results as well as the people around you. It is contagious.

How else does enthusiasm apply to personal finance? I would say this: Be involved in your finances as much as you enjoy and partner with trained professionals and technology to help in those areas you do not enjoy. Because no one wants you to be successful with your money more than you! Go after it with vigor and enjoy it. Let your friends and family see your enthusiasm for proper money management and watch it rub off on them too!

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The Big Finish

Sheryl Sandberg once said: “Don’t let your fears overwhelm your desire. Let the barriers you face—and there will be barriers—be external, not internal. Fortune does favor the bold, and I promise that you will never know what you’re capable of unless you try.” To paraphrase in other words: Be a man of value, for your company and your customers, facing and expecting trouble from which you can learn from and adapt, and work with all your might and enthusiasm to achieve even more than you imagined possible.

Financially this applies just as well: Do the basics really well: Make a budget, save an emergency fund, save for large purchases and retirement, invest your money early and often in valuable investments that use compound interest and time to build it into a fortune. Expect hiccups and setbacks. Work with enthusiasm and enjoy the process. But most of all, stay the course to build your legacy and your wealth. All of which leads to the ultimate goal of financial freedom!

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