Knowing The Difference Between Emergency & Urgency!

Living In Financial Freedom

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Financial freedom is on everybody’s list of must-haves, or should be, because financial freedom allows us the attitude and resources to live abundantly in each stage of life, free of worry, anxiety or money concerns, to completely live out the full vision and goals of one’s life. Although financial freedom is defined differently among people, each definition  contains in it some basic common elements: Let’s take a look at those elements and how they fit into our lives. Common financial freedom elements:

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

This blog post focuses on the savings component of financial freedom, specifically the Emergency Fund Savings, and how to build it and use it correctly.

Emergency Fund Savings – The Best Self-Insurance

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Emergency fund basics:

What is it? Savings set aside for immediate use in the case of an emergency. Essentially, it is the lowest cost self-insurance.

Where does it reside? In a safe, accessible location, like a checking, savings, money market account or any place that is quickly accessible.

Why do we need it? To self-insure against inevitable emergencies or disaster and prevent the build up of debt, worry or frustration.

How much is enough? Most experts suggest 3 to 6 months of expenses, and almost all suggest at least $1,000 to cover insurance deductibles or instant emergency needs.

What priority is the emergency fund? It is top priority, before retirement savings, college education savings for the kids or savings for a home or new auto. The first $1,000 is even more important than debt elimination!

For most people dedicated to financial freedom, building the emergency fund takes a little time but otherwise is easy and straightforward. So what’s the hard part?

Emergency Fund – The Hard Part

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The hard part for many people is not saving the emergency fund money, but determining when is the appropriate to use it. It is tempting anytime we save money to use it for something “special”or when you get “an offer too great to pass up”. But an emergency fund is different from any other type of savings we have. Emergency funds must be saved for true emergencies because it is this money that keeps up out of debt when a crisis occurs. Thus, we need to be very judicious in using the emergency fund.

Urgency vs. Emergency – Know The Difference

For many people, it is hard to determine the difference between urgency and emergency. They look at their emergency fund as ready cash “if something really good pops up.” This is the wrong way to approach the emergency fund, because there will always be a sale, or a special deal, or “any opportunity” to purchase, which can put you at risk when that real emergency unexpectedly shows up. Most sales or special deals use time pressure to get you to buy, so we have a sense of urgency to make the purchase or risk missing out on the deal. By definition, these situations are urgent…but not an emergency. The best way to ensure there is money available for emergencies is to develop and follow a set of emergency fund access rules. Literally, criteria that must be met to access the emergency fund money.

For me and my family, the emergency fund can only be used in four situations: Health, Home, Auto and Family emergencies. Let’s look at some situations in each of these categories that are true emergencies where we can use emergency fund money, or just urgent situations where we can not use emergency fund money:

Type Situation/ Opportunity Emergency or Urgency? Can Use Emergency Funds?
Home Leaky waterheater Emergency Yes
Tables – 75% off sale Urgency No
Broken window Emergency Yes
Health Broken leg expenses Emergency Yes
New yoga class on sale! Urgency No
New workout shoes Urgency No
Auto New cool rims Urgency No
Blown out tire Emergency Yes
New water pump Emergency Yes
Family Job loss Emergency Yes
Vacation Urgency No
Attend family funeral Emergency Yes

Having clear criteria for emergency fund use helps us discern in a time pinch whether or not fund usage is appropriate. Otherwise we risk using the emergency fund money on urgent matters like a sale or special offer and then we are left unprepared for when true emergencies arise.

Why All The Fuss?

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The fact is, each of us will experience significant emergencies in our lives. It is reported that each adult has a 78% chance of a real emergency in any 10 year period of time. So over the course of your adult lifetime, about 60 years or so, chances are you will have 4 or 5 real emergencies when you need to have the emergency fund ready and funded to help you through the situation. It’s not a matter of “if” you will have an emergency, but “when”, so we must be prepared.

What’s the best plan? Build and maintain an emergency fund, with somewhere between three and six month’s of expenses in it. Develop criteria for using the emergency funds and a process to access the account to ensure the fund is used for emergencies and not urgent, emotional purchases. Because, missing a great sale may feel like a missed opportunity, but not having money when an emergency occurs could put us in a financial bind and potentially lead us into debilitating debt. Financial freedom requires that we save and properly use an adequate emergency fund to self-insure against inevitable emergencies. Financial freedom is not easy, but it is worth it!

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Save And Invest Money Or Pay Off Debt?

The question of which is most important, saving and investing money, or, to pay off debt, is much like the age old question: Which came first, the chicken or the egg? Cases for both answers have been convincingly made. For some, this question is easy and they pick either saving or debt reduction as first priority and do it. But to others, the lack of clarity as to the priority has cause them to pause, or even worse, caused them to not act on either priority. So where do you start to answer the question? I think it starts with understanding why we save or eliminate debt. We save and/or eliminate debt to obtain financial freedom. Financial freedom defers for each person, but it is rooted in having the resources to pursue one’s goals and dreams. This financial freedom allows us to be free from worry and concern over money and be free to achieve our long term goals.

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Financial freedom, in most circles, is predicated on four main principles, which include saving and investing to build wealth and eliminating debt. The other two core principles are living within a balanced budget and insuring against disaster. It is the first two principles, building wealth and eliminating debt, that sometimes get at odds against each other. Because many times, debt reduction and savings for investment compete for the same dollar in our budget. It’s a common dilemma that goes something like this: If I only have limited money available to achieve financial freedom, is the priority to pay off my debts or should I save and invest the money to earn a decent return? On the one hand, we have debt, the wealth killer that is to be avoided or eliminated as a top priority. On the other hand we have the need to invest to build wealth to fund our goals and dreams. Both actions are paramount for financial freedom. But which action is the MOST important? Which action comes first?

The Case For Eliminating Debt First

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Debt is an obligation that assumes we know, and can control, the future, in that debt requires regular payments over time which we can’t 100% control. Job loss, natural disasters and health issues can interrupt future payments. Debt is also expensive. Here’s some examples: Home mortgages cost us 4% (Interest rate on the money borrowed) and it only gets more expensive from there: Car loans and student loans are between 3%-7%, and the worst, credit cards, cost anywhere from 10% to 25%. This means that the couch that we purchased on a credit card for $1,000 and made minimum payments on for many years ended up costing us about $2,400 in all. In essence, we had to pay a fee of $1,400 to borrow $1,000 for the couch. Ouch, that’s expensive. And in comparison to the return on money invested in most safe investments, like money market accounts, certificates of deposit or savings accounts, which only pay a percent point or two in interest at most, most debts are more costly than any safe investment return received. So one could argue that paying off our debts is the top priority.

The Case For Investing First

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Building wealth, another core principle in financial freedom, is about investing early and often and letting compound interest work over time. It is imperative to start as early as possible, so we should make saving a priority. In addition, the return on investment for  blue chip equity investments, like an S&P500 index fund, is higher (averaging over 10% per year including dividends over the past 75 years) than the cost of some debt that people carry, like student loans, home mortgages and car loans. So, it could be argued that it is better to invest the money than to use that same money to pay down debt which has a smaller return. In other words, if I can make 10% on my investment, why would I instead pay down debt that only costs me between 3% to 7%?

A trusted source for all things investing: The Street

 

What’s The Smart Decision For Financial Freedom?

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The answer to the question: Should I pay off my debt or save for investment to build wealth?, is rooted in the current condition of the four main principles of financial freedom mentioned previously:

  • Live within a balanced budget
  • Insure against disaster
  • Building wealth
  • Eliminating debt

If you’re reasonably insured against disaster (have an emergency fund) and you’re living within a balanced budget, then eliminating debt is the top priority. But if you don’t have both an emergency fund or a sustainable balanced budget, then the priority shifts to getting those right before attacking the debt.  Let me explain a good way to approach it.

Step #1: Start an emergency fund. Do you have an emergency fund? If you have no emergency fund, then the first priority is to save up at least $1,000 in an account for emergencies. Why is this the first priority? Because an emergency fund is savings to PREVENT further debt associated with any unexpected emergency. It is self-insurance, a key component of financial freedom. We’re not done with the emergency fund quite yet. More on this later. To recap, the first priority is to establish an emergency fund if you do not have one.   If you already have $1,000 saved in an emergency fund, or better yet, your emergency fund covers 3-6 months of expenses (discussed later) then skip this step and go straight to step #2.

Step #2: Eliminate debt. Within the confines of a balanced budget, treat consumer debt with extreme prejudice. What does that mean? It means after a minimal  emergency fund is established, the next priority is to eliminate the consumer debt (and a commitment to stay out of consumer debt).  How would I do it? I would list all my consumer debts (all but the mortgage for now) and rank them by the interest rate paid on each. Then I would pay the minimum amount on all debts except for the one that has the highest interest rate. That one I would pay as much as possible (while keeping a balanced budget). Personally, I would cut back on my lifestyle and use that saved money to make as big a payment as possible each month until it is eliminated, all the while staying within your budget. Here’s an example using the chart below:

This person has three debts, with amounts ranging from $1,000 to $5,000, and through squeezing his budget, can allocate $500/month towards paying down his debt. In the chart below you can also see interest rates and minimum payments. The first step it to prioritize the debt by interest rate. In this case, the first priority is the Visa card at 16%, then the MasterCard and last the Student Loan (See Priority Column). At this point, we pay the minimum payment to all debts except for the top priority. So we pay $125/month toward the MasterCard and $50/month toward the Student Loan. But the top priority, the Visa card, gets ALL of the remaining money available that month for debt reduction, the balance of the $500. In this case, that is $325 ($500 – $125 – $50 = $325). $325 is far more than the minimum payment requested, $60, so the pay off of this loan will be hastened. At this rate, the $1,000 Visa debt will be paid off in full in four months, at which time the payment amount of $325/month gets moved to the next highest priority, the MasterCard. That will make the MasterCard monthly payment $450, while keeping the Student Loan payment at $50/month. Once the MasterCard is paid off, about five months later, all the money will be put towards the Student Loan. In all, using this method called a Debt Avalanche, it will take 18 months to fully pay off all the consumer debt.

Debt Pay Off Plan Available to pay down debt: $500/month
Debt Name Amount Owed Interest Rate Minimum Payment Priority Suggested Payment
Visa Credit Card $1,000 16% $60 1 $325
Student Loan $5,000 6% $50 3 $50
MasterCard Credit Card $2,400 12% $125 2 $125

Step #3: Start serious saving! At this point, we have no consumer debt and $500/month which was used to pay off the debt available to save and invest. But invest in what? There is a priority in your savings and investment. If all you have is the initial emergency fund discussed in step #1, of $1,000, the top savings priority is to build up your emergency fund to self insure against disaster, which could return you to debt. How much is enough? The standard answer is somewhere between three and six months of household expenses, depending upon your risk tolerance. For instance, if your monthly household expenses total $5,000, then your emergency would need between $15,000 and $30,000.

Once your emergency fund is fully funded, it is time to start funding other priorities, starting with retirement. Why is retirement the second priority? Three reasons: first, a retirement account like a 401K, SEP or IRA requires a large amount of time to build up to meet your long term needs. Nothing like compound interest over time to build your nest egg. Second, a retirement account is tax preferred, meaning not only are you saving but you are paying less taxes all the while. Third, many retirement accounts offered by employers have a match program where the employer matches a portion of the savings you commit to your retirement account. In essence, this is free money given to you by your company which then will return interest in your account. How much is enough retirement savings? It is recommended that the full amount by law be saved and invested in a retirement account, roughly 15% of your net spendable income each month.

What’s next after the emergency fund is full and we are meeting our retirement savings needs? If you have children and plan to financially help them attend college, you need to set up and fund an education fund, like a 529 plan, and then contribute an amount that will meet your financial goals and timeframes. We are still not done saving yet. We need to save and invest for future needs too. Cars, homes, vacations and furniture are just some of the things we need to save for so that we don’t go back into debt when it is time to purchase them. In all, there are a lot of things to save for, but using a prioritized approach will ensure you don’t go (back) into debt when an emergency occurs or a large expense is required.

Some Sage Advice

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Warren Buffett is credited with some really sound advice on the topic of saving. To obtain and maintain financial freedom in our lives, he said we need to “spend what’s left after savings, not save what’s left after spending.” Here is where the balanced budget comes into play. It is crucial that we first factor savings into our budget to ensure our goals and dreams are being financed and to keep us from going into debt. Then, and only then, can we determine what we can afford in the way of monthly expenses. So often, people build up a lifestyle that is comfortable, only to find out they can not afford the savings needed to fulfill their dreams. They save money after they finish spending. Then find out there is not enough money left over to save! Make a budget, save first, then spend while not exceeding your income.

There you have it. The answer is quite straightforward, though it is not as easy as deciding between saving or paying down debt. The flow goes like this: Develop and maintain an emergency fund, then eliminate consumer debt, before saving and investing for your dreams and goals in life, including retirement, children’s education, homes, cars, vacations, etc. AND, all of this must fit into a balanced, sustainable budget in order to experience financial freedom. Financial freedom, it’s not easy, but it worth it!

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

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

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

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

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

Financial Freedom – What Is It?

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

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

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

Budget Example Of Financial Freedom

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

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

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

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

Category                              Budgeted $            Includes                                                                         

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

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

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

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

Insurance                                   0%                        Medical and life insurance through employers

Medical                                       1%                        Prescriptions

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

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

Travel budget                                15%                    At least two international trips a year

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

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

Total:                                           100% of NSI

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

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

To Each Their Own…Budget

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

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

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

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

Two Years In The Life Of A Contrarian Dividend Investor

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

First, The Assumptions

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

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

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

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

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

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

The Contrarian Dividend Stocks

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

Stock             Purchase Price      Current Price     Current Dividend     Dividend % Change

KMI                $29.41                       $20.43                   $.50                              -65%

MPW              $11.55                       $12.81                   $.96                              +5%

GM                  $29.40                      $33.55                    $1.52                             +10%

WFC                $51.40                      $54.60                   $1.52                              +5%

SO                    $43.41                      $49.58                    $2.32                             +5%

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

Going Forward – The Upside

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

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

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

Stock            Dividend Yield          Payout Ratio           

KMI                2.44%                          80% of free cash

MPW              7.40%                          88% of free cash

GM                 4.58%                          25%

WFC               2.79%                          38%

SO                   4.69%                         88%

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

In The End…

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

 

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

 

What do you think of my contrarian dividend investment plan?

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

An Unconventional Path To Financial Freedom

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

The Worst Day

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

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

The Situation

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

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

The Big Decision

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

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

They asked some hard questions of themselves, like:

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

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

The Plan

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

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

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

The Math

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

Bill and Jeanette’s New Monthly Budget

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

       minus ($1,900) for taxes and tithing

Net Spendable Income: $5,300

Expenses:

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

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

Debt:                       $ 0 (Hurray!)

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

Food:                     $ 425 (Includes eating out)

Entertainment: $ 300

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

Misc:                     $ 290 (Toiletries, gifts, etc)

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

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From Tragedy To Transformation

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

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

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

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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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5 Don’ts For Financial Freedom

Financial Freedom – What Is It?

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Most people have a fairly good idea of what financial freedom means to them. For some it is simply having no bill collectors calling them. Or maybe a little money in a savings account. Others might define it as simply being rich. Having more money than you could ever spend in a lifetime. My definition tends to fall in the middle: As having the attitude and resources to live abundantly in each stage of life, free of worry, to completely live out the full purpose of one’s life. In any case, just about any definition of financial freedom tends to focus on what we DO want (money, time, savings, etc) to eliminate what we DON’T want (worry, anxiety, debt, etc).

Let’s take a step back and focus on the underpinnings of financial freedom. That is, the attitudes and mindset in order to attain the freedom and then maintain it. There are two main attitudes, I believe, that allow us to become financially free: Gratitude and Contentment. Gratitude allows us to appreciate what we have and stay away from focusing on what we don’t have. Contentment allows us to have peace in our current situation, whatever the circumstances.

How Do I Get This Gratitude And Contentment?

Gratitude and contentment come with a pretty clear set of DON’Ts that go a long way in allowing us to obtain and maintain a basis for financial freedom. So, with no further ado, here are five don’ts for financial freedom:

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  • Don’t let things you own define you

Your car doesn’t define you. Your bank account doesn’t define you. Nor your home, your toys or your barbecue grill. Your stuff doesn’t define you and neither does your neighbor’s define them. When we look at our stuff to define us it quickly leads us to comparison. Comparison steals joy and peace and definitely steals contentment.

  • Don’t let fear rule you. 

When it comes to our finances, fear makes us defensive, negative and “playing not to lose”. The result is worry and anxiety, neither of which bring about the feeling of freedom. When we experience fear, we lose our gratitude for what we have and the blessing that it is,  and instead, focus on the potential of losing it.

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  • Don’t focus on scarcity, focus on abundance

Fear focuses on scarcity, or the sense that there is not enough (money, peace, possessions, etc). Gratitude focuses on the abundance we have in our lives, however little we may have.   Gratitude is thankful for what you have/had, fear focuses on the loss or lack of it.

  • Don’t view success as keeping things the same. Change is constant

Accept the fact that things change over time. If you view success as keeping things always the same, you will eventually be disappointed. Accept that change is constant and inevitable. Here’s a thought process I use to stay grateful: When things change, I give thanks for the opportunities or experiences that I had instead of focus on the loss when it changes. I had a sportswear for 7 years and drove it everyday, but one day, I had to sell it. I gave thanks for the seven years of fun, not on the fact that I no longer had my dream car.

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  • Don’t strive for comfort, strive for freedom

Robert Arnott is quoted as saying: “In investing, what is comfortable is rarely profitable.” Comfort is rarely profitable and can limit personal growth. Many times when we are comfortable, our gratitude slips away. Instead, strive for freedom in your finances, which does require some risk (investment) that builds the wealth that provides the freedom.

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Having an attitude of gratitude and contentment is the foundation of living financially free. Yes, we need to save money for future needs, eliminate our debt and live within a balanced budget. These actions are fundamental to financial freedom. But unless we are grateful for everything we have or experience, and content with where we are in our lives and who we are, we will never truly experience freedom from money worries, fear of unpreparedness or comparison with our neighbors. When we are financially free, our options open up and our dreams can become realities. The interesting thing about having an attitude of gratitude and contentment is that once you have them, material things and your circumstances matter far less and that magnifies your financial freedom even more.

Financial freedom: It’s not easy, but it is worth it!

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

Budget Example of Financial Freedom

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What does financial freedom look like?

Financial Freedom – What Is It?

Financial Freedom is about the liberty to chose without restraint. Since our finances are simply tools for us to use to meet our life’s goals, financial freedom is defined as having the attitude and resources to live abundantly in each stage of life, free of worry, to completely live out the full purpose of one’s life. Many people have heard about the concept of financial freedom, but what does it really look like? I mean, of course I want to be free to do what I want, free to enjoy myself and free to pursue my dreams. But beyond that, what is the big deal? Is it just about having some money?

Financial freedom goes far beyond having a few bucks. Sustainable financial freedom enables us to reach our potential as people. This freedom has five key components. Let’s take a look at those components and how they fit into your life

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

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The budget of the financially free can take many forms, but whatever the form, they all have these common traits:

  • They spend less than they have.
  • They account for saving toward goals
  • They eliminate debt

Let’s take a look at a very good actual budget that allows for financial freedom. Note: The budget is shown as a percentage of Net Spendable Income (NSI). NSI is your total income, minus taxes and charitable giving, usually represented on a monthly basis.

Category                              Budgeted $            Includes                                                                         

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

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

Autos                                         14%                        Car payment, insurance, gas, repairs

Food                                           12%                       Groceries, toiletries, beauty items, eating out

Insurance                                   2%                        Life insurance

Medical                                       2%                        Medical costs and insurance

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

Savings for upcoming needs  10%                    Saving for new car, furniture, house repairs

Kid’s college savings                  5%                    529 plan

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

Vacation                                         8%                    Fun in the sun!

Total:                                           100% of NSI

This is a very good budget, with ample savings, (totaling 27% of NSI) and no consumer debt. This budget is sustainable and takes care of the family’s goals, namely:

  • Saving aggressively for retirement
  • Saving for the kids to go to college
  • Saving for new cars, furniture and house repairs
  • Funding for vacations and living life (entertainment, etc)
  • Funding for security: medical insurance and life insurance

Does every budget need to look like this one? Absolutely not. Each budget should reflect the goals and priorities of the person or family. But every budget must make room for savings, must eliminate debt and must never allow expenses to exceed income in order for it to be sustainable. And a  sustainable budget is a large part of the puzzle to live financially free in order to live abundantly in each stage of life, free of worry, and free to live out the full purpose of one’s life.

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FREE123: Freedom In Less – Spring Break Update

Freedom in Less

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

Less Is More – The Beginning

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

The Goal: Purposeful Simplification

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

Spring Break Update

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This month my wife and I took a vacation with a simple focus. Enjoy the natural beauty of the island (St. Croix) and immerse ourselves in the people, food and authentic culture with little to no tourist activity. In other words, live in the moment like the native islanders do, spending lots of time enjoying the simple pleasures. We did this for three reasons: First, we needed to slow down and recharge. Second, this is probably the only time we will ever visit this island so we wanted an authentic experience. Third, and most of all, we wanted to simplify the vacation to relax and enjoy simple things like laughing, resting and eating together. We had a blast! Take a look at some of the “Less Is More” decisions we made:

  • We rented a small little cottage (AirBnB) owned by a local artist to give us a feel of what is was like to live like the locals. No air conditioning, pool or cable TV. Instead we enjoyed the simple sounds of the island through our open windows that allowed the trade winds to blow through the cottage. It was amazing. So simple and enjoyable.
  • We rented a car and made it a point each day to go to the local beaches, food stands and watering holes and we met so many interesting and enjoyable people who ended up sharing the week with us. There is nothing like having locals take you to the best (secret) places. And we made fast friends.
  • We kept it real simple. No schedules, no large groups, no long lines. We hiked, swam, walked beaches, searched for sea glass and snorkeled. Easy, fun and very inexpensive. Any we also got a little exercise!
  • We depended upon, and benefited from only using recommendations from locals. As a result, every experience was amazing and extremely inexpensive, like free!

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FREE123: Freedom In Less Summary

This month we experienced a “Less Is More” vacation in St. Croix. We decided to simplify and live in the moment on this vacation in order to slow down and spend less. Really, to vacation in a less-is-more style by doing/spending less and enjoying time together more. It was great! The things we did do were memorable and really felt special. The extra time we just hung out together was awesome and restful. And the laughs were endless. By limiting events/activities and excessive vacation spending, we didn’t break the bank and yet enjoyed the most important things: time with friends and shared experiences.

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