Need To Save But Can’t? You Need A First, A Focus & A Fruit

 

Why is saving money so hard sometimes? It seems there is always something vying for the precious dollars we attempt to save. Sometimes savings doesn’t happen because of the bumps in life, like a medical issue, a job loss or an auto accident which requires immediate action. Sometimes it is because there are so many impulses vying for our money. Between TV commercials, social media, influential friends and peer pressure we are bombarded with reasons to spend instead of save. And there are many other reasons why we struggle to save. From a recent poll done by Forbes, here are the four top reasons Americans said they either could not or do not save:

  • Spending Money Offers Positive Short-Term Feelings, While Saving Money Does Not
  • Financial Goals Typically Take a Long Time to Achieve
  • Life Always Seems to Intervene
  • Unexpected emergencies

This contention for dollars results in a troublesome situation in America. MarketWatch reported in a 2016 study: “Americans are some of the worst savers in the developed world. U.S. adults currently save just under 6% of their disposable incomes, according to the most recent data from the Federal Reserve Bank of St. Louis. That number includes savings and retirement accounts.” Six percent is far below the levels needed to meet most family goals and obligations like retirement, college, new cars and the occasional vacation.

What’s more, the article found that: “Almost half of American adults could not cover an emergency expense of $400 without selling something or borrowing money, according to the Federal Reserve. And about 31% of non-retired adults have no retirement savings or pension at all.”

So, if saving is that hard, how do some people do it very well while most people struggle? After researching this issue extensively, and interviewing many spenders and savers in person, I think the answer comes down to this: People who save money well have a FIRST, a FOCUS and a FRUIT. Let me explain:

Good Savers Have A FIRST

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Meaning good savers prioritize saving FIRST, then spending what is left after saving. How do you do that?

Most of the people I have talked to accomplish their savings goals by consistently doing three things:

  1. They develop a set of goals and objectives and then budget, make and use a spending plan, to allow money to be put aside to meet those goals. In other words, they have a budget that ensures money is allocated each month toward their goals.
  2. Most good savers work hard to define and separate needs from wants. Needs are required for simple living and must be funded in the budget. Wants are something more and good savers usually are willing to fund goals before spending on wants. Good savers are willing to sacrifice wants in order to afford savings for important goals. By that, I mean, savers know what must be paid for, like basic housing, food, clothing and other essential needs.  For instance, let’s take housing. A good saver may be willing to afford basic housing (need) but forego something really fancy (want) because they want to save the money to fund an important goal.
  3. Last, good savers commonly use technology to pay themselves first, automatically and usually quickly so they never miss the money in their paychecks because they never see it. What are examples? Direct deposit into savings or 401K retirement accounts or 529 college savings plans. Many good savers also set up automatic payments to their credit cards so they never carry a balance. Only after all the savings and investments are completed does the remaining money become available for spending. And even then, some good savers automatically pay their important reoccurring bills automatically to make sure they never get behind on items like rent or auto payments.

 

Good Savers Have A FOCUS

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As mentioned earlier, good savers have clear goals which help them to FOCUS where their money should go. If, say, your goal is to retire from full time work by the age of 55, that will require a certain amount of saving and investing each month. Having clear goals helps the good saver stay focused on what’s most important.

There are two important mindsets that help people stick to saving for their goals that are used commonly:

Having “micro goals”. Good savers usually break down their big, seemingly far off goals into smaller goals that feel attainable and are easier to measure progress against. For some people, the goal of retiring in 30 years is not a good motivator to save because it is too far away. But if you broke that goal down into something more immediate and measurable, like “I need to save $275 from every paycheck”, it could keep a person on track to save the money.  As long as the end result of the micro goals contributes to your overall goal, this technique can be quite useful.

Focus on progress made, not the distance to the goal. When you’re working toward a big goal, it’s tempting to keep your eyes on the far off prize. After all, this is all about where you want to go, right? You’re moving in a positive direction. Why would you want to look backward? Well, because sometimes looking backwards focuses on your successes to date, which can motivate future successful actions. Case in point: saving for a big vacation. Doesn’t is sound more motivating to say “I have saved $4,000 toward our Bali trip”, than to say, “I need to save for another 6 months to afford our Bali trip”?

Having clear goals to save toward give us our “why saving is the priority” when we are tempted to spend in the moment on less important items.

 

Good Savers Have A FRUIT

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In order for people to save and/or continue to save, they need to see fruit from their saving efforts. Most good savers consistently do a couple things that bear fruit in their saving journey:

Celebrate small wins: They celebrate small wins to build momentum to continue the quest. Celebrating little wins does two things: It recognizes progress and it allows us to include others into the progress of meeting our goals. It also prioritizes the attainment of the goal over immediate gratification through meaningless impulse purchases.

Another fruit of good savers is knowing that giving up something “good” (an immediate purchase) in order to obtain something “great” (achievement of the goal), builds a higher level of satisfaction and ultimately, self-worth. It builds and shows character that leads to financial freedom!

BONUS – One More Thing – Prepare for Life To Happen

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No matter how wonderful your plans are, sometimes life just intervenes. Murphy’s Law. Whatever you want to call it. Life happens in the form of emergencies, crises, and unexpected costs.You lose your job. Someone gets sick. Your car needs replaced. Your hot water heater fails and floods your basement. Making it hard to make financial progress. And, with that, your plans start to go awry. The path you were on is suddenly diverted and the big goal seems farther away than ever. It begins to feel impossible.

It doesn’t have to be this way. Good savers can take action early to protect their progress toward big savings goals in the way of an emergency fund. Most savers start very early in making their emergency fund. They scrimp, save, live beneath their means and earn extra money to build a fund, usually 3-6 months of expenses, that is there in case of an emergency and make sure the fund does not get eaten away by other expenses. Once the emergency fund is establish and available, they stop contributing to it and start saving towards their other goals.

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Really, the emergency fund is self-insurance. Not only does the emergency fund prevent a run up of wealth-stealing debt, it provides the piece of mind and confidence that goals are attainable and worth saving toward.

Having Trouble Saving?

When it seems like you can’t save money no matter how hard you try, sometimes changing your focus can help. Yes, life happens and sometimes it gets unpredictable and expensive. But by prioritizing savings before spending, having a laser like focus on your goals and celebrating small wins as they big toward the larger goal can be just enough to keep us going and, eventually, realize the goals. That’s why good savers have a first, a focus and a fruit!

 

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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Everyday More Salt & Less Pepper: FI Wisdom From Years Of Mistakes & Miscues

While recently getting my hair cut by the same person who has cut my hair for the past 12 years or so, she looked at me sheepishly and said “Mike, times are a changing…it seems like every time I see you, you have more salt and less pepper.” After a moment of bewilderment, I realized she was telling me that my brown hair was gaining more and more gray hair over time. Her statement, while funny, and true, was also a reflection of the years that have gone by in my journey to financial independence. Then I thought about it. Its been 30 years, 8 homes, 6 jobs, 3 kids and 2 careers since I started my FI pursuit. I have learned a lot. Some learning has come from wise decision making, but most, it seems, has come from my mistakes and the steps to overcome them. Here are four FI lessons from many years in the FI pursuit:

 

Tortoise & The Hair

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Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” – Warren Buffett

Warren Buffet, perhaps the single greatest investor of our time, is credited with this famous quote. Unfortunately, it has taken me the past three decades to get it through my head that loss prevention is the higher priority over the risk of chasing huge returns. See, I have been invested in the stock market all this time. And for most of the time, I only invested in what I knew, which was high tech stocks. At the time I was in the industry. The good news was that high tech stocks have had some incredible returns. Years like 1995 through 1998 come to mind when the annual returns ranged from 20% to 37%. The bad news is that those same stocks had some horrible losses. The years 2001, 2002 and 2008 come to mind. The net result was that I made, and lost, two huge fortunes in the stock market since 1983 with very little to show for it as of the 2008 financial crisis. Hence, starting in 2009, I started to put Warren Buffet’s rules into place and have been rewarded handsomely for it. What I have learned: Slow and steady wins the race, just like the story of the tortoise and the hair. You don’t have to chase high returns with high risk stocks to get a good return. Preventing losses is more important than sporadic years of high returns. In terms of my stock investing, that means investing in high quality stocks, with a proven record of profits, growth and good management operating in good markets. For the most part, I invest in strong dividend stocks which also helps guarantee a decent return. I also re-balance my portfolio to lock in profits and lessen the chance of large losses should the market turn. While I have not had huge annual returns in the past nine years, I have not experienced ANY negative return years. The end result is that compounding the small but regular annual returns have produced more wealth than the previous 25 years of investing combined.

The Few, The Proud, The Life Goals

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“If you aim at nothing, you will hit it every time.”― Zig Ziglar

Early in my FI pursuit I had vague, long term goals: Something about retirement, kid’s college, independence and travel. Blah, blah, blah. I focused on climbing the corporate ladder and thought regular promotions would take care of meeting my eventual goals. It wasn’t until the first major stock market crash in 2001 that I realized that my goals were too vague and too long term to foster the best FI actions. It’s true, when you aim for nothing, you hit it every time…and go nowhere! What I have learned: Have specific goals in all aspects of financial independence. That includes quantitative giving goals, savings goals, investing goals, as well as qualitative goals for gratitude, contentment and peace. The reason why? The quantitative goals provide concrete targets that are easily measured for motivation and a sense of accomplishment. The qualitative goals help us round out the true independence spirit (Freedom from worry or anxiety) as well as give more meaning to what FI is all about.

Set It & Forget It

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When I was younger, I would invest regularly, but only after I paid all my bills. Some months I had a lot to invest, but others, not so much. It was irregular at best. Also, as mentioned above,  in those early years, I really didn’t have stated financial goals. The end result was I never knew if I was on track with my saving and investing. What I have learned: As I have aged, and truly learn to appreciate having financial goals and the power of compound interest, I have learned, first, to order the allocation of money as such: Give first, save second, then spend the rest. Meaning, I give to my church and God first because He deserves it. Then I save (pay myself) second after giving to ensure all my savings goals are met. Then, I make my spending plan (budget) based on what is left over, never spending more than I have. Here’s the best part: I use technology to automatically give, save and pay bills so that I am faithful, regular and not consumed with handling money. Simple and easy.

Sacrifice Good For Great

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“There is no progress or accomplishment without sacrifice.”
Idowu Koyenikan

Sacrificing to reach a goal has never been foreign to me. Sacrificing time and effort to get in shape to play high school and college sports was normal for me. Sacrificing fun and parties to get good grades was expected of myself. But somehow, when I got into the working world, and made good money, I didn’t want to sacrifice the trappings of success for the purposes of reaching a bigger, and better, goal. What do I mean by that? I wanted, and got, the bigger house, the nice cars, the big vacations. In some ways, I was trying to stay up with the Jones…and it was very unfulfilling. Bigger homes and nicer cars cost more money and take more upkeep. After a while it felt like my stuff owned me. What I have learned: Foregoing good things, like a bigger home or a nicer car, and using that money for great things like financial independence, helps speed up the process to independence and true wealth, in a big way! I have learned to cherish my smaller home (low taxes, less to clean, less room for stuff to build up) and my old car (paid for) so that I can use the money instead to fuel financial independence! Sacrificing good stuff for great stuff also helps me appreciate everything I have even more. And guess what? I don’t miss the bigger home or nicer car. Sure, they were fun to have but they are not as fulfilling as the long term goal of financial independence.

More Salt – More Focus, More Intention, More Better!

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“There are no mistakes, save one: The failure to learn from a mistake.” – Robert Fripp

Yes, the hair is getting gray-er and the time is flying by. But, a lot has been learned and hopefully, that knowledge can be helpful to others on their way to financial independence:

  • Consistent investment gains in solid stocks are better than the vicissitudes of high risk/reward stocks.
  • Quantitative and qualitative goals help focus FI efforts,
  • Automated Fin Tech tools help assure the Give-Save-Spend prioritized relationship,
  • And, sacrificing good stuff for the sake of great stuff speeds up achieving your FI goals.

Financial independence is not easy, but it is worth it! As one of my kids would say when they were young: It’s more better!

 

My Love Is Unconditional, My Money Is Not!

As parents raising children, we are called to love our children, equip them for life, and lead them in the way they should go to lead happy and productive lives. A large part of being a parent is to introduce our children to unconditional love. A love that transcends behavior and choices and focuses on loving them for who they are. A parent’s love truly is unconditional…

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…but that doesn’t mean they can be irresponsible or entitled with money! In fact, one of the first lessons parents need to teach their children about money is that money, and the making and spending of it,  is very conditional. Here are some basic tenets about money that should be impressed upon our kids:

  1. We are paid money for producing results. For the most part, we get paid in our work based on the value we provide. Provide lots of value, get paid lots of money. But the opposite is also true: provide little value, get paid little.
  2.  There’s a BIG difference between being financially free and making lots of money.
  3. Wants and needs are VERY different things.

Taking these very basic money rules into account, here are four parent teaching moments in the lives of our children when it comes to money and the path to financial independence:

Money Does NOT Grow On Trees

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It does not take very long for a child to learn that if they want something, they say: “Mommy, I want this?” To which, sometimes, the mommy pulls money out of her purse to pay for the desired item. Mommy gives the clerk some money and then the child gets to keep the desired object. Wow, that’s easy. It seems, at least to the child, that it is even easier when mommy “pays” for the item using that little piece of plastic called a credit card: Pull out card, swipe and voila! Easy and fast. The realization that money, especially when using a credit card,  can be rapidly exchanged for desired things is quickly followed, usually, by the fact that the child can find many wants. “Mommy, I want this, and this, and this….well, you get the picture. Which brings us to the first set of Money Lessons and Conditions (Yes, I said set of lessons):

  1. Money is in limited supply, it does not grow on trees (or magically within a credit card)
  2. As a child, mommy or daddy get to determine the best use of the family money
  3. Big finish: The child MAY get to use some of the money, but they are NOT entitled to it! Especially not whenever they want it.

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Wants And Needs Are Two Different Things

As stated earlier, a child learns very quickly to express the desire for many things. The request for stuff can be endless as most kids have seemingly endless energy to express those wants…until a parent teaches their child the difference between wants and needs, as well as the difference between yes and no! A need is something the child requires to grow (like nutritious food), wear (like proper school clothes) or develop (maybe athletic shoes, glasses or some pencils). But a want is strictly discretionary. My favorite line with my kids, when they were old enough to understand it, when they started expressing all their wants, was to say “Well, I want a Ferrari, but we don’t always get what we want.”

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Which leads us to the second set of Money Lessons and Conditions:

  1. Wants are completely different than needs. Your needs will be provided for. Your wants will be taken under consideration.
  2. Your (the child’s) desire for a want will be noted, and when a parent decides either to purchase, or not to purchase an item, that parent’s yes means yes, and a no means no. Period.

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Fair Is A Place To Take Rides And Eat Bad Food

“That’s not fair!” A parent may hear this often. “It’s not fair that a classmate got a new bike, or new video game or new app”…so the child exclaims. The list of unfairness can go on and on. It is important for parents to explain that fairness has little to do with anything, and frankly, that life is not fair and you better get used to it. Fairness stems from comparison. And comparison can lead to envy and discontentment. We compare ourselves to friends, neighbors or what we see on TV. It is important for parents to remember and teach that what our neighbors do should have no bearing on what is best for our family.

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Which leads us to the third set of Money Lessons and Conditions:

  1. Wants are completely different than needs. Your needs will be provided for. Your wants will be taken under consideration.
  2. Just because a neighbor or friend gets something doesn’t mean you automatically get it. (Don’t covet)
  3. Funding family goals and dreams are a priority over instant gratification

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You Do Your Part, I’ll Do Mine

This one is my favorite. We must, as parents, teach our kids that work, and good behavior, gets rewarded AND that the opposite is also true: You don’t do your work, or you have a bad attitude, and you will not be rewarded (or paid). You get paid your allowance when you do all your chores. Don’t do your chores, don’t get paid. In my family, a school aged kid has one priority: learn in school to the best of their ability. Essentially, school is their job. Don’t do your best in school? You lose privileges. If you don’t study for a test, then get a bad grade, you don’t get sleepovers and shopping trips to the mall. Essentially: You do your part and I’ll do mine.

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Which leads us to the fourth, and final set of Money Lessons and Conditions:

  1. There are rewards and/or consequences to our actions. If you do your part, I’ll do mine. But if you don’t, then I won’t either.
  2. Responsibility brings value (and is rewarded). Irresponsibility, not so much
  3. I don’t care how much you want something if you’re not willing to do your part of the agreement (Earned vs. entitlement)

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Final Note – Unconditional Love Means Money Conditions

It’s our responsibility as parents to train our kids in the way they should go…in their actions, behaviors and decision making. Especially when it comes to money because neither our school systems or our culture will or can give them the solid foundation they need when it comes to money and the pursuit of financial independence. The first time I heard a parent use the phrase “my love is unconditional but my money isn’t” seemed a little harsh. But the more I processed the concept, the more I realized it was both responsible parenting and very loving. Teaching our kids that money, rewards and promotions are very conditional helps our kids develop the work ethic and fiscal responsibility they need to take care of themselves and form a proper relationship with money.

My love is unconditional but my money isn’t!

What Do Aging Athletes And Financial Independence Have In Common?

I am passionate about sports and I have been that way for as long as I can remember. More so playing them than watching them but nevertheless, passionate. It was football, baseball and basketball in high school. Then, football and baseball in college. Followed by softball, basketball, tennis, cross-fit and competitive running thereafter. And all the while, I have lifted weights and worked out as a way of life. I love it. It makes me fit, I feel good and it’s cheaper than a psychiatrist when it comes to working out your daily problems! But over time, or more specifically, advancing in age, has a way of catching up to you when it comes to physical performance!

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I remember playing sports in my twenties and it was so easy to perform: Stretching the muscles was easy, as was gaining strength and endurance. If you got a little bit out of shape, you were able to get it back really fast. It wasn’t until I turned 34 that I realized my first reduction in athletic ability. I lost a step. I was moderately fast and running the bases while playing softball I was thrown out going from first to third on a base hit. For the first time ever!  This was my first dose of reality that athletic ability diminishes with time.

Then, I went into my forties. Now I was introduced to regular soreness after working out, coupled with a longer time period to fully recover from the workout. What used to take 24 hours to recover now took at least 48 hours. In addition, it took considerably longer to get in shape. At a twenty something, it felt like three weeks of solid work would produce a great fitness level. But by forty something, it took every bit of eight or nine weeks to feel really fit and even then, I wasn’t sure if I had reached the highest level of fitness. The other side of it was also true: As a forty something, it felt like six or seven days of not working out resulted in losing every bit of fitness and you had to start over again from the bottom of the fitness ladder!

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Then I reached my fifties…and a further reduction in athletic ability, with more aches and pains, and longer recoveries. It was in my fifties that I had to fully accept my physical limitations as an athlete. I could no longer deny that past performance levels were long gone and unreachable.

What Do Athletics Have To Do With Financial Independence?

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At this point, you might be asking, what does athletic ability have to do with financial independence? And I would understand if you did. But follow me here for just a moment. Because the lessons learned as I have aged as an athlete are directly applicable to the process of obtaining and maintaining financial independence. How, you might say?

First, It’s About Time

As an aging athlete, it takes time to get ready to perform. Much more time than it used to as a younger athlete. You need to take the time to fuel your body right before the workout. You also need to stretch and stretch a lot. In other words, you need to be patient  and prepare correctly before you can really perform.

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The same is true with the pursuit of financial independence. It is over time that one can develop wealth. It usually doesn’t happen overnight, and, expectations to the contrary can build unwanted anxiety or stress. To build wealth that can lead to financial independence requires saving and investing money over a long period of time, in order to produce a return. This patient approach to building wealth, and as a result, financial independence, is both time proven and considerably less stressful. There’s one more piece to the time element to develop wealth and that is compound interest.

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Saving money over time is only the first part of the equation. The second part, and largest part, is investing the money and letting compound interest work to develop an exponential wealth effect. What does that mean? It means that investments over time will produce far more profits than the amount of money you actually put into the investments. It is a multiplying effect. An example: A one time $2000 investment with a 6% annual return will yield $xxx after 40 years. But if you left it accumulate for only 20 years, half the time,  you don’t have half of the 40 year amount, you have only xx% of it. It takes an investment in time, using compound interest, to develop wealth, and it grows more and more each year. Just like it takes time as an aging athlete to prepare for a workout to produce athletic results.

Limitations Can Be Your Friend

As an aging athlete, you have to recognize your limitations or else run the risk of hurting yourself. When I was 21 years old I ran a five minute mile as part of a fitness test in college as we were getting ready for my junior year of college football. I’ve got NO CHANCE of running that same five minute mile now, regardless of my preparation or efforts to perform at my best. I need to accept my limitations or risk being deeply disappointed or getting hurt when I tey. In essence, I need to be content with my diminished performance level.

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Contentment is also a key foundational element when it comes to financial independence. Without contentment (Being happy where you are, while on your way to where you are going), what you have will NEVER be enough. You will always think in your mind: “I need more to be happy, or rich, or successful, or wealthy, or (fill in the blank).” Part of being financially independent is to be independent of envy or perceived need for something to make you complete or happy. In fact, only when we can learn to be content in the moment, combined with gratitude for what we have, can we be truly independent of envy, covetousness and the sense of lack. There is certainly nothing wrong with ambition, but when that ambition prevents you from ever feeling secure, peaceful or blessed, you can never truly be financially independent.

Three Cheers For Consistency

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As an aging athlete one of the most important fundamentals of working out is consistency. You need to consistently stretch, consistently eat right, consistently hydrate and consistently work out because of what I mentioned before about losing your fitness level fast! When you can get into the appropriate consistent rhythm, your workouts and performance can be very rewarding.

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The same is true when it comes to financial independence. I have found that most financially independent people I have met didn’t hit the lottery or write a best selling novel to develop instant wealth, but built that wealth over time with consistent savings and investing. What do most of the financially independent people do consistently:

  • They save money consistently
  • They invest consistently
  • They live on a budget in order to meet their goals consistently
  • They track goals consistently to stay focused and on track

Consistency also lessens the sting of living below your means. If you consistently put money into an emergency fund, a retirement fund and a vacation fund, you eventually get used to that money being “gone” and you don’t miss the spending power in your day to day budget. Consistency is so important to old athletes and people pursuing financial independence alike.

Taking Advantage Of Technology

As you get older, an aging athlete is wise to take advantage of new technology to increase their performance, and comfort. There are new fabrics on the market that wick away your sweat while you perform. Running in the Texas heat, I depend on moisture wicking clothing. There are new shoes of all types that help you run faster, farther and with more comfort. There are new training apps that help you work out at peak performance. There is an abundant amount of new technology that can help you better perform.

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There is also new technology to help you obtain financial independence. There are tools like Mint to help you track your expenses and budget, Acorns to help you save spare change, Robinhood to help you invest and most banks now have automatic deposit and withdrawal for 401K plans and emergency savings accounts. Use technology to achieve your financial plans: In most cases it is easy, cheap (as in free), automatic and efficient.

Last, Know Your Why

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Motivation is paramount when it comes to working out or achieving financial independence. People ask me all the time: At your age, why do you workout so hard, and so consistently? It’s easy. I do it because it makes me feel great, it clears my mind, it challenges me and it helps me sleep so soundly. In other words, my “why” is to feel better and, God willing, live longer. It is worth it to me to put the effort in now, to feel better later. We need to “know our why” in the pursuit of financial independence too. We need to know why we are budgeting, saving and investing because it sure would be fun to live life unrestrained now. It would be fun, but it would not help us reach our goal of financial independence. Our financial independence “why” we sacrifice now is so that we can be independent later. Independent of money worries or stress and to be independent to follow our heart’s desire. To move working from something we have to do to survive, to something that we choose to do if we want to. Financial independence is not easy and it does not happen overnight. Just like trying to get into and staying in shape as an older athlete. But by using time to our advantage, practicing contentment, being consistent, taking advantage of technology and knowing our why, we can better enjoy the process and eventually achieve the goals of feeling good and experiencing financial independence at any age!

If you want more information on financial independence and/or the steps to get there, consider Dave Ramsey’s book “The Total Money Makeover”. Click the image to enjoy instant savings.

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

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

Three Common Misconceptions About Money: A Biblical Perspective

I am passionate about the pursuit of financial freedom, which begins with putting money in its proper perspective as a tool to be used to provide for ourselves, our families and to fuel our goals and values. I am equally passionate about dispelling misconceptions of money which can distort our view of money into something that it is to not. I have found in my life that the single best financial management book of all time is God’s Word, the bible. It is from the bible that we can truly discern what money really is and how to properly use and manage it.

All that being said, here is some straight talk from God’s perspective, about some common misconceptions about money.

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Misconception #1: Having Money Is Evil (Or The Root Of All Evil)

You may have heard that money is the root of all evil. That argument goes something like this: “Money is evil because having money makes people greedy, and not having money makes people desperate. Both tend to make man evil. Doesn’t the bible say that having money is the root of all evil?”

Let’s set the record straight. God did not say money is evil. God said the love of money is a root of all kinds of evil: 1 Timothy 6:10

“For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs.”

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God neither hates or loves money, but He gives it to us to use for His purposes: To provided for ourselves, our families and to worship Him and His purposes, including helping others around us. God wants us to work hard and earn money. Proverbs 10:4

“Lazy hands make for poverty, but diligent hands bring wealth.”

God also wants us to enjoy the money He provides for us. Ecclesiastes 5:19 states this:

“Moreover, when God gives someone wealth and possessions, and the ability to enjoy them, to accept their lot and be happy in their toll – this is a gift go God.”

God also wants us to use money to provide for our families: 1 Timothy 5:8

“Anyone who does not provide for their relatives, and especially for their own household, has denied the faith and is worse than an unbeliever.”

Last, God wants us to use money to help others: Luke 10:35. This is the story of the Good Samaritan, who took pity on a man found in the street after being robbed and beaten. The Samaritan tended the man’s wounds and took him to a local hotel to heal:

“The next day he took out two denarii (money) and gave them to the innkeeper. “Look after him,’ he said, ‘and when I return, I will reimburse you for the extra expense you may have.'”

The Samaritan man was able to help because he had money to do so. Money was a tool he used to help a person in need. It is quite possible that if the Samaritan man did not have the money, he would not have been able to help the man in need.

Money is not evil. It is just a tool that comes from God to be used for God’s purposes. We should not feel guilty about building wealth, nor should we worship the wealth we do build, but view it as the tool that it is.

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Misconception #2: Wealth Should Be Equal

It is common to hear children, when playing a game, say something like “That’s not fair!” when they think someone cheated or broke the rules.  It is also common for children to demand equality when candy or prizes are handed out, and to say something like “He got more than I did” when there is inequality in the handouts. I have heard adults apply some of this same logic when it comes to money and wealth. They might say “All people deserve the same money, regardless of job or skill level.” Or, “All wealth should be divided equally among all people.” But, being fair does not mean being equal when we look at wealth in the bible. In fact, God says that each should receive according to his ability: Matthew 25:15

“To one he gave five bags of gold, to another two bags, and to another one bag, each according to his ability…”

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I believe God wants each of us to use our God given talents to the fullest. From those talents we will develop our wealth. And since our talents are all different, the amount of wealth may be different. There is no reference in the bible about everyone getting an equal share of wealth regardless of talent, effort or responsibility. You might say being poor is not fair. And that might be true. There are many reasons for poverty. But God recognizes that poverty exists and also recognizes that wealth is not to be systematically equally distributed to those in need. In fact, God wants those that have much (wealth) to help those who are in need. Psalm 112:9

“They have freely scattered their gifts to the poor, their righteousness endures forever; their horn will be lifted high in honor.”

Jesus, when confronted whether or not a considerable amount of wealth (in the form of perfume) should be donated to the poor or used to worship Jesus, said: Matthew 26:11

“The poor you will always have with you, but you will not always have me.”

 

Wealth should be developed by each of us, according to our talents and efforts, for the purposes of providing for our family and for those in need. But the idea of equal wealth and equal pay regardless of talent and effort is counter productive as it demotivates those that are capable of developing wealth and encourages an attitude of entitlement and unfulfilled human potential.

Misconception #3: We Eventually Outgrow The Need For Budgeting, Saving & Stewardship

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Budgeting (a spending plan), saving and stewarding (managing with honesty and prudence) the money and wealth God provides us fundamental for all of us to do, regardless of the amount of wealth we have. There is no amount of wealth where it becomes unnecessary to manage that wealth wisely. First, let’s look at budgeting. God says this: Proverbs 29:18

“Where there is no vision, the people perish.”

We are responsible for managing this wealth and that requires a plan (vision) and in that plan is a spending budget. You might say, “But if we have extraordinary wealth, why bother with a spending plan because we will never spend too much?” But look what God says in Luke 14:28

“Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it?”

We must budget our money because its the only way to ensure our goals and dreams can be fully funded and realized.

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We must also always be saving towards those goals and dreams. Saving money is a critical part of being wise. God says in Proverbs 21:20

“The wise store up choice food and olive oil, but fools gulp theirs down.”

Not only is saving money always wise to be ready for those times of need (emergency) and for future goals (possessions, education, events, etc), but saving helps us learn discipline, contentment and gratitude, which are critical parts of true financial freedom. Saving also ensures that we will have wealth to share with those that are in need. In fact, God says helping those in need is one of the highest uses of wealth: Proverbs 28:27

“Those who give to the poor will lack nothing, but those who close their eyes to them receive many curses.”

Last, saving money ensures that wealth will be available to pass down to later generations and this is important to God. Look in Proverbs 13:22

“A good man leaves an inheritance for their children’s children, but a sinner’s wealth is stored up for the righteous.”

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Money Misconceptions

Money and wealth is not evil. It is neither to be worshiped or reviled. We should not feel guilty if we have wealth or ashamed if we don’t. Nor is money and wealth our everything. It is just a tool to be used to provided for our families, goals and friends in need. All to glorify God who gives us this wealth.

Neither is wealth to be systematically equal for everyone. Each person, according to their talents and effort level, should develop their own wealth. And then use that wealth for the good of your family, friends and people in need. We are all equal in God’s eyes as His children, but that doesn’t mean we automatically should expect to share in God’s wealth equally.

We are called to steward our wealth, because really, we don’t own it, it is all God’s wealth, we are just called to manage it. Psalm 24:1:

“The earth is the Lord’s and everything in it, the world and all who live in it;”

That means we must budget, save, plan and take care of our wealth as an act of faith and obedience. In fact, God says that each of us will give an account to Him regarding our actions, including the management of HIS wealth. Romans 14:12

“So then, each of us will give an account of ourselves to God.”

So we must take care of God’s money and wealth in every way, knowing we will be held responsible for our efforts and actions. Managing money should be considered a holy activity and an act of worship.

Money misconceptions are common and everywhere. But make no mistake about it that God wants us to have wealth, He just doesn’t want us to worship the wealth, or hoard the wealth, but to use it properly in ways that worship Him: Raise our families, help out people in need and to fulfill our goals, values and dreams that God gives us. Keep money and wealth in proper perspective as the tool that it is.

 

 

 

 

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%.

 

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

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

Miter Boxes, Mallets & Money: Just A Bunch Of Useful Tools, Sometimes!

Know Your Tools

It is important for a carpenter to know his tools. For instance, a carpenter who is a cabinet maker intimately knows how to use a miter box. And most people, especially carpenters,  know what a hammer is and basically how to use it. Actually, there are several types of hammers that specialize for different functions. There’s is the claw hammer, sometimes called a common hammer, a ball pein hammer, a club hammer, a framing hammer, a sledge hammer and many more that make up the hammer family. Then there is a mallet, which is similar to a hammer but not exactly the same thing. A mallet is a hammer with a large, usually rubber or wooden head, used especially for hitting a chisel. It is the right hammer for wood carving and delicate wood working. But when you use the right hammer in the wrong application, it can be bad, even painful. See, one day, a while back, I used a mallet to try and knock some flooring into position. The flooring was heavy and I  didn’t want to mark the flooring so I used a rubber headed mallet to try and knock it into place. I should have picked up the flooring and moved it by hand, but I was tired and it was late and I had the mallet readily available. So I pounded at the flooring to move it across the floor into place. All went well until it didn’t…on one particular swing I got distracted, took my eyes off the flooring and proceeded to hit myself in the foot with a heavy blow. My initial reaction to hitting myself in the foot was one of embarrassment. But as the sensation made its way to my brain, my embarrassment was quickly replaced with severe pain. It hurt so bad. Bad hammer!

You see, this was a classic example of using a perfectly good tool the wrong way, which resulted in the tool not being productive at all, but being a pain (literally) that hinders progress instead of contributing to it. I guess the moral of the story is that tools are very useful when used (and viewed) correctly, but can be counterproductive if used incorrectly.

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Money Is

Money is similar to a hammer in that when viewed and used properly, is a great tool that can help you achieve your goals, but when used incorrectly, can be counterproductive and possibly painful. Money, being a central part of financial freedom, must be viewed and used properly or else be counterproductive to the pursuit of freedom. This is a good lead-in to defining what money is, and by extension, what money isn’t.

  • Money is: A medium of economic exchange and a tool to build wealth. As a tool, it is like a hammer in that you have to get it (some), learn how to use it, take care of it, use it correctly and manage it so that it provides value to you.
  • Money is: A temptation. If you let money be your goal, be the focus of your desires and the answers to your problems, it can tempt you to worship it, hoard it and let it define you.
  • Money is: A test. As we learn each lesson about money we walk away a little bit wiser and a little better equipped to use it going forward. But if we don’t learn our lessons, we are doomed to repeat our mistakes.
  • Money is: A testimony. Our decisions (wise decisions or struggles) with money and finances in general, are a large part of our testimony to our spouses, peers, neighbors and children.

 

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Money Is Not

It is just as important to define what money is not. Although our western culture wants to paint a picture that money is the root of happiness, power, status and popularity, money is just a tool, not the basis for our identity. Let’s take a look at what money is not:

  • Money is not: A measure of success or our sole goal. There are many successful people that have a lot of money, but not having money does not make you unsuccessful. Likewise, there are/were some incredibly success people that had virtually no money. Many, if not most of your artists, missionaries and teachers fall into that category.
  • Money is not: A component of self-worth. Money is a tool, not something that defines who we are or our value to our families, communities and corporations.
  • Money is not: A reward for good living. Money doesn’t care if you are good or bad. Good living is a reward in itself. If you are a person of faith, you know that the true blessings are things such as peace, joy, love, grace and contentment.
  • Money is not: A guarantee of satisfaction. Money does not guarantee happiness or contentment. In fact, most people who look to money to be their source of satisfaction  never seem to have enough of it.

 

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Use It, Keep It, Take Care Of It But With The Proper Perspective

Money, when kept in the proper perspective (as a tool) and used correctly (as a medium of economic exchange and a tool to build wealth) can lead to financial freedom that includes peace, contentment, options and freedom from worry. But when used incorrectly, as a measure of success, self-worth or a guarantee of satisfaction, can lead to the opposite of freedom: Entrapment, discontentment, misery and, yes, pain, just like that mallet story I told earlier. Our lives change for the better (financial freedom being the main objective) when we view money as a tool and not as our goal.

Looking for more help with your finances? Try Dave Ramsey’s book: The Total Money Makeover. Order here and SAVE!
 
The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

Dumb Financial Freedom Dichotomies & How To Avoid Them

Dumb Dichotomies

So, you’re eliminating your credit card debt. And your friend tells you that they know a thing or two about personal finance and tell you that you MUST quickly choose between using the Debt Snowball method or the Debt Avalanche method to pay off your debt or else you are making a huge mistake. Which method are you going to use?

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Really? There’s only two choices and I MUST pick only one right now and use it forever? Not true! Although there are pros and cons for these two popular debt elimination approaches, nothing says you must only use one of the two methods and be faithful to that method forever.  That’s a dumb dichotomy. You don’t have to pick one over the other. In fact, many times, a mixture of the two methods might be best. Why would we want to put that kind of unnecessary pressure on anyone who is trying to do something as important to personal finance as eliminate their credit card debt? Debt elimination is hard enough without undo requirements. Dumb dichotomies can get in the way of financial freedom because they make the task that much harder to accomplish. Here’s a look at some financial freedom dumb dichotomies and how to avoid them:

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Snowball Or Avalanche

To finish the discussion of which debt elimination approach is best, we first have know a little about the person eliminating the debt. Does that person need constant motivation to stay the course? If so, then the Debt Snowball is perfect, where the focus is to pay off the smallest credit card balances first and then work off the larger accounts as the smaller ones are paid off. This approach motivates the debtor in that the debtor sees a rapid reduction in creditors and uses that motivation to continue the debt elimination effort.

Another valid debt elimination technique is called the Debt Avalanche, whereby the debtor pays off the highest cost debt first. In other words, the debtor pays off the credit card that has the highest interest rate first, then works his way down the list towards the lowest interest rate card until all debt is repaid. This technique may interest a “math person” or a cost conscious person. This approach affords the debtor the lowest cost approach to debt elimination. This blog is not judging one approach versus another, but intends to highlight that you don’t have to pledge allegiance to one or the other. In fact, a combination of the two can very effectively motivate the debtor to eliminate the debt AND minimize the amount of interest paid during the debt elimination. For instance, some people have had success starting out with the debt snowball by paying off a small balance to get a quick win, and therefore boost motivation, and then switching to the debt avalanche to reduce interest payments.

From my point of view, “just tackle the debt!” Eliminate it as fast as possible and at the lowest cost as possible because debt, especially consumer debt, is the biggest obstacle to building wealth and more importantly, financial freedom. Debt snowball, debt avalanche or a combination of both…use either or both but just kill the debt!

Looking for a great resource to lead you through debt elimination? Check out Dave Ramsey’s book:

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

Emergency Fund: In Savings Or An Investment?

An emergency fund, money set aside for when, not if, you have a real financial emergency, is central for financial freedom. In effect, an emergency fund is self-insurance to ensure that an emergency  1) does not force you into deep credit card debt or 2) cause you physical and emotional stress from money worries. And for some time there has been an ongoing debate where that money should reside. The two loudest groups suggest that an emergency fund show either be placed in a savings account (because it is the most readily available) or in a secure mutual fund (because it can earn a “greater than inflation” return while sitting in the account). In reality, this is a dumb dichotomy, because you don’t have to choose one or the other. While both are valid options, you could also split the money between an account that is readily available (like a savings account, understanding it will have a very low or no return) and a safe investment like a mutual fund or something similar that produces a larger return on your money. While leading experts, like Dave Ramsey, suggest you have between three to six months of expenses in your emergency fund, you can allocate that money according to your priorities and risk level.

Investing: Active Or Passive?

Active investing, defined here as using professional investing resources to buy and sell investment instruments, is an effective investment approach. So too, is passive investing, where investors invest their money in simple automated investments, like index funds or ETF’s. I recently witnessed a lively debate where people took sides on the “right” investment approach. The battle was focused on the slightly better returns of the active investment approach versus the low cost and low stress of the passive investment approach. There is no one right answer! This is a dumb dichotomy. Both approaches work and the right approach for any investor is based on that investor’s needs and approach to investing. Some people, like me, have both active and passive investments. The point is, there’s no one right approach and you don’t have to unilaterally choose.

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Budgeting: To The Dollar Or With Margin

Budgeting is essential to achieving financial freedom because the budget “tells our money where to go instead of just wondering where it all went” (Dave Ramsey quote). Yet most Americans don’t take the time to budget and the results are not good. The facts are that the same percentage of people in America that do not budget (roughly 74%) equal the same percentage of people who are living paycheck to paycheck! Budgeting is important. But the debate between the experts that say you must either budget “to the dollar” and have every dollar accountable to a category, or, budget with a large amount of margin, or reserve cash, has formed a dumb dichotomy. It doesn’t have to be one form or the other. Pick the budget form that works for you and follow it. Since only 26% of Americans budget anyway, any form of budget would be better than the norm! There’s just a couple foundational rules that a good budget must follow to be effective and sustained: The budget must balance, must be measured and must be followed to be effective.

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Financial Freedom Is The Point

Eliminating debt, having an emergency fund, investing money and having a budget are all essential to developing financial freedom. But the approach to accomplish each one of these elements is dependent upon the person or persons involved, and any person suggesting that one approach is inherently better than the other is causing a dumb dichotomy, which is both unnecessary and distracting. Eliminate your consumer debt as fast as possible, using the method, or methods, that work best for you. Make and keep an emergency fund and reduce your financial worries. Invest money to develop wealth in the way you are most comfortable. Last, make a budget and follow it to ensure proper allocation of your precious dollars. Don’t let any dumb dichotomies distract you from your pursuit of financial freedom! These dichotomies are just…dumb.

For more information on financial freedom, check out Dave Ramsey’s book:
 
The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

Financial Freedom Geek Fest // Budget By The Numbers

Many, if not most people, start off the new year with new goals and dreams for the upcoming year that include budgeting and financial goals. When it comes to personal finance, that is the easy part. The hard part can be following that plan during the course of the year. Now that we are several months into the new year, we can look at our budget performance and see if we are sticking to our plan. We can compare our financial goals and corresponding budget to our actual spending. Simple enough. Then we can make adjustments, if needed, to keep on track on meeting those goals.

But there is another budget exercise that is also worth doing. How does that saying go: “A manager makes sure things are done right, but a leader makes sure we are doing the right things?” So it might make sense to spend some time making sure that we not only are staying on budget but to make sure we have a good budget in the first place. What is a good budget?  In fact, let’s go one step further. Let’s look at the budget through the lens of financial freedom. Let’s make a budget that not only makes sure the bills are paid and our goals and dreams are being funded, but is also optimized to let us experience ongoing financial freedom, and eventually, financial independence.  It may sound complicated but it is not if you have the discipline to stay the course!

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Budget: A Dirty Word

Let’s just put it out there. For some people, a budget is an awful thing. It is hard to make, confusing, very confining and seems to steal joy from life. But let’s start by change our perspective on the budget for this discussion. A budget is simply a tool to help us meet our goals.

“The budget is a plan for our money so that it goes where we want it to go, instead of getting to the end of the month and wondering where it all went.” Dave Ramsey

Don’t think of it as constraining or difficult math, but simply as a useful tool. A good budget can be as brief or detailed as you need to meet your goals and experience the financial freedom you want.

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Financial Freedom: What is it? Why Do We Want It?

If a budget is a tool to help us meet our financial goals, then what is the overall purpose of having financial goals? Is it simply just to afford more stuff? Or to be rich? No, the purpose of having financial goals and a good budget is to achieve financial freedom and hopefully, financial independence. Financial freedom is discussed a lot but what is it?

“Our definition is having the attitude and resources to live abundantly in each stage of life, free of worry and free to completely live out the full purpose and goals of one’s life.”

This freedom allows peace of mind, security and choices, which usually result in a fulfilling life. So let’s get started to define a good budget that can get us on our way to financial freedom.

Typically, a good budget has four characteristics:

  1. The budget has clearly defined goals
  2. The budget funds those goals
  3. The budget has margin, breathing room,  to account for emergencies, opportunities and life challenges, in general
  4. The budget defines and prioritizes needs over wants

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It Starts With A Prioritized Set Of Goals

Before we start talking about making a good budget, we need to define our financial goals.  Goals should be the priority in your budget. They should be funded first. Goals should include responsibilities, short and long term plans, life goals, passions of the heart and family goals. Common goals include:

  • Home ownership
  • Financial security or financial independence
  • Large expenditures: cars, vacations, travel, furniture, etc
  • Retirement
  • Kid’s education/college
  • Hobbies/side businesses
  • Bucket list items

Make a list of your goals. Then ask yourself: Am I willing to fund these goals at the expense of other possible uses of my money? If not, drop them off your list and go through the process again until you have a set of goals that you are excited to pursue AND are willing to fund. Here’s a sample list of 2017 goals with dates and amounts:

  • Max out 2017 401K retirement savings, to support a 2020 retirement from full time work. $18,000 this year
  • Family reunion vacation in July. $3,000
  • Braces for our teenager in June. $3,200 out of pocket (Insurance pays the rest)
  • Tithe, charitable giving, to my local church. $9,000 a year

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Needs vs Wants: Knowing The Difference

One more step before we start making our budget. We need to know the difference between needs and wants, and make sure needs are funded before any budget money is used on wants. A need is something required for basic living. Needs usually fall into six basic categories:

  • Housing and utilities
  • Reliable transportation
  • Groceries/basic food needs
  • Clothing
  • Medical/prescriptions
  • Insurance

One more thing on needs. What you need to spend is just the amount for basic living so as to keep you safe, secure and functional. Anything more is a want that will be discussed later. An example of a need versus a want: The transportation need for a family might be a basic four door sedan or SUV, but a transportation want might be an expensive European sport car.

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Margin Means Freedom: What Does It Look Like In A Budget?

Margin, or breathing space in a good budget, is fundamental for financial freedom and usually takes two forms:

  • An emergency fund (usually between 3 to 6 months of expenses saved for emergencies)
  • Adequate insurance that usually includes: medical, property and long term disability insurance

The amount of money in an emergency fund varies depending upon your situation and risk-adverseness level. Once you reach your goal, you do not need to keep contributing to it but each time you use money from the emergency fund, the money should be replaced for the next emergency. What constitutes an emergency? Job loss, auto repairs, housing repairs, deductibles for medical issues and such.

Many people working full time today have medical, dental and vision insurance (medical) through their employers, but one way or another, we need to have medical insurance to have financial peace. The same is true with insurance for our large pieces of property (home and auto) and with employment insurance (long term disability). Note: Short term disability insurance can be your emergency fund.

One more note on having margin in our budgets. We know each year that we have seasonal expenses coming, like presents at Christmas time and for birthdays. We should budget for them. You might say, what’s the big deal about birthdays? But if you have an 8 year old, that is in a class of 21 students, and has the same school invite policy as our school, you know that you are required to invite all classmates to your birthday party AND you should expect to be invited to ALL 20 of the other classmate birthday parties too! That could be $400 or so of presents each year you should be setting aside for financial freedom in your life.

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Pressing The Information Into A Good Budget

Let’s recap: We know what our goals are and how much money they require. We know what margin in our budget looks like and we’ve identified what that costs. Also, we defined our basic needs in our budget and classified everything beyond those needs as wants that should be funded last, if money is available. Now we can start allocating money to make a budget.

Where to start. A GREAT place to start when forming a budget is to use tools by successful organizations who specialize in budgets and budget allocations. Two such tools are made by Dave Ramsey, http://www.everydollar.com,  and Crown Ministries, http://www.crown.org, that provide guides as to how much money should be allocated to each budget category. Here is a great starting point for each budget category:

Take your net income (net pay after taxes) and allocate as such:

Budget Category       Percentage of Net Pay     Description                             

Charity (tithe)              10%

Savings/Investment   15%   Retirement, emergency fund,

Total Housing             30%    Mortgage, taxes, utilities, cable, HOA, insurance, repairs

Auto                              12%    Car payment, gas, repairs, insurance

Food                              14%   Groceries &  eating out

Entertainment              6%   Recreation, pets, travel, gym, gifts

Household                      6%   Clothing, phone, beauty, services (lawn, cleaning, etc)

Medical/Insurance       3%

Children                         4%   If no children, go towards savings or a college fund

100% of net pay. Can’t be more than that or we have an unbalanced budget (Read: debt!)

What Makes For A Good Budget?

What makes this budget any good? First, it funds our financial goals (In this case, retirement, travel, children’s needs and entertainment). Second, this budget amply provides for all our needs (housing, food, transportation, insurance and clothing) and many of our wants (cable, eating out, etc). Third, this budget provides savings for an emergency fund and prevents the accumulation of credit card debt, which is the biggest wealth stealer around. Notice what this budget doesn’t have in it? It doesn’t have debt payment as a line item, consumer debt that is. That is because consumer debt is not a financial freedom maker, it is a financial freedom stealer. So pay off your credit card in full each month, while sticking to your budget. It also doesn’t have any money that is not allocated in the budget. Unallocated money usually results in mindless spending. In fact, in 2016, Fidelity reported that 22% of all discretionary money is spent on items we don’t remember just 24 hours after the purchase. Mindless.

Recap A Good Budget

Let’s go through our “good budget for financial freedom” checklist:

  1. Our budget clearly funds our current goals, In this case retirement, travel, children’s needs and entertainment). Check
  2. Our budget has margin built into it in the form of an emergency fund and insurance. Check
  3. Our budget has funded all our needs (basic housing, transportation, clothing and food), all of our goals (previously stated) and some of our wants, like cable TV, pets, etc.

There’s one more important thing our budget provides for and that is charity or generosity. It is the first line item in our budget, because generosity helps us keep money in its proper place as a tool, nothing more, and it is a huge component in financial freedom!

Wait! You say, you have completely different budget needs to obtain financial freedom. Ok. Just re-allocate the money according to your goals and/or lifestyle and as long as you are living within your means, savings for your goals and dreams and have ample margin for life’s challenges, you will be all set.

There you have it. We have a good budget that supports financial freedom. There’s nothing better than that!

 

Want more help with your budget. Try Dave Ramsey’s book: The Total Money Makeover. Click here and SAVE!
 
The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness