What is financial freedom?
I’m sure that people’s definitions of financial freedom vary a little, depending on who you’re asking, but not by much. Most people would agree that true financial freedom is when you can stop working, and never have to worry about money again for the rest of your life.
Sadly, for many families today, true financial freedom seems to be an unobtainable fantasy, rather than a goal that they can actually work towards.
Many people are living paycheck to paycheck and can’t even imagine to begin saving money, much less get to the point where they can stop working.
The average household carries over $10,000 in debt, and that’s not counting a mortgage.
Social security is nearly depleted.
The cost of living keeps increasing, and a lot of families are only one financial emergency away from complete ruin.
If you can relate to any of that, then I’m here to tell you that does not have to be your reality.
If you take the right steps, and stay disciplined, you can have that financial freedom that many people only dream of, and you don’t have to hope for a miracle to get it.
There is in fact a foolproof formula that can help just about anybody obtain financial freedom. This formula consists of just 6 steps. If you follow these steps diligently, you can begin to save money, eliminate debt, and retire very comfortably at a reasonable age.
Continue reading to learn these 6 steps to financial freedom.
Disclaimer – Before I get into the formula that I just mentioned, I am legally obligated to tell you that I am NOT a licensed financial advisor.
I do NOT have a securities license, nor do I have an insurance license, although I did at one time.
I am merely sharing with you what I have learned from speaking with financial advisors, and from studying the teachings of Dave Ramsey, a famous financial expert that you may have heard of.
With that being said, do not take what I am about to tell you as professional advice, but rather as an educated opinion.
Step 1 – Protect Your Income
If anyone besides you relies on your income to pay bills and survive, then you NEED to protect your income for their sake, that is, if you care about them anyway.
What would happen if, God forbid, you were no longer in the picture, and your loved ones suddenly lost the income that you are bringing in? What would they do?
I’m sure that no one wants to leave their family in that sort of predicament, which is why it is of the utmost importance to protect your income first and foremost.
What does it mean to protect your income? I’m talking about life insurance, of course.
Now, you may think, as the majority of people do, that you don’t need life insurance. A lot of people reason that they don’t need it because they are young and healthy. Only older, sickly people need life insurance, right?
Well, that can’t be farther from the truth. Regardless of how young you are, or how healthy you may very well be, you are not immortal. The fact is that someday you are going to die. Now, that day is probably a long ways off, but what if it’s not? Things happen to young and healthy people all the time.
If something were to happen to you, think about where that leaves your family. Not only will they be emotionally devastated, but they will no longer have your income coming in, and on top of all that, they are now faced with having to bury or cremate you, and hold a funeral for you. These things are expensive. How will your family handle all of that?
So what kind of life insurance should you get, and how much should you get?
The rule of thumb is that you want to have insurance in an amount that is 10X your annual income. There is a good reason for this which I’ll get into farther down in this post.
There are a few different types of life insurance that you can get and, as someone who use to sell it, I can tell you that it is mostly all garbage with the exception of term life insurance.
One reason that you want term life insurance is that you can buy a lot of term life insurance for a fairly inexpensive premium.
Another reason you want term life insurance, is that life insurance is not meant to be permanent or long term, because you’ll only need it until you have enough of your own money saved to insure yourself, at which point you’ll want to cancel your insurance, which you can easily do with term life insurance.
Don’t put getting life insurance on hold, as it gets more expensive as you get older, and you want to get it while you’re healthy, because you’re a lower risk to the insurance company when you’re healthy, which means your premiums will be less expensive.
As a breadwinner, make sure that your family will be okay no matter what first.
Step 2 – Create An Emergency Fund
Once you have your income protected, you need to have some funds in place in case of an emergency that sets you back financially.
Every person, including you and I, will have emergencies come up that are not going to be cheap to fix. Cars break down, people get injured, and all sorts of other unexpected expenses come up.
The average person doesn’t have a savings at all, much less enough savings to cover these types of emergencies, so what do they do?
Most people will pull out the credit cards, get a payday loan, or take on some other form of debt to cover the costs of these emergencies, and all they are doing is trading one expense for another, much larger expense. What’s the sense in that?
Once you start swiping those credit cards, or taking out those loans, you begin digging yourself into a hole that many people, sadly, never get out of.
To avoid this, you need to finance your own emergency fund instead of allowing finance companies to do it for you.
A reasonable amount of money to have set aside for covering emergencies is $1,000. This is an amount that can cover the expenses that accompany most emergencies, and it does not take very long to accumulate this amount either.
If you are diligent about saving a set percentage out of every paycheck, it should take no longer than 6 months to accumulate $1,000.
Financial experts recommend putting 15% of every paycheck into your savings, but if your on a tight budget, save 10%. Now, if you’re really pressed for money, the very minimum that you should be putting away in savings is 5%.
If you can’t afford to save just 5% of your paychecks, I would say that it’s time to look for a different job, or get a second source of income.
The bank that I have a savings account through is Capital One, and I can honestly say I’ve been very happy with them so far. If you don’t already have a savings account and you decide to go with Capital One, you’ll get a $25 sign up bonus if you sign up through one of the links I’ve provided.
Step 3 – Debt Elimination
Once you get your income protected, and you have some funds set aside for a rainy day, it’s time to get rid of any consumer debt that you may have.
This means paying off credit cards, payday loans, auto loans, overdraft protection credit, and pretty much any debt that you have that is not your mortgage.
This step makes a lot of people squirm, but not to worry. If you follow the method that I am about to explain, you can get all your consumer debt paid off much faster than you can possibly imagine.
There is a debt payment method that is not taught in school, and lenders don’t want you to know called “debt stacking” or “debt snowballing.”
This strategy involves systematically paying off your debts in order from the account with the lowest balance to the one with the highest. As you get one balance paid off, you stack the freed up money from that payment into the next balance. This method creates a snowball effect that allows you to pay off your debts much quicker.
Let me show you an example. Let’s imagine for a moment that your debt balances look something like this:
- Retail Card – $100 balance and $100 payment
- Bank Overdraft Credit – $1,000 balance and $110 payment
- Credit Card A – $2,500 balance and $150 payment.
- Credit Card B – $5,000 balance with $300 payment
- Auto loan – $20,000 balance with $350 payment.
If you were to only pay the minimum payments on each one of your debts, which is what most people do, it would take you almost 5 years to pay everything off!
With the debt stacking strategy, you of course would pay all the minimum payments the first month, but this pays off the retail card completely.
In the following months, you would apply the $100 that you paid on the retail card to the next smallest balance that you owe, in this case, the bank overdraft credit. Instead of paying the minimum of $110, you’re now paying $210 which would pay off the bank overdraft credit twice as fast, and at that point, you have an extra $210 freed up every month.
When the bank overdraft credit is paid off, you do the same thing with your next lowest debt, so instead of paying $150 on Credit Card A, you’re now paying $360, and you do this with every balance that you owe.
Using this strategy, you will have everything paid off in less than half the time it would have taken you doing it the other way, and you will then have a vehicle that you own outright, and $1,010 freed up every single month that you can now spend on whatever you need to. Imagine what you could do with an extra thousand dollars every month.
Step 4 – Build Your Safety Net
With this step, you are simply increasing your emergency fund to a much larger sum of money to further protect yourself and your family from life’s unexpected surprises.
Do you have a plan in place if you were to lose your job due to a layoff, or if something happened making you unable to work? I’m guessing that the answer is no.
Were something like that to happen, sure you might be able to get another job, but not as quickly as you might hope. The job hunting process could take weeks, or even months depending on the job market that you are in, and if all you had was your emergency fund with a grand in it, you would be in deep trouble, because $1,000 isn’t enough to cover all of your living expenses, especially if you have kids!
This is why building your safety net is the next step in your journey to complete financial freedom.
Your safety net needs to be able to cover at least one full year’s worth of living expenses. This way, if you did lose your income, you have a full year to replace it, and all the expenses are covered in the meantime.
There are 3 purposes for your safety net really: vacations, large purchases, or a loss of income. Whenever you take out money, always be sure to replenish it.
Step 5: Set Up A College Fund
If you don’t have kids, nor do you intend to have kids, then obviously you can skip this step.
As for you parents, I’m sure that the majority of you would love to see your kids go to college if they haven’t already.
If you want your child or children to attend college, you need to be prepared for it, and the more children you have, the more work you have cut out for you.
College is expensive. Sure there are scholarships, but not every student gets one. I know that us parents love to view our kids as the amazing little athletes, or the perfect little geniuses that they are, but we have to face the reality that it is possible that our child might not get a scholarship.
Yes, there are student loans available, but you’re trying to obtain financial freedom here, so of course you want your children to do the same, and allowing them to get themselves into $80,000 worth of debt can really put a damper on that for them.
The average cost of a college education is right around $80,000 so, parents, we need to prepare accordingly. Financial experts recommend working on this step and step 4 at the same time.
Step 6 – Prepare For Retirement
Now for the 6th and final step which is preparing for retirement.
In order to really retire, you need to be able to ensure that you never have to work again a day in your life. Sure you can work if you want to work, but you don’t want to be at retirement age and find yourself working because you have to.
There are a lot of cases of people coming out of retirement, because their retirement fund gets depleted too early, so it’s important to take measures to ensure that doesn’t happen.
This is where investing comes into the picture. What if you had an endless supply of passive income? I suppose then you really wouldn’t have to worry about working another day in your life, but what can you do to get this endless supply of passive income?
Before I continue, I must remind you that I am not a licensed financial advisor, but I will tell you what I have been taught by people that are.
Set up a Roth IRA in mutual funds. Nothing too risky, but you want to invest in a mutual fund that has historically averaged an ROI of at least 10% annually for the past 30 or so years. Now you have your money working for you, instead of you having to work for money.
The reason for setting up a Roth IRA as opposed to a traditional IRA is that, with a Roth IRA, you can take out 10% of your retirement fund every year without having to pay taxes, fines, or penalties.
So, if you accumulate say $1 million in your Roth IRA you can take out $100,000 every year to live off of, and if that IRA is in a good mutual fund that gives you an average ROI of 10% annually, your retirement fund will replenish itself every year and you will never run out of money.
Now that is what I call being financially free. Let freedom ring!