10
Steps to Financial Freedom
In a world where success is often
measured by the magnitude of our material possessions, it
can be a real challenge to maintain a course of fiscal responsibility.
The appearance of prosperity has become so important in our
society that it threatens to supplant the more transcendent
concepts of personal integrity and human relationships as
the most sought after societal ideal.
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Ultimately, each of us is left to
determine our own value system. However, regardless of our
own value hierarchy, there is a set of unwritten laws that
will determine our financial well-being. As we come to understand
these laws and comply with them, we can become prosperous
- even on a single income.
Getting Started
Part of the challenge of gaining
control of our finances is knowing where to begin, and how
to go about it. The following information will help us to
develop or refine a plan of action that will lead to financial
security and bring us into compliance with the basic tenets
of financial freedom.
1. Know where your money is going.
It will be impossible for you to
develop a financial plan for the future until you have a very
clear understanding of your present situation.
Most people have a vague idea of
where their money is being spent. Very few, however, have
demonstrated the discipline to drill down into their spending
habits and understand where each dollar is being spent - and
for good reason. It requires a lot of patience.
It is difficult for anyone to maintain
a meticulous budget on a consistent basis. Fortunately, this
is not necessarily required. What is required, is to gain
a preliminary understanding of where your money is going.
Then, armed with this knowledge, you will be in an excellent
position to take corrective action.
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Action Item #1:
Set a goal for the next week to
keep careful track all of your spending. Then repeat the process
for another three weeks. Once you have a month's worth of
data, sit down and assess your current spending habits. You
will probably be very surprised at what you find.
Keys to making it work:
- If you tend to carry and spend
cash, you will need to carry a small pocket notebook to
track your expenditures.
- If you use a credit card, you
will also need to note these expenditures.
- It will probably take you a
few days to get used to doing it. Just keep reminding yourself
that it is a temporary requirement - and a very important
one. The information you glean from this process will form
the foundation for the rest of your financial planning efforts.
2. Develop a plan to bring your
spending into line with your income and your financial objectives.
Action Item #2:
Develop and document a set of financial
goals. Keep your goals realistic and simple. Don't go overboard.
Set a few goals that are attainable. Writing out a long laundry
list of unachievable goals will be counterproductive. What
you need at this point is a clear sense of direction - something
simple and concrete to focus your attention on. Once you have
mastered your first goal, then move on to the next one.
Consider the following suggestions:
- Stop carrying cash. Cash is
far too easy to spend and far too difficult to track. This
is one of the single biggest contributors to financial difficulties
- yet most people are unaware that it is a problem source.
- Don't use ATM's. Same rationale
as above. Remember - loose cash is an enemy to financial
freedom.
- Get rid of your credit cards.
Credit Cards are worse than cash. Credit cards allow you
to spend money that you don't yet have. The basic concept
of credit cards is to mortgage or pledge your future earnings
- earnings that you will need for future basic necessities
- to a bank or finance company in exchange for some object
that you find desirable at the moment.
- Avoid impulse purchases - more
on this later.
- Evaluate your automobile situation.
Most people are surprised to find that their auto expenses
rival their housing expense as their largest monthly expense.
As a general rule, most households overspend on transportation.
Are you getting your money's worth out of your cars before
you sell them for a fraction of what you paid for them and
then replace them with something even more expensive? This
is a very fertile field of opportunity for expense reduction
- and should be evaluated carefully.
- Start "brown bagging" your lunches
instead of eating out everyday.
- Send your kids to school with
a lunch box occasionally instead of having them purchase
lunch everyday.
- Stop ordering Pizza or Chinese
every week. Start spending more time together at dinner
and cooking meals at home.
- Start using coupons more. Shop
garage sales and clearance sales.
The idea is to identify the spending
habits that are keeping you from enjoying financial freedom.
Once you have identified them, develop a plan to eliminate
them.
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3. Spend less than you earn.
This is the fundamental premise
upon which your financial future hinges. To understand the
power of compounding - consider Warren Buffet. He has become
one of the richest men in the world by keeping his spending
in check and investing his surplus. This approach certainly
requires patience, but the few people who truly have the discipline
to do this are greatly rewarded - over the course of time.
You've heard it said that the three
most important considerations in making a real estate purchase
are location, location and location. Well, the three most
important things in financial solvency are Cash flow, Cash
flow and Cash flow. Cash flow simply refers to the difference
between what is coming in and what is going out each month.
Companies and individuals with negative cash flows will not
remain solvent for very long. Spending more than you take
in is a dangerous habit to get into. If done consistently,
it will surely lead to devastating financial problems.
One of the biggest difficulties
most people have is in planning for variable or irregular
expenditures. It is often difficult to come up with an annual
insurance or tax premium in a single month. By identifying
future expenditures you can begin to tuck away a small amount
of money for these expenses each month. This eliminates the
burden of having to come up with such a large amount of money
at one time.
4. Develop a consistent savings
and investment program.
Don't make the mistake of paying
yourself last. If you wait till all of the other commitments
are met before setting aside money for your future, you will
never save anything.
Rule: There is an
unwritten rule that states that "expenses will always expand
to consume all available income."
If you are waiting to begin your
savings program until your next raise, or until you pay off
a few more bills, you are waiting in vain.
Action Item #3:
Save something from every paycheck
- even if it seems to be an insignificant amount. Over time,
these small amounts add up. They also provide an important
emergency reserve in the event they are truly needed. You
may find it easier, if the option is offered by your employer,
to save through payroll-deduction.
5. Be generous in your charitable
contributions.
"In this world, it
is not what we take up, but what we give up, that makes us
rich."
- Henry Ward Beecher
This is a concept which may at first
seem counterintuitive. However, being generous to others -
especially those who have acute financial needs - can actually
improve our own financial outlook. The secret seems to be
that as we focus on the needs of others, our own problems
and appetites begin to fade into the background. Our attitude
about our "needs" changes as we begin to recognize our relative
abundance. We suddenly find ourselves less inclined to indulge
in the extravagant excesses that so frequently characterize
our spending habits.
6. Get out of debt and stay out
of debt.
"Never spend your
money before you have it."
- Thomas Jefferson
There is no way to be truly free
if we are enslaved by debt. Debt is an onerous burden - and
one that should be avoided as we would avoid a great plague.
Action Item #4:
Develop an aggressive plan to get
rid of all of your credit cards. This means paying them all
off and then never using them again. The best way to ensure
that you don't use them is to cut them up or send them back.
It is often easier to track your credit card balance if you
consolidate the cards onto a single card. If you do this,
make sure that you consolidate the cards onto a card with
a low interest rate - that will remain low long enough for
you to pay the card off.
Once you have achieved a consolidation,
destroy all other credit cards and avoid adding any new charges
to your last remaining card. Then, begin working aggressively
to pay the card off. Depending on the magnitude of the balance,
it may take several years. You will not be able to do it by
making just the minimum payment. Pay as much as you can afford
without jeopardizing your other financial commitments.
Is any debt "healthy debt"?
While a certain amount of debt is
sometimes necessary (and perhaps unavoidable) for the purchase
of a home, an education or other significant investment, you
should be striving and planning for the day when your home
is paid for and free of encumbrances. Individuals who are
continually enticed by the lure of easy home equity loans
are moving in the opposite direction of financial freedom.
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7. Learn to discern between needs
and wants.
Action Item #5:
Before you make any spending decisions
ask yourself the following two questions and answer them honestly:
- Is this purchase truly
necessary, or could we get by without it?
- If it is necessary, is
it necessary now, or could it be postponed?
It is amazing what we could get
by without if we put our minds to it. What's happened to the
romantic notion of living the simple life? No one seems to
want the simple life anymore. Everyone wants the complex life
- filled with gadgetry and things, things, things!
It is interesting to watch the maddened
throngs of frenzied shoppers pressing in on the malls at Christmas
time - rushing about in a last minute futile attempt to find
the most popular Pokemon, the latest play station, the holiday
Barbie, the diamond tennis bracelet or another of this year's
"must have" gifts.
But where are last year's gifts
- the gifts that we just absolutely had to have? The ones
that literally broke our budgets and put us neck deep in debt?
Most are shoved into drawers and closets - cast aside like
yesterday's news; thoughtlessly discarded into an ever-growing
heap of possessions and "things". There is no lasting satisfaction
in these gifts - there is no real joy that can come from these
expensive baubles.
In fact, there only true purpose
seems to be to complicate our lives and weigh us down with
unwanted debt and responsibility. The satisfaction they bring
is exceedingly fleeting and short-lived indeed.
There seems to be a high correlation
between impulse purchases and the ease of a transaction. Credit
cards have made it so easy to enjoy something right now that
we have made no financial preparation for. We can always pay
for it later - right? Likewise, a wad of cash in our pocket
or purse is continually screaming out to be spent.
Consider the following payment options
- listed in the order of how widely accepted they are in the
marketplace:
- Cash
- Credit Card
- Check
- Out of State Check
- Barter
- IOU
- Good Looks
One of the best ways to avoid making
poor purchase decisions is to stop carrying money. Of course,
this may not be completely realistic. However, you can certainly
stop carrying the forms of currency that are easiest to spend
- like cash and credit cards. You will be amazed at how many
purchases pass you by if you stick to the lower half of the
list of payment options above. For instance, I have yet to
find anyone who was willing to hand me over some valuable
merchandise on the basis of my good looks - undoubtedly some
of you will be more successful in that regard. The point is,
the more challenging the purchase, the less likely that it
will happen.
Bartering is an excellent option.
You know the routine - spend an hour in the back of the restaurant
washing dishes and then come out front and enjoy a fine meal.
There is just something so gratifying about that kind of transaction.
It's too bad it isn't done more often. Plopping down a credit
card may seem more elegant - but in the long run it is enslaving.
8. Increase your earning power.
One of the most important lessons
we have learned from the dawn of the information age is that
education and training must be a lifelong process. Education
is not only important for our kids, it is important for each
one of us. Technology has created a rapidly changing world.
Those of us who are unwilling to learn new skills will be
passed over and eventually become obsolete. One of the keys
to financial security in the future will be training and education.
Action Item #6:
Take a few minutes to contemplate
you current situation. Are you earning an amount of money
that is adequate for the basic needs of your family? If not,
you need to give serious consideration to receiving additional
training in a more marketable skill. Unskilled workers have
no economic leverage in today's high tech marketplace.
If you are making an adequate living,
you still would be well advised to look to the future and
make a truthful assessment of your earning potential and promotional
opportunities given your current skill set.
9. Focus on your net worth.
All of the work that we are doing
to improve our financial situation will be manifest in one
fundamental way. It will increase our net worth. If our financial
activities are not accomplishing this, then we are failing.
Our ultimate objective should be to increase our financial
net worth.
Ultimately, how much money we make
is irrelevant. As the old saying goes, "it's not what you
make, it's what you keep." The object of these financial exercises
is to decrease our expenses so that we have a surplus left
over to invest in appreciating assets whose value will increase
over time - this is the secret to financial independence.
It is not accomplished overnight, but with perseverance it
can be achieved.
To calculate your Net Worth you
simply need to add up the current market value of all of your
assets (home, automobiles, stocks, cash and other investments)
and then subtract from that value all of your liabilities
or debt (home mortgage balance, auto loans, credit card debt,
student loans, and other personal debt obligations).
Take the time to understand where
you currently are. If you currently have a negative net worth,
do not despair. That is the purpose of this exercise. No matter
where you find yourself today, you should begin now to set
personal financial objectives and work toward them.
Hint: Make wise use
of bonuses, tax refunds and other financial windfalls. By
funneling these unexpected proceeds into productive assets
or into paying off debt, instead of spending them, you will
be able to make much more rapid progress in your quest for
financial security.
10. Plan for the future.
Decide now where you want to be
and when. Then develop a realistic but aggressive road map
to get there.
Action Item #7:
Resolve today to take control of
your own future. Do not rely on the government, an employer,
your church, a friend, or a rich uncle to plan it for you.
There is no one more qualified than you to make decisions
about your long-term financial future. Use the resources provided
and involve your family in the process of mapping out your
new and exciting path to financial freedom.
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