These 3 steps sum up any Financial Freedom plans. “Financial Freedom” means different things to different people. The simplest definition is when you don’t have to worry about everyday expenses. Adding onto that definition, it’s when you have enough income to meet your monthly expenses, and fix things when they need to be fixed (such as cars, teeth, etc.). Studies show that if you have 10 times the income needed by this definition, you wouldn’t be any happier. So money can buy happiness, to a certain extent, but not beyond that.
Step 1: Eliminate Unsecured Debt
This is the very first step. You can’t focus on the other steps with these still hanging around. “Unsecured Debt” means things like credit cards, old medical bills, or left over amounts on a vehicle you turned back in. One way to test whether these debts are really holding you back would be if the monthly payments on them is over 10% or so of your net income. Eliminate these first, by paying them off aggressively or filing bankruptcy, then try to devote 10% of your income to step 2 until you have enough, then to Step 3.
Step 2: Establish an “Emergency Account”
Once you’ve dealt with unsecured debt, open a separate savings account. Many advisers call this an “emergency” account, but I like the term “reserve” account. It might be for other things than true emergencies. You should build this account up to 3-12 months of your expected monthly expenses before moving on to Step 3.
In addition, I suggest you use a different bank than your usual one because you’re less likely to dip into it too easily. In fact, because it’s emergency savings, a vacation fund, or just where you hold money to deal with a once a year expense, you should earn some interest on your money. Go to MagnifyMoney or Nerdwallet for online savings accounts that pay a decent amount of interest rate. Brick and mortar banks pay a ridiculously low interest rate.
Then, “automate it!” Have your employer direct deposit a fraction of your paycheck in that account, or have your bank transfer some money on a regular basis. You won’t miss what you don’t see.
Step 3: Start Retirement Savings (or for other long-term goals)
Once you have an amount equal to 3-12 months’ expenses in your emergency account, start on this step. Don’t do it before, or you’re likely to end up taking some money back out, and paying a tax penalty. If you’re employed, realize that very few people can get by on social security alone. Instead, you’re in what’s called the “accumulation phase.” If you’ll have a pension such as state employees do, you’re lucky! Very few employers do pensions anymore. Many employers do offer 401(k) plans. If you don’t have this available, consider an IRA.
These are the basic steps, of course, but this should get you started. Look for articles, blogs, or other information by searching for “personal finance” or checking out places such as Nerdwallet or Investopedia. Step-by-step, you can get to “financial freedom” if you just start.
Peter Blinn
For over 35 years, listening to clients and putting them at ease, while finding solutions and helping achieve future goals, in Marion County, Lake County. Citrus County, Sumter County, and The Villages.
