Financial Freedom. Those words mean something different to everyone. To some, they mean the power to retire from paid work forever – sometimes at a very early age. For others, it means the ability to become location independent, traveling the world while having more flexibility than they ever dreamed possible. At times, it might mean the power to start a new business without worrying about where the next paycheck will come from. Or perhaps it just means freedom from worry.
I call myself a mom on FIRE – seeking Financial Independence with Retirement Elective. Seeking financial freedom is s similar path regardless of gender, because your money doesn’t care what gender you are. I’ve been on a journey toward financial independence for twenty years now – since I was a teen – through some of the worst things life can throw at you. And I’m still here, still striving. I want to help you to get there too.
Living paycheck to paycheck is a stressful existence. Debt destroys peace of mind, leaving you stressed out and scared of losing your income. Not having built a solid financial foundation leaves you vulnerable to loss of income, emergencies, and jeopardizes your financial future.
I’m here to help you reach financial freedom and your ultimate dreams and goals through a simple, straightforward process. It’s simple, but not easy. But I have confidence that you can do it, and we can all achieve our goals and dreams.
Tier 1 – Know Your Balance Sheet, Cash Flow, and Your Dreams
In order to achieve your dreams, you need to know where you stand – and where you’re going. That’s why the foundation of financial freedom is all about taking stock of where you stand now, and developing your vision for where you want to go. Knowing your “why”, and knowing where you are now, is a powerful tool to helping you move forward.
Balance Sheet – In order to get where you want to go, you need to know where you are right now. You do that by compiling a balance sheet, commonly called a net worth statement. This is where you add up all the things you own – assets like savings, investments, properties, and such. You then subtract all the things you owe – liabilities like student loans, credit cards, car loans, personal loans, mortgages. Once you’ve done that, you know where you stand. I recommend compiling this at least every quarter, and you can see more about my quarterly net worth process here. For an example of what the balance sheet can tell you, check out an example of my analysis from the end of 2016.
Cash Flow – Now that you know where you stand in terms of your net worth, or balance sheet, it’s time to get to know your cash flow. This is a common tool used by businesses to measure where their money is coming from, and where it’s going. I recommend starting by simply tracking your expenses for a month, before creating a budget. You may not even need to create one – many millionaires don’t. But tracking your cash flow will give you the foundation for the second tier, where you’re going to optimize your expenses.
Goals and Dreams – Once you know where you stand now, it’s time to dream about where you want to go. There are no right or wrong answers here. If you’re not sure how to do this, you can use my three step process to getting to know your dreams. You’ll want to be a person with a plan. Check out some financial facts specific to women’s challenges with investing here.
Other Foundational Items – You’ll want to get your credit history from all three credit bureaus, using the free annual credit report tool, so you can review your credit history and make any necessary corrections. You’ll also want to get your credit scores. You can use Credit Sesame, Credit Karma, or Discover to get this information. You’ll also want to start thinking about your investment policy statement – although you don’t need to create it until you’re at the step where you’re investing.
Tier 2 – Protection, Optimization, Planning and Debt Payoff
Once you know where you are, you can start getting where you want to go. This is the step where you solidify the foundation to your financial life, and start to inch your way towards freedom.
Protect Yourself and Your Family – After you know where you are, and where you want to go, it’s time to make sure you’re fully protected. You’ll want to insure against disaster – expenses that can sink your financial ship at any time. It doesn’t only include the basics of car, home, and umbrella insurance. This also means making sure you’ve protected your health, life, and ability to earn an income. And your disability or death. Do you think this isn’t important? I talk about three ways I’ve used insurance and two ways I wish I had here. That same article has information about protecting your businesses.
You’ll also want to make sure you’re protecting your identity. Here are five steps to protect yourself from identity theft, and seven steps to take if your identity is stolen. I highly recommend reading the book Swiped by Adam Levin to educate yourself on this subject – you can find my review here. After the Equifax hack I provided my list of identity theft resources to the community.
Optimize Expenses – Since you’ve worked through your cash flow, you know where all your money’s going. Now it’s time to optimize – to slash those expenses to the bone to reach financial freedom. Here are my tips for drastically reducing your expenses. You shouldn’t be spending just to save money though – the best way to save money is to simply stop spending it. Remember that income inflation plus lifestyle deflation equals financial freedom. You can also use productive hobbies to make – or save – more money.
Emergency Plan – I have extensive experience with dealing with expensive, life-threatening emergencies. Six years ago, my husband almost died of septic shock. This experience rocked my families world, turning it upside down and back around again. As such, I’m a strong proponent of a good emergency plan. Let me show you how an emergency plan can save you. Note that I’m not a fan of simply having an emergency fund. You need a comprehensive, written emergency plan to really deal effectively with lifes curveballs.
College Compact – This step is just for those that have kids. Whenever I’ve read traditional advice about planning for college, almost every article simply says to save for retirement and stop worrying about college. I personally think that’s terrible advice, even if you’re not planning to save or pay a dime. Instead you need to have a written plan for how you’re going to handle college, and adjust that plan as time goes on and circumstances change. Check out more about the college compact – a written agreement about what you will and won’t pay for college.
Pay Off Non Deductible Debt – You’ve set a foundation, now it’s time to get working. This means paying off all non-deductible debt. I’m a huge fan of the Dave Ramsey method of getting out of debt, if this is something you struggle with. Note – I’m an index fund investor, so I don’t use his investment advice. But for getting out of debt he can’t be beat. You can use the debt snowball or debt avalanche method here – use the one that will work. Learn about how my family got out of debt after my husbands near death experience in part 1 and part 2 of our debt freedom story.
Tier 3 – Emergency Fund, Student Loans, and Retirement
You (and your family) are fully protected. You have a plan. You’ve destroyed all your non-deductible debt. It’s time to start saving and investing, and get rid of those student loans.
Emergency Fund – I would recommend keeping a small emergency fund of $2,500 – $5,000 for Tier 2, and beefing that up to a higher level once you’ve gotten rid of the non-deductible debt holding you back. Typical financial advice has this sitting at three to six months expenses. Sometimes you’ll hear eight to twelve months is the right number. Like most things personal finance, the answer to this question is personal. How much you should have depends on your income situation (one income earner households should have more than two income); your job situation (secure vs. not really); your insurance (if you’re not well insured you would need more – but you’re well insured, right???); and your personal comfort level. First check your emergency plan to discover your real, bare-bones, emergency lifestyle expenses. Then decide the target that makes sense for you, create a plan, and go for it.
Student Loans – You’ll want a good emergency fund in place before getting rid of the student loans. Why? You have a lot of options here in the case of an emergency. You can often go into income based repayment, deferment, or forbearance, if an emergency occurs. Plus as a deductible debt, this usually isn’t costing you as much as the non-deductible debt (exception being if you have a zero percent car loan or something like that).
Retirement Up To The Match – This is the point where you’ll start investing for retirement. I highly recommend making sure you get the match at this step, focusing on that emergency fund and student loan payoff as well. Can you invest up to the match in Tier 2? Sure, sometimes that might make sense. You don’t want to pass up free money, after all, and your company might have a great match and a great 401k. Don’t underestimate the power of focus, though. When you focus on one thing at a time, rather than trying to do everything at once, you have a higher chance of success.
Tier 4 – Invest and Pay Off Mortgage
Invest for Retirement – This may include maxing out your 401k – I have a hack to do that here – ROTH IRA’s, and/or traditional IRA’s, depending on your income level. Can’t max due to your income level (i.e., $18,500 isn’t reasonable)? You’ll want to make sure about 10-20% of your income is going here. Where you fall in that percentage range depends on your age and current savings level. If you’re 22 and starting in the workforce, planning on a traditional retirement 40 years from now, or you already have a substantial base of savings, 10-15% could work. If you’re 22 and planning to reach financial independence by 30, or if you’re 40 with nothing saved, you’ll want to go to 20% or higher. You don’t need to do this all at once, though. Increase slowly over time and you won’t notice where the money went. This is the stage where your investment policy statement becomes ever more critical. If you haven’t completed it already, you’ll want to do so now.
Invest for College – This step is only applicable if you have kids, or plan to have kids in the future. Just like with retirement, the sooner you start this step the less you have to save. You can put small amounts of money aside for a long period of time, or lots of money aside for a short period of time. I prefer the former, and you can see my real 529 numbers here. Or learn more about how America pays for college.
Investing doesn’t have to mean only money – you can help your kids seek a path to get a debt free degree using company reimbursements. I myself went from community college to an MBA – debt free – and your kids can do the same thing today. Yes, they really can. You can also encourage family to give the gift of college instead of stuff.
Don’t make the mistake of thinking the old saw about “your kids can get loans for college but you can’t get loans for retirement” lets you off the hook. It doesn’t – the government really doesn’t care if you don’t feel like saving.
You’ll want to adjust your college compact over time, as your kids grow, your income situation changes, and the cost of college adjusts.
Invest in your Dreams – This is the fun part. You’ve built a solid foundation, protecting yourself and your family against disasters. You’ve gotten rid of your debt, except that mortgage if you own a house. Now it’s time to invest in your dreams, those dreams you developed all the way back in the first tier.
This kind of investment can take many forms. Maybe it’s a fund to one day take the family on an epic international trip. Perhaps it’s an investment to start a business. You could be buying properties to get rental income, to eventually have the rents cash flow your lifestyle. Only you can decide on what your dreams are. You can pursue them even in the face of enormous obstacles.
Mortgage Freedom – Pay off your mortgage. I have this as one of the last steps for a few reasons. First, it’s often the lowest cost debt you have. And I know there is a large contingent of people out there who feel you should never pay off your mortgage. As a family that’s survived an extreme medical crisis, getting rid of our mortgage is important to us. We currently have a 15 year mortgage – which I highly recommend – at 2.75% that I plan to destroy before I’m 40. I hate my mortgage company and can’t wait to get rid of this one. Freeing up this cash flow will make Tier 5 all the better.
Tier 5 – Freedom
Now is the fun part – living out your dreams. You can now quit your job to start that business, get a lower-paying job with more flexibility, or retire. You can take three months off a paying job to travel the world as a family. Or you can just keep living your life as before, continuing to build wealth to leave a legacy. You might open a donor advised fund to fund a charitable giving plan. It’s all up to you.