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.
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.
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. I’m not a fan of having only an emergency fund. You need a comprehensive, written emergency plan to really deal effectively with lifes curveballs.
Investment Policy Statement – aka Investing Plan
A personal investment plan, also called an investment policy statement, this is a plan on how you’ll invest. Why plan out your investment strategy? First, you’ll need to do research on the various investment options, and determine what’s right for you. This research will help you better understand what to invest in, and why. Second, having a written plan helps you deal with the ups and downs of the market – because you’ve planned out exactly how you’ll handle them.
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. I’ve even written before about how people should stop criticizing Dave’s debt payoff advice, because science shows he’s right.
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.
That’s It For Step 2 – On To Step 3!
I don’t mean “that’s it” as if this is simple, easy, or will be fast. The debt payoff step, in particular, can take a very long time. If you’ll be in debt payoff mode for some time, you’ll want to proceed to Step 3 and ensure you’re looking at retirement and a good emergency fund. The harder you can focus on getting rid of debt ASAP, the sooner your money stops going to your past-and starts going to your future.