Steps to Financial Freedom
6:00:00 AM
Time flies and now we’re half way through 2017. Being the
goal-oriented person that I am, I’ve check in with my new year’s goal to see
what’s up. I’m happy to see progress to almost of all aspect, including our
financial goals. This inspires me to share with you our strategy and what I
consider steps to financial freedom.
I have read tons of personal finance or financial
coaching books. For me, two books stands out, Think and Grow Rich by Napoleon
Hill and Dave Ramsey’s book. Napoleon Hill’s book gives the best concept about
money while Dave Ramsey’s book gives the most detailed and helpful how to. I’ll
be sharing about how to’s today so most of the concept are from Dave Ramsey’s
book Total Money Makeover, with a little tweak from me.
Just a little declaimer, personal finance is “personal”
in nature. While these things works for me (and hopefully will work for you
too), this are just a guideline and not an absolute rules. With that out of the
way, let’s begin.
Live
Below your Means
The first step to financial freedom is to create an
excess by spending less than what you earn. To do this, set aside a certain
amount of money (20% ideally) for savings. This will force you to live below
your income. If this will become your habit, you’ll rarely have problems with
your finances.
However, I understand that there are some who have
negative cashflow. The expense that needs to be paid is bigger than your
income. This happens to me too. We have
to find a way to get out of this situation. You have two options: increase your
income and decrease your expenses. Better if you do both. To increase your
income you can either get a part time job or sell your stuffs. To decrease your
expenses, you can google right now and see tons of ideas on how to do this. As
an example, you can cut subscription plans, bring lunch instead of eating out,
lower your mobile plans, the possibilities are endless.
Another way to help you live below your meas is by Creating a Budget. A budget is about
allocating your money to particular spending, setting the limits of each
category. Dave Ramsey said, if you don’t you’re your money where to go, it will
leave you. So before even spending, create a budget. Personally, two days
before payday, I created my budget. This way, you know where and how much money
to spend. In the future, this will help you make sound financial decisions.
Save
for the rainy days (Emergeny Fund)
It is important to keep a good amount of savings in your
bank account. Do you know Murphy law? It say’s “whatever can go wrong, will go wrong”. Emergencies like
hospital bills, house repairs, car repairs and the like will happen. Having an emergency fund saves you from
whatever that can go wrong.
How much should be your
emergency fund? Ideally, three to six months of living expenses is a good goal.
This should be a liquid fund (available in cash) and not locked up to any
investment instrument.
But what if you are in
debt? Should you pay the bills or build the emergency fund? Dave Ramsey has a
very good suggestion. He said, Build a Starter Emergency Fund first. Before you
pay up your debts, build the Starter Emergency Fund which equals to USD 1,000
or PHP 50,000 as soon as possible.
The more you are in debt, the more you need
to prioritize having an emergency fund. Why? If emergencies happen, and you
don’t have an emergency fund, you’ll be left with no choice but to borrow money
again. Now you have bigger debts and eventually, you’ll be trapped to borrowing
and repaying cycle again and again. Stop the cycle and give your best not to
borrow again.
Get out of Debt Fast
In today’s world of credit
card and easy loan application, everybody sees loan as something normal. But the
truth is, debt is a money borrowed that will be repaid at a premium. There’s so
much misconception about debt but I don’t want to elaborate on this. Bottom
line, there’s no such thing a good debt. So, get out of debt fast. There are
tons of strategies but personally, the Debt-snowball method is the best one.
The debt-snowball
method is a debt reduction strategy, whereby one who owes
on more than one loans pays off the loans starting with the one with the smallest balances first, while paying the minimum payment on larger debts. Once the
smallest debt is paid off, one proceeds to the next slightly larger small debt above
that, so on and so forth, gradually proceeding to the larger ones later (from wikipedia) . This
strategy may not be financially sound, as you’ll pay more interest expense with
this method, but it is the most encouraging one. What it does is creating
momentum, a little victories (when you fully pay the smallest loan) that will
push you to keep going. It has the most positive emotional effect that will motivate
you to finish strong.
Get
Insured
We all have loved ones we care about. We can plan our
day, our week, our whole life but we can’t boast about the future. Only God
knows when its times up. If it happens, it’s more relieving to know that your
love ones are covered at least financially. Getting insurance gives you that
peace of mind. Whether to get a traditional term insurance or the new ones, VUL
products is up to you. If you asked me, the traditional insurance is the best
route. I won’t go on details right now as I believe the comparison deserves a
separate blog post. Also, if you are employed, best to check with your HR. Your
company might be paying an insurance premium for you. If that’s the case, you
don’t need to get one for yourself.
Let
your money work for you (Invest)
Emergency fund. Check. Insurance. Check. Zero Debt.
Check. Now you can invest. Let your money work for you by putting them in money
market securities, bonds, stocks and other investment instrument. You can start
with Mutual Funds or UITFs. You need to know the fundamentals before investing
but you don’t have to know everything about it. Start small and keep on
studying. Then keep on investing.
Should you wait until you have three to six months
emergency fund, debt free and with insurance before you invest? Ideally, yes. Investing
has risks involved. There’s a chance you won’t get your money back so it’s best
to secure the foundations of your financials first.
However, it is also important to note that the sooner you
start investing, the better chances of winning. So if you are so eager to start
investing, at least secure the bare minimum of the foundation of your
finances. A starter emergency fund of PH
50,000, a debt repayment plan in place and at least a PHP 100,000 life
insurance coverage. Please note however, that this is only applicable if you
have a stable job or a stable source of income. If your income is commission
based or project based, it’s best to have a fully funded emergency fund, zero
debt and insurance in place before investing.
Give
Financial freedom is more than having a lot of money.
It’s about living a life free of money concerns. It’s being free of greed and
selfishness. The best cure to this is giving.
First of all, give to God what it due to Him. The bible
is very clear on this. By giving to God, we acknowledge that He is the source
of your blessings; He owns everything and what we are just His steward. To me,
it’s so liberating to know that it’s not me but there’s a Higher Being in
control of everything.
Give to those in need. Tony Robbins says, by giving away
a portion of what you earn, you are teaching your brain that you have more than
enough. Knowing that you have more than enough creates a feeling of gratitude
that will allow you to create even more.
That’s about it. Be sure to check the book Total Money
Makeover if you want more details about these steps. Also, I’d love to hear
from you. Feel free to leave comments, questions and further suggestions below.
See you in my next post.
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