The Secret to Financial FreedomSubmitted by Financial Planning Solutions, LLC on January 31st, 2019
The secret to financial freedom isn't really a secret at all.
In a book search, I went on Amazon and typed in "Secrets to financial freedom" and got 226 results. One I came across had nothing to do with finances. It was called, "Secrets of how to live in Thailand for free" which may sound appealing on the surface but probably wasn't what I was looking for.
Of the remaining 225 books, I think I can summarize it up for you and save you some time.
- Debt is evil.
Now, there is what some would call "Good Debt" and "Bad Debt". Good debt would be a mortgage for example. Bad debt would be a credit card.
Now, I somewhat agree with the good debt bad debt thing however, even "good debt" can be a problem if it is too high. This is true especially as one nears retirement and their income stops. I do know this. Clients that minimize expenses compared to their income in retirement tend to fare better than those that don't.
This doesn't mean you need to be mortgage free, it just means your expenses shouldn't be so close to your income.
- Spend less than you earn
This seems pretty simple enough right? I mean, how could you spend more than you have? Isn't that just go against all laws of physics? Or at the least common sense?
Well, it is done every day and quite easily actually. It comes down to that evil debt! Credit cards and other loans allow some to spend more than they actually have. Some simply make up these "shortfalls" with our credit cards. When the credit card bill comes, some pay the minimum and then worry about the balance next month. Unfortunately, this cycle just repeats itself over and over again. This high interest debt can build over time and become impossible to pay off. Some may even transfer the balance of this card to a new zero interest card to buy themselves a little more time. In my experience this strategy doesn't work. In fact it can exacerbate the situation,
So how does one spend less than they earn? I've been helping folks for nearly 30 years and the only thing I have found to work is to do the following:
- Write down all sources of income. This could include your take home pay, child support, alimony, rental income, etc.
- Write down all of your expenses. This one isn't as easy (or as fun) as the income component. You will have to spend some time looking at your credit card statements, debit card transactions, and your check register.
I've got a couple of monthly expense gathering worksheets I'm happy to share with you to help make this project easier.
Throughout the ages, folks have tried shortcuts to these two pieces and it just doesn't work for most. (If your income exceeds your expenses and you don't carry any credit card or other debt, you are ahead of the game.) You can skip "B" but only if you…..
- Save the right amount of money
What is "the right amount of money?". Well, the right amount is what will get you to financial freedom!
How do we determine what the right amount of money is? Here's where it can get a little tricky.
Let's assume you now know what you income is after taxes and you also know what all of your expenses are. Maybe it looks something like this:
Monthly income after taxes $6,800
Monthly expenses $6,000
It appears you have $800 a month left over. But, it is not that simple. If you are carrying credit card debt or other loans such a student loans, it may not be best to save the $800 but rather pay this debt down faster.
The other issue is, whether the $800 a month in this example is enough or too little to meet your financial goals. This comes down to three things:
- How long you have to save
- What kind of return can you achieve on your savings
- How much will your "goals" cost
The only way to know with a degree of certainty is to create a comprehensive financial plan.
That's where we come in. By working together, we can put a plan in place to help ensure your financial goals can be met.
Bear in mind, your meaning of financial freedom may be very different than someone else.
John enjoys traveling several times a year at a cost of $35,000 a year. Bobby enjoys fishing and renting a cabin that costs $2,000. Obviously, John may either need more in savings or more income than Bobby.
There is one last piece to the financial freedom thing. These examples assume that nothing ever goes wrong. Life isn't like that. Stuff happens and sometimes it can be quite costly. Your financial plan should factor in some protection.
A ship that is only unsinkable if it doesn't hit an iceberg isn't really unsinkable.
Let us help you achieve what is important to you. Give us a call.
We are here to help.
All the best.
Rick Fingerman, CFP®, CDFA™, CCPS®
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.