If you are looking for a guide to becoming financially free then read this post. No matter how old you are or how much money you make this guide will apply to you. These steps won’t be easy but if you crave being financially independent then you must follow these steps.
Lets get right into it shall we!
Step 1: Create a Budget and Stick to It
This is really a no brainer. If you don’t already have a budget then you need to start. I personally use EveryDollar. There are other great sites out there like Mint or even YNAB. Now I don’t want you to just download one these apps on your smartphones, create the budget items and then have to manually enter in each transaction. I have tried to be cheap with this before and it just will not work. For your budget to truly work for you you need to spend money on the monthly or annual subscription for one of the applications I mentioned above.
This step will take a good month or two for it to truly work for you. You may think you only need to spend $200 on groceries but in reality you may need to spend $400 or even more for your family of four. What I want you to do is to use your best estimate to how much you should budget and then with one of the apps above see the transactions come in so you can adjust your budget accordingly.
Once you have chosen the best application you or your family lets look at the different budget categories you should have. If you populate each of there categories into your budget and give a dollar amount to each then you should be in pretty good shape. Of course some of this may not apply to you like Medical Insurance. We use Tricare insurance and not our employer sponsored health care so it is a separate budget category for us. If you have medical insurance coming out of your pay check then you wont need that line items.
- Food and Dinning
- Take Out
- Health Care
- Medical Insurance
- Medical Bills
- Auto and Transportation
- Lunch/Starbucks/Dunkin etc.
- Lunch/Starbucks/Dunkin etc.
- Joint Spending
- Home Projects/Repairs/Cleaning Supplies etc.
- Fun Money
- Baby needs
Now that you have all of your categories have fun with this part. Keep track of your expenses and try to live off as little as you can especially if you have debt. You aren’t quite finished yet though. As a family you should all sit down at the end of the month and plan for next months expenses. for us October is packed with birthdays and November and December are quite expensive too. You want to try and avoid as many unexpected expenses during the month. Having these budget meetings will help you in the steps that follow too.
Step 2: Save $1K For Emergencies
I read recently that 58% of Americans dont have $1K in cash to cover themselves in the even of an Emergency. I don’t want you to be in this category so as soon as you have your budget all squared away and even slashing some unnecessary spending lets build that $1K emergency fund so you can sleep a little better at night. Also, create a separate savings or checking account that holds this money. I dont want you to ever touch this unless you really need to.
Step 3: Live of Last Months Salary
You may be scratching your head at this idea. Many people preach about how you need to have a budget and have an emergency fund but I’m sure you have not come across this advice before. For me personally no matter how much debt I had or how many expenses I may have for a given month this strategy alone has reduced my stress about finances exponentially.
The Strategy works like this. You follow my advise and have a budget all set up. I recommended then having a family budget meeting where you outline all of the money you will spend for the month. So Lets say its October and you have two birthdays to by gifts for and you need an oil change this month so your monthly expenses will total to be $6,000. Assuming you live off less than you earn you would want at the end of the month to have $6,000 sitting in your checking account. The first of the month comes along and you have your mortgage to pay for and your car loan and then a week later you need to buy that gift you planned for but thats okay. You have the exact amount of money sitting in your checking account. Now what’s important is to then have your pay checks set up to direct deposit everything into this account.
Now at the end of the Month you spent your $6,000 but you made $7,000. It’s time again for your monthly budget meeting so this month its not as expensive so you need $5,500 for the month. Well, you have $7,000 in the account now so lets move the excess over to your savings, paying down debt or to your investment account.
If you follow this strategy I guarantee that you will be much happier with your finances. You wont be nearly as stressed out. It does require a little time because you do need to save up one months salary.
Step 4: Pay Off High Interest Loans
We could have lumped this step and the next together but I believe it is very important for you to understand that if you have credit card debt, Student loans or any debt over 6% interest rate then this is an emergency! You have your budget and finances all organized now its time to really stay focused and pay down off your debt. I will go into more detail on another article on why credit card debt, student loans and high interest loans are so killing you.
Step 5: Pay off Auto Loans
I understand that a car or two is necessary in many families but having a note on a auto loan is one of the worst financial mistakes you can make. If you were to go out and buy a new 7 passenger SUV you will probably spend at least $50k. I dont have a problem with you purchasing that car as long as its with cash or you are a millionaire. After you pay off your debts from Step 4 use that cash now free’d up to pay down your debt as soon as you can.
Step 6: Save for College
If you don’t have kids then this step obviously wont apply to you but once you are out of debt except for your house you are ready to give your kids a jump start on life. There are several options for parents out there now so I would go and talk to a financial advisor for the best options for you. While your kids are not in college yet this step is to help set them up financially. If you aren’t paying for college or believe it’s the responsibility of your kid that is fine too. It’s your money you can decide what to do with it but promise me this. NEVER co-sign on a student loan. If you do decide to pay for college than you should have this as a line item on your budget each month.
Step 7: Pay off Mortgage
If you have made it to this step you are doing very well financially. You have a budget you are out of debt and college is covered either by a lump sum payment, cash flowing the cost or having your kids take on the responsibility of paying for their school or trade. It is no time to pay off that mortgage. Many expert will tell you to invest the extra money and mathematically that does make sense but imagine having a house that is all paid for? Wouldn’t your life change forever if you could do this? Well in this step lets pay down that house. When it is paid off you will probably see a lot more cash coming your way each month. You are getting very close to achieving true financial freedom
Step 8: Save 60% of Income
If you can save 60% of your income you will not be working very long. In fact, if you have made it this far you should be at or exceeding this number by now.
Take a look at the simple math to see how quickly you can retire based on your how much income you can save.