Advice & Assistance
TEN STEPS TO FINANCIAL
By Ramona Creel
Financial freedom -- that’s the American dream, isn’t it? But how many of us actually stand any chance of achieving this grand and glorious goal? Buried in credit card debt, living in houses we can barely afford, spending more than we make and putting nothing away for the future -- I don’t see it happening. But financial independence is well within our grasp -- we just have to make a few fundamental shifts in the way we view money and material possessions -- and in the way we choose between instant gratification and future security. Here’s how it works.
UNDERSTAND WHAT FINANCIAL FREEDOM REALLY MEANS
What do you think of when you imagine being financially independent? Living on an island in the South Pacific in the lap of luxury, never having to work again? This might be part of the reason why so few of us attain financial independence! Financial freedom has less to do with wealth and more to do with liberty from monetary worries. Someone who earns $10,000 a year can achieve financial independence as easily -- sometimes more so -- than a person who earns 30 times that. It’s all a matter of perspective.
Let me share my vision of financial independence. Imagine having no debt -- no credit card bills, no car payment, no loans, no mortgage. Imagine having reduced your regular monthly expenses to an almost unbelievably low level, and having a healthy Nest-egg stashed away for emergencies. You live in a reasonably-sized home that is paid off and inexpensive to maintain. You receive at least some income from your steady habit of investing -- dividends or interest -- yet you still have plenty to cover you into retirement and old age. You live well within your means, buying nothing that you can’t afford to pay for at the time. And you are frugal and deliberate with all of your spending decisions, buying only because it will enrich your life and not because you are trying to keep up with the Jones’s. Finally, you don’t have to work if you don’t want to -- at least not full time. You have plenty of time to pursue other interests without feeling the pressure to "pay the bills." You live a life of fulfillment, with a minimum of stress.
Sound like a pipe dream? It’s a heck of a lot more realistic than the idea of retiring as Bill Gates to an island! And a lot of people are shifting to this philosophy of voluntary simplicity in an attempt to escape their financial burdens. But more about that later!
CHANGE YOUR ATTITUDE ABOUT MONEY
The first obstacle to financial freedom is the way we view money. We, as a society, are incredibly hypocritical about our finances. We place such importance on income and material possessions -- we almost tend to define ourselves by what we make and what we own. At the same time, debt has become commonplace, accepted, almost a badge of honor. People talk about their financial liabilities in the same way that they talk about the fact that they are working an 80-hour week -- with a kind of sheepish pride, like these facts make them important. But when folks try to talk about steps they are making toward reducing debt and building wealth -- especially when it comes to simplifying, cutting back, and stepping out of the rat race -- the audience often grows uncomfortable, as if this is a traitorous way of life.
All in all, it’s a very unhealthy approach. We’ve overcome the taboo of dealing openly with sex -- we need to do the same with money. And the only way to do this is to understand that money is nothing more than a means to an end. The accumulation of wealth is meaningless in and of itself. Money is only valuable in terms of the NON-MATERIAL things it can buy you -- unfettered time, security, the freedom to really enjoy your life and the people around you. But we also have to understand that money is not the root of all evil. It has no qualities beyond the purpose for which we use it. Only when we relieve money of its falsely elevated (or lowered) status can we see it for what it really is -- a tool.
RE-EVALUATE YOUR SPENDING PRIORITIES
So, with this fresh perspective, let’s talk about how you spend your money. Look honestly at the things you own, the bills you pay, the debt you incur. Are your spending habits in alignment with your values? Here’s an example of what I mean. Let’s say you claim that spending time with your children is a priority. But over the years you have chosen to purchase an expensive car, two homes, a boat, and a houseful of "stuff." You eat out regularly at high-end restaurants, you take expensive vacations, and you are carrying a tremendous amount of debt. And you feel that you have to work 70 or 80 hours a week -- evenings and weekends -- to "pay the bills" and you rarely see your kids. At first, it may have seemed that you were providing them with a good life, but wouldn’t they benefit more from your time and attention? In hindsight, were those really the wisest spending decisions?
So achieving financial independence is all about making value-based spending decisions proactively, before you regret having gone the wrong way. It requires avoiding impulsive spending and making CONSCIOUS DECISIONS about how to invest your precious resources. It also means moving beyond the insane need to keep up with your peers -- to own the newest, sexiest, and most expensive "toys" out there. And you really have to view money as more than cash –-- you need to see it in terms of the time and energy it takes to earn it.
PLUG YOUR SPENDING LEAKS
Think about all the "stuff" you buy everyday without really paying attention -- snacks at work, a magazine when you stop for gas, that cup of coffee on your way in every morning. And don’t forget about the expenses you are racking up because of financial disorganization -- interest charges on your credit card debt, late fees because you forgot to return that movie on time, overdraft charges because you didn’t balance your checkbook. All of these fall into the category of unconscious spending. You just do it because it’s a habit. And although you think that a dollar here or fifty cents there is insignificant, it can really add up.
What’s your vice -- eating out when you are feeling lazy? Buying every new CD or magazine that comes out? Procrastinating on paying your utility bills? If it’s a drain on your finances without providing you with any tangible benefit, do your best to eliminate it. Get organized, sign up for an automatic bill-paying service, plan your time better -- do whatever you have to get it together. But "spending leaks" that give you pleasure and satisfaction can still get in the way of other priorities. Decide how often you can reasonably afford to indulge and still reach your other financial goals. Also look for unnecessary convenience expenses -- things that we spend money on because we are overwhelmed, too busy, or just worn out. Perhaps by re-evaluating how you use your time, you might discover that many of these expenses are just symptoms of misplaced priorities.
SPEND LESS THAN YOU EARN
This sounds fairly simplistic and dangerously like common sense -- but it’s amazing how many of us fail to stick to this one basic principle. I partly blame our culture of instant gratification -- as a society, we are nearly incapable of sacrificing in the present for a benefit in the future. Let me tell you a story to illustrate. I have some friends in their twenties who wanted to buy their first house. But instead of choosing a small, affordable "starter home," they built a 5-bedroom, 3-bath house with a pool. This is the sort of home our parent’s generation hoped to have after gradually working their way up the housing market over a period of decades. But it strikes me as tremendously more house than a young couple with no kids really NEED. Not to mention the fact that my friends are now deeply in debt, their relationship is suffering because of money troubles, they have put all savings and investing on hold, and must forgo the recreational activities they used to enjoy.
So the point of this tale is not to judge my friends. I just don’t understand how this purchase has improved their quality of life -- in fact, it seems to be actively detracting from it. I am not suggesting that my friends don’t deserve this house, I simply question whether or not they needed it right now. So many other financial and personal goals are put on hold because of a purchase that could have waited several years without the least bit of pain. And the really ironic part is that the impetus to make these kinds of purchases usually comes from an outside influence, rather than our own personal values. In other words, our spending decisions are not always our own. But this trap can easily be avoided if we choose to live within our current means rather than counting on future earnings to pay off our debts.
PAY OFF YOUR DEBTS -- NOW!
Your first priority on the road to financial independence should be to become debt free. While you might earn as much as 10-15% on your investments, many loans and credit cards carry much higher interest fees. So no matter how much you scrimp and save, you still end up at a loss if you have outstanding debt. Suspend your investments, top putting away money in savings, just temporarily, and focus all of your financial energies on your debts. Plan to knock out the highest interest debt first, then move to the next highest and the next, until you have cleared them all out. No excuses, no rationalizations, just do it!
USE CREDIT CARDS JUDICIOUSLY
The compulsion to have the best, the most, the newest -- and to have it immediately -- forms the basis of the lending industry. Why else do people take out loans or use credit cards, if not to buy things that they can’t afford at the present time? But you are taking a big risk when you ASSUME that you will be able to pay these purchases off at some point in the future. What if the economy tanks or you lose your job? And if you can commit to paying off a debt after the purchase -- plus interest -- why can’t you commit to saving the money ahead of time? Your purchase will cost less in the long run -- and you might even earn a little money as your cash accumulates interest in the bank!
I am not diametrically opposed to the use of credit cards -- they can be a terrific way to consolidate your purchases, simplify bill-paying, and keep track of your expenses. Not to mention the fact that purchasing your basic necessities -- groceries, gas, etc. -- with a charge card is a fabulous way to build good credit. But you have to pay your ENTIRE BALANCE off each month -- otherwise you are simply flushing money down the toilet on interest charges.
REDUCE YOUR MONTHLY EXPENSES
Now we get into the real meat and potatoes (I say that metaphorically, since I am a vegetarian) of becoming financially free -- deciding which expenses are necessary and which are simply eating up your extra money. And I’m not just talking about cutting back on the number of times you eat out each week or how much you spend on your vacations. In order to really trim the fat from your budget, take a good hard look at those expenses you’ve always thought were unchangeable. If you are spending more than 30% of your income on housing (and even if you’re not), maybe you need less expensive housing. Is it really necessary that you and your wife and one child live in 50,000 square foot house? And if you had to make a choice between the house and not having to work 80 hours a week (or not having to work at all), which would be more important to you? Can you get by on with one car? Would your vacations be just as pleasurable if you flew coach or stayed in a 3-star hotel? We get accustomed to demanding the very best because we feel that we deserve to be pampered after all of our hard work. But if we didn’t pamper ourselves so much, we might not have to work so hard in the first place.
SET UP AN EMERGENCY ACCOUNT
What kinds of expenses tend to throw off our budgets and cause us to rack up unwanted credit card debt? The UNEXPECTED kind! Think about all the times you’ve had a car repair or medical bill or other expense creep up on you when you didn’t have any cash on hand. And what happens when the economy tanks and you are "downsized" out of a job. What will you live off of? The solution is easy -- set up an emergency savings account to cover you when disaster strikes. You should put away at least 6 months worth of income -- a year is even better -- so you have something to fall back on. Of course, this kind of saving comes after you have paid off all of your debts -- just start taking the money you were putting toward credit cards and loans and begin socking it away in the bank. And remember, this money is only for emergencies -- if you want to take a vacation or buy a new stereo system, set up a separate savings account for purchases.
DEVELOP THE INVESTING HABIT
Okay, so you’ve paid off all of your debts, you have a nice nest egg put away for emergencies, and you’re saving ahead of time for major purchases so you don’t have to use your credit cards. The final step is to really put money away for your future. If you want to get to a point where you don’t have to work and can still live comfortably -- whether you expect that to happen at 45 or 65 -- you must start planning for it as soon as possible. There’s this great little invention out there called compound interest that allows you to earn money not only on what you have invested, but also on the interest you’ve earned in past years. This allows you to geometrically increase your earnings in a way that could easily allow you to retire a millionaire. But only if you follow three basic rules.
First, invest REGULARLY -- putting a set amount of money aside each month for your future. You’ll thank yourself for setting up this habit later. Second, don’t attempt to TIME the stock market --- putting money in when prices are low and yanking it back out again when they are high -- you’ll end up losing out in the long run. Plan instead to invest for the LONG-RUN. Over any given 20-year period, long-term investors always end up making money -- regardless of dips and plunges in the stock market. Remember that over the last 75 years, the stock market has seen an average gain of 10% per year -- when you look at the big picture. Finally, DIVERSIFY. The people who lose big money are the ones who put all of their eggs in one basket -- sinking everything they own into one company. As we’ve seen in recent years, even the so-called "eternal winners" -- the blue-chip stocks -- can lose in a bad market. But by spreading your money around -- lots of different industries, different sized companies, foreign and domestic investments, real estate, stocks, bonds, etc. -- you will protect yourself against major losses down the road.
So I will leave you with one final thought -- it’s never too late to get your finances in order. And the sooner you begin, the sooner you will be able to live without the burden of debt, fear about the future -- the sooner you will achieve financial freedom!
“Ramona Creel is Professional Organizer, NAPO Golden Circle Member, and the original founder of OnlineOrganizing. A former Social Worker, she has always enjoyed helping people find the resources and solutions they need to improve their lives. Ramona now travels the country as a full-time RVer, sharing her story of simplicity with everyone she meets. She leads by example -- having worked for more than 10 years as a Professional Organizer, and having radically downsized and simplified her own life as a full-time RVer. Ramona now considers herself a "Renaissance Woman" -- bringing all of her passions together into one satisfying career. As both a virtual and traveling organizer, she can create a customized organizing plan for your home or office, put on a workshop, or educate you through one of her popular teleseminars. As a simplicity coach, Ramona provides a proven program for making every area of your life a little bit easier -- perfect for those who want to make the time and space to focus on their true priorities. As a Professional Photographer, Ramona captures powerful images of places and people as she travels. And as a freelance writer and blogger, she shares organizing techniques, social commentary, travel tips, and film reviews with others. You can see all these sides of Ramona -- read her articles, browse through her photographs, and even hire her to help get your life in order -- at www.RamonaCreel.com. You can also follow her on Twitter, check out her Facebook profile, and subscribe to her blog feeds”
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