Guide to Financial Freedom (I)

For many people it is as if there were a neon light flashing in front of their eyes, a light that identifies their ideal goal in life.

Financial Freedom!

Yes, financial freedom. And for most it means freedom from work with all the money they need to live the life they want. But do they have a money freedom plan? Do they know how they expect to achieve financial independence?

The Financial Freedom Dream

Many people do seem to dream about a day when they can retire from work and begin doing anything they want. They fantasize about a time when they would have no bills to pay, a ton of money in the bank, and be able to travel the world eating in the best restaurants, staying in the fanciest resorts, and seeing the world's most beautiful sites.

Who wouldn’t want to be free from money worries? There is an old saying that money can't buy happiness. Perhaps so, but no matter how true that is, it is equally obvious that all else being equal having money can eliminate a lot of problems and make life a lot easier.

Money can’t buy happiness, but all else being equal having money can eliminate a lot of problems and make life a lot easier.

And who could deny that giving up an unpleasant job to take up golf, working on Habitat for Humanity houses, or traveling wouldn’t be pleasant? Not me. And I’ll bet not you either.

Every day Americans spend a fortune on lottery tickets. Most of these people think that if they just had enough money all their problems would be solved (at least the financial ones) and they could live a life of ease. Of course that rarely happens, even if they win millions.

An Inside Secret About Financial Independence

Now I am going to give you one of the greatest secrets to success with money and to finding happiness in life generally: you have a potential to experience financial freedom and to do so much sooner than you think.

The key to financial freedom is to discover that achieving this independence is internal more than external and in arranging the financial affairs of your life so that neither the lack of sufficient money nor the involvement in managing a lot of it restricts your potential to live a full and happy life.

The truth about financial freedom can be found in the fifth law of money.

Financial independence is not generated by temporary levels of wealth or income but by setting correct priorities, exercising self-discipline in financial decisions, living debt free, effectively managing resources, and claiming it as a personal emotional and mental attitude

When you do these things well you will soon find yourself with plenty of money in the bank, but more important you will discover that the freedom people seek can be realized easier than ever dreamed.

Financial independence is not dependent upon the particular amount of money in your possession or your income as much as it is in being free from the limitations that people experience because of their financial entanglements.

It is not being able to buy the most expensive car or home in the world as much as it is realizing that most of the things you really want to do don’t cost much, if anything, and that most people can easily afford to do everything they really want to do—once they get in control of their money and follow the approach recommended in this article.

Achieving financial freedom does mean having a clear, set amount of money in the bank or reliable passive income. But it may not take as much as most people think when they manage their affairs correctly.

1st Key to Financial Freedom:
Correct Priorities

Let’s look at these keys one at a time. The first is setting correct priorities. Your financial future begins with the priorities you choose to set for yourself. There are many of these choices but the most important one is this. It is more important for you to choose to save than it is to choose to spend. Unfortunately most Americans choose spending over saving.

In the USA credit card debt tripled in less than two decades, from $238 billion in 1989 to a whopping $800 billion in 2005. Shopping is often described as a hobby rather than a necessity. (Fortunately the current economic crisis has jolted many back to reality, hopefully for good.)

And cost has been no inhibitor. Even with the soaring cost of gasoline, until recently Americans showed little interest in curtailing their driving even though their overspending was enormous.

Your financial future begins with the priorities you choose to set for yourself. The most important one is this: it is more important for you to save than it is to spend.

At the same time saving money, for many, has become non-existent. Incredibly for the first time since the great depression over seventy years ago the American savings rate recently became a negative number! (It now shows some sign of improving in the face of long term economic difficulties.)

Financial independence requires setting savings as a top priority, with a ten percent rate suggested as the norm. Without saving money financial success is impossible; with it, success is almost inevitable.

What are your financial priorities? Are they good ones? If financial independence is high on your list you will choose financial priorities that support that goal. As noted, one of the first is to choose saving money over overspending. Then you can learn to make other better choices as well and you will succeed.

2nd Key to Financial Freedom:

Exercising self-discipline in financial decisions is the second step toward financial independence. Many people have heard about delayed gratification but not nearly so many have learned to practice it! Achieving financial independence absolutely requires us to stop spending money unnecessarily and impulsively. It must be spent purposely and by plan.

Almost every retail store is organized around the fact that most of us are undisciplined spenders. If we go to the grocery store the milk and bread are at the back while the cookies, cakes and candy bars are up near the checkout counters. They know we will buy on impulse all the stuff we don’t plan to buy in advance. If we see it we will buy it.

Many people have heard about delayed gratification but not nearly so many have learned to practice it! Achieving financial independence absolutely requires us to stop spending money unnecessarily and impulsively.

Several years ago I decided to curtail my own impulse buying. It wasn’t easy but I think it has been one of the best financial moves I have ever made. I started a new practice. If I wanted something I saw I just put it on a list to think about and buy later. (I still do this although most often my list is an Amazon wish list.)

For a few weeks if I caught myself having purchased something impulsively I returned it to the store even if I knew I would later buy it purposefully. In short order I had developed a new habit, really a whole new mind set, that has had a significant impact on my personal finances.

Now I almost never buy anything at first glance. Instead of saying, “That looks interesting; I think I’ll get it,” I think “That looks interesting; I’ll think about getting one.” It is my habitual way of shopping.

There are numerous benefits to this discipline.

  1. A lot of things will soon just be dropped from your list. Not all impulses reflect real needs or desires.
  2. Buying later gives an opportunity to do a little research and buy more intelligently.
  3. There are often alternative products or sources that can offer better prices or values.
  4. You will feel a lot more in control of your spending when it is intensional rather than impulsive.
  5. You will avoid a lot of stupid mistakes with your money.

Remember, people selling to your impulses are specifically targeting your tendency to buy things you would not buy otherwise simply because they are in front of you. Now I often find things on my wish list and wonder why I ever even considered them worthwhile.

3rd Key to Financial Freedom:
Living Debt Free

The next essential for financial independence is one I suspect you may have been anticipating, living debt free. This is believed by many to be an impossible dream and by many others to be laudable but impractical. It is neither. It is totally practical.

My parents lived on a rather average income, a somewhat low one really. But they managed relatively well. They were able to buy new cars (an expense I don’t recommend) and after my father died my mother was able to trade their lake home for a brand new home in town. But they never borrowed money for anything. Never. Not even for their home!

Many, actually most, people believe that they cannot have anything much without assuming debt. This is simply not true.

People without debt get to save or invest a lot of money and still spend more than others every month. Once that fact gets firmly implanted in our minds our financial thinking will never be the same again.

People without debt get to save or invest a lot of money and still spend more than others every month. Once that fact gets firmly implanted in our minds our financial thinking will never be the same again.

Buying a home may be an exception, at least in some cases, but even here the maximum period of payoff should ordinarily be fifteen years (monthly payments are not much larger than for thirty year notes) and then that payoff should be accelerated as much as possible.

If you think this is silly get out your home loan papers and look at the amortization schedule. How much are you paying on your house. Not the total house payment, now. Look at the principal payment! Not much is it.

All that money you pay every month is not for your house but for the privilege of financing it over an extraordinary period of time. Making an extra payment on your loan equal to that principal (probably much less than you think) will knock off a whole month’s payment at the end. Remarkable. There are two other possible exceptions where loans may be acceptable, medical bills and education costs.

The real villains are those credit card debts, of course. Depending on who you read, the average American owes between $9,000 and $14,000 in personal debt. Wow.

Do you want to experience financial independence? Then decide now to change your attitude toward debt. Despise it like the enemy it is. Determine to eliminate it. Learn how to live debt free. It will revolutionize your life.

Before leaving this point I need to point out another kind of debt. You may not consider it a debt at all, but its affect is the same so I choose to identify it this way. This is the ongoing debt of any kind of regular obligation. It is important to look at every commitment you have of this kind and take every possible step to eliminate or reduce every one.

These obligations include everything from your electric bill to your health insurance, from your cell phone to your house rent or purchase. Your goal should be to make sure you are getting your money’s worth, but more important to reduce the total amount of these obligations as much as possible.

Your sense of freedom financially will be in proportion to the amount of money you have left over each month after meeting all your commitments, including savings.

4th Key to Financial Freedom:
Manage Resources

The next secret to financial independence is to effectively manage resources with financial freedom in mind. When we feel constrained by our financial situation it is not just because we do not have enough money or because there are too many obligations. It is also because we feel like we are out of control, that our need for money is keeping us from enjoying life as we would like.

When it comes to getting in control of our money the best approach is first to follow the steps outlined in the Take Control! section of this site, and then start managing our personal lives as we would that of any important business, utilizing the basic management skills outlined in the law of management articles.

I will simply emphasize here that learning how to keep track of income, expenses, resources, and obligations is the beginning, making sure that your money is being used where it should be is the middle, and evaluating results, making decisions about the future, and guiding your financial situation toward your own goals is the end.

When you know you are effectively moving in the direction of your goals you will feel good about yourself and your money. This is one place where your Net Worth statement, prepared on a monthly basis can be a real plus.

When you see your list of assets growing every month and your list of obligations vanishing before your own eyes while your net worth just keeps growing, the effect on your sense of freedom and control is really dynamic.

It takes only a few minutes when your paperwork is in good order, but when you see your list of assets (home, bank accounts, savings, and investments) growing every month and your list of obligations (home loan, car loans, and credits card debts) vanishing before your own eyes while your net worth just keeps growing, the effect on your sense of freedom and control is really dynamic.

At this point we can introduce the key element you may have been looking for, the money to live on when you quit holding down a paying job! It isn't Social Security! It is your financial freedom (or retirement) account.

If you are following these key steps you will find it easy to set aside say $200 a month in an investment like a Roth IRA. This, over 40 years, should give you much more than a million dollars. Even a low wage earner can do this when their priorities and management practices are right.

If you start late, adjustments are obviously necessary. Elsewhere I discuss passive income methods and some of us who start late have to find them: rental income, certain kinds of online income, getting paid for your “hobby.” Remember, it doesn’t take much if you follow all we have outlined in the previous steps.

5th Key to Financial Freedom:
Freedom Attitude

The final key is claiming financial independence or freedom as a personal emotional and mental attitude. The previous steps are not particularly chronological in nature, but it is unlikely that you will ever feel financially independent before making substantial progress on the previous ones. Still, a person does not have to become especially wealthy to begin experiencing a feeling of financial independence.

The mistake most people make is associating financial independence with great wealth. The fact is that you could have millions and be totally enslaved by your financial responsibilities.

Many wealthy people are constantly in fear of becoming destitute. This is partly because of the way they invest and manage their money. But it is primarily because of the way they think and feel about themselves and their money.

On the other hand a person can have no income but social security and have only modest savings but feel a great sense of independence, especially when they own their own home debt free and have no other debts of any kind.

If you have all the money you need to meet all of your necessary expenses, if you know how and remain firmly committed to avoiding any other unwanted financial obligations, and if you have more than enough funds to do the things you really value in life, why shouldn’t you feel a sense of freedom financially speaking no matter the absolute level of your resources?

You can and there is no reason not to do so.

Because of its unusual importance, the secrets to applying this final and dynamic principle will be explored more completely in part two of our discussion of financial freedom.

Continue to Financial Freedom, Part II