Road to Financial Freedom Part 7 - Saving and Investing

The fun starts now. You've successfully navigated some of the more difficult territory on this road to financial freedom, and now we are coming out of the woods into the clearing close to the top of the mountain, and the views are beginning to change. It's amazing what a fresh perspective can do for you!

A lot of people get to this point in their journey and get stuck, not because they don't want to continue on, but because they get distracted by other things or more often just don't know what to do next! Can I just interject a thought right her? Now would be a really great time to reevaluate and refine your budget. Take a good hard look at where you're at, what you're spending, and what you have available to you for saving and investing. My personal conviction is that your first two priorities should be your retirement and your children's higher education. To that end, my advice is to start here:

1. First make sure you're regularly putting 15% of your income into Roth IRA's and pre-tax retirement. If you have a 401K at work, contribute up to your company's matching amount, if they have one. Put the balance in Roth IRA's in mutual funds with long standing track records of good growth. If you can't save 15% right away, start where you can, then increase the amount by 1 or 2% each year as the incremental changes will help you get where you want to be without having a huge impact on your finances. The easiest way to keep this up is to make it automatic - have the money deducted from your paycheck or withdrawn monthly from your account automatically to help you resist the temptation to skimp on contributions.

2. If you have kids, begin saving for their college education. You really don't want your kids to start off the way you had to, do you? Here's some websites that will help you identify some different savings vehicles and determine which one is right for you.

• http://personal.fidelity.com/planning/college/content/compare_options.shtml.cvsr
• https://personal.vanguard.com/us/CompareCollegeSavingController

Once you've determined which vehicle is the best choice, you'll need to do a realistic evaluation of how much you can save (and how much you want to save!) and create a plan based on the number of kids you have and their ages. Depending on your available resources, this may mean that your kids will have some limitations on where they go to college, what expenses you will cover for them, and what expenses they will be responsible for themselves.

3. Pay your house off early. Can you imagine the freedom you would feel if you were living debt free, including your mortgage? Think of what you could accomplish with NO PAYMENTS!

After you've covered retirement, college, and the house, the possibilities are limitless! When it comes down to it, there's a lot ideas about what you should do first when it comes to saving and investing. But what it really boils down to is this - you have unique goals and priorities for your life and your family, and you're the only one who can make those decisions for yourself. So ask yourself, "What are the things that are most important to me right now and down the road?" Here's some ideas of different priorities:

• We'd like to pay for our daughter's wedding (or weddings, for those of you blessed with lots of girls!)
• We want to take that vacation we've always dreamed of as a family
• We want to give to support a particular ministry
• We have a business idea that we'd like to pursue
• We want to retire early (50/55/60)
• We want to buy a car for our son/daughter
• Insert your dream here....

Have fun dreaming! You've reached a place that the majority of Americans (still steeped in debt) will never see. And remember, even though there's a definite order to the process, when you get to this phase, a lot of your saving will be done simultaneously. Don't feel like you have to have college completely paid for before you start saving for the vacation you've dreamed of or launch the business you're envisioning. Just use good judgment and common sense, and most important, make sure you have a plan!

Road to Financial Freedom Part 6 - Completing the Emergency Fund

Back in Part 4, we started building an emergency fund. This was your temporary emergency fund - $1000 in the bank - to help keep you from going into more debt as you began your debt snowball. Now that you're out of debt except the mortgage, it's time to complete that emergency fund. What is a complete emergency fund? This fund provides you a buffer for major life events, such as a loss of work due to layoff, illness or injury, major medical expenses, major car accident, fill in the blank. It can also cover you for smaller emergencies, such as a hot water tank going out or replacing the timing belt on your car.

How much cash should you have in your emergency fund? This is something that you'll have to evaluate for yourself. Most experts would advise that you have 3 to 6 months of living expenses set aside in some sort of fairly liquid savings account. Take an objective look at your financial situation. For dual income families, or people with relatively strong job security, three months may be sufficient. On the other hand, if you're the sole bread winner, or if you work on a commission basis, six months is probably a whole lot more realistic!

Where should you put your money? We talked about this on Monday - because you want this money available to you on short notice, you need to keep it fairly liquid. For this reason, your standard checking and savings accounts, money market accounts, or even a money market fund (brokerage account) are usually good options. Just be sure you keep it separate from the rest of your money (ie - in a separate account) to avoid spending it inadvertently.

Reaching this milestone is often one of the more difficult, because now that you're completely out of debt except your mortgage, you're beginning to taste a bit of freedom. The temptation is not to save, but to spend on all those things you've felt deprived of all this time you've been working so hard to get out of debt. The temptation is to loosen up the purse strings and start enjoying life a little! Sometimes you've been on this road so long that you're really getting sick of the journey! You're like a little kid in the back seat of the car saying, "Daddy, are we there yet?" I want to encourage you to stick with it! You're almost there! If you take the whole amount you've been throwing at debt and start putting it towards your emergency fund, it shouldn't take long before you've reached this milestone.

Keep at it, you can do it! And join us next week as we look at the Road to Financial Freedom Part 7 - Saving and Investing.

Road to Financial Freedom Part 5 - Getting Out of Debt

So let's recap where we've been in the past couple weeks. First, we figured out where we were financially and created a budget to get us moving in the right direction. Then, with the help of our newly created budget, we got current on all our past due bills. Finally, we've sold a few things and socked away $1000 for our temporary emergency fund. That's quite the list of accomplishments! Do you realize how many people never even get to this place? Now that you're here, it's no time to kick back. Instead, it's time to kick up...the intensity, that is. It's time to go after that debt and get it paid off. But before we do, I want you to imagine for a moment what you would do if you were debt free. Maybe you would save up for that vacation you've always wanted to go on and pay for it WITH CASH. Maybe you'd finally be able to save enough for a down payment on a house. Or maybe there's a ministry that you've always wanted to be able to give to. Whatever it is...get your imagination going and let it fuel your passion, desire and intensity to get yourself out of debt...because this milestone is typically one of the hardest to reach and usually one of the longest milestones to get to.

Here's how to go about tackling the mountain in front of you.
1. Quit borrowing more money! Cut up your credit cards and close any open credit lines to help remove any temptation. Remember, you have your $1000 emergency fund for those unexpected events now!
2. List your debts in order by balance amount, smallest balance to largest balance. Include creditor name, payoff amount, and minimum payment amount.
3. Using your budget, determine how much money you need for your regular monthly expenses, and how much is left over.
4. Using the amount left over, make the minimum payment on all your debts EXCEPT the first on on the list. Take whatever is left after paying the minimum amount on all the others and put it ALL towards the first debt on the list, the one with the smallest balance. Continue doing this each month until the first balance is completely paid off. Don't forget to call the creditor and send a letter to officially close the account - some people mistakenly think that by cutting up their credit card, the account is closed!
5. Cross that debt off your list, take a deep breath and then jump right back in. Continue paying the minimum payment on all but the NEW smallest debt. On this one, you want to pay the minimum (which you've been paying all along), PLUS the full amount you were paying on the debt you just paid off. Continue doing this each month until the balance is completely paid off. Close the account and move on...
6. Continue this process until all your debt is completely paid off.
This technique is called the "debt snowball", simply because the concept allows you to start small and pick up momentum as you go along, much like a snowball picks up snow as it rolls down hill, getting bigger and bigger and bigger. The longer you stick with it, the faster your debts will begin to disappear!

The steps are simple, and actually fairly easy as well. However, the discipline and endurance to finish the job are far from easy. It will take intensity, desire, and commitment to make this happen and to not lose heart and get discouraged! Setting some goals for yourself and celebrating milestones as you reach them is one way to keep yourself motivated. Another way is to find an accountability partner. Find someone you know that will do this with you. Its kind of like getting a workout partner...someone who will go to the gym with you, keep you accountable about what you are eating, celebrate with you when you lose weight...same concept. Having accountability will help you keep the momentum going.

Getting out of debt is an exciting, liberating accomplishment! Savor the victory, but don't get too comfortable, because Friday we're going to continue moving down the Road to Financial Freedom with Part 6 - Finishing Your Emergency Fund!

Road to Financial Freedom Part 4 - Building an Starter Emergency Fund

Life happens. And usually, it costs money. That is why your very next step on the road to financial freedom is to begin building a starter emergency fund. Before you tackle your debt, before you invests in your 401K, before you do anything else (besides pay your bills and stay current!), you need to put $1000 into the bank for emergencies.

Why have an emergency fund? Most people are one medical emergency away from financial disaster. When your working to get your feet under you financially, your emergency fund will provide a buffer for you during the first difficult months. It will help you avoid getting behind again or going further into debt while you're working so hard to stay current and get out of debt. This fund is just your "starter" fund...eventually you'll want to grow this to 3-6 months worth of living expenses. But that's another step, so for now, let's just concentrate on the $1000.

What constitutes an emergency? That's for you to decide, but I'd recommend that you put it in writing, especially if you're married! Sit down, write out and be in agreement on what you would consider using your emergency money for. Unexpected car repairs, replacing a broken water heater, an unexpected medical bill...are you getting the picture? Emergencies are usually things that are necessary and unexpected. Buying the kids school clothes because they...oh my goodness...grew is NOT an emergency. Christmas gifts are NOT an emergency. A vacation with your friends that came up unexpectedly is NOT an emergency (definitely unexpected, definitely not necessary)! These are things that you know are coming and can (or should!) be planning for.

Where should you keep your emergency fund? Because you want this money available to you on short notice, you need to keep it fairly liquid. For this reason, your standard checking and savings accounts, money market accounts, or even a money market fund (brokerage account) are usually good options. Just be sure you keep it separate from the rest of your money (ie - in a separate account) to avoid spending it inadvertently.

Here's some ideas of how to get that emergency fund in place quickly:
1. Sell some stuff! Most people probably have at least a couple hundred dollars worth of stuff that is just sitting around unused and unwanted. Get rid of it! (Craigslist is free and works great)
2. Take any bonus checks (or tax returns, etc) and put them towards your emergency fund.
3. Work overtime for a couple weeks (if its available) and use the extra for your emergency fund.
4. Some of you get paid every two weeks. How about budgeting for 2 paychecks a month, then when those extra paychecks come as a result of a 5 week month, set it aside for your emergency fund.
5. If all else fails, make some changes in your budget (ie, cut back in a couple areas) to begin putting extra towards your emergency fund.

Happy saving! And don't forget to join us on Wednesday for our next milestone on the Road to Financial Freedom - GETTING OUT OF DEBT.

Road to Financial Freedom Part 3 - Getting Current

Once you've got your budget laid out, you need to get yourself current. When you're behind on bill or debt payments, you probably feel as though you just can't get your footing...it's like you're walking up a sandy hill, and every time you take a step you feel the sand sliding out from under you. You can't get very far very fast that way, can you! So, if you’re behind on any bills or debts, you first need to bring everything up to date before you start on anything else. Here’s a systematic way to get this done:

1. Go through all your bills and make a list of anything that is past due. List the creditor, the total amount due, the date due, and if this is a payment that recurs, the date and amount of your next payment.
2. Devise a plan to pay off your past due bills. Get your budget out and see where you can come up with some extra cash to accomplish this. Most households have paychecks coming in at least twice a month, sometimes more if spouses are being paid on opposite weeks. Depending on when bills are due, you may be able to juggle your bills around for a month and "pay as you go" instead of all at once at the end of the month.
3. Communication is your greatest asset - call your creditors and talk to them. Explain your situation and ask how they can help. Ask if you can make a payment a couple of days after it is due. Ask them if you can defer the payment until a date you know you CAN pay. Ask if you can pay a certain amount now followed by another payment in a couple weeks (or whenever you get your next paycheck). Ask if you can set up a payment plan to systematically pay it off. Ask, ask, ask! If you don't ask, you won't receive! Be creative and come up with a solution that works for you. Remember, don't try to set up any payment plans if you haven't already completed your quickie budget! If you don't know exactly where you are, you will not know what kind of payments you can afford. Setting up a payment plan without knowing what you can afford will simply put you right back where you started - behind.
4. Cut out all expenses but the basics until you're current. Yes, this means no Starbucks, no eating out, no manicures, no golf games, no snacks at the grocery store, and no movie dates! Remember, getting your footing under you is worth the sacrifice, and it will only take a short time - it's not how you will have to live long term.
5. Remember, don't ever sacrifice the four walls to pay off something else. Too many people allow themselves to get behind on a mortgage or car payment to try to pay a credit card on time. Don't go there...it's not worth losing your house! Keep your four walls - housing, transportation, food, and clothing - intact while you work on getting current.

Once you're current, take a deep breath, because next week we'll be moving on to our next milestone on the Road to Financial Freedom Part 4 - BUILDING AN EMERGENCY FUND.

Road to Financial Freedom Part 2 - Defining Your Current Position

So first things first – you need to define your current position. This is fairly easy to accomplish, and gives you your first point of reference. If you don't know where you're at, you will have no idea how to get to where you want to be - living financially free! If you like a cookie cutter approach, one way to get started is by using the basic "quickie budget". If you like something a little more personal and customized, follow the quickie budget format and lay out all your expense categories, the dates that bills are due, and how much they typically run. Personally, we always start with our tithe first before anything else, because we believe that God owns it ALL...100% of our provision comes from Him and belongs to Him. He's only asked us for 10%, so we give it joyfully, knowing that His promise is that the remaining 90% will be blessed. After your giving, you want to make sure you're covering your necessities first, including housing, food, transportation, and clothing. After that, go through your other expenses, listing them in order of priority from the most important to the more discretionary. Finally, you'll want to create a separate list of all unsecured debts, including creditor, amount owed, minimum payment and date due. Total up the minimum payments, and add this total as a line item on your budget.

When you first create a budget, the idea is to first get down on paper what you're actually spending in each of the expense categories. However, in order to be an effective budget and not just a listing of what you're spending, you need to evaluate each category to ascertain if your spending is reasonable and realistic given your income and situation. Some categories you may need to increase. Others may need to decrease. When it's all said and done, the goal is to have your income minus your expenses equal zero.

That said, when you've completed the budget exercise, total up your monthly expenses, and then subtract from your monthly income. If the result is positive, great work! You're off to a good start. A positive number means you have either extra cash to throw at your debts or to save/invest. We'll get to both of those options in a later post. If, however, the result is negative, you either have a cash flow problem or a spending problem! Reevaluate your expenses and trim where you can until the resulting number is zero. If you trim down to the absolute necessities and are still getting a negative number, you may need to consider some other options to bring that amount positive, such as selling some things, getting a second job, or moving to a less expensive home.

Getting started on a budget is probably the hardest part of getting financially free. It's often very difficult for people to face the reality of their situation. It's difficult to reign in a lifestyle of overspending your income, and will require sacrifice. But I assure you, it will pay off in the long run!

Email us your questions on this process, and we'll try to post answers later this week. And be sure to come back on Friday for the Road to Financial Freedom Part 3 - GETTING CURRENT.

Road to Financial Freedom Part 1 - Building a Solid Foundation

Welcome back from a fun 4th of July holiday weekend! We're glad to be back at it this week, talking about our favorite topic...financial freedom.

Now I'm no architect, but designing and building a solid foundation is probably one of the most important steps in building a house. Without a solid foundation, the rest of the house, no matter how strong, will not stand the test of time. Its the same in your finances. A solid foundation is critical to your financial success, and essential to living a financially free lifestyle. Everyone wants to be financially free, but most simply don’t know where to start. We often hear the question, “What’s the process to move in the direction of living financially free?” In the next few weeks, we’re going to step through how to get yourself to a financially free life, one milestone at a time. We'll look at those simple, safe and proven "building practices" that when applied to your finances, will ensure that your foundation is secure:

1. Define your current position
2. Begin operating by a written budget
3. Get current on anything that's behind
4. Save $1000 for an emergency fund
5. Get out of debt
6. Save 3-6 months of living expenses (this replaces your $1000 emergency fund)
7. Begin saving and investing

These steps are good no matter what your financial status - whether you make a lot of money or just a little. Unfortunately, many people with really great incomes make the mistake of trying to skip over steps, thinking they are "beyond that", when in reality, they're in effect circumventing safe building practices! For example, just because you have more money left at the end of the month instead of more month left at the end of your money doesn't mean that you should skip the budgeting step and go straight to the investment step. On the contrary...to whom much is given, much is required! But I know plenty of people who do just that...they'll put 15% away into mutual funds or retirement accounts, but then they'll finance a car or continue to make slightly more than minimum payments on their credit card debt. This doesn't make any sense at all! I understand the argument of compounding interest, but would you ever go take out a loan to invest the money? No - that's ludicrous! Ok, I digress. But the point is that regardless of where you are financially, the steps to financial freedom are the same. So no matter where you are, if you're feeling the crunch of financial pressure and have been wondering if there's a better way to live, there is. Come with us as we walk this road together.

Be sure to join us on Wednesday for the Road to Financial Freedom Part 2 - DEFINING YOUR CURRENT SITUATION.