Financial Freedom in 4 Simple Steps

4 steps to financial security

You’ve heard to the old saying so many times, it has probably become cliché. It has been used by many people in many different ways, but the idea remains the same: “It’s not about how much money you make, it’s what you do with it that counts.” Take that quote and think about it for a minute. Have you ever done your taxes at the end of the year and thought; “Where in the heck did all of that money go.” Don’t feel bad, most people have, and your in the right place. This article will help you figure out where the money goes and develop a plan to put your money to work for you in 4 SIMPLE steps.

STEP 1 Create a Budget
Most people wince when they see what step one is, but don’t be scared, it wont hurt I promise. Keep in mind I said the steps were simple I never said they were easy. J
Start with a sheet of paper and write down All of the money that come IN to your household each month. Its OK to estimate if you don’t know the exact numbers, but be conservative. In this case a low estimate is better than a high one.
Next take all of the Bills that you pay every month write down everything. The mortgage, the car payment the electric bill, the trash bill…you’ve got it. Your doing great. Now subtract the bills from your income and what is left over is your “disposable income.” One quick side note, if the number you get is negative you have to find a way to cut the monthly bills or increase your income. We are going to talk about ways to lower your bills in steps to come, but you will never get ahead financially if you spend more than you make.
Disposable income is the money we have to do the fun stuff. Movies, restaurants, morning coffee. A key step in budgeting is tracking what you do with your disposable income. My challenge to you is to track it for one month. Any time you spend money keep the receipt and take a look at all of the receipts in 30 days. You’ll be surprised what you find. It’s a very eye opening experience to realize that you buy $100 worth of coffee on your way to work in a month, or $300 because you refuse to bring your lunch, and if you smoke or drink alcohol regularly be prepared to see some shocking numbers.
When you figure out your disposable income put it into your budget. Is there any money left? Probably not, most people spend what they make, but if so good for you. We are going to take this money and put it to work for you. If there is no money left look for a few simple ways to free up some money to use in the up coming steps. Would you give up a cup of coffee, a night out, or bring your lunch to work once in a while to become financially free. I would. Take another look at your budget and look for ways to invest in your future.

STEP 2 Pay down debt
If you have a lot of debt or any debt for that matter this step will seem crazy and difficult, but if you are disciplined and stick to it, it is a great way to payoff debt fast.
In my career I’ve seen this technique used many times by many and done any different ways. This is my favorite. Find all of the debt payments you have, include everything but your mortgage. Look at credit cards, personal loans student loans, vehicle payments, and sort them by balance from smallest to largest. I’ve seen people advise clients to sort their debts by interest rate so you pay off the debts with the highest rates first. The reason I ask you to sort them by balance is when you get started and you find yourself paying things off quickly you are more likely to stay motivated and keep going.
So, now you have your list. Take the money you set aside in your budget and put it with the minimum payment for the smallest loan. Continue to make this larger payment along with the minimum payments for all of your other loans until the smallest loan is gone. Next, take the amount you were paying on the small loan and put that with the minimum payment of the next largest loan is gone. When that loan is gone take the payment you were making and add it to the minimum payment for the next largest loan. Keep going until all of your debts are gone. Please be disciplined and give this process a try. I have seen credit counseling companies charge their clients over $2000 to use this exact same process. Stay focused, you can do it.

Step 3 Build Personal Savings
Take a look at your budget now that you don’t have any debt. What are your monthly expenses? Include all of your utilities, your mortgage payment, your disposable income expenses. How much money do you spend every month?
Take the money that you used to spend on debt payments and put it in a basic savings account. Most experts say that you should have at least 3 to 6 months of expenses saved for emergencies, but in this economy who knows what could happen and since you are debt free and your expenses are low I recommend at leas 6 months and possibly even 9 to 12 months of expenses. Keep going build that savings account and once that cash is saved you will not be tempted to go back to the credit cards when something comes up.
　
Step 4 Save for retirement
Ok, at this point you are debt free and have plenty of money saved for an emergency. You are in good shape. Now it’s time to focus on retirement. The best way to save for retirement is through your employer, usually a 401k. The reason this is best is because it’s automatic and it comes out of your paycheck pretax. What does that mean to you? It means that you can contribute quite a bit of money to your plan without even noticing. Also, many employers will match employee contributions up to a certain level.
So how much should you contribute? Most experts say that you should contribute an average of 15% of your pay through your entire career. I say you should contribute at least that and don’t count any employer match as a contribution, this should just be a bonus. This money is for you and your retirement, save as much as you can, contribute the maximum you are allowed if possible. You will thank yourself later.
So there you have it. Four simple steps to financial security and even financial freedom. Again, the steps are simple but they are not always easy. With a little bit of discipline and determination you will be able to achieve a financial situation you never thought was possible. Good Luck!