Learning how to achieve financial independence is not for the elites. Anyone can learn to do it with hard work and discipline. Allow me to tell you how I used these 7 principles to jumpstart my journey.
It takes me a couple of minutes to take it all in; slowly I being to wonder how an ordinary Joe like me was able to make it to this dream destination? I’m barely 2 years into my first job, my wife and I have managed to pay off our six figure student loans, we’ve just bought our first home, and we’ve managed to save enough money to go on this vacation without it adversely affecting our budget.
I want to let you in on a little secret. Listen closely. I’m not special! There is nothing extraordinary about me. Simply put, I was able to follow a game plan that is available to every one of you, with gazelle-like intensity. If you didn’t get that last part, I highly recommend picking up Dave Ramsey’s, Total Money Makeover. I think it has some good advice in there that can change your outlook on finances.
I want to share a few principles with you that ultimately led me to be able to take a dream vacation to Bora Bora. This isn’t a comprehensive checklist, because finances are personal and require personal attention for each individual. The principles though are timeless and can dramatically alter your financial forecast.
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This was honestly one of the hardest things for me to do when it came to money. The first paycheck that comes in is most likely already spent before it’s deposited into your account. Self-control or the mental aspect of money is the biggest factor in walking down the road to financial freedom. One of the hardest things anyone has to learn is how to implement delayed gratification and suppress instant satisfaction. Instant satisfaction is ingrained into our psyche from the time we are born. It takes a lot of work to overcome this barrier. Self-control is not only a good financial skill to have, but will also make all other aspects of your life more manageable; it’s a good life skill. Once you have mastered self-control, managing your financial life will be a breeze.
Control Your Finances
Do you ever wonder why credit card companies send you multiple invitations in the mail? The easy answer: they want you to sign up for their product. Do the credit card companies care about you? The easy answer: no! Credit card companies are willing to pay the printing fees and mailing fees to send propaganda to potential customers because they know that if they catch you in a moment of weakness, they can net several thousand dollars in profit, easily compensating them for their advertisement expenses.
You will get financial advice from dozens of people in your lifetime. Don’t trust them, even if they are family. Open up Google, go to your local library or bookstore and scour articles and books about how to manage money. Invest in yourself. You will never regret that. As a doctor of physical therapy, my goal is to make my patient’s as independent as possible by giving them the tools they need to succeed. The less they need me, the better I’m doing my job.
Don’t trust other people with your money. Educate yourself on how to automate your finances, how to grow your nest egg, how to minimize expenses, how to live beneath your means; then you will be far along the road to financial independence.
Follow Your Money
Does your paycheck disappear before it gets deposited in your account? Do you spend more than you make? If you answered yes to both of those questions, then you need to earnestly start following the money trail. Document every expense. Track all your transactions. I’ve found that Mint is a powerful, free product that allows you to track all these things. It even calculates your net worth for you.
Creating a budget is essential to long-term success with your finances. Fortune 500 companies spend their money by carefully allocating a specific amount to their various branches. You need to start treating yourself like a Fortune 500 company. You need to tell your money where it needs to go and how much you need to spend for that category. Once you do this, you can see where you aimlessly spend money and work on reining that back in. You’d be surprised how much money you can save by simply creating a budget.
Start an Emergency Fund
In his book, The Total Money Makeover, Dave Ramsey suggests creating an emergency fund of $1000. This was one of his recommendations that I personally did not agree with. My wife and I decided that if we only had $1000 in an emergency fund, we would put ourselves at an unnecessary risk. So we decided to put in a little bit more.
Regardless of what amount you come to, this needs to be your number one priority. Only after creating an emergency fund can you then attack your other financial goals. How much you need to put in it will be something that you will have to calculate. Pay yourself first. This is probably the most recited phrase in personal finance. Setting this money aside is ultimately for your benefit.
It is very important that you make this emergency fund as liquid as possible. It needs to be readily accessible in case something unforeseen happens. Research banks, credit unions, and online savings accounts for the best interest rate available. Make sure that you are not paying any fees for your account either because if you are then your bank, credit union, or online savings account is pulling a fast one on you.
Start Saving for Retirement
Most Americans neglect saving for retirement. Don’t be like most Americans. If you are in your twenties, then you need to start today. Because of the way compound interest works, the sooner you start saving, the less principal money you will have to deposit into your retirement accounts and still reach your goal. Many people are confused with how to save for retirement. So let me give you a quick rundown of your options.
My first recommendation is to save 15% of your gross income. So if you earn $100,000 before taxes, you should be saving $15,000 each year for retirement and allocate it accordingly across your various investment accounts.
Start with an employer-sponsored 401k. If your employer offers a match, then contribute just enough money to receive your match. The beauty of the employer-sponsored retirement accounts is that the amount that you decide to contribute comes out of your pre-tax money, therefore it lowers the amount of money that you can be taxed on. You decide when your contributions get deposited into your account so you can front-load your contributions during the year, back-load it, or just distribute it evenly. Do whatever works for your situation. If your company does not offer you a match, then I recommend contributing straight to the Roth IRA first.
Next move on to a Roth IRA (single filers start phase out at $117,000 and are ineligible at $132,000 in 2016; married filers start phase out at $184,000 and are ineligible at $194,000). The beauty of the Roth IRA is that you contribute money into the account after you’ve already paid Uncle Sam. So any interest that you earn on the money you deposit is yours to keep, you don’t have to pay any taxes on it again.
Lastly, after you’ve done both of these options, I would then go back and contribute any remaining money back into the 401k.
The truth is that your individual goals are going to reflect heavily on how much money you allocate and where you decide to allocate your money. There are several different investment vehicles each with their pros and cons. You need to sit down and study each option to find out what is best for your situation.
I refused to pay an investment advisor to manage my portfolio because I wanted to be in charge of where my money was going. But if you think that route would work best for you, then I highly recommend finding a fee-only advisor instead of a commission-based one. There are also several robo-advisor websites that you can utilize to aid you on your saving journey.
It is important to understand how taxes work even before you get your first direct deposit. I’m not saying you need to become a tax guru but you should at least have a working knowledge of tax brackets and how they will affect your tax rate. You should understand what kind of things you can deduct and claim on your taxes to avoid overpaying Uncle Sam.
You should also understand how to properly fill out a W-4 form and claim the appropriate number of dependents for your situation so you don’t end up like I did and get stuck with an enormous tax bill. Learn from my mistakes! I don’t believe in giving Uncle Sam a free loan throughout the year and then getting that money back at the end of the year as a huge refund. I’d rather have that money parked in the appropriate account earning interest for me. You can fill out multiple W-4 forms throughout the year, so play around with it until you have figured out the right amount.
I would rather pay a couple hundred dollars during tax season than receive a huge refund because then I know that throughout the past year my money was building interest in my own accounts rather than receiving it interest-free from Uncle Sam.
Insure Your Health & Wealth
You are the MVP for your life and/or family. You need to take precautions to ensure that even if you have an accident, it will not adversely affect your family. Get medically insured. It will give you peace of mind and protect you from paying enormous amounts of money should the unexpected occur. If you have the opportunity to enroll in a high deductible health insurance account, then I highly recommend that.
My wife and I don’t visit the physician frequently at this point in our lives so we figured, we should not throw money away monthly for traditional health insurance premiums; money that we will never get back if we don’t use it. So instead we enrolled in a health savings account which our employer offered. HSA’s are incredible tools; they offer you triple tax savings. First, the contributions are made pre-tax so they will drop your total taxable income. Second, you can invest your contributions and your earnings are tax-free. Finally, they can be withdrawn tax-free for qualified medical expenses. No other account that I’m aware of offers you these kinds of benefits.
You work hard for your money so don’t put it at risk. If you rent, consider renter’s insurance to protect you from theft or other mishaps. Disability insurance is another big protection that you can provide yourself and your family. Your ability to earn money is a valuable asset to you and if something unforeseen occurs, disability insurance gives you the benefit of knowing that you can still get a steady paycheck if you are unable to work for an extended time due to an injury or illness.
The small decisions you make today can end up saving you thousands of dollars in the future. Being in charge of your psychology, not being influenced by the world around you, creating a lifestyle that doesn’t exceed your income, are all real viable options that can lead you down the road to financial independence. I don’t want to have to work for the rest of my life.
The small choices I make today will lead me down that road one choice at a time. It’s as simple as that. You don’t need fancy degrees to control your money. Once you understand how money works, you too can start down the road to financial freedom. There is a saying that Dave Ramsey has, “Live like no one else, so later I can live like no one else!”
I think I’ve sat out in the sun long enough. My skin is feeling warm. My wife just jumped off the deck into the Pacific to go snorkeling, I think I’ll join her!
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