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.
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 the founder of OnlineOrganizing.com
--
offering "a world of organizing solutions!"
Visit OnlineOrganizing.com
for organizing products, free tips, a speakers bureau -- and even
get a referral for a Professional Organizer near you. And if you
are interested in becoming a Professional Organizer, we have all
the tools you need to succeed. (Copyright 2000, Ramona Creel)
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