Financial Freedom in Any Economy

Times are tough. Just as the average person is getting used to the idea that we share a global rather than national economy, the blow-dried Chicken Littles on every major news program happily remind us that the sky is indeed falling. They do this without giving us any meaningful solutions to the problems on which they almost gleefully report. It’s enough to make any level-headed citizen go into full-on “I’m building a secret cabin in the woods” survivalist mode. If you’d prefer not to head for the timberline just yet, there are steps you can take to protect your financial future (and present) that aren’t quite as challenging as learning to make lye soap and do your own blacksmithing. Master these steps and you’ll eventually have financial freedom in any economy.

Create New Habits

According to an article researcher Phillippa Lally published in the European Journal of Social Psychology, it takes 66 days to form a new habit. Others believe it takes anywhere from 21 to 28 days to replace bad choices with good, but the truth is that it varies from person to person. The important thing to remember about creating a new habit is that how long it takes isn’t nearly as important as choosing which habit to create and then sticking with it. Maybe you’re wondering where your next meal is coming from or maybe you even have the enviable problem of choosing between purchasing that sleek sports car or the less expensive and more reliable family sedan. When it comes to personal finance the most important habit you can have is self-discipline, no matter where you are financially. Self-discipline will give you the ability to stick to the plan.

I’m not advocating that you live your life as if you were sequestered in a monastery, but freedom takes sacrifice. Depending on your situation the sacrifice can be as small as eating out less or as large as spending less time with your loved-ones in order to better provide for them. Self-sacrifice takes self-discipline, but if you do it with forethought many of the sacrifices can be temporary.

Create Your Freedom Schedule

Money is freedom, and the freedom schedule is the term I use to describe the plan my wife and I have to be financially free. Think of your freedom schedule as a road trip from New York City to Los Angeles. A cross-country drive can be done in a handful of days if done the hard way; you could also meander and backtrack so much that you never reach your destination. Realistically you would have a plan and a schedule, along with a budget for gasoline, food, lodging, and automobile related emergencies such as a flat tire.

You might drive for eight hours a day, with stops to refuel, eat and stretch your legs. At the end of the day you’d check into the motel that you reserved before you embarked on your journey. After getting a good night’s sleep you’d hit the road again the next morning, and after a reasonable amount of days travelling you will have completed your cross-country drive. This is the same journey you want to take to financial freedom.

Here’s the type of journey to freedom that you’ll want to avoid: I once drove fifteen hundred miles in 26 hours, stopping only to refuel and take bathroom breaks. I was in my mid-twenties and wanted to surprise my family. I arrived safely at 10 am, beyond exhausted, and immediately slept the day away once I’d said my hellos. Ultimately I spent the same amount of time with my family as I would have if I’d just broken the drive into 2 days and gotten a good night’s rest in between.

Whether you are planning for retirement or just trying to make ends meet at the end of the month, having a reasonable idea of when you can accomplish this goal and a budget to get there will make the going much smoother. That is your freedom schedule.

John and Susan

Here’s a realistic example of someone who needs a budget: John and his wife Susan have a combined income of $40,000 per year. John works full-time as a warehouse manager, making $28,000 per year, while Susan works part-time as a school crossing guard, making $12,000 per year. One of the main benefits to Susan’s job is the healthcare provided by the school district; it covers Susan and her family with no deductable and a low co-pay. They have two children ages 8 and 6, and Susan’s job also gives her the flexibility to be at home when the children are. Their combined take-home pay (net income) is $32,820 annually. Because Susan’s income is earned during the school year, their actual monthly income varies. From September through May they bring home $3,010 each month, but from June through August they only bring home $1,910.

Here are John and Susan’s monthly fixed expenses:

Mortgage Payment

$680

Utilities

315

Groceries

400

Credit Card Payment

100

Automobile Payment

200

Auto Insurance

65

Gasoline

150

Total

$1,910

During the school year things are pretty good. John and Susan have an extra $1,100 per month to spend so they treat the children to fast food on the weekends. Each child rents a few video games, and the adults rent movies. John likes to order pay-per-view sporting events, and Susan can’t say no to a cute pair of shoes. John eats out for lunch every day and takes the family out on Friday nights. Each payday they put a little aside for Christmas but know they should be saving more. Instead, they tell themselves that they work hard and need to be rewarded for their efforts.

During the summer things are extraordinarily tight for John and Susan. Every surprise is an emergency: invitations to birthday parties, an unexpected home repair, a sick child, any of these things can put a huge strain on the family budget. They cut back on groceries to pay the plumber, and then the following month something else comes up and they cut back again. At the end of August the children need new clothes and supplies to start the school year, so John pays the car note and utilities late, knowing that they’ll have the money to pay the late fees and get caught up once Susan gets her first paycheck. The cycle continues.

They agree that they’re tired of being broke all of the time, and decide to do something about it. Worried that they may not have the self-discipline to put aside most of the extra income they have during the school year, they come up with a plan.

Susan’s employer gives her the option of having her 9 month salary stretched out over 12 paychecks. This means Susan will get 12 paychecks of $825 each instead of nine paychecks of $1,100 each, giving them a true monthly net income of $2,735.  Now John’s monthly income of $1,910 can go directly toward their fixed monthly expenses while Susan’s monthly income can be used for savings to fund future yearly expenses like school supplies and clothing. They also set aside a small portion of Susan’s income for entertainment, limiting the children to one rented video game per week, and limiting themselves to one rented movie per week. John stops ordering pay-per-view and Susan agrees to buy shoes only when she needs them.

Track Your Spending

They each start carrying a small notebook to keep track of their spending. After a few days John realizes he’s spending $9 a day for lunch at a local buffet, for a total of $45 per week. That adds up to over $180 per month, and John decides to make his lunch at home and bring it to work with him. He’s surprised to discover that he can eat pretty well on less than $4 per day, saving over $100 per month.

This makes John and Susan want to take a more detailed look at all of their spending. As they go over the monthly budget they take a closer look at their utility bills:

Cable & Internet

$135

Cell Phones

85

Electricity

85

Water & Sewage

   10

Total

$315

The cable and Internet package includes premium movie channels that they rarely watch. After making a phone call to the cable company Susan sees that they can save $30 per month by getting the basic cable package bundled with Internet service.

John goes online to their cell phone provider’s website and analyzes the monthly bill, noticing that the data plan he and Susan are on is much higher than their typical monthly usage. They can downgrade to a cheaper plan that more than fits their needs and save $25 per month.

With the savings John made on lunches, and the reductions they both made on utilities, John and Susan now have an extra $155 per month to add to their budget. They’ve been paying $100 each month on a credit card balance that seems to always hover around $3,000. Just when they get the balance paid down by a few hundred dollars, a new need or want emerges and before they know it they’re back to owing about $3,000. Sensing that they’re on a roll, John and Susan come up with a more detailed monthly budget and a plan to get out of debt.

Mortgage Payment

$680

Utilities: Cable & Internet

105

Cell Phones

60

Electricity

85

Water & Sewage

10

Groceries

400

Credit Card Payment

255

Auto Loan

200

Auto Insurance

65

Gasoline

150

Entertainment

100

Future Expenses: Clothes

75

Home Repair

75

Auto Repair

75

Vacation

100

Savings

300

Total

$2,735

 

If they can stick to their budget, in about a year John and Susan will have the credit card paid off. Then they plan to use $200 of the extra $255 they’ll have each month to double up on the car loan, paying it off six months later. The rest they’ll to the amount they’ve set aside for savings. This is their short term freedom schedule.

Sticking to It

The first month is tough. John misses eating lunch at the buffet, and conveniently forgets to pack his lunch a few times each week. The children aren’t too happy about cutting back on fast food and video games, and feel as if they’re being punished. Susan remains strong. Opening the savings account made her feel that for the first time in their lives they were actually in control of their future. She wasn’t about to lose that sense of security, and vows to be steadfast for the rest of the family. She understands that it may take some time but eventually the rest of her family will adjust to having a budget.

Susan plans a Saturday outing to the library where she and the children can borrow books, video games and movies free of charge. The library soon becomes part of the routine and before she knows it the family is saving another $40 a month in entertainment expenses. John and Susan are now living well within their means. They’ve begun the good habit of sticking to their budget and look toward their future with anticipation instead of fear. They’ve created their freedom schedule, and Susan will have the strength to see that they stick to it.

Short Term and Long Term Freedom Schedules

The budget John and Susan made gave them a short term freedom schedule of 1 year and 6 months. In this time frame they paid off the credit card and the auto loan. They took a family vacation that was paid for before they even left home. Shopping for school or taking a family member to the dentist was no longer an emergency. Once this was accomplished they had the confidence and experience to begin their long term freedom schedule.

Long Term Freedom Schedule

In the 18 months it has taken them to pay off the credit card and auto loan, John and Susan have both gotten modest raises at work. Unfortunately the price of gasoline, groceries, and utilities has also risen at the same pace as their income. The couple now brings home $3,100 per month, and even though the price of a few necessities has gone up they are still in a much better position thanks to the discipline they used in paying off the credit card and auto loan. Here’s an updated budget:

Mortgage Payment

$680

Utilities: Cable & Internet

105

Cell Phones

60

Electricity

105

Water & Sewage

10

Groceries

550

Auto Insurance

65

Gasoline

200

Entertainment

100

Future Expenses: Clothes

75

Home Repair

75

Auto Repair

75

Vacation

100

Savings Account

300

Total

$2,500

Even though it’s more expensive to live than it was 2 years ago, John and Susan’s budget is $235 less because the paid off the credit card and the automobile. Coupled with their combined pay raises they have an additional $600 per month after savings. Speaking of savings, with interest earned they now have almost $7,800 in their account.

When they bought their home 10 years ago, they had a high interest rate of 7% on a $100,000 loan. Now that they’ve built a solid credit history they decide to refinance the balance of $88,000 at 5%. They make the decision to put an additional $500 toward the principal on their mortgage, with the remaining $100 going into their savings account. By paying an extra $500 per month toward the house note, John and Susan will own their home free and clear in just 8 years.

Here is the budget they use for their long term freedom schedule:

Mortgage Payment (with an extra $500 per month toward principal)

$1180

Utilities: Cable & Internet

105

Cell Phones

60

Electricity

105

Water & Sewage

10

Groceries

550

Auto Insurance

65

Gasoline

200

Entertainment

100

Future Expenses: Clothes

75

Home Repair

75

Auto Repair

75

Vacation

100

Savings Account

400

Total

$3,100

Eight years later, when their oldest child is ready for college, John and Susan will be debt-free, with a $50,000 balance in their savings account.

Although that was a simplified example it should give you a good idea of the power of coming up with a freedom schedule of your own.

Money is Freedom

It’s true. Money can’t buy happiness, but it can be a powerful tool that if used properly will give you more freedom than you currently enjoy. Wouldn’t it be nice to not have the stress that comes with not being able to pay your bills on time? Wouldn’t it be fantastic to have the freedom to spend at least part of your working life pursuing something you love, instead of dragging yourself into work because you can’t survive without that steady paycheck? Are you content to just survive, or do you want to live?

You have the power to create financial security that will last for the rest of your life. With a little self-discipline and a few simple changes you will never have to worry about money again. Track your spending, create a budget, and start your freedom schedule today.