Steps you need to take to the path of financial freedom

To really first start on the path to financial freedom you need to recognize what was working for you is really not working for you and it’s time to change up your strategy. Reading up on how you can take steps towards getting out of debt is the first step, so good job!!! Acknowledgement is the first step to change your mindset to something that WILL work from something that WON’T.

Those that fail to plan, plan to fail.

-Ben Franklin

WHERE MOST OF US ARE NOW

Of all the financial threats in a family these days, there is none more dangerous than debt in a household. Where did a majority of us learn to manage money growing up? From our families. Nothing against mom and dad, but it might have worked for them back then, but the financial world is changing. Your sole source of income, from your job or 2, even 3 is being divided into small funds for that household.

  • Housing expenses- mortgage, insurance, taxes, water, electric, etc…
  • Food- groceries
  • Automobile- gas, license/tags, upkeep, etc…
  • Insurance- medical, life, other, etc…
  • Debts- credit cards, loans, other
  • Recreational expenses- baby sitters, activities, vacations
  • Clothing
  • Savings
  • Medical expenses- doctor visits, dentist appointments (paid out of pocket not covered by insurance
  • Miscellaneous- gifts, toiletry, salons, barbers, etc…
  • School costs
  • Any investments- 401k, mutual funds, RothIRA’s, etc…

All this time, if you’re paying money towards debts and expenses, it’s money not going toward your savings and retirement. You can’t keep above pace from the cost of living.

Inflation is rising every year, this is why it costs more today to buy a coffee at Starbucks than it did 10 years ago. Taxes are increasing to afford more social programs to help Americans that need financial assistance. Emergencies pop up like dental or medical expenses that you are unprepared to afford cause your medical insurance doesn’t cover everything and you haven’t put anything away in savings to prepare of life unexpected events.  And thus, you get more into debt.

Debt is a leading factor in most family friction and is the leading cause in divorce. The U.S. DivorceStatistics mentioned in a 2014 study that the level of income is a contributor to separation and divorce because money is the source of conflict in their relationship.

  • Arguments over money being spent or not being saved
  • Rising costs in living forcing couples to take 2nd even 3rd jobs to make ends meat
  • Working several hours, a week puts strain on their work/life balance and end up having trouble staying connected emotionally and physically
  • Unexpected medical, household or other unexpected costs can put strain on their family budgets, thus causing them to resort to credit card debts or loans to keep afloat

CHANGE THE MINDSET ON MONEY TO START A BETTER LIFE

The list builds on each other and can cause resentment toward each other. If you never took the time to sit down and agree on a plan, establish a budget and strategy to build for their present and future, then you are planning to fail. So, you are probably asking, “Well how do even start, I know the problem, how can I begin changing my circumstances toward a better one?”

Until you have the thought and action to get out of debt you won’t be able to even start. This will require teamwork and discipline. You must sit down with your spouse or partner and get on the same page with what you both want financially and keep each other accountable to stick to the goals and budgets you set. Need help onsetting a budget, click the link to download your copy of a budget. On a further note, I recommend getting in touch with a financial management group or representative to create a financial needs analysis to understand all aspects of your financial like to get a full view of your financial goals and your projected outcome by staying on that fiscal path.

UNDERSTAND HOW DEBT AFFECTS YOU FINANCIALLY

You might have heard of compounding interest, right? Simply put, if you put money, say $1000 into an account that pays out 9% interest on the balance each year. You gain 9% of the total each year. So as the amount grows each year, the amount in the account is increased by 9 % annually.

Example:

Timmy on the day he was born, his parents invested $1000 into an investment fund that consistently pays out 9% interest annually until he is of age 67 without investing another penny into the account except the interest building on the investment annually will have amassed $406,466! Awesome, right? That’s how compounding interest can work for you. Just think on how large that amount can be if invested monthly each year until age 67 can compound into millions!

It is a powerful thing and as much as it helps you build wealth. It can also work against you in the form of credit card debt interest rates. Some being as high as 25% or more in interest. When you pay the minimum balance on your credit cards, interest charges are added each month to that principal balance. So, each month is your new balance, WITH your interest! Small debts can become massive debts.

Example: You purchase a TV at your local electronic store with the initials, BB! You incurred a $3000debt and walkout the store not paying a cent until the next month, great right? Let’s be generous and only have a locked 18% APR interest rate on the balance. You decide to pay the minimum payment each month, $20 or more. It will take you 10 years to pay off the debt and incur $2,002 in interest charges. $3,000 + $2,002= $5,002!

KNOW WHAT DEBTS TO AVOID

All debt you want to avoid, but life happens, you can always change your circumstances. This will take time, discipline and effort. Some credit cards can have 2 forms of debt:

Revolving Debt (avoid at all costs)

Interest compounds daily instead of monthly, and end up paying more on interest. Revolving debt of $17,000 @ 18% interest can incur $12,500 in interest because it isn’t a fixed debt. It is changing almost any time.

Fixed Debt

Fixed debt of $17,000 @ 18% interest can incur $5,370 in interest paid. Even at a smaller interest paid out, $5,370 is a great deal of money.

TAKE ACTION TO ELIMINATE DEBT

Setting goals and use the momentum of each goal you set to stack onto the other. Yes! I know you have heard it… If you haven’t gotten a hint already, you will know now… I’m referring to debt stacking. Dave Ramsey covers this on many occasions on this podcast and books. He is a very trusted voice in money and a great financial advisor. I highly recommending listing to his podcast when driving to work or on a trip. This can help get your mind on the right path. What you focus on is where you will succeed.

You may even be saying to yourself, “I’m good, I’m not doing bad, able to have a little left over, just how much IS it potentially costing me to be in debt?

I know, looking over all your debts may be like looking at an elephant, where do you even begin? With one bite at a time. Overwhelming as it may be, you can actually surprise yourself by what you can do when you have the mindset and will to stay on task of your goals. You need to first take into account the interest rate of the debts. Debt stacking identifies the amount of that debt, the interest paid and places the order in which to pay off each at a time.

HOW DOES DEBT STACKING WORK?

You list out all your debts (not living expenses, your debts, what you owe) in the order of the smallest debt with the highest interest rate first. You want to pay off the highest interest rate so you can save more money over the years.

 Your first target debt should be the smallest debt with the highest interest rate. Instead of paying the minimum payment like you normally would have pay extra on that one debt and pay the minimum on all the others.

Once you have paid that target debt off you then roll over what you were paying on that one debt towards the 2nd debt you listed to pay off. As you pay that debt off you will roll over what you paid on your first and second debt to pay onto the third debt and so forth.

Example: (Better illustration applied)

Retail CC #1 @ 25%, balance of $500, paying $20/month will take 36 months

Interest paid, $214 that could have gone towards savings

Retail CC #2 @ 19%, balance of $670, paying $20/month will take 49 months

Interest paid, $292

Retail CC #3 @ 15%, balance of $500, paying $20/month will take 31 months

Interest paid, $103

Retail CC #4 @ 10%, balance of $1,250, paying $20/month will take 89 months

Interest paid, $523

Total debt: $2,920 +total interest paid: $1,132 = $4,052 before debt stacking

Debt stacking applied:

(Illustration)

A FINAL NOTE IN SUMMARY!

  • We see where most of us are now and can relate to it as it is an everyday occurrence month to month to year. But nothing is set in stone, we can change the cycle we were brought up from by our parents by applying some tools to help get you out of debt.
  • We identified that the first step is to change the mindset on money to start a better life by getting a plan together, setting goals one at a time.
  • We understand how debt affects you financially by the examples and see the potential of how those compounding negatives could become positives in our bank account if we have more disposable income instead of paying things each month and never really saving.
  • We know what debts to avoid and that can be almost impossible to pay off if we don’t do it responsibly.
  • The most important thing is to take action to eliminate debt by listing it out and setting a plan of attack on paying it all off one at a time using debt stacking.
  • Finally, we see the power of debt stacking and how it works. Once you have everything paid off, tally up the potential disposable income on how you can apply it to paying your self first, such as the 3 funds you need to apply your extra money to stay on the path towards financial health with wealth for you and your family.

That is what we will cover on my next post. Until then, if you are interested, I recommend using the budget sheet to get a plan together as a family. Here is the link to a budget sheet you can use at no cost to you!

I would also recommend getting in touch with a financial advisor. If money is a concern on getting a plan together I can recommend my brother who is a financial representative of a reputable financial firm, Primerica. He does a lot of great things for the family and some of our closest friends. I have a page contact, just click the link and he can follow up with you.