My Main Objective: Freedom from thinking about money
If you read my earlier post “Are You Rich?” you’ll know that I don’t buy into our society’s current definition of Rich. This is where I differ from the crowd in my goals with personal finance. I don’t spend my time day dreaming lofty thoughts about driving a Bentley or having a huge mansion somewhere. I spend my time providing a safe, decent home and lifestyle for my family. I used to worry about how much money I had and when I would be able to buy that next item. Now I don’t. I am not going to lie and say that I never buy a lottery ticket, or that I do not want to live on the water. However, in my head, if I take care of all the right things, good things will happen. This is the root of my personal finance main goal: Freedom from thinking about money.
Here are the steps I am taking to meet this goal:
- Get out of Debt
- Build an Emergency Fund
- Save Heavily for Retirement
- Get Insured
- Save for Kid’s Education
- Give to Others
Get out of Debt
First and foremost, I strive for 100% freedom from debt. This includes any mortgages I carry. In 2006, my wife and I paid off all debt beyond our mortgages. This included $19,000 total in one year. I first paid off a vehicle I bought new right after college (listen to everyone and don’t buy new vehicles). Then I sold that vehicle to pay off my remaining balance of student loans. After that we attacked the $8,000 in credit card debt we accumulated. We cut up all of our credit cards. My wife actually cried when we cut up her first card. For some reason, we have associated credit cards with freedom and adulthood. It sure seems silly to associate debt with freedom. We used the debt snowball method to pay off the credit card debt and it worked wonderfully.
Build an Emergency Fund
I have always followed the concept of an emergency fund. However I know that most people do not. In college, I kept an extra $200 in my checking account. I considered that money a minimum balance and I never used it unless it was necessary. As my expenses and income grew, I increased that amount to $500. Then once I got my first real job, I increased it to $1,000. To this day, I still carry a minimum balance of $1,000 dollars in my checking account. That amount will cover most immediate emergencies.
I also built a full 3 month emergency fund. This step is the slowest and most boring part of securing your finances, but it is also the most important. Knowing that you could live for 3 to 6 months without financial worry provides a significant feeling of freedom.
I figured out how much I need based on an absolute minimized expense set. I take what my monthly expenses are and subtract out all things that I consider unnecessary. Examples would be magazine subscriptions, cable, internet, blow money, etc. The theory behind this minimalist approach is that anything I can survive without gets cut. So if I lose my job, I’m cutting all burdensome expenses. Think of it like cutting weight on a fuel starved airplane. Start throwing everything off that is not essential. My expense minimum is right around $3,000 a month. It would be much lower if I didn’t have a rental house. I include the rental house in a worst case scenario where I have no job and no renter in the house.
After figuring out my minimum monthly cost, I multiply by 3 and that is my first emergency fund goal. Each month I then set away as much as I can afford until I reach that goal. Then I multiply that monthly cost by 6 and got my new goal. 6 months is where I stop. I believe that I can get almost any situation back on track within 6 months.
Save Heavily for Retirement
Most people picture retirement saving with that quintessential image you see in the retirement commercials where a senior couple is sitting on their ocean front porch smiling in the sunset. However saving for retirement is much more than that. There are so many unanticipated parts of aging. Most of us will have to deal with our parents or other family members. We ourselves will start to have medical issues. Kids will be going through college and buying first homes. Retirement savings is important for these aspects. Saving is much more about preparing for the unknown future. Considering these situations, save as much as possible.
Currently I save anywhere from 15 to 26% of my salary. For company retirement plans, you should contribute up to the maximum of your employer match. For instance, my company matches 50% up to 6% employee contribution. So if, I contribute 6% of my gross salary, my company contributes another 3%. That is free money and a guaranteed 50% return on that first 6%. If you don’t do this, you are just throwing money away. That doesn’t even consider the tax savings you get by contributing to employee retirement plans. I contribute 12% total to my 401k. I then send another 3% each month to a private Roth IRA. On top of that, I am back filling my emergency fund to have a full 6 months expense equivalent. Once my emergency fund is up to six months, I will move those contributions back to investments.
I am a much heavier saver than most, but you do not have to go that extreme. You just have to start. Do what you can, but make sure it is the absolute maximum that you can. It’s more important for your financial independence than you realize.
To Be Continued…
This is part one of my personal finance philosophy. In the next article I will discuss my take on insurance coverage, saving for kid’s education and giving to others.
Feel free to comment and give your opinions or tell us about things that you feel are successful strategies for managing personal finances.