7 Steps to Financial Freedom
If you are like most Americans, you are living paycheck to paycheck with almost no money in savings and a lot of credit card debt. Make this year the year you get yourself on track financially. Follow these 6 simple steps in order to get yourself out of debt, saving for your future, and living the life you have always dreamed:
- Make a new budget every month - It is time to get serious. Sit down with your spouse if you have one and make a monthly budget based on your income, not your expenses. You are no longer going to be spending more money then you have. That is what has led you to debt in the first place. Decide each month what is coming in and what will be going out. Assume only minimum payments on all debts, but whatever happens, the income must be greater or equal to the expenses.
- Cut up your credit cards - From now on, you will be using cash or a debit card for everything. If you have a credit card in your wallet, you will use it, so cut it up. You don’t need it anymore.
- Save $1,000 fast - This is your starter emergency account. This is the first thing you do and do it quickly. It doesn’t matter what other bills or obligations you have right now, set this money aside in a money market or savings account first. While you are working to pay down debt, this will be the emergency account that prevents you from needing to whip out your credit card in an emergency. Your car breaks down, the hot water heater dies, or the roof leaks are all good reasons to access money. This is not fun money and should never be used for anything that is predictable and not vital for you to live your day-to-day life. Christmas, Birthday Parties, or an LCD television all fall into this category.
- Contribute to your 401k only enough to maximize the employer match – Once your $1,000 is neatly tucked away in a safe location, adjust your 401k contribution at work (if you have one) to take advantage of all the free money the employer gives you. Usually that is some percentage of your salary up to a certain level. Example: If your employer matches 50% of the first 5% of contributions, contribute 5%. If they match up to 3%, then contribute only 3%. The point is that the best return on your money is a risk free match from your employer. It is in your best interest to take full advantage of it. If you do not have a 401k or an employer match, you will skip step 3. Remember, you should not be working on step 2 until you have completed step one. If you are on step 2 and the breaks on your car need to be repaired and the cost is $500, pay for your breaks but then go back to step 1 and make sure you bring your savings back to $1,000.
- Pay off your debt - Now that you have $1,000 squirreled away and are making a matching contribution to your 401k, it is time to tackle your debt. Make a list of all your debts excluding your home mortgage. This list should include car loans, credit cards, student loans, etc. Then, put those debts in order from smallest to largest. It doesn’t matter if you have a $20,000 loan at 24% and a $500 loan at 1%, the $500 debt comes first on the list. Start by making the minimum payments on all your loans except for the first one on your list, the smallest loan. On this loan, pay as much money as you can every month and focus all your energies to get it paid off. Once that first loan is paid off, take that money you were paying monthly and begin to aggressively pay off loan #2. Continue right on down the list until all of your debt is completely paid off.
- Increase your emergency savings to 3-6 months’ worth of expenses - Now that your debt is all aid off, saving money should be a breeze. Consider saving 3 months of expenses if your income is fairly secure and 6 months if your income fluctuates or is commission based. This money should also be in a savings or money market account. Don’t worry about the interest rate; just make sure it is safe and easily accessible.
- Increase retirement savings up to 15% of income - If you have a 401k at work; this is the first place to start. If not a Roth IRA (if you are eligible) or a traditional IRA (if you are not eligible for the Roth) are the next logical steps. This savings will grow with tremendous tax advantages and help provide for your future.