3 Keys to Financial Independence

3 Keys to Financial Independence

Asset Building First Have you ever heard the phrase, “pay yourself first?” That is a very good rule of thumb after taxes, tithing, and protection considerations. “Pay yourself first” means we should save for future needs before buying the things we want now. Most people find it very difficult to build significant assets because they do not have the discipline to sacrifice what they want now so they can have what they want most at some future date. They erroneously believe that they just need to get lucky with a risky investment or win the lottery to be wealthy. Building wealth can be a relatively simple process. All we need to do is consistently save a significant portion of our income and invest it wisely. If we are not willing to do this, we may never be able to get ahead financially or retire with a decent standard of living. Although it is simple, it is not always easy. Lifestyle Spending Second Finally, we get to spend some money! If we can be disciplined enough to take care of all the preceding concerns first, then live within whatever is left, we will essentially be financially bullet-proof throughout life. When we know we are taking care of the other essential areas, spending money is more fun because we do not have to feel guilty or wonder whether we can really afford to spend it. Most people are stressed out about money because they have it all backwards. They spend everything they make—or even more than what they make—to meet their current wants, then hope that nothing bad ever happens to them....
How to Channel Cash Flow To Reach Your Financial Goals

How to Channel Cash Flow To Reach Your Financial Goals

Have you noticed that whenever we receive money, it somehow always seems to magically flow through our fingers like sand flowing through an hourglass? It is very difficult to hang onto. Perhaps this is why in the financial services industry we call it “cash flow.” Most people put much less thought into where their money is going than into what they will do this weekend or where they will go on their next vacation. Then they wonder why they never seem to be able to get ahead financially. Before the money arrives, we must set up financial dikes and ditches—strict financial priorities, rules, and boundaries for ourselves—so our money will be used for the things that are most important to us. Yes, work is required, but the reward is well worth the effort. Once we decide where we want our money to go, we need to make the flow as automatic as possible to be sure it consistently goes to the right places. I am a huge fan of direct deposits and automatic withdrawals, not only because they are less work, but also because they make the discipline of regular saving and investing much easier. It is psychologically much less painful than having to decide every month to write a check to a savings or investment account. Properly channeling our cash flow is easier said than done. As mentioned in other articles, successful money management is not so much about math as it is about personal discipline, sacrifice, and having a clear vision of what we want to accomplish. It has much more to do with emotions and behavior than...
What Kind of Debt Is Acceptable?

What Kind of Debt Is Acceptable?

Acceptable Forms of Personal Debt Although I have been harsh on debt and believe we should pay cash for as many things as possible, I acknowledge that some forms of debt may be the best way to meet some of our most critical spending needs. When used wisely and sparingly, it can provide tremendous opportunities for economic improvement that may never be available otherwise. In my opinion, the most responsible use of personal debt would be limited to reasonable amounts for education, a modest home, and basic transportation. It may also be prudent for businesses to incur certain forms of debt at sensible levels for expansion that would be impossible otherwise, but we will limit our discussion here to personal debt. Why am I okay with debt for these purposes? Since higher education often dramatically improves potential earning power, and since our ability to earn an income is typically our greatest asset throughout most of our life, student loans may produce a higher long-term return than any other investment we could make. If a student’s parents or grandparents cannot afford to pay higher education costs for her, she may never be able to save up enough money on her own to pay for the schooling required to increase her earning power so substantially. In this case, student loans can be a very valuable tool. Still, we must be careful not to spend more on education than we can reasonably expect to be able to pay back based on the earning potential of employment opportunities related to our field of study. We can minimize the use of student loans by...
Creating a Spending Plan

Creating a Spending Plan

Whether they make a lot of money or squeak by on a meager salary, most people shiver when they hear the word “budget.” Since the “B word” typically evokes such negative emotions, I prefer to call it a Spending Plan. I enjoy thinking about how I am going to spend my money much more than I enjoy contemplating how to restrict myself by living within a budget. After all, money is ultimately meant to be spent, right? Creating a spending plan is a beautiful thing because it is the only way to ensure that our money will go to the things we want most, not just to the things we want now. This is a critical distinction, because the two are often mutually exclusive. We can never have enough money to buy everything we want. Therefore, we should think of our spending plan as a friend who helps us get what we want most, not as an enemy to all happiness. If we have already allocated the proper amounts to taxes, tithing, insurance, and savings, then we are most of the way there. In fact, we do not even have to keep track of where the rest of it goes if we do not want to. The most important thing is to distinguish between fixed, totally necessary expenses (such as mortgage payments and utilities) and discretionary expenses (such as eating out and taking vacations). We must be sure we have enough to cover the fixed expenses first, and then we can spend whatever is left on the extras. In our family, as we have learned to discipline ourselves we...