Ahhh, financial freedom. It sounds like a great concept, but where does one begin? What does it even mean? A common definition often sounds something like this: The place where a person’s assets generate more income than their living expenses, thus eliminating the need to be actively employed.
In short, you no longer need to bust your butt working 9-5 to cover your day to day needs. Must be nice, heh!
This definition provides us with a good example, but it can also make financial freedom seem out of reach for many.
I prefer to consider financial freedom a journey rather than a destination. I mean, how do you stay motivated towards a goal that can take decades to accomplish? If and when you get there, will you even be healthy enough to enjoy that freedom during the later stages of your life!
That’s the beauty about the concept as a journey. Even if you are completely broke today, by changing the way you manage money, you can immediately begin to reap the rewards!
Time to get moving!
Every journey has a common element. Movement! You can’t get from point A to point B by standing still. You have to take action. Everyone starts from a different place, and that’s ok! If you are stuck in neutral, or feel like your sliding backwards, make the decision to start moving.
But how? Often people feel paralyzed, they don’t know where to start. Don’t worry if your income isn’t where you think it should be. It doesn’t matter if you have no investment knowledge.
Begin by reducing your spending!
The key to transforming your finances is to reduce your spending. This is something you can do immediately. Unlike increasing your income, which usually requires more time, you can free up large amounts of cash flow in a matter of days or weeks by cutting out a lot of wasteful spending.
To fully yield the power of spending less, you have to be ruthless. It’s going to take more than a gentle trimming of your budget to make meaningful change.
Over the coming weeks, I’ll take a deeper look at some of the key areas in which many families are overspending, but in the meantime I’ve listed a few activities below to help you get started!
- Review a 3 to 6 month history of your bank account. Do you really have a handle on the money that’s leaving your account? How much you are spending on stuff that isn’t improving your quality of life? The easiest way view your account history is through your online or mobile banking. This will allow you to filter your withdrawals by item rather than date or amount. I warn you, this can be a pretty scary exercise. If you spend a lot of money eating out in restaurants for example, or fulfilling your Starbucks habit, you may be in for a real shock.
- Total up of your communication costs. This one deserves a full blog post, and it will get one soon! Think about it. How many of these bills do you pay each month, and what’s the total cost?
- Cable/Satellite TV
- home/wireless internet
- home phone (landline)
- Internet streaming subscriptions ie. Netflix, Crave TV, Apple Music, Spotify etc.
- newspaper/magazine subscriptions
- satellite radio subscriptions
People waste SO much money to communicate. There is a tonne of opportunity here to significantly lower your spending. Total it up and then ask yourself, how much of this do I really need? Most of these services could be cut immediately without penalties, cellphones possibly being the exception
3. Understand your debt situation. If you have debt, total up the balances of different credit card, or loan accounts. Figure out how much interest you are paying on each account. Don’t just stop with the interest rate. Put it into dollars and cents, and then add it all up. That will help you get an understanding just how much of your hard earned income is being used to simply service your debt.
Here’s an example:
XXX Visa Card: Credit Limit: $10,000 Balance owing $8,000 Annual Interest Rate 19.99%
$8000 X .1999 = $1599.20 annual interest cost.
If your balance has floated around that $8,000 figure for the past 3 years, you’ve paid about $4800 of interest on that one account during that time.
I realize this is very simple math, but totalling up the interest you’ve spent over a period of time on all of your credit accounts can be an eye opener.
From here, there are a number of potential options to reduce the interest costs on your debt and begin paying it down. It really depends on your individual situation, but once you have a handle on the costs, you should certainly explore the options available to you.
If you do have questions or are looking for advice specific to your situation, don’t hesitate to email me at firstname.lastname@example.org, I read all of the email I receive and will respond as quickly as possible!