Correctly answering these questions is fundamental to your creating financial freedom, because it’s impossible to reach a destination if you don’t know where you’re going. So it only makes sense that before we dive into the specifics of how to create financial freedom, we first define what it is.
I recently attended a conference where the instructor asked people for their definition of financial freedom. The answers ranged from “not being in debt” to “being able to buy anything I want.” But the answer that I liked best was, “Financial freedom is the freedom of not having to think about financial matters.” That definition covers the wide range of possible definitions, because whether your financial desire is to get out of debt or be able to buy whatever you want, your ultimate desire is to be free from financial concerns.
So in a financially-focused world where the financial demands are real, what can you do to feel financial freedom in your life? Well, let me share with you a method for experiencing financial freedom, a method that my mentor shared with me a couple of years ago. It’s called the financial pyramid. This method has worked in the lives of countless people around me as well as in my own life, which is why I endorse it so strongly. If you apply the principles, you will experience the peace of financial freedom in your own life, as well.
Step 1: Save 1½-2 times your average monthly expenses (AME) in a checking account. Having enough money in a checking account to cover two month’s worth of day-to-day expenses. This relieves an incredible amount of financial stress, which is why this step is at the base of your financial freedom pyramid. To calculate your AME, simply subtract your total savings from last year from the income you made last year and divide by 12. Any amount that you didn’t save was spent. This is a much more accurate way to calculate your AME than trying to track all your expenditures, which is time-consuming and difficult to accurately track.
Step 2: Save 2-3 times your AME in an interest-bearing account. This money is for emergencies, such as a new furnace, a broken window, a new roof, or a new car engine. Once you complete this level of your pyramid, events that you previously considered “disasters” will no longer be a concern. You’ll feel peace even in times of emergencies.
Note: A great interest-bearing option is www.emigrantdirect.com, which currently pays 2.4% interest (as of today), and your money remains completely liquid.
Step 3: Save 3-9 times your AME in an interest-bearing account. This level of your pyramid could be titled “income insurance.” These funds give you peace of mind knowing that you and your family will be just fine even if you get injured, laid off, or let go. In addition, you will have the freedom to look for other jobs or experiment with opening your own business. You will no longer need a job. You will have the ability to choose your line of work, and having the ability to choose is what freedom is all about.
Note: Deciding whether to save 3 or 9 times your AME will depend on a number of factors, including:
a. How stable is your job? Are you a tenured professor or an NFL quarterback?
b. How stable is the income at your job? Are you paid commissions or salaried?
c. What amount of savings makes you feel secure about your financial situation?)
Step 4: Invest 10-20% of your income in retirement accounts. The reality for most of us is that there will come a day when we will no longer be able to work. The question is, “Will you be at peace when that day arrives?” I encourage you to take your financial future into your own hands. Begin planning now and you will receive the peace of mind of knowing that your future is taken care of.
Step 5: Save for long-term commitments. Saving in advance for your long-term commitments, such as your kids’ education or a wedding, will prevent you from getting behind the 8-ball in the future. For instance, if you commit to your kids that you will pay for their college education, and then you proceed to complete levels 1-3 of your pyramid while never saving for their future college tuition, the entire base of your pyramid will be wiped out when you write that check, and you’ll need to start again from scratch. To maintain stability in the financial realm of your life, save for long-term commitments before they arise. Planning ahead will give you a great deal of peace.
Step 6: Save before you buy. Most people do this step backwards. They buy, and then they’re forced to save in the form of payments. That method leaves you feeling trapped to your debt and you pay more, with interest, than the item actually cost. Let me suggest a better way: If you will need a new car in 3 years, start savings for it now. Not only will it give you great bargaining power at the time of purchase, it will also provide you with a huge boost of self-confidence knowing that you had the character to save in advance. In addition, you’ll stop worrying about your future, wondering whether or not the “old beater” will last another year, and you’ll sleep well knowing that your financial future is secure.
Financial Freedom is a wonderful thing, and it’s difficult to experience when you feel trapped under debt.
Step 7: Give it away! Giving is oftentimes a great barometer of someone’s financial freedom, as it demonstrates their detachment from financial concerns. If someone is able to freely give with a cheerful heart, they are released from the hold of money. On the other hand, if someone believes that they need every single penny, then they’re always concerned about not having enough, and financial matters consume their thoughts.
Oddly enough, my wife and I have found in our own lives that the more we give (with a cheerful heart) the more we receive. So after you’ve completed levels 1-6 of your pyramid, consider giving the rest away. You won’t need it. Holding onto more money than you need will only serve to make you think more about money and worry about how you might lose it. Free yourself of that concern and release your resources to the causes that you’re most passionate about. This is truly one of the most satisfying feelings you’ll ever experience.
Note: I am not suggesting that giving should be your last step. Quite the contrary. Tithing is the first step in my family’s financial planning, and I’ve experienced the blessings that come with doing so. When completing your financial pyramid, take your tithe into consideration by including it as part of our AME. Step 7 is simply a gift that goes beyond tithing and helps free you from want.
One final thing to note is that these steps are not necessarily in chronological order. For instance, I recommend that you save for your retirement while you’re completing step one. The steps are simply in order by how much stress they relieve. For example, if your basic needs aren’t met (Step 1), you’re most likely too stressed to even be worrying about your retirement.
I understand that completing the financial pyramid is not as simple as 1, 2, 3. It will take time and effort. But all meaningful things require time and effort, and you’ll just have to ask yourself if financial freedom is worth the effort. I suggest it is.
Remember, the financial pyramid is merely a means to achieve financial freedom, and is not the only way. Ultimately, financial freedom is nothing more than the freedom and lightness of not having to think about financial matters, which you can achieve at any time by merely making a decision to think freeing thoughts.
COO and Director of Finance