Financial Freedom

Dated: August 29 2022

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What is Financial Freedom and How is it Different Than Being Rich?

Financial freedom means having enough savings, financial investments (including 401K, Roth IRA, real estate investments, etc), and cash on hand to afford the life we want for ourselves and our family. It means having the kind of life where you can choose your career or hobby without basing it on a salary, or choosing not to work at all. Financial freedom is when our money works for us and not the other way around. 

Becoming Financially Free

To become financially free you must first build an emergency fund of roughly $1,000, then pay off all your debts. Debts include credit cards, college loans, automobile loans, and mortgage loans (to an extent - we will cover more about this later). After your debt is paid off (except your mortgage loan) you need to build an emergency fund that will cover 3-to-6 months' worth of expenses. Finally, you need to create a passive income that will pay for your current and future living expenses. 

Mortgage loans and student loans generally have lower interest rates than credit cards and retail store cards. Credit cards should be paid off first - generally, the debt with the highest interest rates gets paid off first. However, if you are a person that thrives from instant gratification - start with your smallest debt. That way you see that the work you are putting in gets paid off (pun intended). Rather than starting with that $15,000 credit card bill that does not seem to decrease no matter how much you throw at it, start with your smallest one. This type of debt payoff is considered the debt snowball - you pay off the smallest credit card while paying the minimum on all of your others. Once that debt is paid off, then you move to the next one and put all effort into that one with the same drive while still paying the minimum amount on your other ones. That way you are paying off more and more since you are snowballing the amounts into the next debt objective.

Budget

To become debt-free and financially free, you need to create a budget. A budget is necessary to understand where your money is going. If you do not fully grasp that your Starbucks run for the day might only be $6, but you are going to Starbucks twice a week and so is your significant other. Those Starbucks runs start to add up - let's say you go twice a week and your spouse goes once a week that's three times a week over  4 weeks. The total adds up to 12 times a month at $6 each which is a total cost of $72/month. That's $72 that you could be putting towards your debt a month which adds up to $864/year. On the flip side, you want to be able to budget for "fun," too. You want to budget for those date nights, movie nights, and amusement parks for the kids. It is so much easier to do this when you have a budget in sight. 

Save

Pay yourself first and foremost. Sign up for your employer's retirement plan and make full use of their matching contribution benefit. Once you max out the matching contribution, put up to $6,000 a year in a Roth IRA, then go back to putting more into your employer's retirement plan if you can.

Financial Advisor

If you do not know how to invest properly, then you need to get with a trusted financial advisor. Not an advisor that wants to sell you a ton of products like whole life insurance. Term life insurance of 20 years should be enough to get you on your way. You need this coverage until you reach financial freedom. At that point,  you should have built enough wealth to leave money to your significant other, children, charities, etc.

Investing

Investing should be done in mutual funds through 401Ks or IRAs, not individual stocks. Also, beware of investing too much into the company you work for. We know how companies like to offer the incentives of purchasing company stock for 1/2 the price. However, if the company were to go bankrupt you would not only be out of a job but your stocks, as well. 

Did you know that stay-at-home husbands or wives can invest in a Roth IRA? As long as one person in the household is bringing in a paycheck and you file jointly for taxes, then you can set up a spousal IRA. That means that you can both invest up to $6,000 a year (for 2022) in your individual IRA accounts. Even teenagers can invest in a Roth IRA - up to the amount that they have earned in one year to a maximum of $6,000 - it's never too early to start investing and having your money work for you.

Real Estate Investments

If you plan on investing in real estate then you need to work with a knowledgeable Realtor® that can help you find an investment property that will provide you with an independent income. Not only do you need a Realtor®, but also a fantastic property management company that is looking out for your best interests and not their own. 

Independent Income

Independent income is money that is coming in that does not require you to work or exchange time for said money. Investment properties can be a source of independent income, especially if you hire a great property management team. You pay your property manager roughly $150/month and they make sure that your tenants are maintaining your property per rental agreements and they find tenants for your rentals. Other sources of independent income include business, government benefits, or other sources of regularly paid income that do not require you to work such as social security benefits, or military retirement benefits.

Monitor Your Credit

Monitoring your credit is another key aspect of financial freedom. Did you know that in most states auto and life insurance premiums are impacted by your credit score? The insurance company's line of reasoning for this is simple - if you are reckless in your financial life then you are more likely to be reckless in other areas of life. It is a fact that, as a group, individuals with lower credit ratings submit larger claims to their insurance companies than those with higher credit ratings. Now - that does not mean that individuals with higher credit ratings have fewer accidents. However, it does mean that they may be able to pay out-of-pocket for claims that individuals with lower credit scores would otherwise need to submit a claim to cover cost.

Tune in next week to find out more about Financial Freedom.

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Katie Wildasin

As a full-time professional real estate agent, excellence, integrity, and superior personal service before, during, and after your transaction are my top priorities. Knowledge, commitment, honesty, ex....

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