Steps towards Financial Freedom
Hi All! This post will go along with this week's podcast. Just to give you all some background about myself, I'm an enthusiastic believer in the power of finances, and I wanted to create a space where we can educate ourselves and support each other to achieve my goal; financial freedom! My goal is ultimately financial freedom, aka early retirement and I want you all to join me on my journey. Just a quick aside about myself, I’m a small business owner in Maine with two young kids! I think having children has definitely changed my perspective on finances.
Throughout the next few blogs I want to discuss topics I wish I had when I first started my financial journey. And like many of you, that journey started when I found out I was pregnant in 2018. I thought to myself- holy shit! I really need to get my finances in order.
So for today I want to discuss with you all the order we should proceed in our financial journey. Now obviously there will always be exceptions but generally speaking this is how I would approach financial independence.
STEP ONE:
A very basic and overlooked step. You’ll need some cheddar. And if you have no idea what the hell I mean by that… you’ll need a job. Or a great inheritance. I actually don’t know anyone with an inheritance, but I digress. You can’t really do anything without making money. In theory, the more money you make the easier it will be to reach financial freedom. But, I say in theory because of this little thing called lifestyle creep. The more money you make the more people typically spend. So if you’re new to this journey I would recommend trying to keep your fixed costs low.
STEP TWO:
Pay off credit cards and other debt. Everyone in the finance world will tell you there’s good and bad debt. Credit cards are most definitely bad debt. The next episode I have is a deep dive into credit card terms and how they work. But what about other debt? Historically, very conservatively, the market has returned between 6-8 percent. So if you’re sitting on any loan, look at how much interest you’re paying . If you’re paying under 6-7 % then I would continue to make minimum payments and invest the difference. But this is what some people forget to do. Don’t make minimum payments on your mortgage so you can buy the latest designer purse. I talk a lot about purses, but my purse is actually very sad looking, and is usually just caked in whatever my kids drop in it.
How should you pay off debt? There are all kinds of different methods. My personal favorite is very mathematical. I would look at whatever card or loan has the most interest and then I would pay off that one first. I really wouldn’t overthink it too much. I would just start paying off as much as I could.
STEP THREE:
Create an Emergency Fund. This is the fund you keep so when the shit hits the fan you don’t have to go back to putting purchases on your credit card. The finance world will often recommend having six months of expenses saved. This will likely be different depending on where you are in life. As a person with a mortgage and kids, six months seems reasonable. This would likely be different if you are in your 20’s without kids, and you can couch surf and eat ramen if you lose your job. If you’re a business owner, especially if your business is unpredictable, you may want to save slightly more than this.
I put some money in my checking account where it's easily accessible, and then I put the rest in a high yield savings account. Getting your money out of a high yield savings account can take a few days so just be aware of that. Why not just keep all your money in a checking account? Because checking accounts are basically robbing you! That’s why! The average checking account savings rate is currently 0.07 %. You can easily get some high yield savings accounts that are 3-5 %.
STEP FOUR
Capitalize on tax advantaged accounts. A tax advantaged account is any account you get a tax benefit from. Examples of tax advantaged accounts include 401k’s, 403b , 457, IRA accounts. I wouldn’t put any money in a brokerage account until you’ve maxed out your tax advantaged accounts first. If you work for a company, pension plans used to be typical. Now most offer either a 401k, 403b, 457 plan. I know, I know! In the beginning they all sound similar and it can be very confusing. For simplicity sake I'll outline the order I would do this. Just keep in mind this is very basic and well expand on it later
Max out a 457 (b) plan if you have one.
If you don't have a 457 (b) contribute to your 401 (k) or 403 (b).
Contribute AT LEAST ENOUGH TO GET THE MATCH FROM THE 401K OR 403B!!! ALWAYS CONTRIBUTE ENOUGH TO GET THE MATCH. THIS IS FREE MONEY. This means the return you will get is 100%.
Max out your HSA
Open and Max out your IRA ( I like IRA’s for several reasons we'll explore later but one big reason to not just max out your 401k first is because you can often get funds with lower expense ratios outside your 401k. You can contribute to either a traditional or Roth IRA. Keep in mind there are salary caps on these. More about these later.
Go back and max out your 401k or 403b
If you are a business owner consider a Solo 401k or a SEP IRA.
STEP FIVE
Contribute to a brokerage account.
Once you have maxed out all the tax advantaged accounts that are going to offer tax breaks then you should focus on opening a brokerage account. Although you won’t get the same tax benefits you would in a tax advantaged account, like your 401k or your IRA, you will still get a good return on your money. If you’re new to the finance world, a brokerage account is just an investment account, in which you can trade stocks, bonds, mutual funds, and ETF’s. Fidelity and Vanguard are exams of places you can open a brokerage account.
STEP SIX
If you have children and are in a secure place financially, consider contributing to a 529. You should only save for your children's education if you yourself are financially stable. DO NOT put off saving for your own retirement in order to save for your childrens’ college.
STEP SEVEN
Retire early like the OG that you are! To me money is a tool that can be used to buy time. Time to travel, time with my children. It was the FIRE movement that first lit a fire under my ass to make changes. FIRE stands for financial independence retire early. Before reading about this it had never occurred to me that I don’t have to work until I’m in my 60’s if I don’t want to. Today I want to leave you with an example demonstrating how saving early makes a huge impact.
Say your goal for retirement is to reach 2 million dollars. To save the first one million dollars, assuming you get a very safe 6 % back in the market it would take you 21.5 years of investing $2,000 a month to reach a little over a million dollars. But if you continued to put in $2,000 a month to get to 2 million dollars it would take you less than 10 years. So your first million took 21.5 years and your second million took less than 10! MIC DROP! MIND BLOWN. This is just to demonstrate the power of compound interest.
Well I hope this was helpful for all. I will go into more detail about each of these in upcoming blogs. Let me know if there’s a topic you would like to hear. Email me at leahgrotton55@gmail.com.
Also, just so there’s no confusion I have no formal training in finances. Consult your CFP, CFA, or CPA for formal advice.
