When I was paying off all of my debt, I wanted a simple plan of attack. I chose to use Dave Ramsey’s Baby Steps, which has helped thousands of people get out of debt. Here’s the thing I never really followed the baby steps to the letter, I ended up creating my own steps that made the most sense to me. I realized that the steps I created were a better example of what people should be doing with their money, I call it Brick by Brick creating your road to Financial Freedom.
I created the Brick by Brick steps while paying off over $100,000 in personal debt. What’s important to know is that these steps are meant to take an approach that revolves around your values and what matters most to you. Not every brick is mathematically calculated to produce the most efficient results because I have found that for myself and the people I work with that’s not the best solution for them. Remember personal finance is personal.
It’s important to know and understand your values and what you prioritize as the most important items in your life. Write down 3 things you value most in your life. Examples could include but are not limited to travel, church, fashion, family, adventure, etc.
My personal values are my immediate family, travel, my health & fitness. What are your values?
Another way to think about your values is to replace the word “value” with “happy”. What makes you happy? Each person is going to be different and those values may even change over time, but the first brick is really crucial in building the road ahead.
Another great exercise that can help with your values is the 5 Whys. The 5 whys analysis was originally developed by Sakichi Toyoda, and was used to trace the root cause of the problems within the manufacturing process of Toyota Motors.
The 5 Whys. The goal of this exercise is to figure out why you want financial freedom or to pay off debt because the road ahead can be difficult. If you know Why you are striving for financial freedom and you see a friend or colleague driving a new Range Rover you are going to question your own reasons for paying off debt or saving extra money on your old Jeep Grand Cherokee.
Here’s an example of mine when I was starting to pay off debt, yours may be less than 5 to get your results.
My Why: I love to travel and spending time with my wife.
Now you try it. Why are you on the road to financial freedom? Why are you paying off debt, saving, investing, etc? With each answer, rephrase the question and ask yourself Why. What’s Your Why?
If you don’t know where you are today, then you will never know which direction to head tomorrow. This is a saying I live and die by and one of the reasons I am so adamant about tracking your expenses.
There is a number of ways to track your expenses here are my top 3 suggestions:
If you print off your last statement from your financial institution you can see where you have been spending your money. An exercise to understand and categorize where your money is spent can be done with a highlighter, calculator, pen, and a piece of paper.
Take your last month’s statement and highlight all of your expenses for your groceries in one color. Then add up all the highlighted items on your calculator. Take this total and write on your sheet of paper “Groceries” and the dollar amount.
This is a perfect example of tracking your expenses. You can change highlighters and do this with each category until your bank or credit card statement is completed with all of your categories.
It’s a simple process that literally anyone can do. This is a manual process and it will take some but it’s also really effective when you first are starting out.
You can also skip the calculator, pen, and paper and add and categorize these in Excel or Google Sheets.
If you have online banking you are most likely able to download these items to a CSV file and skip the highlighter. That’s some next level stuff for those of you familiar with online banking and excel.
I like to keep things Simple. I joke that if I cannot explain part of my process to my own mother then I cannot use or teach it to my clients. The zero-sum budget is as simple as it gets. The process can be done with a piece of paper, excel, or fancy software.
Let’s start. Write down your income at the top of the page for the month and then subtract all of your upcoming expenses for the month until you get to exactly $0. Simple as that.
Your budget is something that will never be perfect. It’s something that takes time to get right and even then life comes up, but the main point of putting together a budget is to spend money on the things you value most in your life.
If you are driving around in a new Ferrari, but value spending time with your family then let’s make sure your money and your budget are spending and saving money on your family rather than an expensive car.
This is just one example, but spending and saving money with specific values in mind will take the ugliness out of the word budget.
The biggest issue as it relates to getting your financial house on track is unexpected expenses. Now that you have a general sense of how much money is being spent each month by tracking your expenses and creating a budget.
The emergency fund should be the amount of money that allows you to sleep at night. For some, this number is as little as $500 or $1000 and for others, this number is as high as 6 to even 12 months of their expenses. The more comfortable you are with your budget the more precise this number will be.
There are a number of factors that should be considered when deciding if this helps you sleep at night. I would narrow it down to these 3 items:
Time and time again through my own personal experience and helping others throughout the years I have found that creating your emergency fund should go before attacking your debt.
Life is filled with unknowns. If you have an emergency fund to protect against those unknowns it will help and in many cases save the day.
If you have no debt with the exception of your mortgage I would recommend building an emergency fund that helps you sleep at night.
However, if you have debt it’s time to start thinking about a smaller emergency fund to get you started. This amount probably won’t have you sleeping like a baby, but it will allow you to get some sleep and that’s a start.
I don’t give blanket advice with emergency funds because I believe personal finance is personal and each situation will vary.
Some personal finance experts recommend as little as $500 or $1000 and that very well could be the right amount for you when you have high-interest debt to pay off. I’m not here to make that decision for you and in fact, when I work with clients it’s a number we talk about together.
The dollar amounts may vary but the answer still remains the same, you NEED an emergency fund!
This brick will only apply if you receive a company match from your employer. If this is not the case, skip “Invest in Free Money” and move right on to “Pay off Debt”.
After you have laid out the previous bricks on your road to financial freedom make sure to check with your employer to see if you are eligible for the company match.
A company match refers to a matching dollar amount contributed by an employer to the retirement savings account of an employee who makes a similar contribution, usually to a 401(k) plan.
Most companies will offer some sort of derivation of between a 3%-6% match on the dollar amount you contribute to your 401K.
This goes against Dave Ramsey’s Baby Steps, but this road is built Brick by Brick, don’t miss out on receiving a bonus from your company.
Contributing to your 401K is a great introduction to saving and investing for retirement and when you become a super saver, but that comes later.
Focus, Focus, Focus. When paying off debt you will read about interest rates, snowball, avalanche, side hustles, lowering your expenses, increasing your income, and just about everything you can imagine.
The number one way to pay off debt and pay off debt fast is making debt your ultimate focus. You can’t multi-task paying off debt and do it fast. I’ll just save a little here, invest a little there, pay off some debt over there. NO, focus, focus, focus on paying off debt.
I have written about paying off debt multiple times and I am a firm believer that getting rid of debt as quickly as possible will have a major impact on your financial life today and your future ahead.
If it’s one thing I hear from friends, family, and clients it’s the desire to retire comfortably. Most of my friends are in their 30’s and understand that working till later than 65 is a scary action plan.
They don’t necessarily want to retire early or play golf and jump on their yachts, but the option to not work when they are older is the retire comfortable option they desire.
The action plan for this is to become a Super Saver a term coined by Fidelity. The definition is based on saving 15 percent of your income for retirement, this number also includes a company match in the percentage if available.
For a number of reasons like inflation, longer life expectancy, and the desire to retire comfortably, this is where I work with my clients to start, not finish.
Imagine you have no debt besides your mortgage and an emergency fund that allows you to sleep at night, this is what I work to obtain with my clients. Contributing 15 percent of your income is easily attainable after you have gone through brick by brick to lay your road to financial freedom.
Many of my clients have done very little to this point in retirement savings and why I emphasize becoming a Double Super Saver. The goal is to save 30% of their income.
If you are 35 years old with $0 in savings for retirement, time is no longer on your side to retire comfortable and early. Want to retire at 60 years of age? You have only 25 years left, it’s almost imperative to be a Double Super Saver.
In the Shockingly Simple Math to Early Retirement, Pete Adney aka Mr. Money Mustache provides a savings rate chart that works out to save 30% of your income will leave you with 28 years until retirement. In this scenario, you would be 63 years of age and no longer need to work.
All of these figures and scenarios I mention are “ballpark” answers. Personal finance is personal and each situation will vary.
Since each situation is personal I recommend keeping track of your investments. For our investments, we track everything through the free website and app Personal Capital.
It allows us to see everything in one place including our investment holdings, balances, performance, allocation, and sectors. Personal Capital also allows us to see the big picture with our overall net worth and even do an investment checkup with a retirement planner and fee analyzer. If you sign up using these links I may earn a commission from Personal Capital, that’s my transparency guarantee.
If I can coach my clients to save 30% of their income, I’ll leave the details to a licensed professional later in their journey. One could make a pretty good argument to listen to Warren Buffet and invest 90% in a low-cost S&P 500 index fund and 10% in short term government bonds.
The first brick on our road to financial freedom was to write down the 3 things you value most in your life. This originally was done to make sure your spending matched to what you value the most in your life today.
It’s also important to realize why you are doing all of this. Why am I even paying off debt could be a question you ask yourself after you see a friend or family member buy a new Ford F-150.
It’s easy to throw your whole plan away if you don’t have a clear picture of what’s important to you.
I clearly know my values are my family, specifically my wife, travel, and health & fitness. For example, as a family, we prioritize trips and vacations with each other when we are spending money. Eating organic food, grass fed beef, fresh vegetables, and working out at my local Crossfit gym are far and above more valuable than buying a new vehicle, in fact, it’s not even close.
These same values apply to the rest of your life and your money. It’s more important to put your money where it brings the most value.
Also, I use the term “value” a great deal, but it’s just as easy to replace “value” with the word “Happy”.
What makes you happy? Would financial freedom make you happy?
What’s great about building your road to financial freedom really is the last brick. This allows you to save money for that family vacation, new vehicle, or whatever brings happiness into your life.
If creating financial peace of mind for your family is important to you then paying off your house a few years early will bring a TON of value and happiness to your life.
Maybe like myself you came out of college and had entirely too much student loan debt and want to make a wrong a right, creating a college fund for your children will bring you joy and happiness. We all want a better life for our children, maybe this is your top value.
The possibilities, values, and what makes you happy could lead to donating money at your local animal shelter. It could lead to giving a homeless veteran a warm bed and a meal. Whatever cause you choose it’s all up to you.
As you can see this final brick is really open-ended and specific to your situation. Dave Ramsey’s final baby step says to “build wealth and give” and I think that’s a great last step but I don’t think it truly matches with what each person values.
I’ve said it a number of times here but personal finance is personal. When I work with clients it’s important to understand that general advice is a good starting point but you are unique and have your own story.
Over the last decade or more of my life, I created these exact steps. I made errors along the way and adjusted each step accordingly to make a better path for the person ahead of me. If you follow each brick this will create the foundation of your road ahead and to a path of financial freedom.
Today my wife and I are on the last brick as we put money towards the values in our life that truly make us happy. It’s an amazing feeling to be where we are at today financially, it took many years but it’s a rewarding journey. I hope you will join me.
If you are looking for a guide through each step as you lay the foundation to financial freedom brick by brick, I am available as a money coach.