Let’s be real, money can be overwhelming, period. Add to that a society built on consumerism, aesthetics, and status and you have a recipe for anxiety. It seems like we’re all working harder and harder just to live and to be honest, financial independence can seem like a pipe dream to many of us. Many people don’t even know how to define financial independence or know when they’ve achieved it. While getting there isn’t always easy, it is possible.
Building wealth and getting clarity around your finances doesn’t have to be daunting or stressful. In fact, with the right practices instilled, it can be wholly liberating.
Let me back up for a second. A few months ago, I started working with a financial client to get their finances in order, evaluate the profitability of their business, and progress their financial health. In their case, it has been difficult to balance their accounts and get them to practice new habits. However, our client has admitted seeing the shifts has been motivating and even empowering, and they know they’re setting up my future self for a better life.
If you want to be one of them, then read on to educate yourself about debt, value-based spending, the best saving habits, financial freedom, and the key components that lead to financial success. It won’t be easy to implement these new habits, but you certainly won’t regret it.
Paying off credit card debt
The average Canadian household has an average of $13,000 of credit card debt. And that is the worst kind of debt. But not all debt is bad. Debt with a plan can actually be really good for acquiring assets. When we talk about bad debt, we are talking about consumer debt. And the reason it is so bad is because of the three little letters: A. P. R. or Annual Percentage Rate. That is the amount of money you are paying for borrowing money. Take an APR of 20%. That means every time you spend $100 on that credit card and can’t pay it off, that $100 item is actually $120.
Our recommendation is to educate yourself about finance and further, to become more aware of your status. Your credit score is like your adult GPA. Pull off the bandaid and become aware of your APR rates, your credit score (which you can get for free) and make a plan to pay it off. One of the methods is the Snowball Method where you focus on paying off the debt with the highest APR or the highest balance first.
Determine your priorities
When you prioritize debt, think about high interest versus low interest. Mortgage rates, for example, can have an interest rate as low as 3%, making them less pressing. Whereas, credit cards with high APR rates need to be aggressively paid off.
Paying off debt and building an emergency fund need to work in tandem. If you don’t have that backup savings account, then you may find yourself on a slippery slope back into debt if something unexpected happens. Being in debt is stressful so you will feel more compelled to rid yourself of that burden. High interest debt steals from your wealth; values-based spending helps you get in alignment with building wealth, and an emergency fund protects your wealth so that you don’t slide back into high interest debt.
Practice value-based spending
The first step is awareness: know what you’re spending. Look back at the last three to six months of spending and analyze how much you’re spending on your lifestyle. We often assume that we’re just paying for rent and food but our brains want to rationalize that we’re on our best behaviour, so it doesn’t allow us to think about all of the subscription boxes.
Value-based spending is a lot easier than budgeting. Setting a budget can feel restrictive, like being on a diet. We’re good for a week and then we see a pair of perfect shoes. That instant gratification won’t be gratifying for long because it’s not aligned with our values. Once you determine three values that really matter to you, you’ll find that they can function as a filter. An example would be equity, family, and leverage when you’re willing to spend money on things that help make life easier. Buying the shoes doesn’t align with any of those pillars, so it needs to be a preplanned choice.
Open a high-interest savings account
Saving is the inverse of spending. Think of something like Parkinson’s law to explain why we fall into the habit of over-spending. Parkinson’s law states that work expands to fill the time available for its completion. Basically, any one thing can shrink or contract to the size of its container. In relation to money in a bank account, the reason you end up spending what you should be saving is that it’s right there, visible, in your checking account. We encourage people to open a high-interest savings account and automating transfers on a monthly basis. That recurring act will give you accessibility to only what you should be spending.
We are not talking about a regular savings account. The average interest rate on a bank savings account is about 0.1%. That means if you have $10,000 of your emergency fund sitting in bank savings, you’re making a dollar. If you move that money to a high-interest savings account, you’ll make a much better profit.
Understand financial freedom
Financial freedom is an equation: enough passive income to outpace your expenses. When you have financial freedom in your life, work becomes an option instead of an obligation. This is not vying for young people who are financially free to stop working either. It is simply saying that having that choice can liberate financial stress and even lead to more contentment in your career.
Financial freedom allows you to enjoy your wealth because time is no longer a finite resource. When you go to work, even as an entrepreneur, you are trading time for money. But, if you can buy assets to create additional income, then you are trading money for assets that bring you more money.
If you get on this train and educate yourself, you will find that you don’t always have to rely on yourself and your body to make money. It takes a lot of time, effort, and sacrifice to get up every morning and go to work. We all want more time to enjoy our lives, not just work for a living.
There are six qualities that every wealthy person should try to encompass:
Planning – Determine your financial goals, write them down, and find an accountability partner. You can’t get what you want if you don’t plan for it. When it comes to money, you have to be goal-oriented.
Frugality – Commit to saving more, spending less, and sticking to a plan. This formula leads to an ability to have a passive income because if you spend all of your money then there will be nothing left to invest it.
Confidence – In order to gain financial confidence in managing your money and investing, you need financial education. We didn’t learn this in school. You have to go and find it, otherwise, you will stay in a state of stress. Inaction is terrible for your finances.
Responsibility – Accept your role in financial outcomes and take action to make financial changes in your life.
Focus – See your process through to completion one step at a time. Accountability is crucial.
Indifference – Don’t succumb to buying the latest thing as a means of feeling good. If you practice this, it will change your life. We are the targets of consumerism. But, if you appreciate how you look and how you are inherent, you will save yourself a lot of time, money, and energy.
It is hard work identifying what financial independence means to you. It is more then just money. Achieving financial freedom is the first step, but maintaining it is the rest of the battle. We need to modify and attune our wants, needs, abilities and habits. Many people have achieved financial independence but have also lost it. Some have a see saw battle between having it, losing it, and regaining it again.
That’s where planning is key. A financial life plan that is reviewed and modified at least on an annual basis or as you are experiencing changes in your life. Changes that are bad or good, chosen or imposed. That is why working with a professional mentor or coach, your financial life planner, is a great strategy. One Keeping Life Current.