Celebrating Your Financial Independence
Words by: Bryon Gragg
Published July/August 2012
During this time of the year, Americans’ thoughts turn to freedom and independence. Across the nation, we celebrate our Declaration of Independence with fireworks, parades, cookouts and baseball. On July 4, 1776, 13 colonies declared they would no longer be subject to the rule of the Kingdom of Great Britain, giving rise to a new nation. Unfortunately, many Americans are under a different type of oppression today and the worst news is that for the most part, it is self-imposed.
Consumer debt, student loan debt and credit cards impose a huge weight on many Americans today. Our society has endorsed the “buy it now, pay for it later” mentality that causes many to get in over their heads. Don’t get me wrong, debt is not necessarily bad; in fact, in many cases, it makes perfect sense. Would you ever own a home if you had to pay for it all at once? Is it appropriate for a business to use all its working capital to pay for its growth instead of using someone else’s money? Using debt wisely can be a very good thing; it is the unwise use that gets you into trouble.
Financial freedom isn’t defined as having no debt, but instead, having other assets greater than the debt. Financial freedom allows you to do the things you want to do on your terms. There is a misconception that financial freedom is only available to the wealthy. Being financially free can really occur at income levels most wouldn’t consider “rich.” It doesn’t take a high income to be financially free, and, conversely, having a high income doesn’t necessarily translate into being financially free.
How do you achieve financial freedom? In theory, the answer is simple: Spend less than you make. It takes discipline, desire, sacrifice and hard work but with proper planning it can be done. Saving money is obviously a part of the process, through retirement savings at work, individual savings and development of your safety net. Having a plan and implementing the plan are keys to success.
This column started with the subject of debt, which is one part of the financial planning process. In order to develop a plan, you have to start by documenting where you are. This entails sitting down and listing all of yourdebt in a schedule. Mortgages, student loans, auto and boat loans, home equity loans and credit cards should all be listed with the balances and interest rates.
You say you haven’t looked at your interest rates lately? It is important to know what your interest rates are as well as the current rates that are available. While interest rates are at near historic lows, it may be a good time to refinance your home or make other changes to your debt structure. If you are alarmed after compiling your list of debts and are in a hole, the first course of action is to stop digging. It sounds simple but you can’t climb out of debt while still accumulating it.
The next step is to rank your debt by interest rate: the higher the rate, the faster you want to pay it off. It is often helpful to develop a schedule which tracks the total debt, the interest rate and your current payment schedule. Start by allocating more of your payments to the higher interest rate debt. Once you pay off that debt, start allocating more to the next highest debt. Debt can be looked at like the question, “How do you eat an elephant?” The answer is, ”One bite at a time.” Keep taking bites out of your debt and then move on to the next piece. If your mortgage is the highest rate of debt that you have, please back up a couple lines and review the information on refinancing.
Many people think financial freedom is an unachievable goal. While investment management, insurance and tax planning are all additional pieces, debt management is one that isn’t discussed as much but is just as important as the others in achieving financial freedom.