Why don’t you have any savings? Emergency savings? The answer is most likely very simple. Humans like buying stuff. It brings us joy to consume. The moment we have an ounce of surplus money, why let it go to waste? Afterall, you absolutely NEED that new wall decor.
But I think it goes a bit deeper than that. We don’t save, because, other than our elders telling us to, we don’t ask the why’s. Why should I keep a surplus of funds? An unexpected repair? That’s easy! Just use credit cards. Problem solved.
If we give ourselves a good reason to save, such as saving for an income producing asset, we may then be much more inclined to pass on stuff we really don’t need. A clear cut path to financial freedom can also help, which is the ultimate goal of this article. It just takes being exposed to a little bit of knowledge. Here are 5 steps you can take to get you on that road.
1) Set Up Automatic Deposits Into a High-Yield Savings Account
When people say they don’t make enough money to save, they’re either lying, or they really should pick up a second job and/or do some major cutting of their monthly spending. I believe the vast majority of us can save at the very least $25 dollars a paycheck.
A high-yield savings account in a nutshell; The bank pays you, monthly, on interest for your money sitting there. (rates are hovering around a 4.00% interest rate at the time of this writing) Most accounts will offer daily compounding interest.
As a simple first step to begin creating a pile of money, consider opening up this savings account that your paycheck will automatically deposit funds into. Setting the automatic deposit into an account is the key to tricking yourself into saving cash. You will budget around what's in your checking account, forgetting that money has already been added to your savings. It will take minutes to set up this type of savings account online. (Talk to your employer to see how direct deposit is set up and add this newly created account.)
A high-yield savings account I believe is one of, if not the best first building block of investing and gaining wealth. There’s no investment more passive (making money without doing anything) or more liquid (readily available, like cash). Plant this investment seed today.
2) Adjust Your Attitude - Fix Your Mindset
This may be the hardest step on this list because we’re all flawed humans that like to compete with other humans. One universal spending habit that will get you into trouble quickly is buying luxury goods you can’t afford so that people will think you can afford them. How pitiful. (I’ve been guilty of this too) But until you've reached financial independence, it is the smartest idea to punt on purchasing things you don’t really need, at least momentarily. Accumulating a surplus amount of cash will not only provide security for our livelihood, but will open plenty of other opportunities.
With a surplus of cash, we can create passive income revenues. Passive, as in not doing squat and getting paid. That may sound way too difficult or just plain boring but one thing is for sure; The more cash we save, the higher the potential of cash flow we can produce.
If you have a bad attitude about anything, you won't succeed. Start building habits of focusing
It’s time to deter emotionally charged purchases of things that you lie to yourself about thinking you need. But this is just temporary. In no time you’ll be able to spend lavishly on consumer items to show off to people that don’t care. Only this time you won’t be faking charging it.
There are hundreds of books out there that explain how important this step is, and for good reason. You’re going to need cash to purchase assets. Collecting income-producing assets will increase your monthly income, slowly rendering your 9-5 expendable. There are workarounds (using credit cards or loans for down payments on houses). However, there is immense power that comes with a surplus of readily available capital.
Becoming wealthy or financially independent is very much a choice but first you must get your attitude right about money. The next 3 steps will help with this.
3) Make a Budget
By now, you’re building savings, your money is earning interest that is now monthly cash flow, and most importantly, your head is right. Now it’s time to get your monthly budget in check.
This will act as the proverbial guard-rails on your journey to escaping the rat-race. After all, if you don’t know how much money you’re spending per month, how are you supposed to know how much to put into your savings account? Don’t worry, you won’t need to hire a fancy accountant. Start one by simply tracking and putting monthly spending limits on food and entertainment. Cancel all unnecessary subscriptions and cut down on every bill necessary. Call around for cheaper car insurance, check for lower tier phone plans, and check for cheaper internet in your area. Most importantly: Stop, spending, money, on, things, you, don't, actually, need.
Congratulations. You’ve planted yet another seed that will eventually help you on your way towards freedom.
4) Sell Your Ass!
Ass-sets, that is. You may be a collector of things, have a bunch of “stuff” laying around, or if you’re extremely lucky, you’ve purchased toys over the years (like me) with the intention of later profiting. There’s an old adage: “If it don’t make money, it don’t make cents. (sense*).
You may think you have nothing worth of value, but what I've found is that people will buy anything. There are a lot of ways you can sell your stuff - Facebook Marketplace and eBay are two popular options. Local flea markets will let you sell items at a space for cheap. If you have valuable antiques, you can also rent a space out in a consignment shop and they'll sell your stuff for you!
Selling your ass-sets is a great way to pay down your debt before touching your sweet hard-earned cash. As you’re paying down debt by selling assets, you can also begin to use the money that your high-yield savings account is paying you to help pay down debt as well. This way your cash pile is growing and not all being spent on debt. Most people are quick to spend all their extra money to pay down their debt. It is important to keep a healthy savings balance that will allow us to buy passive-income investments. More on that later.
Woah! The seeds are sprouting.
5) Start Paying Off Debt Using the Snowball Method
The snowball method is a debt repayment strategy where accounts are paid off in order of size, starting with the smallest balance and moving on to larger balances. This is not an original idea - a lot of finance gurus will introduce the same method.
Why? It works.
How? Keep reading!
Since you mostly likely have a short attention span like I do and are probably pretty sick of reading this article already, I’ve broken down the snowball method into 3 simple steps:
What we don’t want to do is tell ourselves that since we just freed up a monthly payment, time to add more to our debt balance sheet. Help you, help yourself. What this payment strategy does is it establishes momentum, or a snowball effect -hehe- to paying off your debts. There is a psychological effect at play here - when we accomplish little wins, like paying off credit cards, it will inspire motivation. Motivation is critical to achieving any goal. There are strategies that will advise us to pay off the highest interest debt first, but since your mindset is important in your journey to financial freedom, I have found it most effective.
There is another magical thing that happens when you pay off debt. Your credit score improves.
6) Bonus!
I lied - How can you trust me and my personal finance ideas, now? We’re not getting off on the right foot are we..
There is a 6th step I would like to add as a bonus. With your newly improved credit score, it’s time to take care of those high interest rates on your higher or left over debts that just won’t go away. The balance on them may be moving down slowly, or barely at all. That’s most likely because most credit cards for example can hit you with a 24% interest rate on your balance. I won’t get into the math. That’s awful.
Because you’re a rebel and didn’t listen to Dave Ramsey, you are primed with a nice credit score. With it, you can consolidate your debt into an account(s) with a much lower interest rate, or no interest at all for a period of time.
There are currently many credit cards that are offering 21+ months of 0% interest on balance transfers.
That’s not a typo. Yes, it is common to transfer your debt to 0% interest credit cards. (There is typically a small one-time transfer fee of 3%, but it is most likely worth taking that initial hit to save on an extremely high APR that you’ll pay for the life of the card).
I’ve met a lot of people that are scared to open another credit card again, or simply just don’t know that these offers are available. At the time of this writing, here are some current offers:
Capital One
0% Intro APR on purchases and balance transfers for 18 months
Discover
0% Intro APR on purchases and balance transfers for 18 months
Wells Fargo
0% Intro APR on purchases and balance transfers for 21 months
Bank of America
0% Intro APR on purchases and balance transfers for 21 months
You can also visit local credit unions to see what their current specials are for transferring credit card debt to personal loans with lower interest rates. If you’re lucky, you can find offers with $0 fees on balance transfers.
Nearing the end of the 0% APR intro rate term? Transfer that balance to a new card with the same 0% interest rate term. Again, you may have to pay an initial balance transfer fee with most card issuers. However, the amount in total interest you will save should be substantial since a standard interest rate may be in the 19%-24% range. Ouch.
One thing to note: You may want to wait to apply for a new credit card or loan until your credit score is in good shape. FICO score ranges tell us that anything above 670 is considered “good”. Your situation might be unique, but it will be a better idea to wait until your score is in this range before consolidating.
That’s it. 6 steps you can take today that should improve your financial health and get you on your way to financial freedom. These are small seeds we can plant today that will blossom into wonderful, beautiful trees in the future. That may or not be the last time I use that terrible metaphor.