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Three Steps To Financial Freedom

By Blanchard Warren, CFSL  

The first, and perhaps the most important step, is to live within your income. In today's society, this may seem like a foreign concept. It wasn't always that way. In fact, prior to the advent of credit cards in the 1950s, living within one's income was commonplace. About the only credit available was a home mortgage and a car loan. The terms of these loans weren't as liberal as today. There was no 30-year mortgage. You couldn't finance a car for more than three years. Sure there were store charges, but they weren't revolving charges. They had to be paid for at the end of the month.

Homeowners made do with what they had. Appliances, cars, etc. were repaired rather than replaced. If money weren't available for an item they wanted, or even needed, the mind set was to wait until they could afford it.

With the economy and unemployment as good as it is today, many Americans think only of the present rather than their future needs when spending their income. The feeling is if we can pay our debt service each month everything is OK. So we continue to create new debt until we can't afford any more debt. Unfortunately, some go past this point without a thought of the consequences until it is too late.

Most consumers fail to realize is by having credit debt, including a mortgage, they are seriously jeopardizing their ability to create retirement wealth. The fact is most Americans are only two paychecks away from insolvency because of their spending habits.

The second step is to pay yourself first by paying off all your debts, including your mortgage, before investing or even saving. This is an unique concept to the financial planning community.

Paying off a credit card with a 15% APR is the same as receiving an equivalent return of 15% from an investment. In addition, this return is guaranteed. Ask your stockbroker to guarantee the percentage of return on any stock he recommends.

Using the model of the average American family that I use in my seminars, I show that this family would realize a 37.13% return on their money by investing in their debt of $169,341 first.

Furthermore, let's assume this same family invests 10% of their monthly gross income ($427) to get rid of their debts first rather than investing it in an investment vehicle yielding a 10% return. The long term result by investing in their debts first is they would build a retirement nest egg of 1.8 million dollars over the same the same period it would have taken them to pay off their mortgage in the normal way. The person who invests first would accumulate about 500 thousand dollars,  700 thousand dollars less. Both families established a six month cash reserve.

After all your debts are gone, the money you were using to pay your debts is now available for investing. To become debt free can take from 5 to 10 years, many years before the time required to pay off the mortgage alone. What also is important that by freeing yourself from debt you are not vulnerable to financial misfortunes such as a loss of income. You probably could survive on unemployment compensation if necessary.
The third step is to create wealth by investing your money in low risk investments over a long period of time. A debt free 60-year-old may not have enough time to build real wealth. However, without debt even the 60-year-old still can enjoy a debt free lifestyle. On the other hand, someone in their thirties or early forties could conceivably amass over one million in retirement wealth. One million dollars is the nest egg amount USA Today said on May 8, 1995 that the average Baby Boomer earning $50,000 annually today will need to retire to enjoy the same lifestyle they had before retirement.

It is recommended you invest for the long term using dollar cost averaging. This means investing the same amount of money each month no matter what the market does. It may be wise to invest in an indexed mutual fund such as the Standard & Poors 500 that returned 14.3% during the period from 1985 to 1995. My intent is not to give investment advice since this isn't my are of expertise. Rather, I am suggesting a way to invest for the long term without having to learn the ins and outs of investing in the stock market. 

The rewards by following these three steps are immeasurable. Think about how much disposable income you would have when you have no debts. I suggest you calculate the amount of money you spend each month on debt payments. This exercise might prompt you to really consider becoming debt free. Without debts perhaps your life would be less stressful. Your marriage and family life might be more enjoyable. You then could build wealth for a happy, comfortable lifestyle.

Start today by living on less than you earn. Next pay off all of your debts before saving or investing.. Then build retirement wealth by investing the money you were putting towards debt payments in conservative, low risk investment vehicles.  

Remember most Americans believe that "everything will just work out." It doesn't work that way. You must take action to build real wealth and to achieve financial freedom.

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Category:  Money

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