Each summer we take pride in celebrating the Fourth of July, the day that commemorates the 1776 adoption of the Declaration of Independence, which proclaimed our nations freedom from England (United Kingdom).
This Fourth of July, as we consider our freedoms, and consider what we can do to keep our nation great, Americans can declare their own personal financial independence by making a commitment to become free from the bondage of debt.
The stress of unmanageable debt has destroyed marriages, shattered families and contributed to lost jobs. No one ever plans for financial ruin as a part of their life, but when financial distress occurs, it is a very real part of a person’s daily activities, as debt is a burden people carry with them 24 hours a day.
Fortunately, there is a way out from under the oppressive weight of debt. The first step is creating a plan that works for you and your situation. In honor of the Fourth of July, I would like to share some principles of financial freedom:
Earn more than you spend! Most of us would agree that earning more is better than cutting back. However, until you earn more, you should practice general principles of frugality, and strive to get the best value for your money. This is the #1 rule of personal finance, and the best way to achieve financial freedom.
Prepare for the future! Build an emergency fund and contribute to a retirement account. Adequate insurance is also important if you are series about protecting your assets and your Family’s financial future. Make sure you are ready for the financial problems that can so easily arise.
Start paying off credit cards for good! Considering interest rates on credit cards are well into the double digits, freeing yourself from this debt is crucial to your finances. You can stop committing financial treason against your future self by committing to a pay-off strategy today. The snowball approach is one of the most popular methods for debt reduction. Breaking conventional wisdom, this strategy ignores interest rates. Pay the minimum amount required on all credit balances except the smallest. Place as much money as you can towards the smallest balance until it’s completely paid off. Then take the money you were using on that card to apply it towards the next smallest balance until that one is paid off too. Repeat this process until you have zero credit card and loan debt.
This approach is best for people who get discouraged easily. Sending the majority of your monthly debt repayment to the balance with the highest interest rate is more efficient, but it is called personal finance for a reason. Some people need the satisfaction of paying off balances to keep them motivated. Use what works for you! Once you have zero credit card debt, adjust your budget so you pay off any credit card usage each month. This allows you to avoid interest charges and build good credit.
Take the free money! Freedom is not free, as the American saying goes. But, financial freedom does involve taking advantage of what is free, such as a 401 (k) match. We should celebrate the 401 (k) match as we celebrate the Fourth of July. Ignoring a 401 (k) match is like ignoring free money. At a minimum, you should save enough money to take full advantage of any 401 (k) match. For example, if someone is earning $50,000 a year and works at a company that offers a 50% match up to 6% of pay. The saver would receive a $1,500 company match on top of the $3.000 he or she contributed to the 401 (k) plan.
Take a look at your automatic bill payments! Are exorbitant internet/television packages, unused gym memberships and smartphone plans depleting your bank account? Paying attention to spending shouldn’t only involve reducing household expenditures. Increasing some monthly payments may save you money in the long run. Many people have their mortgage on automatic bill pay, because it must be paid to maintain your shelter needs. But, instead of just paying the minimum, extra principal payments can reduce how much interest you pay over the life of the loan. Paying an extra $200 a month on a 30 year fixed rate mortgage will save the homeowner thousands in interest payments.
Give to others! Part of a well-rounded financial plan is giving to others. It may seem strange that giving away resources can contribute to financial freedom, but it does. Whether you give to your church, a local charity or a national cause, giving can be a stepping stone on the path to financial independence. When you plan to give to others, it forces you to take a look at your financial priorities, and to better manage your money so that you can afford to help others.
On this fourth of July, reflect on our great nation, our freedoms and your personal situation. Take some time to consider how you can improve your own financial independence. You might be surprised at what you can do to further your journey on the path toward financial freedom.