Six Steps to Creating Financial Liberation

When it comes to building financial independence or what I like to call financial liberation, there are six core steps needed to build a solid foundation. In this episode I will walk you through them and break each one down giving you some action steps to put towards designing your own plan. 

Transcript

Speaker 1: 0:10

Hello and welcome to the six steps to Creating Financial Liberation. Today I'm going to go through what the six steps are and dive a little bit into each of the six steps. Then I encourage you to come back to the following modulars, where I will then take each of the different steps and break it apart and spend more time on each of the six steps. Not only will I be sharing practical wisdom that you can put in your own life, but I will also share ideas that you can bring to the youth in your family, whether it's your kids, grandkids, children or kids that you know. My favorite friend saying is, the best time to teach kids money management skills is when they're born, well , maybe two, maybe three, maybe four, maybe five. Anything older than five, they can understand the lessons. So I will share with you Tibit , on how do you share these Now , these ideas that I put in the modulars with the youth in your life, so that not only do you become financially solvent, but you can ensure that when they grow up, they have the financial foundation to set them up for a good life, set them up for financial liberation, which will take out a lot of the stress that people have in their lives. In fact, I would say, well, I wouldn't say statistics say that most stress, well situations, divorce, death, et cetera , the habits of people's lives often happen over money. So my goal is to make sure that you are set up to have control over your financial life, that you are able to create a solid financial foundation to ensure that you have the peace and the success and happiness in your life that you deserve. So now let's look at the six steps. Step number one is cash flow . Now, cash flow is the lifeblood of one's family's or personal finances. If you're a business or owner or you have a business, cash flow will make or break your business. I'm going to talk about it from a personal level though, because most of us find ourselves in that situation cash flow . What do I mean by that? Money coming in? Money going out. So as an example, if you have $3,000 a month that you get paid, that comes into your life, into your bank account every month, how much of your expenses are eating that $3,000. Let's say you have 3000 coming in. Do you have 25 going out? Do you have a surplus of $500? If you have 3000 coming in, do you have 3000 going out and you break even and there's no money left at the end of the month? Maybe you have 3000 coming in and you have 3,500 going out and now you find that you have more month than money. Question is, is how do you solve for making sure there's a surplus and not a deficit in your personal finances? The first step, I know the word budget is like a four letter word for a lot of people. If you don't like the word budget, let's look at spending plan. Do you have a spending plan in place that dictates how you control the money that comes in, how you can control the money that goes out? The next question though, and I would uh , take it one step further, is don't just treat it as a spending plan. Treat it as a job description. What I mean by that is the job of the money coming in at $3,000 is to support your lifestyle. The job of each dollar going out is to solve part of that lifestyle. So let's say your mortgage or your rent is a hundred, I mean a thousand dollars, most people might be a little bit less, probably a little bit more, but for the sake of this example, let's say it's a thousand dollars. So 3000 comes in, a thousand goes out to mortgage. That first thousand's job is to pay the mortgage or rent. Part of it now is food. You's gonna have food with the meals. So assign , uh, amount that you're going to use to buy food with. The job of that is to make sure that you are fed and nourished. Part of it is utilities, water, electricity, all of the different things that come into the household and expenses that you need to cover. And then there's many other expenses on top of that. One of the things that I'll do is I'll put together a budget that you can, or a spending plan that you can help keep those in check with. But again, the goal is having enough money coming in to cover the money going out. If, and a lot of people I work with are actually in a situation where they have 3000 coming in again as an example, and 3,100 or 3,200 going out. So they actually again, have a deficit. What do you do there? The question is, is of those $3,200 going out, what can be changed? You really have two options. Either you increase your revenue or you deduct or decrease your expenses. If you can't increase your revenue, which most people find themselves in that situation, they only have to go to work on your expenses. Don't try to tackle a bunch of expenses at one time though, because that's overwhelming. Do what I refer to as percent bites . Again, $3,000. So if you have 1% of that would be $30. If you have $3,200 going out, 3000 coming in a deficit of $200, the goal would be to figure out how to reduce your expenses by roughly 4%, 3%. If it's 3% of that, it's $300. So let's say you could do it by 3%, that $300, now you are down to , uh, surplus instead of a deficit. So look at 1%, 1%, 1% to get the expenses down to where you break even and then continue to switch it down from there. So now you are able to create a surplus in the money coming in. Again, if you try to do too much too fast, it's overwhelming. So make sure that you are able to do it in small increments, small sizes. And usually if a person is spending 32, 30 $300 a month on expenses, some of those things, maybe it's going out to eat , you go out to eat twice a week, cut it down to one that could do it right there or there's different expenses. What in expenses, and I'm not saying you have to do this forever, but what things can you cut out right now to get your deficit gone? Get it to where you have a surplus and now when you start to bring in more money, your wealth starts to grow, then you can bring these things back. This is a short term fix to ensure that you have positive cash flow coming in because the cash flow is well dictate the quality of life that you have. So that's number one. Number two is proper protection insurance. The average person spends a fair amount of money each month in insurance. Could be for your car, it could be for your house, it could be for your health. There's lots of different things. We spend money on insurance. First, make sure you are properly insured, meaning that you have enough assurance to cover the what ifs in your life that really helps reduce the stress. On the other hand though, I highly recommend if you don't sit down and have a conversation with your insurance professional at least once a year, find someone who will do that with you. Because every year our insured situation changes. So make sure that you have enough money coming in to ensure that you are properly insured so that if something were to happen as an example over the last couple years, the cost of rebuilding a house. If you own a house and the house got leveled somehow and you had to rebuild it from the ground up, it was gonna cost a lot more today than it would've five years or 10 years ago. So if your insurance is still ensuring that five years ago house, you're underinsured there, you need to increase that to make sure that that is covered. On the other hand, make sure that you aren't paying more. If you buy a brand new car, your insurance is going to be one thing because of the blue book value at that time, within a year or two, the value of that car is gonna drop down. If you're still paying the high insurance amount on the new car cost, you're uber insured, so you want to drop it down to what the car would be worth if it got totaled and you have to replace it, what would that be? So again, every year you should be sitting down and looking at your insurance and seeing are you uninsured? Are you over-insured? And either one is okay, just make sure you understand. Well, it's not okay if you're over-insured, make sure that you bring it down to where you're properly insured and then you can put that into your spending plan. If you are underinsured though, now you might have to take a little bit of money from your spending plan to bring it back up so that you are properly covered. If you are properly covered and something bad happens, if bad happens, it's gonna be hard in its own right. You wanna make sure that financially though you are covered so you don't have that on top of that, again, reducing the stress in your life. Number three, emergency fund . Now, I didn't really like the term emergency fund. I like the term , uh, possibility fund because I find that if a person sets aside and then if I end she'll speak, they often talk about making sure you have an emergency fund of six months to , or three months to six months in case something happens. You lose your job. As an example, if a person is moving in that mindset, remember our , well our brain will bring to us what we think about. So if we're looking for making sure we have enough money to cover emergencies, guess what? We're probably going to attract emergencies into our life. If you look at it as opportunity, possibility fund , now that additional money you put into that account can go to bring more opportunities, more possibilities into your life. At the same time safeguarding you against something that you don't want to happen happen to . That said, not to get off on a philosophical tangent here. Three to six months, 12 months is ideal. Three to six months though of your expenses. So again, you have 3000 coming in. You have, let's say you've done a great job with your, your cash flow , you've got your insurance in check and you now have 2,800 going out. So you have a surplus of 200, right? You wanna have three times 2,800. Your monthly expenses, which would be 6,000, three times eight , 8,400, something of that nature that is in a liquid account could be a money market account. So you can get a little bit of interest on it, but make sure that you have it set aside so that if for some reason that income stops, you now can draw from that to cover those expenses. Again, six months, most people are able to get rehired or figure out how to recreate that income within a six month period of time. So more than that's not a hundred percent necessary, but you never know. My wife has an example. She lost her job, but because we had enough money to cover our expenses for a year, she was able to take one year, put all her time into building a new business without having to put money into the business or take money out of the business and put it into our family. So within a year, she built a very strong business and then could put money back to rebuild the savings. So we're again, stress load. The more safety buckets you have in place, the less stress you're going to feel because you know that if something does happen, heaven forbid you have the resources to cover it , to take care of it. So cash flow , proper protection opportunity or possibility fund. Number four is debt reduction. What are you doing to reduce the level of debt in your life? Do you have credit card debt? Do you have a car loan? Do you have a mortgage? A lot of times going back to a $3,000 coming in, the average person, a good 50 to 60% of their outgoing money is to cover debt to make sure that they're paying back the things they put into your life, the car credit card, et cetera . So when I go in , I'm gonna go a lot more into the how-tos, how do you reduce your debt, how do you make sure that if you have a lot of credit cards, all of that stuff, how you start here and you do it to kind a snowball effect where you continually widget it down to where you are eventually debt free . For right now though, just know that there's good debt and bad debt. Good debt are things like a mortgage, a car. If you need to get to work, things that will enhance your lifestyle as, and you have, if you own a house, the house isn't gonna go up in value. Therefore, yes, you have a mortgage against the house, but if you're paying rent of a thousand dollars a month, the rent's gone. You're paying somebody else's mortgage. If you have a mortgage and you pay a thousand dollars a month, maybe one or 200 of that will go towards the principle and the rest is interest, which doesn't really help you, but at least a couple hundred is going to be your debt reduction. Go towards the principle. Plus you have the equity of the house, hopefully increasing. So real estate, I would argue, is good debt because it will allow you to create a financial asset and it's something you need anyway. I mean, you can rent a house, you don't have to buy a house, but again, you have to have somewhere to live. And it's something that money is relatively cheap to get into. Not so much in today's world, but compared to other forms of debt, it's relatively cheap a business, if you invest money into a business and a business is making money, that could be good debt because you're investing it into something that's going to allow you to create more money. If you have a business and it's not yet making money, then that's a whole different conversation. I'm not gonna go there. I'm just talking about putting money into debt that's going to allow you to buy or to create an asset that will bring in more money to pay down the debt so that the asset is paying for itself. In essence, credit card debt, if you have expenses going out and you don't have the money to cover it, car breaks down, you have to replace the tires and you don't have the money and the opportunity account to cover the four new tires, maybe you have to use a credit card to pay for that. That's different because it's not so much a lifestyle choice, but it's reacting to something that happened that you have to solve for. Just make sure though that while you continue to work towards building up that opportunity fund, you're the third part of the financial piece that you're also paying down the debt. And you'll find that eventually you have enough money that you can take it out of that and you won't need to use a credit card so you can keep your credit card debt down. The challenge with credit card debt is the interest rates are often very high. It can be 8, 10, 12, I see as high as 28% interest on a credit card. And if a person doesn't have a lot of money going into it, it can put somebody behind very quickly. So that I would refer to more of as bad debt because you're using it to pay for something that isn't going to have the ability to pay for itself. Back is are there times when it's necessity? Yes, but try to keep control of that so that you don't allow it to become a monster in its own right. So debt reduction, car loan's , the same scenario. If you have to buy, borrow might buy a car so that you can get to work or whatever, that's one thing. But if you have to borrow money, then maybe buy a less expensive car right now so you can have a smaller loan and then try to figure out how to again, build your opportunity account so now you can buy a nicer car later. The other scenario too is people ask me, okay, I have a lot of debt and I have some money in savings, but not much. What do I do? I pay down all my debt and then start to save money. Do I save money and not worry about my debt because so and so said that I need to have three to six months and an opportunity fund to make sure that that's covered. My philosophy is do both. If you only save money, your debt's gonna grow. If you only pay down debt, number one, your brain goes, your energy goes to where you focus on. So if you put all your energy into and focusing on paying down debt, guess what you're likely to attract into your life. More debt. So make sure that you are paying down debt, yes, but at the same time you're putting money away in a savings account and your opportunity account so that your savings account is going up, your debt's going down, and if you do both at the same time, part of the energy is going towards accumulation of wealth, part of it is going towards de accumulation or reduction of debt. Both are going to help build your wealth, both work together. And I find that when your energy is focused in that arena, you are a more in control of your budget, your cash flow , and B , you're going to reduce debt much faster because you are also putting money into the accumulation buckets. So that's number four. Number five now is when you get into the fun stuff, short-term, mid-term, and long-term savings, that's putting money into an investment account. That's putting money into a savings account. That's putting money into something that, let's say you wanna buy a car and the car you have now is fine, so you can push it out for another year, let's say, and you could buy the car next year and you have the money now that you're putting into this account to save for the short-term savings account, the extra sup , the um, extra money coming in that you can put into that, right? Your surplus income, disposable income, you can put into that. Now when it comes time next year to buy the car, maybe you can pay cash for it or maybe you can borrow half and pay cash for the remainder and now you have a much lower loan. So that would be short term , something that you're putting money towards, saving money up for that will be one to 12, one to 18 months really one to 12 months. You now have midterm. Midterm is one to two years up to five years. That would be something that, let's say you wanna buy a house and you wanna save money up for a down payment as an example. Or you have a kid that's getting ready to go off to college, you wanna help them with that. So you wanna put money there again, you wanna put a portion of your incoming money, the surplus income into midterm savings. Then you have long-term savings. That would be your 401k , your ira, the investment accounts that you have through work perhaps, or that you create on your own that will allow you to now create that long-term income, the retirement income, so to speak. So again, when you have money coming in, and it's funny because I'm gonna digress real quick. People would look at, when I sit down with the client as an example, put together a financial plan for them. They will look at me and say, but isn't your job to help me save money, to help invest money for the long term ? And that the answer is yes. However, if they're not, if the number one through four isn't in place yet, it doesn't matter how much money they save, well it matters, but not really in a big scheme of things because there's gonna be things that will happen that will take it away, that'll deplete it . The worst thing that you can do is work hard to save money and then have a life occurrence happen, and now it wipes it out. So you want to build the foundation underneath your savings to support your savings. So once you now are putting money aside for the future, you now are able to do it stress free and you are now protected against those unforeseens. Another question people ask me is, I read in a book or a financial person told me I should save 10% of everything that I make. Yeah , in a perfect world, that's true. In fact, I would argue that you should save 30% of all you make. But do you start there? Not unless you have a lot of money coming in, you don't have any expenses. If you're 12, sure, good place to start. If you are an adult, it's not so easy. So again, the percent bites start with 1%, 2%, 3% get down to 10%. And then there's a conversation too that if you have money coming in, should you take a portion of that and apply it towards tithing or apply it toward , apply it towards sharing, giving it back to help your community. The answer is yes. If you give it out in slices, it comes back in loafs. So make sure that the money coming in, you are part of your, your cash flow system. Your spending plan is earmarked to help different causes you believe in. It could be a church, it could be a school, it could be something in your organization that you are putting money back into. You're helping to feed your community. If you do that, you number one, you get great gratitude, great fillings when you help other people in need. But number two, through the law of compensation, I've seen this over and over and over again. Once income will rise, it's amazing how fast. Now , I'll share a great example of this with you. Years back, my daughter's my daughter, I have two daughters and a son. My kids and I decided that we were going to raise toys, raise money to buy toys, and we adopted this homeless shelter that was for women and kids. And our goal was to buy a Christmas present for every kid in that shelter. And it came down to a point to where we were $300 short. There were a couple toys that we weren't able to cover. And my daughter and I, she was like , I dunno , eight at the time we were talking. And I looked at her and I said, wow, what do you think? I mean, we're at this point. And it became a whole project with our family where we had, again, the cashflow , the spending plan, we knew how much we were coming in, how much we need to put to the toys, et cetera . Back to the $300. I looked at my daughter and I said, wow, we are $300 short. Is there a way to quickly raise the $300? There wasn't. I had two options. It's now two days before the deadline of when this had to happen. I could say, well, unfortunately we did pretty good kids. We got most of the toys. All we have to do is explain to three of the kids that they're not gonna get us Christmas present. Don't know about you guys. But I wasn't going down that road. Not only because I didn't wanna have to explain which three kids were getting a present, but I didn't want my kids to watch me have to do that. <laugh> . So I, and this isn't necessarily a financial strategy, but it's a story to hit home my point, and that is I had money set aside for the lease payment for one of our limousines, a limousine company at the time. I had, I could take the money outta their lease payment and use that to buy the toys, solve the conundrum There. Challenge though, was the following Monday, a few days down the road from that point, the lease payment was due. If I didn't earn the money back, lease payment wasn't getting paid. Not a good place to be for a business owner. One of those situations where I stepped out in faith and I said, my role, my job is to do with what I can with the resources I have in front of me now and trust that the rest would take care of itself. And I knew of push Kim Shov , I'd figure out how to come up with the money to cover that bottom line. I wasn't totally foolish. Not the smartest, but not really foolish either . That said , we went and bought the toys, we delivered the toys. It was an amazing experience. Everything was good except the next Monday I woke up thinking, okay, now what went to the mailbox? In the mailbox was an envelope. In the envelope was a check and a note. I had done a limousine service, a birthday party for a family two years in the past. And they wrote me a check for, it was like $360. And the check bounced. Actually, no , the check was for like $320 and the check bounced the family then moved out of town. I didn't think I would ever see the money again. So I wrote it off. One of the things you're doing business in a situation like that, in this envelope was a check and a note that said, I am so sorry for having the check bounce . My family and I hit some hard times. You made my daughter's birthday very special that day. And for that I wanted to make sure that you were taken care of for that. Here's the money for the party or that they owed me. And here's a little bit more for the troubles. The check was $1 more than I spent on the presence. Again, if you properly plan, if you properly put in place the steps to ensure that your financial foundation is solid, the other piece is take care of themselves. So again, cash flow , proper protection, opportunity fund, short, mid, long-term savings. Now go in again, more detail on all of these in future modulars. And then number six is estate planning. Because as much as you can do to build your foundation in place, true financial liberation includes creating a legacy. True financial liberation includes having the money to support things again that are important to you. For us, it was this shelter and there's been many things beyond that over the years. What is it for you? What's important to you? How are you gonna show up within your financial arena to yes, create financial liberation? I'm a firm believer that there is plenty of resources out there. If you do something to help other people, you offer a service, you deserve to get paid from it. If you properly take care of and manage your financial resources, more will come. More is given to those who are ready to receive it. So make sure that you're continuing to work on these six principles within your financial life. And again, come back and watch the other modulars because I'm gonna teach you ideas, teach you strategies that you can put into your own life right now that will help ensure that again, not only do you strengthen your solid financial foundation, now that you have a financial foundation built on a brick foundation versus one that's built on straw. But I will show you how you can take care of things that are important to you. How you can raise your kids or the people in your family that are young, and ensure that they have the proper resources, the proper skill sets , so they too can develop the lifestyle that they deserve. Art of creative financial liberation is being on purpose, intentional with an open and giving heart as you continue to grow your finances. And if you do, I promise you, Katie , bar the door, you'll have more riches brought into your life. I wouldn't say that you know what to do with because you will know what to do with them and you'll put them back out. And again, I'm not saying that this is a get rich quicker, this is a get rich conversation. I'm saying let's build a solid financial foundation so you can live a peaceful stress-free life. Even if it's on $3,000 a month, you may or may not become a multimillionaires, but it will afford you to live a comfortable life and to do the things you wanna do and not have the stress on your shoulders that so many people walk around with. It will give you the ability to be at peace with your money. And at that, I'm going to bring this modular to the end and look forward to talking to you on the next one. Goodbye for now.