If you are like me, you’ve had to work hard at improving your financial intelligence. Everyone wants financial freedom, but having greater financial freedom is not an end in and of itself, rather it helps position you to:
- Pursue your life goals
- Live with less stress
- Increase your options
- Help those you love
- Support worthy causes
One of the books the most influential books that helped us to get focused and on track in our finances is Dave Ramsey’s “The Total Money Makeover“. Here is my Canadian adaptation of his seven steps to financial freedom:
1. Save $1,000 Cash as a Starter Emergency Fund (as fast as you can)
Money magazine says that 78 percent of us will have a major negative event in a given 10-year period of time. Life happens, so be ready. Stop everything and focus. Twist and wring out the budget, work extra hours, sell something, or have a garage sale, but quickly get your $1,000.
2. Pay Off All Your Debt Using the Debt Snowball
List all your debts (except the house- covered in step 6) in order of smallest payoff balance to largest. Then pay the minimum payment to stay current on all the debts except the smallest. Every dollar you can find from anywhere in your budget goes toward the smallest debt until it is paid. Once the smallest is paid, the payment from that debt is added to the next smallest debt. When debt number two is paid off, you attack three, and so on.
3. Finish the Emergency Fund
A fully funded emergency fund covers three to six months of expenses. When the big stuff happens, like the job layoff or the blown car engine, you can’t depend on credit cards. If you use debt to cover emergencies, you have backtracked. A strong foundation in your financial house includes the big savings account, which will be used just for emergencies.
4. Invest 15 Percent of Your Income for Retirement
The rule is simple: Invest 15 percent of before-tax gross income annually toward retirement. Make the most any RRSP matching program that your employer offers. Invest in a diverse portfolio of mutual funds with a good track record.
5. Save for College
When you save for your child’s college tuition, you must make at least seven percent per year on your investment to keep up with inflation increases. You can contribute up to $4000/year to an RESP and it allows tax sheltered growth, plus Stephen Harper will throw in an additional 20% for good measure.
6. Pay Off Your Home Mortgage
Put all of the intensity and financial power you put toward your debt snowball to pay your house off as quickly as possible. Imagine how good the grass will feel under your feet when it’s paid for. Without a house payment you have control of your greatest wealth-building tool—your income.
7. Build Wealth
Here’s the payoff. After all your hard work you have finally gained control of your most powerful wealth-building tool and it is yours to do with as you will. You have all this financial muscle, so now you should do something intentional with it. Have fun, invest and give.
You can do it!