Budgeting | Middle Class Dad Money

Do you struggle to get ahead financially? Live paycheck to paycheck? Financial freedom means living the life of your dreams and having the financial flexibility to live life on your terms. But what are the keys to financial freedom? Here's what I learned in obtaining it: The keys to financial freedom are spending less than is earned, doing a monthly budget to track spending, paying off debt and not incurring any new debt other than a mortgage, and having a long-term plan to significantly increase income with a side-hustle, or starting a business. But that's just a quick glimpse. The keys to financial freedom are NOT beyond your reach. You and your family CAN live your dreams. Even if you're over 40 and way behind on planning for your future, it's not too late. In this post, we're diving in deep on how to get ahead financially. But we're not just talking dry numbers and things like spend less and earn more. No, we're putting some emotion behind it and getting you to really focus on the long-term goals that are important to you and your family. Specifically, we're looking at the keys to financial freedom that will allow you to live your dreams! I'm excited to be interviewed on the @hackyourwealth podcast in this week's episode! Check it out here - https://t.co/v2zjYwpXoi — Middle Class Dad (@middleclassdad1) January 7, 2020 What are the steps to obtain financial freedom? To obtain financial freedom, we need to: Acknowledge where we are on the journey to financial success (hiding our head in the sand doesn't help anyone) Know where we want to be (you'll never hit your goal if you don't first define it) Break down the path to get to your goal into small steps (baby steps make it less overwhelming) Get on a written monthly budget (that you agree to with your spouse if you're married) Spend less than you earn Have a long-term plan for significantly raising your income (either at your current place of employment or starting your own business) Pay off any debt you have and stop accruing new debt But before we talk about the keys to financial freedom and how to achieve them, I want you to answer a question. What do you and your family dream of? Where would you like to be in 5-10 years? The answers will vary and your dreams might be totally different than mine. In 2017, my 5-year dreams included: Continuing to have no debt other than our mortgage No longer working a job where I trade time for money (I actually quit my job in Sept 2020 to be a full-time blogger) Being able to travel more (also accomplished) Ramp up retirement savings (also accomplished) Get an RV (bought in Sept 202) Move to a more rural house with a lot of land (moved to .75 acres in Wimberley in the hill country outside of Austin in 2018) My wife, on the other hand, wants to finish her degree. She'll do that while our newest child (coming later in 2017) is in her pre-k years. Then my wife can get back to teaching once Layla enters kindergarten. Your family's dreams might be totally different from that. That's totally OK. In fact, I WANT you to have your own dreams and goals. I want you to picture your dreams. Sit down with your spouse and kids and talk about your dreams Write them down. See where everyone comes together and where everyone differs. Focus on the common ground. Maybe even set time frames in which you want to achieve these goals. Then break each one down into small, achievable steps and get about the business of making them happen! Wagner's rules of financial planning success. If you're uncertain when #3 applies, call your financial planner! pic.twitter.com/84U25PLOV7 — MichaelKitces (@MichaelKitces) June 18, 2017 Why do I want financial freedom? Many people want financial freedom so they have the flexibility to work when they want, where they want, and how much they want. It's not about not working. It's just about doing it on your terms instead of somebody else's. When I quit my job in Sept of 2020, it wasn't so I could stop working. I just didn't want to work for somebody else. I had started blogging in 2016, and by the time I gave my 30-day notice to my employer, I had gone 3 months in a row of making twice what I made at my day job doing my blogging. Now, I actually make about 6 times my old salary each month. But, financial freedom might mean different things to different people. It could mean any or all of the following: Getting out of debt Paying off the house Saving a large nest egg for retirement Saving for your kid's college fund Buying a bigger house Buying a nicer car Traveling in retirement All of those and many more are the keys to financial freedom. We got an RV because I wanted to be able to travel extensively when my kids weren't in school, and working online from my laptop meant we could go anywhere as long as I could get Wi-Fi or tether off my phone. We did a month-long trip in the fall of 2020 and another almost month in June of 2021, and I couldn't be happier. Financial freedom is simply a stage in your life where you are, as Dave Ramsey says, "winning with money". You will be in a place where money and money problems are no longer a concern. They will no longer be a source of friction between you and your spouse. That's not to say you won't have to work to stay ahead in the game, as anything worth doing requires continued effort and focus. But it will no longer constrain you and your family or keep you up at night. Again going back to quote Dave Ramsey, you'll be "able to live and give like no one else". Are you ready to get out of debt? https://t.co/S50NmZ6VZB #payingoffdebt, #financialadvice pic.twitter.com/v7TjXludLq — Jon Snodgrass (@JonS_Accunet) June 9, 2017 Does debt make it harder to have financial freedom? Having large amounts of debt outside of a primary mortgage will make it very hard, if not impossible, to obtain financial freedom. That is because large amounts of money will be paid as interest instead of investing and growing wealth. It also means someone isn't living within their means. Many people across the globe are struggling with massive debt! According to Fortune Magazine, the average US credit card debt is over $16,000! We're also now at the highest level of personal debt since the meltdown in 2008; topping 1 trillion dollars! Clearly, we should have heeded Shakespeare's famous words "Neither a borrower nor a lender be". Thus it should not be a surprise to anyone that being in debt is NOT one of the keys to financial freedom! When you are giving hundreds of dollars each month, both to repay debt and also to cover interest payments, that's money that ISN'T going to your financial future. Think of it this way. Every dollar given to credit cards, student loans, car payments or home equity loans is a dollar you could be investing in mutual funds. Investing in your future instead of making bankers wealthy! Learn how to pay off your credit card debt faster - Watch video https://t.co/0f9bF2Q79T#money #creditcard #debtfree pic.twitter.com/YOupsTIvK9 — Ric Bender (@RicBenderSocial) July 30, 2021 What about debt other than credit card? In addition to the $16,000 in credit cards, according to The Federal Reserve, the average American household also holds: $176,000 in mortgage debt $29,000 in car loans $50,000 in student loans That's a serious lock down on your financial freedom! Putting aside the mortgage for the moment, let's look at the remaining $95,000. I know interest rates vary, but let's say it takes the average family 10 years to pay off that balance at 8% interest. Of course, that's also assuming they don't KEEP borrowing money. But for now, let's work with those figures. Using a calculator courtesy of Bankrate.com, you can see that the $95,000 you borrowed will actually cost you almost $106,000. So not even thinking about what you could do with $106,000, let's just look at the interest you paid. That $11,000 in interest you paid, had you simply invested it in mutual funds over that 10 year period, earning an average of 10%, would have earned a total of $28,500. Those figures are courtesy of a compound interest calculator courtesy of the government. So instead of paying $11,000 in interest payments, you could have earned almost $30,000! And that's with no actual retirement or savings planning or making any additional contributions to the mutual funds! Imagine what could happen if you were debt-free and intentionally planning for retirement?? https://t.co/dc8QpgpBGx — Middle Class Dad (@middleclassdad1) August 4, 2021 How much money do I need for financial freedom? A monthly income that is between $10,000 and $20,00 is an ideal goal for achieving financial freedom. But, of course, the state and cost of living, and lifestyle preferences will all affect those numbers. For me, I live outside of Austin, Texas; one of the most expensive places that aren't New York or California. I was working a job running a large martial arts school for a husband and wife owner team. I was well-paid, making just under $80,000/year. Once I realized I could achieve financial freedom, I set out to double my monthly net pay (around $5,000) from my online ventures. And I wanted to hit that 3 months in a row to be confident of my ability to continue doing that. I also knew if I could hit that, I could probably double that again (which I did). I hit my 3rd month of making over $10,000/month blogging in August of 2020 and gave my 30-day notice at the start of September 2020. Can't believe I make that much just blogging? I keep doing it month after month, and more than once have topped $30,000 in just one month. Check out my income reports to see my latest (and previous) income report where I break it all down in a way that's simple and easy to understand. Just click that link to read it on my site. A FICO score is a “I love debt” score. #ramseysmartmoney pic.twitter.com/gRXq1jDYE9 — Cassie Peterson (@CassieLpeterson) October 30, 2018 Is good credit the key to financial freedom? Good credit is not the key to financial freedom. After all, a credit score is simply tied to borrowing money. And financial freedom is not about borrowing money; it's about finding or creating a well-paying job that allows you the freedom and flexibility to work when and where you want to. So while I don't want to you stop paying bills and tank your credit score, don't worry that much about it either. Pay off all debts other than your mortgage, get on a written budget, spend less than you earn, pay your bills on time, and have a long-term plan to significantly boost your income. If you do those things, you will obtain financial freedom and your credit score won't matter. https://t.co/lRyZPelrDG — Middle Class Dad (@middleclassdad1) August 4, 2021 How to get ahead financially when you are behind To get ahead financially when behind, first get on a written monthly budget where less is spent than earned. Then prioritize bills such that food, gas, car loans, and electricity are top priority, and all other debts are last. Then focus on using any extra money to pay off debt without incurring any new debt. Always behind on your bills? Constantly trading which bill to pay late so the same debt collector isn't always calling? When you're in that boat it can be hard to think about the keys to financial freedom. Financial success won't even be a blip on the radar if you're not sure how to make it through the day, month, and year. If that's the boat you're in (been there, done that!) we need to get some stability first before we start talking about your grand tomorrow. The good news is with some focus and intentionality you can get there! When you Can't Pay Your Bills, you can take some crucial steps to get ahead. Once you're afloat, then you can get back to the business of living your dreams! First, we need to understand that money problems are simply a combination of 3 things: Not having our finances organized (if we aren't clear on where we are, it's hard to get anywhere else) An income problem An expense problem The first one simply means we need to get clear. We need to know exactly what our bills are, how much we owe and when we need to pay those things. The best way to get organized is to have a monthly household budget. Think of your budget as your roadmap. I can't get to Timbuktu without a map (or at least GPS) and you can't get to your financial success without a budget. Since I've already covered how to make a budget extensively in the linked post in the previous paragraph I don't want to repeat myself. But if you aren't on a written budget yet I highly recommend you check that post out as I walk you step by step in creating your family's budget. Trust me; this is one of the most crucial keys to financial freedom! The budget is something you do monthly before the month begins. You also need to be on the same page with your spouse. But it's OK if one of you is more the math or Excel nerd than the other. You start at the top knowing your probable income for the coming month. Then you simply subtract all the known bills for that same month. Any extra dollars at the bottom of the page would get allocated to: Paying off debt Going towards retirement funds Saving for kid's college Going into short or long-term savings accounts Going into a Christmas Savings Account While my budget post does walk you through the steps to make a budget, you need a way to do it. If you aren't sure how to craft a budget, I have a free Excel budget spreadsheet you can download right now. It's the very same budget spreadsheet my family used to pay off over $80,000! If you have an income problem then it's time to look at a career change, taking on a 2nd job, and/or looking at some additional training or schooling that can boost your earning potential. And expense problems will go away once you start doing a budget each month. Unless you're in Congress, it simply doesn't work to spend more than you make, and the budget will show you where you stand in an instant! So what are my . . . 11 Proven Keys to Financial Freedom & Living Your Dreams? 1. DEFINE WHAT FINANCIAL SUCCESS MEANS TO YOU AND YOUR FAMILY You need to know your financial goals. Be specific. Where applicable, set realistic deadlines for achieving those goals. Measure your progress and adapt as things change. 2. MAP OUT YOUR DREAMS The keys to financial freedom are logical. But to really get passionate and fired up, we need to tap into the emotional. That's where dreams come in. Dream big. Make those dreams in color! What do you and your family most want to do? How does your life look in 5 or 10 years? If you can dream it, you can see it. When we can see it, we can define it. When you do that, you can get there! 3. BABY STEP TO GET WHERE YOU WANT TO GO Any goal can seem huge, lofty, and insurmountable if it's a long way from where you are now. Do you know what happens when goals seem insurmountable? We lose focus and they fall by the wayside. To stay motivated, break your goals down into small, achievable baby steps. You might not be able to go from making $50,000/year to $200,000/year in 6 months. But I bet you could add $1,200/month by delivering pizzas at night. That one small step takes you to almost $65,000/year. Imagine what other small steps you could take? 4. USE A HOUSEHOLD BUDGET EACH MONTH As I said above, you can't get anywhere that's unfamiliar without a roadmap. Your budget IS the biggest of the keys to financial freedom. Do a written (online counts too) budget each month before the month begins. Do it EVERY month. Include your spouse so that they feel a part of the conversation; they are your equal, not your kid. Make every dollar go exactly where you want it to go. Be intentional. 5. SPEND LESS THAN YOU EARN This ain't rocket science, folks. Granted when we see governments routinely spending way more than the revenue they take in, it sends the wrong message. Spend less than you make. Save what you don't spend. Do that every month and you'll be set for life! 6. GET OUT OF DEBT If you have debt other than your primary mortgage that money you're paying the bank or credit card companies is money that could be working for you! If you have debt, have a plan to pay it off. Do that before you start saving for retirement or kids' college. That way every dollar you have extra can go right towards the debt. Our family got out of debt following Dave Ramsey's Debt Snowball plan. But however you do it, your financial success depends on it! 7. SAVE FOR RETIREMENT Once you're out of debt except for the house it's time to set aside money for retirement. Ideally, save 15% each month of your gross income. Do it in a 401k if your company offers one (a Roth 401k is even better). But even if your employer doesn't offer one, open up a Roth IRA and put it into mutual funds each and every month. I linked above to my post on retirement basics, so start there if you're not sure what to do. 8. ALSO, SAVE FOR YOUR KID'S COLLEGE As with retirement, once you're out of debt, if you have kids you should be saving for their college. That way you aren't saddling them or yourselves with massive debt when they head off to college. According to CollegeData.com, the average 4-year degree (factoring in books, housing & other expenses) costs anywhere from $100,000 to $200,000. Many exit college making only $50,000/year (according to Time Magazine). Does that math make sense to you? 9. HAVE A PLAN FOR ANNUAL EXPENSES LIKE VACATIONS AND CHRISTMAS Vacations and Christmas spending are known entities. They don't happen randomly. Thus like any other expense you need to anticipate and plan for these things. That way you're not surprised, strapped or reaching for the credit card. Plan for these things in advance. Figure out how much you need. Divide that by how many months you have before the spending starts. Put that amount aside each month leading up to it. Trust me; those presents or that vacation will be a whole lot more fun if you aren't stressing about the bills that are coming in the mail afterward! 10. DON'T BUY MORE HOUSE OR CAR THAN YOU CAN AFFORD If your household income is well under $100,000/year you should not be buying a house that costs $389,000! I use those exact figures because that's exactly what my wife and I did in 2006. Your house payment should be about 25% of your monthly take-home pay. That payment should include taxes and insurance. Thus if your family brings home $5,000/month, you should be buying a house somewhere in the $160,000 range. Cars are even worse as, unlike homes, they go down in value. NEVER buy a new car. Buy a gently used late model car where someone else has taken the 11% loss in value the moment it was driven off the lot. Save up and pay cash for the car. There's nothing worse than a car payment on a car you can't afford where you actually owe more on it than it's actually worth. All vehicles in your house combined should not have a total value greater than 50% of the annual household gross income. In other words, if your family makes $100,000/year, don't own more than $50,000 (purchase price) in cars. Another of the keys to financial freedom! 11. IT'S OK TO MAKE MISTAKES! You will mess up. There will be months where you buy something you shouldn't have. Maybe you and your spouse don't agree on something and you do it anyway. Own it, apologize for it, fix it. But don't dwell on it or let it derail your long-term goals. We are human beings. Guess what? We aren't perfect. Mistakes are how we learn. The trick is simply to not keep making the same mistakes over and over again expecting different results. Own the mistake. Take responsibility for it and then get back to focusing on your dreams and the keys to financial freedom! Final thoughts In this post, I took a hard look at the long-term strategies needed for financial success. But instead of just talking about budgeting or planning (which we do get into), we talked a lot about your dreams and goals, and focusing on those can help transform your financial life by putting emotions, heart, and soul into your planning and motivation. Specifically, we talked about the keys to financial freedom so you can live your dreams! The app Trim automatically looks at your monthly bills & spending and then cross-checks that with savings programs almost all vendors have. It's a great way to save a few extra bucks to go towards your dreams! When they match up, you save. They'll even handle the hassle of canceling memberships you no longer want or renegotiate bills for you like insurance and cable bills. Just sign up and spend on your Visa card and earn automatic savings back on your statement! What are your dreams and what are you doing to make them come true? If you like this post, please follow my Budgeting board on Pinterest for more great tips from myself and top financial experts! - While I have years of successful financial & budgeting experience and run several million-dollar businesses and handled the accounting, P&L and been responsible for the financial assets of them, I am not an accountant or CPA. Like all my posts, my posts are my opinions based on my own experience, observations, research and mistakes. While I believe all my personal finance posts to be thorough, accurate and well-researched, if you need financial advice, you should seek out a qualified professional in your area. Photo by ROMAN ODINTSOV from Pexels