Base Layer – Building a Strong Foundation
Ask anyone who has achieved financial freedom and almost all will say creating a strong foundation is the most important step. While it’s not as sexy as investing and growing your money, it’s equally if not more important – even millionaires go broke if they don’t have a strong base. There are three critical steps to building a strong base which much be accomplished before continuing to build toward financial freedom.
The Golden Rule: Spend less than you make.
This is the golden rule and something everyone must adhere to whether you are making $50K or $5M. Violating this rule is the fastest way to catastrophically impact your path to financial freedom and potentially go broke. This is also the hardest rule to follow because it’s all about self-discipline and the psychology of money because there is no shortage of temptation to spend money in our society. There is absolutely 0% chance you will achieve long-term financial freedom if you can’t find a way to spend less than you make. You can’t out-earn your expenses if they are uncontrolled.
There are many tools, tricks and tips, but the most helpful for me has been to document and track my expenses and income every week. It takes about 10 minutes each week to document every transaction and that 10 minutes is the most important part of my financial freedom plan. Part of the exercise is that it keeps me accountable to myself when I list out everything that I’ve spent money on in the past week. While this isn’t required, I HIGHLY suggest you do it. I have been tracking my expenses for the last 5 years and my financial net worth has skyrocketed during that time as I’ve been able to keep myself from spending more than I make. I recommend picking one day per week (mine is Sunday) and set a reminder each Sunday to document and then analyze how you’re doing.
Pay off and avoid high intertest debt
This step is all about paying off credit card bills and other high interest consumer debt. I define high interest consumer debt as anything with a high interest rate and is in service of buying “stuff.” Credit Cards are the most common, but there are all sorts of high interest ways to fund your lifestyle creep.
Here are examples of what I would include in high interest consumer debt: All credit cards, Buy Now, Pay Later, PayDay loans, cash advances and personal loans. This list is not exhaustive, but if it’s not in service of an auto, education, healthcare or home loan it probably falls in the category of consumer debt that must be taken care of.
There are several strategies for paying off your high interest debt, but my favorite is the snowball approach which is described well in the linked article.
Build an Emergency Fund
Life is unpredictable. We need cash set aside to deal with life in a way that won’t prevent us from advancing toward financial freedom. An emergency fund is a separate savings or checking account that we set aside cash in for emergencies only.
This account is used only for large and unpredictable events like a health care emergency, losing your job, emergency auto repair or something else along those lines. This isn’t a fund that you should rely on often and you need to use self-discipline to avoid using it for travel or those shoes that you have had your eye on. It’s a slippery slope and if you let yourself use it for “normal” expenses a few times it’ll be easier to justify to yourself in the future. One trick for those who may be tempted to spend it is to build your emergency fund in a separate bank and only look at it one or two times a year. Sometimes being out of sight helps avoid the temptation to spend it.
The amount of money you need to put into the fund is a personal preference, but my advice is to have no less than 6 months of critical expenses saved in that account. By critical expenses, I include shelter, food, phone and anything else you absolutely would need to survive if you didn’t have a paycheck for 6 months.
To build the fund, I recommend setting aside an automatic withdrawal from your paycheck and having it directly sent to that bank account so you can “set it and forget it.” Once you build your reserve account you can turn off the auto withdrawl.
