To us, financial independence is a large part of self-sufficiency. Debt is a claim on future labor. When a substantial part of your income is going towards debt, you are working for your creditor, not for yourself.
We have been following the method presented in Financial Peace University by Dave Ramsey to reduce our debt and build wealth. The basic idea behind the method lies in the seven steps of the program:
- Build a $1,000 emergency fund to pay for unexpected emergency expenses. This would pay for things like car repairs, appliance repairs or replacement, emergency medical expenses, and anything else that can’t be anticipated, but which is a necessity.
- Pay off Debt. After making a budget of your necessary expenses, including minimum payments on all outstanding debt, all additional income goes towards the loan or line of credit with the lowest balance. Each time one is paid off, it frees more income to put toward the next item of debt.
- 3 to 6 months living expenses saved. Once your debt is paid off, continue putting as much money as possible aside. Instead of paying someone else, this money is being saved for you, as a fund to make sure you don’t have to go back into debt for any reason. This money is intended to cover longer term problems like a job loss, extended illness or temporary disability, etc., and needs to be kept in a liquid account, so that it is fully accessible.
- Invest for retirement. After you have 3 to 6 months of living expenses saved, start investing for retirement by saving a minimum of 15% of your income. As much as possible of this investing should be done in tax-friendly accounts like Roth IRAs and 401ks
- Save for College. If you have children or plan to, or have any other children in your life whom you’d like to help with college expenses, start saving.
- Pay off Home. If you have a mortgage already, make the largest payments you can toward paying it off (while still saving 15% for retirement and another portion for college).
- Build wealth and give. With the home paid off, and savings established for college, all of your expendable income can now be invested and grown. This period of your life allows you to build wealth for your future, and for the inheritance you can pass down. It also gives you the ability to give freely to help in your community.
The whole of financial peace university covers many more aspects to financial life than these, but these points are the foundation. Other important topics presented include teaching children the value of money and work, how to minimize expenses and gain the mindset needed to be successful at conquering debt and building savings, and great information about the types of insurance one should have at the different stages of their lives.
Whether using this program, another program, or your own approach, we highly encourage everyone to take steps towards financial freedom. As it fits into our goals, financial freedom will allow us to spend less time working for money, and more time working for our own satisfaction and sustainment.