Key Takeaways
- To have financial freedom, you must look long-term to achieve short-term financial flexibility and financial freedom.
- The two key areas to look at for short-term flexibility are expenses and savings.
- The two largest areas of expenses are in housing and transportation.
- Save 10% of your income and contribute at least the minimum to get the match on a 401K to ensure you have enough savings to cover emergencies or career moves.
When I was first starting in business, my mentor said, “Gary, you have to slow down to speed up.” Doesn’t seem to make much sense, but it works really well. Likewise, if you want to have financial freedom, you must look at it from a long-term perspective to get short-term financial flexibility and financial freedom.
There’s two key areas to cover when thinking about short-term flexibility: expenses and savings. Let’s look first at cash flow, and in particular, expenses.
This is where people get in trouble all the time. The two basic expenses are housing and transportation, and they are typically 35%-50% of our total expenses. When you think about housing, you may want to consider getting a rental unit for a year or less, perhaps with roommates, or even live with friends or family to cut down on this expense. In terms of transportation, look at buying a used car so you can get through the payments as soon as possible. Five years down the road, you have no payments, and you own that vehicle outright.
The second key area to cover is savings. You need to have dollars available when bad things happen in life with you personally, your job, family, the economy and so forth. So first, think of saving 10% of the money you make every year. For example, let’s say you make $50,000 a year. You save 10% every year for five years, so you’ve got $25,000. Also, you find employment with a company that has a matching 401K at 4%. You put away 4% minimally to get the full match of 4%, and that combined 8% of $50,000 is $4,000 a year. After five years, you’ll have $20,000 in your 401K!
Five years out, you own your car, you have no long-term commitment with your housing, and if something goes wrong and you lose your job, or perhaps you want to pursue another job, you have $25,000 set aside to look around for a while and you’ve already got some money saved for retirement. Another advantage to this is that banks love you. If you decide to apply for a loan, they are going to give you the lowest rate because you are a great risk.
Taking this approach, you get the financial freedom in the short-term, and the flexibility you want because you focused on what it would look like in the long-term, five years down the road. That’s why it’s important to focus out in to the future.
Until next time, enjoy!
Gary