7 Steps To Financial Freedom. Part 4

February 2nd, 2012

Quick summary:  Step zero, the awareness step, collecting all receipts and categorizing them. If you’ve been doing this for 4 weeks, congratulations, you now have a months worth of data and a rough idea where the money is being spent.

Step 1, setting up an emergency fund. That piece of mind, knowing that in the back of your mind if something critical goes wrong you have cash set aside.

Step 2, the snowball debt reduction strategy and how this moves forward to larger items. Get off that treadmill of revolving credit. Start filling the hole rather than making it deeper.

Now we’re on to what some would term more interesting (positive saving) things and the creation of what I like to term a cushion or a buffer. The goal in this step is to gradually work on building up enough cash reserves, such that if you become unemployed or sick or your income drops to near zero for some reason, that you have a cushion or a buffer zone to fall back on.

The big question that comes up naturally is, what size of cushion do I need?  The rule of thumb is 3-6 months of EXPENSES. Not 3 to 6 months of income that’s totally different. You want to know that for 3-6 months you have enough cash to cover all your monthly obligations if some life event happens.

Hopefully you see how this is building. You’ve been collecting receipts for a month, so you know today what the monthly funds are going out. You’ve found an item or 2 that are non-essential expenses and have started to attack your debt.

At this point, I say the choice is yours. You can finish paying off your credit card/loans and then start building a cushion or you can repeat step 2 and put the new found cash into a separate savings account. A little more belt tightening for sure. Thing of it as short term pain for the ability to give yourself choices in the future.

I would argue that today, jobs are less long term secure (working for 1 company for 40 years) and more short term and dynamic (2 or 3 years changing jobs but staying within an industry). Given this new reality, I would say starting to save now (along with debt reduction) for that next job change might be a good idea. Even if you only manage to save up 1 months expenses in a year, you at least have that 1 month more than you had before. Having a little margin in life is better than no margin at all.

Again, similar to the emergency fund, you want to put this into a separate account, away from your daily use chequing/savings account. You want to be able to watch this account grow over time.

Now if you are self-employed or commission based, like me, I will suggest you examine your peaks and valleys and determine how long the valleys last and work on an income levelling plan as well. For example February is my worst month. Things start up again in March, but that usually means I don’t get paid until April (30 day closings). For me I know that I have to have enough saved (after Christmas) to be able to go 3-4 months (worst case) and try and reduce my expenses during that time of year.

Next post we’ll be looking at planning for the future… unless you want to work for WalMart in your retirement years. 🙂


One response to “7 Steps To Financial Freedom. Part 4”

  1. walshsurvey says:

    I will work at Walmart in retirement years if I can be the person that puts up the coupons….that would be a cool job. They can even pay me in coupons!!! Well maybe, money and coupons.