Debt Free Living
So what does debt free living mean anyways? Is it the best way to go? Well, that depends. Essentially, it means living without any debt and paying cash for all purchases. No mortgage, no credit cards, no loans.
Is being debt free the way to go? Well, with the prices of real estate today, debt free living can be a pretty tall order to fill and not all debt is bad. For example, debt used for the purpose of purchasing real estate or an investment could be considered good debt. It is the consumer debt such as credit cards, car loans, etc that you want to get rid of.
Living without this kind of debt is a foreign concept to most people. Before you can live debt free, you must first make the choice to take control of your money. It is impossible to eliminate or reduce your debt without first managing your money.
Debt free living is a daunting task for many, but we will show you a system for managing your money that is so simple, even a child can do it! It is so easy that you can do it even if you despise managing money. You may even have some fun with it.
The simplest and easiest way to manage money is to divide your income into five basic categories. This system forces you to save a fortune and also have money for fun. It is important to have money to play with that you can spend without guilt because eventually your playful and creative side will sabotage your logical side.
You can use separate bank accounts, envelopes, jars, or any combination to divide your money. The percentages are not set in stone and the amounts are not important. It is the habit of managing your money that is important and the habit is more important than the amount.
Manage money category: The first category is your Financial Freedom Fund: 10% of your income goes into this category. This is the most important category and this is your golden goose – you never ever spend it. You can only spend the golden eggs – never the capital. This money is used only for financial investments or passive income-producing vehicles and assets.
Obviously it doesn’t make sense to use an envelope or jar to store your Financial Freedom Fund money. You will want to use a bank or investment account to hold it. You may even want to set it up as an automatic withdrawal from your bank account.
Nothing goes ahead of your Financial Freedom Fund. You have to begin to honor yourself more than the plumber, grocer, mechanic etc. Even when you come up short, still pay yourself first. Pay yourself first, invest the money, and let the creditors yell. Just don’t cave into the pressure and spend your savings or liquidate your investments or assets to pay for consumer debt. Use that pressure to inspire your financial genius to come up with new ways of creating more money and then pay your bills. If you don’t exercise self-discipline and pay yourself first, you will never achieve debt free living or become financially free. Manage money category: Another category is Savings for Big Ticket Items: 10% of your income also goes into this category. These long-term savings are used to pay for big ticket items such as vacations, vehicles, college funds, down payment for a house, paying off debt, and so on. Similar to your Financial Freedom Fund, you may want to arrange for an automatic transfer from your bank account to a savings account or money market fund etc. Use this money pay down your debt more quickly and reach debt free living sooner. Manage money category: The next category is your Fun Fund: 15% of your income goes here. This is the money that you spend on skiing, extra clothing, eating out, entertainment, spa days and so on. Spend this money every month or at least every 90 days and make sure it’s on something really fun and exciting and that you have a great time with it.
This gives you the opportunity to balance guilt-free fun spending and saving for financial freedom. If you don’t have your play account and spend it, it will sabotage your Financial Freedom Fund. Always keep your Fun Fund money in cash. Manage money category: The fourth category is Giving: This is 5% of your income. You can either give monetarily or with your time, or both. Manage money category: The final category is Living Expenses: This is 60% or the remainder of whatever income is left over. This is for your living necessities such as food, rent, utilities and clothing – things you need.
If your expenses are more than 60% of your income, you either need to dramatically increase your income or decrease your definition of necessities. You will never achieve debt living if you cannot live within your means. There are only a few things you really need to have.
Difficult as it is to adjust to the fact, if you cannot afford it, you don’t have to have it. Your real needs are: shelter, home repairs, food, clothing, children’s daily needs, insurance and taxes. Of course, all within reason. Leave this money in your checking account so it is always accessible.
A note for business owners:
You must keep your business and personal finances separate and you must write yourself a consistent paycheck. That paycheck gets divided into the categories described above. Remember, the amount is not important, but the habit is.
By utilizing these methods of managing your money, you can eliminate the use of debt in your daily living, avoid going further into debt and be on your way to debt free living before you know it!
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