5 Ways to Boost Financial Flexibility

This blog is not intended to provide professional financial advice. You should consult a certified financial professional to support you in your individual needs. The purpose of this blog represents my own experience, and should not be used as professional financial advice.

So, you’ve started to pay down your debt, and now you have extra money each month!  What should you do with those extra funds?

 The first thing to boost your path to financial flexibility, even while you are aggressively paying down your debt, is to establish your emergency fund.

1) Emergency Fund

This fund should cover all of your expenses anywhere from 1-3 months.  Once you have your budget, you should be able to establish what this number is, and then make sure you add the savings contribution to your monthly budget.  The best thing you can do for this is to automate it…set up one day per month where your allocated number is automatically taken from your account (even if it is just a small amount of money to start).

 The great news is, once you have paid off or significantly paid down your debt, you have established the start to financial flexibility!  With your extra money leftover each month that you were putting towards debt, now you can allocate those funds to the remaining four strategies to boost your path to financial flexibility.  The strategies are as follows:

2) Savings

Ideally, (especially in COVID times), you should really look to have 6-12 months saved, but many start with a 1 month emergency fund and build from there.  Again, the number you need to establish this savings fund will be based off of your expenses in your budget.  Look to putting your money in high yield savings accounts or CDs.  One caution with CDs is that they may have limits on your ability to withdraw money, and this account needs to be liquid and available, so a high interest savings account may be your best bet. 

3) Tax Efficient Retirement

(Source information check out the IRS website)

Roth IRA:

This is a retirement account that has amazing benefits!  Because the money is put in after tax (meaning you’ve already paid the tax on the money before it goes in), when you hit retirement age, you will be able to withdraw it tax free!  One thing to note is that if you withdraw money before the age of 59.5 there are fees associated with this.  There are income limits (you must make under certain amount of money per year in order to contribute) and limits on how much you can contribute to this account per year, so you definitely want to do your research on this account, but it can be a great resource for retirement saving.

401k/403b/457b:

These are retirement accounts that are typically offered through your employer. 401ks tend to be offered by for-profit companies, and 403b and 457bs are offered through government agencies, schools, and nonprofits, but they are essentially similar vehicles for retirement savings.  Many companies match a certain percentage of what you put in which is, you guessed it, FREE MONEY!  You should check with your employer to see if this is a benefit that is offered and start contributing.

For these accounts, the money goes in before tax, so that is less money you owe in taxes during the year, and the benefit is that the money grows tax free before retirement. However, when you go to withdraw from them during retirement, you will be taxed at your tax rate at that time.  There are ways to potentially reduce these taxes (something called “Roth Conversions”), but you would definitely need to speak with a financial advisor or do some research on when you could make those conversions.  You cannot withdraw the funds until you leave your employer—either by finding a new job, or through retirement.  You will also need to pay extra fees if you withdraw the money from the account before the age of 59.5.

There are also limits for yearly contributions to these accounts as well, so if you are able to, you should maximize your contribution to the yearly limit.

Traditional IRA:

These are accounts that you are able to open on your own, independent of your employer.  Money goes into these accounts before tax, so you are not responsible for taxes on these accounts during the year, however; when you go to withdraw money in retirement, you will be subject to taxes just as you would with a 401k.  Money grows in these accounts tax free until retirement.  You will also need to pay extra fees if you withdraw the money from the account before the age of 59.5.

For traditional IRAs there are maximum contribution limits, but there is no income limit for contributions.

4) Taxable Investments/

Nonretirement funds

(Source information found here)

 If you have contributed to your savings and retirement accounts, and you still have leftover money you would like to see grow, you are also able to open up a taxable brokerage account.  This can be done through low-cost investment brokerage companies such as Vanguard, T. Rowe Price, or Charles Schwab.  With these accounts you are able to select stocks and bonds and other investments to see your money grow.  I am a huge fan of low-cost index funds and bond index funds.  I basically set my allocation to a few index funds, including a total market index fund, and a total market bond fund with a specific percentage allocated to each and ride the rollercoaster.  If there are particular company stocks that you are super interested in, these accounts can be a good vehicle for those investments.  For these accounts, any capital gains or dividends are subject to tax, and any withdrawals you make during the year are taxed at that year’s tax rate, so keep all of that in mind when you are investing, but unlike retirement accounts, there are not extra fees imposed when you withdraw from these accounts.

5) Real EstatE

Commodities

Cryptocurrency

 Many people are interested in further diversifying their portfolio through real estate and other investments.  Real estate can be a lucrative investment, because with the money you make on rental properties, you can use these funds to pay your monthly expenses, leaving you more money for savings and retirement, or taxable investments.  You can also choose to invest in real estate through something called REITs which is a portfolio of real estate investments without the requirement of maintaining the physical property.  The downside to having physical rental property is you will need to maintain tenants as well as the property you purchase, and go through the process of closing on the property, closing costs, etc.  There are also specific rules with lending and rental properties, so if this is something you are interested in, do your research and speak with an experienced realtor or financial advisor.  For more information, check out this resource!

 Commodities are another investment class.  Commodities can be physical property such as precious metals, food, or wholesale products.  I tend to think of cryptocurrency as a member of this group, since it is something either purchased or mined, and this is definitely something to research to see if it is the right investment for you, as Bitcoin, a type of cryptocurrency, has skyrocketed over the last several months.  For more information on cryptocurrency, take a look at this.

 Ultimately, investment in the real estate and commodity domain should be explored after the other four ways for boosting financial flexibility…but with any investment, there is always a certain amount of risk involved so you should do your research, talk with a financial advisor, and evaluate what level of risk you are willing to take with your investments. 

Diversification is key.  Just like you should diversify your income stream, you should also diversify your investment portfolio!

How I Paid Off Over $175,000 in Debt in 7 Years

First some legal jargon:

This blog is not intended to provide professional financial advice. You should consult a certified financial professional to support you in your individual needs. The purpose of this blog represents my own experience, and should not be used as professional financial advice.

Now on to our blog…

In true transparency, I know a reader somewhere is going to be kind enough to do the math for me, and my debt is probably going to be even higher than what I am saying here, but for simplicity sake, we will round the number I owed to $175,000.  This was a mixture of student loan and credit card debt. 

In staring at this massive task before me, I took the first step forward.  I made a budget.

1) Make a budget

At this point, it seems cliché with many financial gurus stating this as the first step, but I am going to tell you.  This. Is. The. First. Step.

You will not be able to efficiently track your spending unless you actively make a budget that encompasses your financial goals.  There are lots of apps out there that can help you with this, but I am a fan of a good old excel spreadsheet.  Each column represents a month and you should plan out 12-18 months.  Do a top row for monthly income, and then in the first column list out all of your monthly expenses.  Go into your bank accounts and credit card statements to get your spending for the last few months to estimate your spending for the upcoming months.  Subtract your expenses from your income, and this is the amount you have left over for the month.

Why is this important?  That leads us to the next step.

2) Cut your spending

No, I am not telling you to cut out the coffee in the morning from your favorite coffee shop, and live on rice and beans (although, you could do this, and it would probably supercharge your ability to pay down your debt), but you need to take a long, hard look at that leftover money at the end of the month.  How much is it?  Is it enough to make a significant dent in your debt?  If not, what can you reasonably cut from your expenses that can increase that leftover amount? One of the exercises I did at this stage and continue to do on a quarterly basis is to give myself three expenses that I will not sacrifice on:  they are books, travel, and takeout 2 nights per week.  Everything else, I either cut or find a way to reduce my spending such as shopping with coupon codes.  The more you have leftover each month, the quicker you can reduce the debt.

3) Move to cash flow

What does it mean to move to cash flow?  Put your credit cards in a box somewhere and lock them up….give someone else the password, and remove them from all of your saved payments.  Do not use them.  All of your spending needs to come from your bank account.  Trust me…this was the hardest for me, but it is necessary.  You can’t pay off your debt if you keep spending it.

4) Select the debt you are going to focus on first

Dave Ramsey refers to this as the “snowball” debt method, but for me it was more than taking the smallest debt and paying that first to get the momentum.  I felt very strongly that I needed to pay off my student loan debt first, as I knew that this is a debt that would stay with me until death.  Typically, even if someone files bankruptcy, student loans will remain as they are difficult to discharge.  For me, personally, I selected my student loans as the debt I was going to work on with my leftover money each month, and I selected the student loans first that had the highest interest rate.  (Interestingly, selecting the debt with the highest interest rate and paying them down first is called the “avalanche” method).

5) Start paying it off…and don’t stop.

With the leftover money I had each month, subtracting my expenses from my income, I focused on one loan at a time, until eventually, I was left with $22,000 in credit card debt alone.  This led me to step 6….

6) Look into refinancing/debt consolidation programs/lowering your interest rate

This is where you should get help, or reach out to a financial professional to evaluate your options.

For me, this is where my story may diverge from what is typical or able to happen for some people, but this blog is sharing how I did it.  I was fortunate that we were able to refinance our home when interest rates dropped lower than the interest rate we had on our mortgage, and we also had 10 years of equity in our home.  In refinancing, I lowered our monthly payments on the mortgage, and used the cash out to pay off the remaining $22,000 credit card debt.  This may not be an option for some, and I do feel fortunate that we had this option.  There are debt consolidation programs that may also help you to consolidate loans with lower interest rates, cutting the overall cost of what you would owe on those remaining loans.  You could also try to call your credit card company and negotiate a lower interest rate, especially if you have been a customer for a long period of time and have always paid your bills on time. I will say that with the clip I was going, had we not refinanced, I still would have paid off the credit card debt in 8 years rather than seven.

So….this is all fine and good, but what if when you do your budget, and your expenses are more than your income?….and you cut everything you can down to the bare minimum, but it is still not enough to pay down the debt?  This is where you will need  to “diversify your income stream.”  I’ll talk more about this in my next blog!

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Financial Blunders of a Young College Kid: How I Racked Up $175,000 in Debt

I started college the summer of 2003.  I went to an in-state school with lower tuition that was 6 miles from my house, however; I made the choice to live on campus for the “experience” for freshman and sophomore year.  In doing so, I left my bachelor’s degree with $25,000 in student loan debt.  I then made the decision to immediately go back for my master’s, the summer of 2007, and at the time (pre-2008 crash), graduate students could take out up to $25,000 per year of student loans to pay for cost of school, even if tuition was not that expensive.  I made the decision to do so, even though my tuition was around $20,000 for the full two year program.  My justification was that I was going to school full time, and I needed the funds to cover living costs while I was in school.

So, in doing the math, I left my master’s degree with $75,000 of student loan debt.  If I stayed at home for my undergraduate degree, and took the minimum needed for tuition in my master’s program I would have left with a little more than $50,000….a big difference from $75,000.

So, what about that other $100,000 I mentioned above?  Some can be attributed to interest, and I can also look to freshman year of college for the addition of the other major blunder.  As a freshman in 2003, living on my own for the first time, I came across a table in the student center during my first week of class.  This table offered a remarkable display of pens, t-shirts, and assorted pins….which could be mine if I filled out an application today for a credit card!  It would be easy, they said…I would receive notice in a few minutes.  So, I filled in that application and was approved for a $500 credit limit, along with a shiny bag full of new pens and a t-shirt.

As soon as I had that piece of plastic in hand, I went right to the Apple store to purchase my very first ipod (yes, ipod…).  It was all I wanted, but my parents could not afford one for my birthday or Christmas….but, hey, I could afford it all by myself now!  Or so I thought.

Fast forward to 10 years later--credit line increases, 20.99% APR, and a spending habit all equaled to $32,000 of credit card debt.

What did this all cost me in the long run?  For that, I am still doing the math for the interest I’ve accrued over 10 years…so let’s go with around $175,000 (but I am fairly positive it is more, and I’m sure a kind reader somewhere will do that math for me). 

What was that reality of living with this debt?

After I graduated, I was luckily able to obtain work with a decent wage, earning $50-70,000 per year in the time frame I started paying off my debt.  However, despite the decent wage, there were several roadblocks that popped up preventing me from achieving goals due to my financial blunders.  For one, when we went to purchase our home, I could not be on the note, and if it wasn’t for my partner’s frugal spending habits and lack of debt we would never have been able to afford a home at all.  Why?  My debt to income ratio was too high—the majority of which came from student loans.  I also was not able to significantly contribute to my retirement accounts as most of my income was tied up with paying minimum payments on those loans, while I continued my spending habits.  During those first 3 years, I learned hard lessons about my choices in racking up student loan and credit card debt.

But…after 3 years of paying the minimum payments each month, I took a long, hard look at my spending and my debt, and I made the commitment that I was going to get out of it.  It would take me 7 years or so, but I was committing to this action…to improve my spending habits and to decrease my debt significantly.  I made the goal that by the age of 35, I would have no credit card debt, and no student loan debt…and I would learn from the mistakes of the past.

How did I do it?  I’ll share my strategies in the next blog…sign up below to get the link sent directly to your email!

Financial Flexibility: The Origin Story

I’ll never forget when my father came home from work and my parents sat us down to tell us that he had been laid off.  I think I was around 8 years old.  From the time I was born, and long before that, he worked at the big building downtown, and was supposed to be a “career man.”  They had paid for his bachelor’s in accounting from a prestigious university, and now…had laid him off.

This was a spiral of events that would eventually lead to my ultimate path—someone who is committed to helping people succeed in business and in personal life, so that they can learn to pivot through setbacks.

Eventually, my father pivoted to a new career, as a consultant where he and his business partner consulted with banks and insurance firms in the area.  In addition to this, he got his real estate license and began to sell real estate, also working as a freelancer for a local real estate agency.

It was here that I can really pinpoint where my entrepreneurial spirit came from…watching my father pivot when faced with a setback, and for future work, he learned from his layoff always making sure that there was a diversification of income streams.

This is something we can learn from today.

We are living through some epic times—and it all happened in one year.  We are dealing with a pandemic, systemic racism, and political unrest and division within America and around the world.  The markets and economy are on a rollercoaster ride.  Millions around the world are out of work.

So what does this all mean for us?  At this moment in time?

What I am about to say may shock you, but I strongly believe this is the perfect time to diversify your income stream and get yourself on the path toward financial flexibility.

More and more, companies are laying people off and slashing retirement funds.  The world is changing, and it is no longer a world where staking your career in one organization for income, healthcare, and retirement is a secure option.  It is possible to set up these systems for yourself—to become financially flexible, so that you become your own boss, with the freedom to work, or not to work if you choose.  To work in a job that brings you joy and happiness without worrying about income.

I hope that this blog will be able to help you on your journey.  I’ve been the founder of successful businesses, serving in leadership roles in the for-profit and non-profit sectors for the past decade.  I’ve also made my own share of financial mistakes along the way, that I will share in the hopes that you do not make them as well.

In the interest of full disclosure, I have not completely reached my own goal yet for financial flexibility, but I am farther than I was yesterday, and I hope that I can share what I learn along the way.

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