FOUR Levels to Financial Freedom

DavidBibby · #1 (**permalink**) 08-24-2010, 10:36 PM

To my way of thinking, there are essentially 4 levels to being financially free. Everyone falls into one of these levels.

Level 1 - Totally Broke and in Debt

If this is your level.. don't panic. This is where we all started. Get a plan to pay off your debt and stick to it. It takes time, but it can be done.

If you're unsure if your plan will work, reply to this message, let me know what your situation is and I'll help you write up a plan.

If you have your plan ready.. execute your plans until you reach the next level...

Level 2 - Consumer Debt Free (non mortgage debt is paid off)

At this level, you have paid off all loans, credit cards, department store cards, etc. The only debt you have left is your mortgage. This is the only thing standing between you and being 100% debt free.

But you have a choice to make..
a) Accelerate the payoff of your house...or
b) Build up an emergency fund of 3-6 months expenses.

Hopefully you have an emergency fund of at least $1000. But at this point.. it's going to take a few years or more to pay off your mortgage. So the question before you is..how stable is your source of income?

A 3-6 month emergency fund is to protect you from job loss. If you are not guaranteed employment for the next few years then you may want to take a detour of your debt elimination plan and focus your financial energy to the emergency fund. How much is 3-6 of expenses? How much financial energy can you devote to it?

Once you have the emergency fund established and fully funded, then you can accelerate the payoff of your mortgage. In this step, you send in your mortgage payment PLUS any and all extra that you can afford, EACH and EVERY month until it's gone. It is possible to pay off a 30 year mortgage in 5-7 years.

When the mortgage is paid off.. you move to the next level...

Level 3 - 100% debt free

This means that you have absolutely NO debt, and a paid off house. Now you have the security that NO ONE can take your place from you. You also have your full INCOME to spend as you please.. but if you have to WORK for your income... then you are NOT financially free yet.

The next goal is to establish a nest egg large enough that you can live off the interest. It sounds daunting..but it's a lot easier than you think. If you're at level 3, you are already 90% of the way to financial freedom.

Building the nest egg means that now you're use all your financial energy to INVEST into accounts that EARN you interest. What you invest in will be determined by many factors.. but in general.. you want to amass somewhere in the neighborhood of 1/2 to 1 Million dollars. Compounding interest will HELP you reach that goal. Building wealth will be an exciting leg in your journey! When you've got $10k, $20k, $50k, $100k, $500k, etc. you're ready to take on the world!

A debt free person CAN do this.. a person burdened by debt CANNOT do this.

Once the nest egg reaches the size it needs.. you move to the next level...

Level 4 - Financially Free

At this point.. you can move your nest egg into something that will pay you interest without EVER touching the principal. This monthly interest should easily provide for your lifestyle. Now you can work.. or not work.. as you please. Financially free, you are now able to pursue your life's purpose without having to work to live. Financially free, you can give to whomever you like, do whatever you like, and enjoy life to the fullest.

No matter what level you find yourself at.. enjoy the journey to reaching financial freedom. It's my job to help you, motivate you, and encourage you.

Are you making progress toward your goals?

Smart Payment Plan · #2 (**permalink**) 08-30-2010, 05:23 PM

What about a person who owns a business with some revolving credit lines or with some debt associated with the start up or operations of said business that also brings in income?

DavidBibby · #3 (**permalink**) 08-30-2010, 06:49 PM

A business should also seek to operate in the black as well. If your business is leveraged on borrowed funds.. then you are vulnerable to events outside your control.

The businesses that are going to survive will be the ones who control their expenses and stay debt free.

damejennifer · #4 (**permalink**) 09-01-2010, 03:41 PM

Hi there

I wanted to get your option on my financial plan. I owe 7000 across 3 credit cards, ranging in interest from 14.9 to 19.5. I have been putting the most I can on all 3 cards, most on the highest interest one but yet it seems to make no difference. Any advice you can provide?

Thanks
Jen

DavidBibby · #5 (**permalink**) 09-01-2010, 05:09 PM

Quote:

Originally Posted by damejennifer

Hi there

I wanted to get your option on my financial plan. I owe 7000 across 3 credit cards, ranging in interest from 14.9 to 19.5. I have been putting the most I can on all 3 cards, most on the highest interest one but yet it seems to make no difference. Any advice you can provide?

Thanks
Jen

While I don't have all the details of each of your three cards.. I do believe there is one technique that will be most effective for you.

Most people don't want to pay "just" the minimum on their credit card bill. So they are used to paying an extra $20... $35... $50... or whatever on EACH of their bills.

Unfortunately.. this doesn't really help you pay down ANY of them.

Instead.. decide to eliminate each of the cards and debts one by one. I prefer to take care of the one with the smallest balance first.

Now. Whichever of the 3 cards you decide to tackle first.. put ALL your extra money on that card and pay ONLY the minimum on the other two cards.

So maybe by doing this you'll be paying an extra $100 on one card instead of spreading that out among the other two cards.

By doing this you should have your smallest one done in just about 2-6 months. Again I don't know your exact situation but I'm sure you'll be glad to be rid of these.

Also.. it goes without saying.. but don't borrow money on credit cards, especially the one you want to pay off.

I advise folks to cut up the card...pay it off as quick as you can...paying minimums on all the others... then CLOSE the account afterward.

Some do it... some don't. That's a choice you have to make.

Hope this helps!

gsmith2885 · #6 (**permalink**) 09-01-2010, 10:13 PM

Lets say your current minumim payments are 250 total. you should set aside the 250 and what ever extra you can pay for the entire time you need to pay off the cards. so lets say you are paying an extra 100 then you should pay 350 every month all the way to the end rather then just an extra 100 each month. IE month 1-350 month 2-345 and so on. Instead pay month 1-350 month 2-350 and so on until you pay off the cards.

dcrabb · #7 (**permalink**) 11-07-2010, 03:49 PM

Thank you,Dave for the honor.Yes I made a bunch of mistakes and I am responsible. I am a Parent with Two Daughters and wife. They need so much Financially and we only make so much (76,000) and shrinking.For example Braces (4300) and a Leadership Program in Washington D.C. for (3000) and snow tires (600) just this year really killed my Budget and I should have said NO.
I need a plan I can live with.
The numbers are:
1. Two Visa accounts- total Balance of 14,600 with 18 and 7 percent interest
2. Two American Express accounts- total balance of 10,100 with 11.9 and 9.9 interest.
3. Lowes Account- Balance of 2,000 with 19.5 interest.
4. Amazon Credit Card- Balance of 1300 at 7.0 interest.
5.Monthly Payments for above are $567.
I have contacted my Card Companies and have agreed to pay a very low interest rate for this year and maybe next year. Also they have put a stop on all usage, not a problem for me.
Here is a real mess: I borrowed $36,000 from my 401 k account to pay off a car payment of $637.00 and my Braces of $ 186.00. I have a 5% loan of $668.00 a month untill July 2014. Each paycheck I get untill this time will be deducted $334.00.I will be paying $500.00 instead of $637.00 a huge savings in interest.
I have another Car payment of $184.00 a month at 6.6 interest,finished in late 2013.
My paycheck is slightly below a thousand dollars. My second job is $ 250.00 a paycheck. My wifes Paycheck is $ 830.00 a paycheck.
I have a mortgage of $2414 a month total.
My Budget is trashed right now. I borrow several hundred dollars a month for I am short.
I am doing a Loan modification with my lenders to bring my mortgage down. I am waiting for their responce.
I have chosen a different Health Benefit plan with my Employer that will reduce my monthly more than a Hundred dollars.
I use moneydesktop software to help me get to debt free very quickly,but it is not working for me as I have a deficit in my Budget.
Not sure what else i need to tell you. I will wait for a reply.Good day

joelv · #8 (**permalink**) 11-07-2010, 04:32 PM

Dear Dave,

Nice to see what I am...... I am on your level one. What should I do? What you want me to tell you to help me?

DavidBibby · #9 (**permalink**) 11-08-2010, 01:22 AM

Quote:

Originally Posted by dcrabb

Thank you,Dave for the honor.Yes I made a bunch of mistakes and I am responsible. I am a Parent with Two Daughters and wife. They need so much Financially and we only make so much (76,000) and shrinking.For example Braces (4300) and a Leadership Program in Washington D.C. for (3000) and snow tires (600) just this year really killed my Budget and I should have said NO.
I need a plan I can live with.
The numbers are:
1. Two Visa accounts- total Balance of 14,600 with 18 and 7 percent interest
2. Two American Express accounts- total balance of 10,100 with 11.9 and 9.9 interest.
3. Lowes Account- Balance of 2,000 with 19.5 interest.
4. Amazon Credit Card- Balance of 1300 at 7.0 interest.
5.Monthly Payments for above are $567.
I have contacted my Card Companies and have agreed to pay a very low interest rate for this year and maybe next year. Also they have put a stop on all usage, not a problem for me.
Here is a real mess: I borrowed $36,000 from my 401 k account to pay off a car payment of $637.00 and my Braces of $ 186.00. I have a 5% loan of $668.00 a month untill July 2014. Each paycheck I get untill this time will be deducted $334.00.I will be paying $500.00 instead of $637.00 a huge savings in interest.
I have another Car payment of $184.00 a month at 6.6 interest,finished in late 2013.
My paycheck is slightly below a thousand dollars. My second job is $ 250.00 a paycheck. My wifes Paycheck is $ 830.00 a paycheck.
I have a mortgage of $2414 a month total.
My Budget is trashed right now. I borrow several hundred dollars a month for I am short.
I am doing a Loan modification with my lenders to bring my mortgage down. I am waiting for their responce.
I have chosen a different Health Benefit plan with my Employer that will reduce my monthly more than a Hundred dollars.
I use moneydesktop software to help me get to debt free very quickly,but it is not working for me as I have a deficit in my Budget.
Not sure what else i need to tell you. I will wait for a reply.Good day

Dcrabb,

Thank you for sharing your situation with us. I'm going to email you directly because I have some questions and it might be easier if you can email me back (which you can't do here until you have 15 posts).

I do hope that your mortgage company can provide you some relief with a modification. Some companies will put you on a "Trial Modification" and if that's a hoop you have to jump through, then so be it.

I have a wife and two daughters as well, though younger, so I know how hard it can be for you and the stress you're under.

Hang in there!

DavidBibby · #10 (**permalink**) 11-08-2010, 01:24 AM

Quote:

Originally Posted by joelv

Dear Dave,

Nice to see what I am...... I am on your level one. What should I do? What you want me to tell you to help me?

Joelv,

Just like Dcrabb posted above, if you can give me a breakdown of your debts and what your take-home pay is each month.. I can figure out a plan for you as well.

Somethings along these lines

Credit Card 1 - $8000 - 19% - $212/month
Credit Card 2 - $1000 - 12% - $40/month

With that I can help you figure out how soon you can have it all paid off.

dcrabb · #11 (**permalink**) 11-08-2010, 12:46 PM

Thank you,David. I can submit an entire budget to you through my email address.
Thank you.

cjscully · #12 (**permalink**) 11-08-2010, 02:12 PM

If you're already behind and you have too much month at the end of your money, you should seriously consider some form of consolidation.

When you're upside down that's the first thing you need to address. The next priority is dealing with your debt.

cjscully · #13 (**permalink**) 11-08-2010, 02:52 PM

My last post is crap. Ignore it. I hit the submit button when my phone rang thinking I could come back and edit it after I got off the phone. I started editing it and by the time I got done, the time limit for editing it had elapsed. Here is the complete post. Sorry for the crappy first "attempt"

In general when you're upside down that's the first thing you need to address. The next priority is dealing with your debt. I always recommend an approach like this: If you had no debt payments to make are you able to cover the rest of your budget out of your current income? If yes, then you can move on and work out a plan for the debt. If no, your problem is much bigger than just the debt. You must further reduce your expenses or increase your income, preferably both. Either way you HAVE to get your budget to the point where your non debt expenses are covered and you've got something in your budget to start addressing your debts.

Once you have the above done, if you're already behind on your debts you should seriously consider some form of consolidation. When it comes to this there is no "one size fits all" program.

dcrabb · #14 (**permalink**) 11-08-2010, 07:59 PM

Thank you. I am doing just that right now.I am not at ground zero yet. Getting there. It really takes time and effort to get to income minus expenses is at $0 or better several hundred dollars plus.
I am doing Loan Modification now,consolidating all Credit Cards,Lowering my Health Benefit Deductions,Lowering my insurance payments by increasing deductible.Put a Freeze on all Credit Card purchases.lowering my Budget items.
Some items of change will not kick in till Jan. 2011. I am ploding and pulling every weed and crack I can. The answer to my budget is fortcoming.
Good day.

cjscully · #15 (**permalink**) 11-09-2010, 03:08 PM

Good!

Here's the big question: If you paid $0 on your unsecured debts each month does that put you in the black or are you still in the red?

I'm not necessarily advocating that you don't pay anything on your unsecured debt, it's a question of priorities. If you can't put a roof over your head and you've reduced all other expenses you have to cut something else... You have to stop the bleeding fast!

If your loan mod doesn't bring your budget into line so you can pay your unsecured debts and other expenses too, you may need to move or consult with an attorney about bankruptcy.

To be clear - I am NOT an advocate of bankruptcy. For me it's the last option after all other avenues have been explored and failed.

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