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Before You Start, Do This!

On my way into the office this morning I was listening the ChooseFI podcast and thinking about a better way to articulate the early steps to getting started and on a path to financial peace and independence. But before I do that, let me explain what that means.


Financial peace is different to every person, but to me that means that I can sleep at night, not thinking about bills to be paid, or upcoming needs. Christmas is not a strain that comes with added credit card bills in January. Additionally, it means that if I get laid off tomorrow, I have a cushion to fall on. If you have ever fallen on concrete or anything you know that it hurts, but add a mattress there and suddenly it does not hurt as much. The same applies to our job situation, does it feel good to get laid off, absolutely not, but when you know you have the money in the bank to take care of yourself, it suddenly does not hurt so much, you have the breathing room to accept what has happened and go find something else aligned to your goals. That covers financial peace, but now what about financial independence. This is totally different, it means that now you can walk away from your job, do whatever it is you want and not be concerned about where the paycheck is coming from. In essence you know longer depend on your employer and if a startup is in your mind, you can take the time to go do that. Most of you will recognize or align to some of my definition, while it is different to everyone, there are some core similarities.

Now, how do you get started and figure out what is necessary to get there. I teach the Baby Steps, popularized by Dave Ramsey to get out of debt and find financial peace, which I believe cover a good a clear strategy to find financial peace, BUT I believe they leave out a key part which I call the pre-steps to get you aligned to that plan, clear you plate and set you up for success.


Step 1: Understand Your Income

Write down very clearly what you make per month, Gross and Net. I tell people your net should include what your take home pay is, but I also emphasize to know what is coming out of that paycheck. Some things to include and think about are insurance payments, 401K contributions, Taxes and any other deductions coming out. You should know where your pay is going and what you are netting at the end of each paycheck.

Step 2: Understand Your Debt Position

All the companies out there are measures on various ratios, one of those is your debt to income ratio. How much is a company borrowing, versus how much they are paying? The same goes for you, when a mortgage company looks at you they are looking at this very same position. On a monthly basis how much are you making versus how much are you paying. You will see that number range from everything 35 to 50%, I would encourage you to look a bit closer at this. For me, I’m at about 16% because my only debt payment is my mortgage. The article referenced below shows some scary statistics, and some concerning ones to me, take a look, but here are some quick notes (Car Payments average $648, Average Personal loan $7,860, Credit debt up by 100 Billion, reaching 5,221 per household). Now the part that concerns me is that despite those increasing statistics our Debt to Income Ratio is on average 9.5% which I believe to be missing quite a bit of data. Many of you know that credit payments can be way less than the actual balance, plus student loans payments will be very low and keep you paying on them for years. That is why it is so important that you actually now your numbers and not rely on a bank to give you these. So to finish up step 2, write out your debts from smallest to largest and compare that to your yearly income (for this remove your mortgage debt, since that is typically the largest).


Step 3: Know Your Net Worth

Many find this daunting but it is really a pretty straight forward calculation. List out everything you own, your car, your house, investments and cash in the bank. Now lay out your total debt, this time including your mortgage. This now shows how much you are worth. Depending on your age, what you have been doing for the last few years and your amount of debt this may look really bad or really good. Which is exactly what you need to see to understand the basis to get started.

Step 4: Pull it all Together

Now you have a good picture of your position financially and it is up to you to look at those numbers and decide what you are going to do. What story are you going to tell yourself? What does financial peace and independence look like for you. Many people will look at those numbers, throw their hands up and just say forget about it, I just do not make enough or I am just not blessed financially or whatever your story my be. Or you can decide that life does not have to be this way, you deserve better and your family deserves better and be ready to make a change.


So, what are you going to tell yourself. I was listening to EntreLeadership this morning and they were conveying the story of a person that called into the show and said they just cannot save money. The response from Ramsey was simple, you mean to tell me if someone you cared about needed a medical procedure and you needed $1,000, you could not save that money in a 1-3 months. Well, you can guess the answer to that, if the circumstances require an immediate action you can find a way, so your answer to Step 4 above determines if you are ready to jump in and make a change. The time is now and the time is here to change your story, and know that anything is possible, so run the numbers, unless you are too scared, in which case I would say run the numbers. You owe it to yourself.


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(NOTE: I do not support signing up for Credit Cards to get points, especially if you are already in debt)


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