Our entire financial system is based on debt and borrowing. Mortgages are designed around the expectation that the properties value will always go up (and inflationary practices in governments and financial institutions almost insure this); credit cards are given out and limits increased to keep people at the edge of there ability to re-pay, and everyone will tell you, you have to barrow to buy a car or to get a good education. But what if this is all a big lie perpetrated by our own social ideals of consumptionism, fueled by capitalism, and enslavingly villainised by greed and frivolity.
Rather then listen to the rest of society, and the clever marketing campaigns and product placements we see on TV, perhaps what we should do is avoid the quick and easy “got’a have it now” attitude that leads to indebted slavery and despair, and instead follow the council that Modern Prophets have been giving us over the last century:
“Joseph F. Smith advised . . . ‘get out of debt and keep out of debt, and then you will be financially as well as spiritually free’ (In Conference Report, Oct. 1903, p. 5) . . . there are certain basic principles that we . . . can apply, such as: 1. Live within your income. 2. Prepare and use short- and long-term budgets. 3. Regularly save a part of your income. 4. Use your credit wisely, if it is necessary to use it at all . . . 5. Preserve and utilize your assets through appropriate tax and estate planning.” – Franklin D. Richards, “Personal and Family Financial Preparedness,” Ensign, May 1979, 38
Many times I’ve been thought in church about living within our means and staying out of debt, but for some reason I never really got it until more recently, and I think my wife is starting to get it too. The biggest reason I think for not getting it is all the generalities presented me on the subject at church and home, but without a real plan of action, it was hard for me to understand how the principles can be put into action.
In an attempt to provide a more specific plan, and hopefully give others a more practical idea on how to apply the principles of thrift and being good stewards of what God has given us while on this earth, I’ve come up with a plan of my own to achieve financial freedom in 7 steps (the order of these steps is also very important):
- Step 1: Getting and staying ahead of your income.
Heber J. Grant said, “If there is any one thing that will bring peace and contentment into the human heart, and into the family, it is to live within our means, and if there is any one thing that is grinding, and discouraging and disheartening it is to have debts and obligations that one cannot meet” (Relief Society Magazine, May 1932, p. 302).
This mean having a budget, because if you don’t know where your money is, where it’s coming from, or were it’s going, you’ll never know if you’re getting ahead or further behind. Your money will essentially control you, instead of you controlling your money.
From there, it’s really just a simple matter of prioritizing your absolute needs first (and don’t forget the tax man), followed by less important needs, then a one or two important wants that make life bearable (but don’t forget to pay your insurance), and finally putting as much as you can of whats left over towards paying off dept or building up security for the future.
- Step 2: Sell and Dispose of Vices
“. . . people are heavily in debt for things that are not entirely necessary . . . build a modest home . . . pay off the mortgage as quickly as [you can] so that, come what may, there [will] be a roof over the heads of [your] wife and children. I urge you . . . to get free of debt where possible and to have a little laid aside against a rainy day.” – Gordon B. Hinckley, “The Times in Which We Live,” Ensign, Nov 2001, 72
This step may need to be done before step 1 can be fully implemented, but you likely will not understand what your vices are until you’ve at least started step 1; in fact it may take a few months or more of working hard at step 1 before you truly understand what needs to be done in step 2 so that step 1 can start working for you.
So what is your vice? For some it’s a big expensive house. For others it’s a nice car, a boat, or some other expensive item or idolization. Even credit and consumer cards can be vises, or enable other vises such as the ability to shop any time one feels a little down or thinks they “need” that new pair of overly expensive shoes.
- Step 3: The Rainy Day Fund
This step should be completed as soon as possible; however, it’s listed 3rd because it usually requires steps 1 and 2 to be done before one can get a good enough handle on things to be able to complete step 3. Theoretically, the first three steps could be done simultaneously, but its usually best to take things one step at a time.
The amount you should save should be significant enough to cover any insurance deductibles or co-payments and/or unexpected repairs or other expenses that might come your way. However, don’t save up so much that it unnecessarily delays moving on to step 4. A thousand or two dollars is probably a good place to start, and I would recommend at least this much, but no more then a half months worth of pay; even if you can save it quickly.
If you end up using this fund, you’ll need put it at the top of your budget priority (after the necessities) to replenish it as quickly as possible. Be sure to budge wisely enough that your emergency fund is only used for true emergencies; not something you just forgot to budget for, or think you “needed” but really didn’t.
- Step 4: Paying Off Dept
Eliminating a required re-occurring payment as quickly as possible, by starting with loans with the smallest balances first, frees up extra money in your budget much faster then any other method out there. This allows the eliminated payment to be re-applied to your next biggest balance to pay it off even quicker, and of course the sooner you pay of a given debt, the less interest you end up paying on it anyway; regardless of what the interest rate was. This also helps you gain quick wins which can be very motivating; especially if you’ve decided to literally start eating beans and rice for every meal to keep your grocery budget to a minimum.
- Step 5: The Adult Security Blanket
When many of us were little kids, we had a blanket that as we got older we didn’t want to give up. Often called a Security Blanket because it helped you feel safe and gave you a warm comfortable feeling. So how much money would you need saved up to feel safe from a catastrophic event, such as loosing your job? How much do you need to survive for a year?
Put it in an easily accessible money market or savings account (with a half decent rate of return of course, so you don’t have to worry about inflation). Don’t expect to have this built up all at once, but if you start saving the same money used to pay of your debt (don’t do this until step 4 is fully complete), you’ll likely have it faster then you might think just by using your income from you’re regular job; with no gimmicks or risky investments needed.
Also, this safety blanket doesn’t have to be just money, but it does have to be something that you can use to survive with, such as food storage:
“‘. . . Plan to build up your food supply just as you would a savings account. Save a little for storage each paycheck . . . Make your storage a part of your budget . . . If you are saving and planning for a second car or a TV set or some item which merely adds to your comfort or pleasure, you may need to change your priorities. We urge you to do this prayerfully and do it now.’ (Ensign, Nov. 1980, p. 33.) . . . One of the important keys of home production and storage is the acquisition of skills. Sometimes we may be able to buy food inexpensively, but the skills and intuitive wisdom gained through gardening and other home production projects are worth more than the time and effort they require. In a sustained emergency, basic gardening, sewing, repair, construction, and production know-how are invaluable. Provident living helps us develop these skills—and build family unity by doing it—before an emergency.” – “Catching the Vision of Self-Reliance,” Ensign, May 1986, 89
- Step 6: Invest Wisely
To truly grow wealth, and ultimately secure your financial freedom, you have to make your money work for you, so that you don’t end up working your whole life for your money. Still the best way for anyone to grow wealth is with the income they will earn over their lifetime of hard work; if used and invested wisely. All I can really suggest here is to be wise in your investments, only investing things you fully understand and feel comfortable with, and look for investments with good track records of longevity and stead returns.
- Step 7: Pay Off the house
It may take a few years to get to this point, depending on how dedicated you are to getting out of debt, but once you are here, it shouldn’t be too difficult to complete this step. To truly reach financial freedom, you must eliminate all financial risk, obligations, and financial bondage, including a mortgage payment and poor investments.
Do you think truly rich people care about their credit, when they can simply buy it with cash? Read the Millionaire Next Door if you want to learn more about this perspective. The only problem I’ve found with this is that some employers want to see a good credit score before they will trust you. (Some businesses do the same when signing up for services with them, but they aren’t impossible to avoid). In all reality, it really doesn’t take much to keep your credit score looking half way decent, and can be done without compromising your financial freedom; or having a large risky mortgage payment.