In my last column I introduced the term “financial freedom” as no longer needing to rely on others (parents, friends, employers and the government) to meet our financial needs. This happens when our cash flow from income-producing assets exceeds our routine living expenses. That requires managing our fixed expenses to keep them at a minimum (for example, making it a goal to live off one income if both spouses are employed) and investing in assets that produce increasing cash flow.
What do I mean by income-producing assets? Well, most think of a home as a good investment because over time we build equity by paying down the mortgage. However, a home is actually an expense-consuming asset. Think of the ongoing maintenance, taxes, insurance and other expenses that go with the upkeep of a home. I don’t disagree that equity can be built, but perhaps not as efficiently as with an income-producing asset, like dividend-paying stocks or rental property. I’m not advocating either one, per se, but use them here for illustration. Each of us needs to determine what best fits our investment portfolio.
We need to understand that the future is not already written. Where we are two to three years from now has a lot to do with the choices we make today. We can shape that future or let it shape itself. That is a choice available to all of us. As in any area of life, if we choose to shape the future (rather than react to whatever comes along) we need to use a written plan. By planning for a different future financially, we take control of our financial situation by taking proactive steps that we wouldn’t have otherwise taken. If we choose to achieve financial freedom, then we must have a plan to pay off debt, minimize our fixed expenses and begin to build and shift savings into income-producing assets that generate an increasing cash flow.
For example, let’s say our monthly expenses to maintain our standard of living total $3,000. Included in that amount is $600 of debt from a $90,000 mortgage. At some point in the future the mortgage (and any other fixed debts) will be paid off, reducing our monthly expenses to $2,400 in today’s dollars, or $28,800 annually. If investments generated a 4% cash flow (income vs. appreciation), a portfolio of $720,000 would be needed to meet living expenses apart from wages or other income.
That’s a large number (a proverbial elephant), and most wouldn’t get close to it (absent inheritance or winning the lottery) without a long-term plan to achieve and save toward that goal, which takes years, not months. Typically we think of retirement as a time when we no longer rely on wages, but savings from 401(k) plans and Social Security income. As long as we have time on our side (years to save) and a well-developed plan (bite-sized specific steps to eat the proverbial elephant), achieving financial freedom comes easier, even though it may not come earlier.
I realize that not all of us have many years to save and work toward financial freedom. However, each of us can become more disciplined with financial management, and a plan helps us accomplish that. Achieving financial freedom with that plan is a great goal (and process) and also serves as a best practice to work toward as stewards of God’s wealth. I have also found that a significant benefit of using a plan to identify where we are, and giving specific steps to a better future provides tremendous peace of mind regardless of how far off goals may seem; so be encouraged. The goal may not be insurmountable, and the journey toward that goal is rewarding and peace-giving in itself.
Author: Craig Kuhlman