Six Habits for Financial Freedom
Have you ever wondered what allows some people to become wealthy, while other equally talented and well-positioned people just get by? Certainly, luck plays a role. However, as Ernest Hemingway said, we tend to make our own luck. Here are six habits than can help you enjoy the blessing of financial freedom.
Habit 1: Decide where you want to go and commit to a plan to get there. This first habit is foundational to everything else that follows. Some people may stumble into money (think about lottery winners), but nobody ever stumbles into financial freedom.
Attaining financial freedom requires intentional effort and sacrifice. It requires deferred gratification, which is rarely an easy choice. A well-designed financial plan can help you map the path to financial freedom. It can also help develop the resolve needed to pay the price for financial freedom.
Habit 2: Live within your means. Spending more than you make leads to growing levels of debt and debt is the opposite of financial freedom. If you want to be financially free, you have to get out of debt and stay out of debt. Dave Ramsey talks about achieving a gazelle-like focus when it comes to getting out of debt. If you have ever watched a nature video of a gazelle trying to out run a cheetah, you understand what he’s talking about. During the chase, the gazelle is focused exclusively on escaping the cheetah. Likewise, if we want financial freedom, we need to focus on getting free of debt.
Habit 3: Build a rainy day fund. Financial resilience is the ability to deal with the unexpected shocks without losing your financial footing. If you are living paycheck-to-paycheck and have no emergency reserve, even a small financial hiccup can turn into a significant reversal. If you don’t currently have a reserve, you can start small. Anything helps, but I recommend building your reserve of at least 3 months’ worth of core living expenses. As your wealth accumulates, you can grow your reserve to 12 months.
Habit 4: Be smart about investing. Several academic studies have shown that most people are not well-equipped to manage their own investments over time. Building a strong portfolio is difficult and managing the portfolio in volatile markets can be even more challenging. Emotions can get in the way resulting in poor investment decisions. A better approach is to work with a trusted advisor who takes the time to understand your goals and can structure a portfolio to fit your needs.
Habit 5: Stay the course. Financial success takes years to achieve, during which time you are certain to face many ups and downs. Your ability to stay the course when things get difficult will determine the measure of your success. The financial plan we discussed in Habit 1, provides the road map to your financial freedom. Update your plan as your life evolves and stick with it.
Habit 6: Teach what you learn about financial freedom to others. We always learn better when we teach others. If you are a parent or grandparent, teaching your kids sound financial principles is one of the most valuable things you can do for them. As you help your loved ones learn to live financially free lives, your understanding of the principles involved will increase. There are several excellent resources available to help you teach kids about money, including one of my favorites -- MoneyConfidentKids.com.
The habits that lead to financial freedom are not difficult to understand, but they take effort to develop. As you systematically work to develop them over time, you will experience the increasing financial confidence the comes with your growing sense of financial freedom.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.