Next week will mark 247 years since 56 delegates to the Second Continental Congress unanimously adopted the Declaration of Independence and solemnly pledged “their lives, their fortunes, and their sacred honor” to the cause of freedom. It was a bold step which, in the end, cost many of those signers their lives and their fortunes.
The Founding Fathers were not perfect men and the legacy of freedom they bequeathed us was not perfect either. In many profound ways, we continue to struggle in our efforts to live truths which they considered to be self-evident: namely, that we are each created equal and that we are “endowed by [our] Creator with certain unalienable rights”, including the right to “life, liberty, and the pursuit of happiness.” However, as imperfect as our efforts may be, we are the children of freedom fighters and for that I am truly grateful.
And so, as we celebrate our heritage this 4th of July, I invite you to reflect on how you are doing in the fight for your freedom. What price are you willing to pay to really be free? Perhaps more to my point: what are you settling for in exchange for your freedom?
The opposite of freedom is bondage. As we surrender our freedom, we descend into bondage. There is no middle ground in this. There is no neutral. Every day we decide by our actions whether we are fighting for our freedom or betraying ourselves into bondage.
Financial freedom comes as we live by correct financial principles. If you want to be financially free, you need to understand some hard realities:
- Consumer debt is the enemy of financial freedom.
- Those who entice you into debt are trying to bring you into bondage.
- Choosing to live beyond your means is an act of self-betrayal.
When you buy on credit, you become subject to what I call the debtor’s paradox, a situation in which buyers are actually sellers. In the debtor’s paradox, debtors sell their financial freedom—something of tremendous worth—in exchange for things of trivial value.
Living within your means requires you to control your spending. You may have to radically alter your day-to-day spending patterns. For example, how often do you go out to lunch? How often do you pick up a coffee on your way into the office? Do you have a gym membership that you don’t use? What kind of cable TV subscription do you have? What is in your grocery basket? These are little things, but they add up quickly.
While you are getting your spending under control, you will also need to get a clear view of the debt you are in. You can do this by making a list of every debt you owe. This list will include every credit card, every auto loan, every medical bill, every IOU to your brother or best friend—anything you owe to anyone. For each loan on your list include the outstanding balance, the interest rate, and the minimum monthly payment.
Once you have a complete list of your debt, decide how much money you will set aside each month to pay down your debt. I call this your “ransom fund” because it is the money you will pay each month to buy your freedom. The larger your ransom fund, the faster you will escape bondage. If possible, the ransom fund should be at least twice the total of your minimum monthly payments.
Every month, you will use your ransom fund to systematically pay off your loans. Your first step will be to take money from your ransom fund and pay the minimum monthly payment for each loan. You will then take the remaining money in your ransom fund and apply it to the balance of your smallest loan. Repeat this every month until that loan is paid off. Once it is paid off, the ransom fund stays at the same level and the process continues as before. As each loan is paid off, more of the ransom fund is available to pay down the next loan and the rate of payoff accelerates.
This process is simple, but fighting for freedom is never easy. Situations will arise that will test your resolve. As you maintain your discipline you will be surprised at how quickly you reclaim your financial freedom. So, stay focused. Be a freedom fighter.
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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 smerrell@montereypw.com.