It’s easy to dream of the day when you won’t have a care in the world, including your mortgage payment and retirement, and can enjoy your money without guilt. This is the purpose of a structured financial framework.
The Seven Step Money Framework you’ve heard about will help you accomplish this – it’s not a difficult concept – but rather, a detailed step by step plan to take you from having no idea where your money is going to long term, sustainable wealth.
The first step to reaching this goal isn’t to create a large savings account or investing; instead, you must create an emergency cushion in case of unexpected expenses such as a car breakdown or doctor’s visit. If you have enough money set aside, you won’t have to worry about creating debt to pay for these emergencies.
Many people choose not to create a small cushion and go straight to paying off debts quickly but if you don’t create a cushion, then one small emergency can wipe out the progress you’ve made and put you right back where you started.
The plan is to have a basic emergency fund that can hopefully provide enough cushion to weather any sudden and unforeseen expenses before collapsing the financial plan entirely.
Once the emergency fund has been established, the next step is to eliminate all consumer debt (credit cards—student loans—auto loans—personal loans—medical bills, etc.) using a ‘debt snowball’ approach whereby you will pay off these debts in the order they are listed, starting with the least amount owed and ending with the most.
This approach may seem counter-intuitive because you will be paying off the smaller debts first, but this is actually very effective both psychologically as well as mathematically. Paying off those smaller debts quickly gives you momentum, which encourages you to continue paying off the larger debts. You will not feel overwhelmed by the amount of total debt, and in fact, you will see early on that you are actually making progress, which builds your confidence.
Once you have paid off all of your debts, the focal point will now be to establish your long-term financial security.
In this case, you will set out to build enough emergency savings to cover 3-6 months worth of living expenses, so that in the event of an unexpected occurrence (job loss—home repairs—medical issues—income loss), you won’t have any reason to return to debt.
The moment financial peace becomes real is when everything starts falling into place.
Taking a Detour
Renting, with intentions of home ownership, makes sense when you save to make a down payment.
Buying a home isn’t about rushing into a mortgage; it’s about properly preparing yourself to buy a home. A suitable down payment will lower your monthly payment, avoid additional costs for insurance, and provide a stronger foundation for your financial future.
Creating a good foundation for your home before actually building it.
Beginning to Invest
Many people think that investing for their retirement should have been their first step; however, it is actually at this point in your journey that you will start investing toward your retirement.
Once you have paid off your debts, have built a strong savings account, and feel secure in your plans to buy a home, it is time to start investing for your retirement. Investing for the long-term can be accomplished by consistently making investments with an allocated percentage of your income each month; this allows for time and compound growth.
The sooner that you begin investing toward your retirement, the more significant your wealth will be at retirement.
It will not happen overnight; however, with time, it will happen!
Making Plans For The Future
Financial planning involves more than just maintaining personal financial security; Once someone has had their first child, preparing for educational expenses is the logical next step in financial planning.
Preparing for educational costs does not mean considering all educational expenses. It simply means preparing so that you can pay for college or vocational training without creating financial hardship in the future. Over time, very small contributions monthly can add up to a substantial amount towards your children’s education.
Providing a better start for your children is what this means.
The Milestone Everyone Looks Forward To
Now you have reached the pinnacle of your financial journey — your house is paid off!
No more mortgage means no more stress of a large monthly payment. The ability to utilize your income more flexibly, the reduction of stress, and the acceleration of wealth accumulation are all outcomes of paying off your home.
This is the point where you have removed most of the financial burden from your life and money becomes an asset to use, not a liability.
Many people will tell you this point in time is when their lives started to change. This is the point when everything changes and the game is completely different for you.
There are now three real uses of money:
- Saving more
- Spending more with intelligence
- Helping more without throwing away resources
With no debt or mortgage, you are free to invest aggressively, have many enjoyable life experiences, and assist other individuals while not having to worry about your own financial success.
This stage of having wealth creates the conditions for wealth creation naturally, while at the same time financial stress ceases to exist.
An interesting observation is that this entire system is circles back around to a basic truth which is; Freedom is created by the structure.
Without having a defined plan for money, money will generally just vanish. By having a clearly defined road map for your finances, even with an average amount of income, you will have extraordinary results over time.
You do not have to be wealthy in order to begin this journey. All you have to do is move forward one stage at a time by taking action consistently.
Ultimately, establishing financial independence is not luck, it’s having a clear plan and sticking to it.
