Everyone can achieve Financial Independence, no matter your income or background. Money Mage created the 8 Principles of Financial Independence and it’s no surprise that the first principle is all about Debt.
Debt can be a never-ending spiral. Innocent purchases of credit cards, unemployment, and borrowing from friends and family can all start a spiral. Debt can and will run away from you if not checked. By following 8 simple Principles you can beat Debt and be on the path to financial freedom.
I have personally cleared over $160,000 of Debt using these Principles. If I can do it, anyone can.
The first Principle is ‘Develop a healthy skepticism for debt’. In other words: can we avoid Debt in the first place?
Here’s how you can avoid Debt:
Measure your Expenditure
There is a saying: ‘You get what you measure’. It’s in our nature to shoot for goals. It’s also in our nature to pay attention to metrics that we are measuring.
So, gather up your bank and account statements for the last month. Open up a Google Spreadsheet.
Capture every bit of income you make. Where from, and how much.
Now capture every bit of expenditure you made. What did you spend your money on? Mortgage? Debt? Taxes? Food? Utility? Cinema? Beer? Netflix? Car Repayments? Holidays? Capture everything, down to coffee.
You now have a Profit & Loss account of your finances for a month. How much you earn and what you spend.
Now you need to comb through your expenditure and figure out what you can reduce. Where can I go? Be brutal. Be ruthless. You need to do this to get on top of your expenses.
Keep repeating this exercise every month for the next 6 months & you’ll start to form a habit.
A habit of having more cash left at the end of the month.
Build an Emergency Fund
Did your car break down? Did your washing machine start leaking? Did you lose your job?
These are not black swan events. Prepare yourself!
Open a savings account with your bank. Take all the extra cash you saved in #1 and every month, stash it into your savings account. The savings account should have instant access and be as high an interest account as you can find.
Start small. Just save what you can. Try to save a few days worth of expenditure. Then a month. Then try to get to a couple of months of expenditure in your emergency fund.
Now, when your car breaks down, dip into your Emergency Fund rather than borrow.
If you do dip into your Emergency Fund, build it back up again.
Spend From Savings
If you are not Debt Free, you should clear down your debts. If you are Debt Free, you can use the same approach as the Emergency Fund to build up Savings and Investments.
‘Pay yourself first’, regularly paying into your savings and investments.
Open a savings account. This can be a notice account or a fixed-term account. Try to maximize interest. Place all of your spare cash in this savings account.
Now, when it comes to big-ticket spending like new TVs, holidays or even a new car, plan your spending: at least a year in advance. Spend from your savings.
Grow Your Income
The best way to reduce your risk of Debt and future Financial Independence is to relentlessly grow your income and keep your expenditure low.
There are many ways to grow your income, from seeing a promotion, taking a second job, retraining and switching to a more highly paid career, freelancing, selling arts and crafts, and making money online.
Or start a ‘sweaty startup’ business. Something like dog walking, garden care, or painting and decorating.
Keep your expenditure low. Don’t fall for lifestyle creep. The more income you have, the more quickly you can pay down debts, the more quickly you can build an Emergency Fund, and the more you can save & invest.
The 8 Principles of Financial Independence are not a secret. Principles will reduce your risk of debt and build lasting wealth for you and your family.