7 Steps to Financilal Freedom.

We live in a society based on consumption and fueled by capitalism. Neither of which are necessarily bad at face value, but can often became enslaving and even destructive when mixed with greed and/or frivolity. Our entire financial system is based on the expectation of inflation: mortgages are designed around the expectation that the properties value will go up; credit cards are given out and limits increased to keep people at the edge of there speeding ability and indebted to their creditors; annual "Cost of Living" raises are expected by employees so the cycle can continue on indefinitely.

What happens when inflation is no longer the constant, and deflation sets in? We start hearing words like "Mortgage Meltdown" and "Financial Crisis". Houses are no longer worth the "100% financing" loans they have on them. Businesses that have leveraged dept to get ahead can no longer sell there products for enough, or in high enough volumes, to pay their lenders. This results in layoffs that cause people to loose their ability to pay their numerous bills. In an attempt to "fix" the perceived "problem" the federal Reserve starts pumping trillions of dollars into the financial markets hoping to regain inflationary momentum; encouraging cheap loans to people who can't afford them. In the mean time, people like you and me, stuffer in the crossfire.

So what do we do about it? Try to play the game with the big boys, the way they want it played, with tax shelters, Limited Liability Business shelters, and other businesses dealings that you can trash when things get tough and they go under - hopefully without trashing your own credit and reputation? Maybe try catching the benefits of a government bailout along the way?

Perhaps what we should do is avoid the quick and easy "got'a have it now" attitude that leads to indebted slavery and despair, and instead follow the council that Modern Prophets have been giving us over the last century:

"Joseph F. Smith advised . . . 'get out of debt and keep out of debt, and then you will be financially as well as spiritually free' (In Conference Report, Oct. 1903, p. 5) . . . there are certain basic principles that we . . . can apply, such as: 1. Live within your income. 2. Prepare and use short- and long-term budgets. 3. Regularly save a part of your income. 4. Use your credit wisely, if it is necessary to use it at all . . . 5. Preserve and utilize your assets through appropriate tax and estate planning." - Franklin D. Richards, “Personal and Family Financial Preparedness,” Ensign, May 1979, 38

I've many times been thought in church about living within our means and staying out of debt, but for some reason I never really got it until I listened to a man who had a very specific and detailed plan: Dave Ramsey. While his plan works extremely well for anyone willing to put in the effort, I find myself wanting to take a slightly different approach, and believe there are people who need a little more flexibility in their planing. Either way many of the same principles apply, and go right along with the council I quoted above.

Here are my steps to financial freedom. The order of these steps is important, but depending on your situation you might find yourself able to skip one or two of them; not because you don't have to do them, but because you're already doing them.

• Step 1: Get caught up
  

Heber J. Grant said, “If there is any one thing that will bring peace and contentment into the human heart, and into the family, it is to live within our means, and if there is any one thing that is grinding, and discouraging and disheartening it is to have debts and obligations that one cannot meet” (Relief Society Magazine, May 1932, p. 302).

This mean having a budget. Before you catch up with your finances you must first make a budget. This is essential because if you don't know where your money is, where it's coming from, or were it's going, you'll never know if you're getting ahead or further behind.

I don't care what kind of budget you use, as long as it works well for you, and you can do it consistently, at least once every month, for the rest of your life (Dave Ramsey has a couple of excellent methods for tracking budgets). The first thing I put at the top of my budget is tithing (and other Charitable contributions) that I pay at least every month. As I've done this, I've always had enough to take care of my needs.

See my notes on a speech I gave about paying tithing.

The key to being successful financially relies entirely on budgeting, or in other words, telling your money what to do for you, instead of being a slave to it.

• Step 2: Sell and dispose of vices


". . . people are heavily in debt for things that are not entirely necessary . . . build a modest home . . . pay off the mortgage as quickly as [you can] so that, come what may, there [will] be a roof over the heads of [your] wife and children. I urge you . . . to get free of debt where possible and to have a little laid aside against a rainy day." - Gordon B. Hinckley, “The Times in Which We Live,” Ensign, Nov 2001, 72

This step sometimes needs to be done before step 1 can be fully completed, but you likely will not understand what your vices are until you've at least started step 1; in fact it may take a few months or more of working hard at step 1 before you truly understand what needs to be done in step 2 so that step 1 can start working for you.

So what is your vice? For some it's a big expensive house. For others it's a nice car, a boat, or even credit and consumer cards used for shopping any time one feels a little down or thinks they "need" that new pair of overly expensive shoes. What ever it may be, you need to shelf it long enough to get a grip on reality and get to where you can be more responsible about it.

I would even go so far as to say, anything you cannot get paid off in the next few of years needs to be sold; excluding any real-estate - unless that real-estate is just too expensive for your budget. Any credit cards you cannot pay off every month, without fail, need to be cut up. If you do not have the discipline to use credit cards appropriately, they need to be closed; ALL of them. Try using a debit card instead, but if you really have a hard time keeping track of expenditures, you may need to go to an all cash basis; Just as Dave would advise. And I don't care who told you credit cards are safer, if you can't handle the, they are extremely dangerous to your finances.

• Step 3: Emergency fund
  

This step should be completed as soon as possible; however, it's listed 3rd because it usually requires steps 1 and 2 to be done before one can get a good enough handle on things to be able to complete step 3. In fact the first three steps can be done simultaneously if you like, but its usually best to take things one step at a time.

Setting aside a little for a rainy day can bring more peace to you financial perspective then just about anything else you can do. Plus, once you're able to set aside some money and save it, you start to find saving money comes much easier. The amount you should save should be significant enough to cover any insurance deductibles or co-payments and/or unexpected repairs or other expenses that might come your way.

However, don't save up so much that it unnecessarily delays moving on to step 4. A thousand dollars is probably a good place to start, and I would recommend at least this much, but no more then a few thousand, even if you can save it quickly. If you end up using this fund, you'll need to come back to this step until you replenish it, so be sure to budge wisely enough that your emergency fund is only used for true emergencies; not something you just forgot to budget for, or think you "need".

• Step 4: Dept Pay-off
  

Some people spend all kinds of time trying to figure out how best to minimize how much they will end up paying in interest, or find fancy ways to pay of a mortgage faster by paying extra or paying early. The problem with all this is that it gets very complex, and usually ends up not helping very much if at all. In fact focusing on the highest interest rate loans first, is rarely the fastest way to get out of debt for one main reason: most loans have a minimum payment amount that includes some principle as well as the interest.

Eliminating that principle payment as quickly as possible, by starting with loans with the smallest balances first, frees up extra money in your budget much faster so it can then be re-applied sooner to other loans, and of course the sooner you pay of a debt, the less interest you end up paying on it. It also helps you gain a quick win which can be very motivating.

Personally, I like Dave Ramsey's theory of Focused Intensity were you start with the smallest balance and work your way up to the largest. It start with finding as much extra money as you can from your budget, by living on as little as possible, to use exclusively for paying extra on your smallest debt. The more you do without extras, luxuries, entertainment, etc. the more extra money you'll have to pay things off with. Once that smallest debt is paid off, move onto the next smallest debt using the extra money from your budget, and the money you are no longer paying to the debt you've paid off. Continue this cycle until you have everything paid off, except your house (and any other real-estate you own that is paying for its self - if it's not paying for itself you might consider it as part of step 2). By the end of this step you may find yourself paying a thousand dollars or more a month on you highest balance, high interest rate, loan.

• Step 5: Security Blanket(s)
  

When many of us were little kids, we had a blanket that as we got older we didn't want to give up. Often called a Security Blanket because it helps you feel safe. So how much money would you need saved up to feel safe from a catastrophic event, such as loosing your job? How much do you need to survive for a year?

That's right, how much would you need to pay for basic necessities for an entire year? If you have a lot of debt and monthly obligations, this is probably a full years salary for you; however, if you are out of debt, no "same as cash" obligations, or other monthly subscriptions/installments, you'll find you can survive off of very little, and very little for an entire year isn't all that much. I'd suggest saving 20-40% of your annual pay in an easily accessible money market or savings account (with a decent rate of return of course). You don't have to do it all at once, but if you start saving the money from your debt snowball, you'll have it faster then you might think. This should help you realize how quickly the money (not over night, or get rich quick of course) can build up just by using your income from you're regular job; with no gimmicks or risky investments needed.

"'. . . Plan to build up your food supply just as you would a savings account. Save a little for storage each paycheck . . . Make your storage a part of your budget . . . If you are saving and planning for a second car or a TV set or some item which merely adds to your comfort or pleasure, you may need to change your priorities. We urge you to do this prayerfully and do it now.' (Ensign, Nov. 1980, p. 33.) . . . One of the important keys of home production and storage is the acquisition of skills. Sometimes we may be able to buy food inexpensively, but the skills and intuitive wisdom gained through gardening and other home production projects are worth more than the time and effort they require. In a sustained emergency, basic gardening, sewing, repair, construction, and production know-how are invaluable. Provident living helps us develop these skills—and build family unity by doing it—before an emergency." - “Catching the Vision of Self-Reliance,” Ensign, May 1986, 89

This safety blanket doesn't have to be just money, but it does have to be something that you can use to survive with, such as food storage, or even a garden. If you have enough food storage to last a year, then you don't need as much money saved up to last for a year without any income. Some say Gold, sliver and other precious metals are also good insurance against monitory problems (I have some myself); however, keep in mind that gold (or cash) isn't very tasty or nutritious. If I could choose between gold (or cash) and food when both were hard to come by, I'd stick with the food.

• Step 6: Invest
  

To truly grow wealth, you have to make your money work for you, so that you don't end up working your whole life for your money. Still the best way for anyone to grow wealth is with the income they will earn over your life time of work. All I can really suggest here is to be wise in your investments, and look for investments with good track records of longevity and stead returns.

Get to a point were you are saving at least 10% of your income, which shouldn't be hard at this point if you've done all the steps in order. Certainly the more you can save and invest the more money you will have working hard for you. However, I must give a warning: don't try to save every last penny and turn yourself into Scrooge. Just as being in debt causes you to be a slave to your money, so can wealth if you get too greedy.

Try putting some of your savings aside to invest in your kids education. Give a little extra to charities, and even save up for a new car or house (see how much fun it is to pay for it with cash) or some other vice that you've had to do without for the few short years it took you to get to this point (that's right, Dave has testimonials from people who get to this point within a couple of years when they are truly focused on it). Just make sure you keep your expenditures within your budget without compromising your ability to continue giving and saving at least 20-30% of your income.

• Step 7: Pay Off the house
  

It may take many years to get to this point, depending on how dedicated you are to getting out of debt, but once you are here, it shouldn't be too difficult to complete this step. If you do find it difficult, then you haven't learn anything from completing the previous steps.

You'll hear a lot of people talk about how you "need" to have a mortgage to save on taxes, or to keep a good credit score. These statements have some truth to them, but if you take a closer look at the amount you'll save on taxes you'll likely find it's only a fraction of what you are paying in interest charges on the mortgage. Not to mention the extra risk, obligation, and financial bondage you are in any time you finance anything - including a house.

What about a credit score? If you've gotten to this point, you might find that really don't need one because you'll never buy anything with credit again! At least that's how truly rich people do it (read the Millionaire Next Door). The only problem I've found with this is that some employers want to see a good credit score before they will trust you. (Some bussnesses do the same, but they aren't impossible to avoid). However, it really doesn't take much to keep your credit score looking half way decent, and can be done without compromising your financial freedom; or having a large risky mortgage payment (take out a small loan every few years and pay it off after six to nine months, keep a credit card open that you never use, and keept your bank or credit union happy with you, and you'll be just fine).

Also check out my list of money related scriptures.

- Posted by S.J. Hollist

The 6 accounts to good credit

First of all, what's the whole point to having a good credit score? To borrow money of course. It may also help with setting up other accounts such as for TV or utilities, but they will just require a deposit if you don't have good credit. The only real reason is to get good rates on loans, but if you have too many loans that's not good either. It's really and balancing act, and despite popular belief it really is optional. If you're good enough with your money to never need a loan, then there's really no need for credit or a good credit score.

For those of you who insist on having good credit, here's a good six account formula that I've come up with from reading about credit and from personal experience that I believe will help anyone maintain an excellent credit score while still allowing you to achieve financial peace and freedom. Please keep in mind that I'm not a financial expert or financial counselor, and I really do believe that the ultimate goal should NOT be to get perfect credit, but rather to achieve financial peace and ultimately financial freedom and independence.

First of all, the basics: Don't make late payments, avoid bankruptcy and judgments at all cost, have 2 major credit accounts, don't even come close to maxing anything out, make regular monthly mortgage or rental payments, and check your credit reports at least once a year to make sure they are accurate. If you don't plan to use your credit history any time soon, you should contact the credit reporting agencies and have them put a freeze on your credit report so that you (or anyone else) cannot use it on a whim. Every time you allow a potential lender to look up your credit, it shows up on your credit history, and too many of these will hurt your score. Freezing you credit history can also prevent a lot of those annoying letters for pre-approved credit cards, as well as help to prevent identity theft and fraud.

If you don't have all of these accounts right now, don't feel rushed to go out and get them right away. If you are just starting out, be patient, as building really good credit takes a long time and very careful planning. If you have too many open accounts start closing them, but one at a time until you get a good feel for what you truly need. You don't want to close the one's you've had the longest either (unless you have a poor history with them), as a long stable relationship with your creditors will actually help your credit score.

Remember, you really only need a good credit score if you plan to finance something, so if you're going to an all cash basis, as Dave Ramsey suggests, you really only need the first two or three accounts. With that in mind, here's the 5 to 6 accounts I recommend (in order of importance):

1 - Savings.

We all need to save money, and this account will help you get started with that. This will give you a safety net for when emergencies come up. It should not be used for anything else. It doesn't need to be huge either, in fact once you've saved the enough to cover a year's worth of basic necessities, you probably have way more than enough, and should be already be investing into higher yield investments such as mutual funds (Investment funds are not included here because they don't affect your credit score, though they can help when taking out large loans such as a mortgage).

Just about any lender will lend you as much money as you have saved regardless of your credit, because they at least have some collateral that can be used to pay back the loan. Of course I wouldn't recommend buying anything on credit in the manner as you'll probably end up with a very high interest rate for something you could have just as easily pay cash for.

2 - Checking.

If you have a long standing checking account in good standing this will help your credit. You'll want to keep a minimum balance in it (some banks require this to avoid maintenance fees), and you'll want to manage it well so that you never bounce checks or incur overdraft fees. The more money you keep in this account as a minimum balance, the better it looks, but don't keep so much that you're losing out what could be well invested money (not to mention safety issues). I'd suggest between $1,000 to $10,000 for a minimum balance, depending on your situation, plus however much you need to cover what you're paying for with it.

3 - Mortgage or Rent (or any long term high dollar loan).

Certainly an affordable mortgage is going to help your credit, if you make your payments on time religiously every month. On the other hand if you are upside down on your house, paying more for it then anywhere close to what you can really afford, or not making payments on time, this will very likely destroy your credit. Be wise when buying a house, save up a good down payment, and buy something that's much less (not more) then what you can afford.

What if you are a Renter? Many rental facilities will report your payment history to the credit reporting agencies, but even if they don't they should at least be willing to give you good reference letters stating that you've made your payments on-time every month; as well as how much you were paying. Make sure you understand the landlords policies on this matter before renting from them. Any good lending institution with a good underwriter should be able to use these letter effectively, especially when you are applying for a mortgage.

4 - Line of Credit.

To truly have good credit you need at least one revolving credit line, such as a major credit card; though many credit consolers will recommend two major credit cards to obtain perfect credit, but I think having financial peace and decent credit, is far better than being constantly tempted by your credit cards in an effort to obtain perfect credit (Personally, I've never had perfect credit, but I've also never had trouble getting excellent loan rates). This account is not needed to show that you can make payments, but rather that you are responsible with credit, and aren't the kind of person who pushes their available credit to its limits. I would suggest a small line of credit of no more than $1000.

This line of credit should be tied to a debit card threw your checking account as an overdraft protection. The Debit card should also be tied to a major credit card company so it can be used as a credit card with all the protections that come with it. The thing you want to watch out for is that you never actually use the line of credit, but if you end up doing so only do it because it's an emergency and with the determination to immediately pay it off using your emergency funds in your savings account.

If you bank doesn't provide this type of product or protect, find a good Credit Union that does. My Credit Union actually lets me setup it up so that it pulls from my savings first before hitting the Line of Credit.

5 - The payment history loan.

This loan can be almost anything. It is where you get your secondary payment history from (after rent and mortgage payments, but if you still live at home or in a collage dorm, this may be your primary payment history). It could be a student loan, a car loan, a credit card or credit at your favorite store.

Be sure to use this account very responsibly. The key to having this load without destroying financial peace is to be conservative. If it's a line of credit, religiously pay it of every month, and do some research to find a good credit card that you feel comfortable sticking with for the long term. If it's a structured loan, don't borrow anywhere near to more than you can afford, or even more then you can pay off quickly and easily should the need arise. Also, be sure to find the best interest rate you can, as this could save you thousands over the life of the loan.

You actually only need to have this loan open for a minimum of six months (the longer the better), and you only need one of these loans every few years for it to show up on your credit report and improve your score. Make sure you close these accounts when you are done with them, as having a too many open accounts will hurt your credit score, even if you never use them.

6 - The Optional accounts

Having as many savings, checking and/or investment accounts as you want is probably ok so long as you can actively manage all of them responsibly, so they really don't apply here. However, some of you may want an additional credit card or store card, and you'll probably find that responsibly using one or two of these additional credit accounts will further improve your credit score. My suggestion to you is to use them wisely, and don't have more than one or two of them open at a time. Pay them off every month, and make sure you get good rates (less than 10% interest) on any balances.

Some credit councilors actually recommend carrying a balance of about 10-25% of your after tax income on credit accounts, but that sounds like slavery to me. Remember every bit of money you pay to interest charges, is that much less money you have to purchase with or save. On the other hand, ever bit of interest you make on your savings and investments brings you that much closer to true wealth. If you truly want to build wealth you'll need to stop borrowing, and start making your money work for you as hard as it can; instead of going towards making someone else rich.

P.S. Yes, co-signing also counts toward these accounts. I would suggest that the only reason to co-sign is so that you and your spouse are both on the loan so there's no confusion as to who the assets go to in the event of a tragedy. On the other hand, if you want to keep your finances separate, and still want everyone to have good credit, then you and your spouse should each have these five to six accounts. In such cases one of you can replace #3 with an additional #6 type account, but #3 is likely to be the one you'll both want to be on. Likewise, you can share some of them, and have others be separate, so long as each person only has their name on 5 or 6 accounts.

-Posted By S.J. Hollist