12 Step Guide to Financial Freedom
Most people believe that the wealthiest individuals in the world – like Warren Buffett, Jack Bogle, and Robert Kiyosaki – created their wealth through a complex scheme, but nothing could be further from the truth. These titans built their wealth through a set of very simple rules, repeated year after year.
Below are those simple, time-tested and proven strategies implemented by the self-made millionaires. If you follow these strategies continuously over the years, you too can reach your financial goals, whether your goals are to get out of debt or retire young – the methodology is the same.
Start with Step 1. Once you have completed Step 1 move onto Step 2. Continue working from one step to the next in the order below. The faster you move through the 12 steps the quicker you’ll reach your goals.
1. Set Clear Goals
“The path of someday leads to the town of Never!” said the Wiseman. Get ridiculously clear on your goals; what kind of house you want to live in, what kind of car you want to drive, what kind of vacations you want to have, what you want to give, etc. then layout a timeline for when you want to achieve each goal (be realistic!). Armed with this kind of clarity you have a visible target you’re working towards. Tim Ferriss has a helpful document for this exact process here.
2. Set & Stick to a Budget
Everyone knows budgeting is hard and creates some FOMO but, remember your “why” and what you’re working towards. Are those $10 beers really worth your future dream house or car? To determine the required monthly investment needed to reach your goals use tools like Mint (which can also help with budgeting). If you’re struggling with a budget then use the simple Dave Ramsey envelope system.
3. Fully Utilize Company Match via Roth 401k
If you have a company sponsored 401k then use it! It’s free money! Contribute up to the match. Example: your company offers a 3% match then contribute 3% of your salary but nothing more. Contribute into your Roth 401k instead of your Traditional 401k, why? Because you want to pay taxes now (on the seed) while your taxes are low and not pay taxes (on the tree) when your taxes are high. There are other options for you if your company doesn’t offer a 401k; SEP IRA’s, Solo 401k’s, etc. The kicker is you’ll have to pay a penalty if you want to withdraw before you reach 59.5.
4. Pay Off High Interest Debt (>7% interest rate) via Debt Snowball
Credit cards or high interest student loan debt will crush (or severely inhibit) your financial position. Pay these off as quickly as possible and put it in your budget. Use the Debt Snowball technique by paying on the loan with the lowest balance. Once that loan is paid off, start paying on the loan with the next smallest balance. Continue until all debts above 7% are paid off.
5. Max HSA
This is a triple tax advantaged account (contributions are tax deductible, growth is tax free and withdrawals are tax free) that is available for individuals in a high deductible health plan. You may not have the ability to contribute to this account but if you do it’s one of the most lucrative and flexible.
6. Max Roth IRA
Good news! If you don’t have a company sponsored 401k or an HAS you can still contribute to your Roth IRA. These accounts are taxed like a 401k but with special benefits – like being able to withdraw earnings penalty free (for first time home purchase or financial hardship) and you can always withdraw your contributions penalty free after the account has been open for five years.
7. Get an Acorns Account
Acorns is a great way to invest in diverse, low-cost index funds with minimal effort. There are several different ways to contribute; recurring contributions (daily, weekly or monthly) or by rounding up your spare change. Example: you buy a Starbucks coffee for $3.44. The $0.56 of “change” is added to your Acorns account. You hardly notice your investing! And the fees are ultra-low.
8. Save 3-6 Months of Living Expenses
What are your monthly expenses? (You should already know this from your budget you built in Step 2) Save 3-6 months of living expenses for emergencies and the unexpected. If you are confident in your job security and health then you can go on the lower end with only three months, but if you’re in a volatile profession or have health concerns, save closer to six months (or more). Pro Tip: If you have a problem spending excess cash in your account, open a separate savings account or move the money into a Certificate of Deposit (CD).
9. Buy Real Estate
I’m a firm believer that everyone should own real estate at some point in their life. People will buy for different reasons, but the main goal (at least initially) should be to reduce your largest expense – your rent/housing payment. Below are a few options to help achieve this:
1. Rental – Buying a rental property isn’t for everyone. It’s for someone who is comfortable with calculated risk and whose finances won’t be strained by unexpected expenses. You can buy a rental for cash flow, tax advantages or equity growth. The type of property you buy (and why you’re buying it) should be aligned with your goals. Here is my personal real estate calculator to help you in selecting a great property.
2. Primary – If you’re not quite ready for a rental but you still want to take advantage of the power of real estate, purchase a primary residence. A primary residence can be more lucrative than a rental purchase because financing is cheaper for owner occupants and it requires less of a down payment (just watch out for high closing costs and fees). Also, you can buy another primary residence after one year of purchasing your current primary residence AND keep the cheap financing in place. Below are two of the most lucrative ways to eliminate your mortgage payment with a primary residence:
I. House Hack – This is a term coined by Brandon Turner of BiggerPockets where you purchase a house and rent out the rooms to friends, family or trusted individuals. You must trust these people because they are going to be living in the house with you! You don’t want to sleep with one eye open! Ensure you have something in writing so it’s clear how much each person will pay for rent, utilities, etc. If you’re not a fan of conflict, then this might not be the best option for you.
II. Airbnb – I’m sure you have heard of Airbnb – renting rooms (or the whole house) for short-term stays. These can range from a couple days to a few months, whatever you decide. Again, you must be comfortable with other people living in your house, but this is a great way to meet new people and eliminate your mortgage (especially for people who live in desirable vacation areas).
10. Hire Tax Strategist or Accountant to Maximize Capital
Taxes are most likely your largest expense, if not, they’re a close second – next to your housing payment, which we did our best to minimize or eliminate in the last step. A tax strategist works with you to find ways to maximize your capital while legally paying the least amount in taxes. However, most people will work with an accountant that is a friend, friend of a friend or family relative. This is a huge mistake! You need to heavily scrutinize your accountant. They should be working with you year-round to find ways to maximize your capital, not just at the end of the year to tell you how much you owe (which is how most accountants operate).
How important is maximizing capital? If you double one dollar 20 times it will be worth $1,048,576 but if you are taxed 30% on that same dollar before OR after you double it 20 times it will be worth $734,003, and if you tax it before AND after you double it 20 times, it would only be worth $513,802. Yes, you read that correctly – ignoring your tax planning could be a $500,000 mistake.
11. Depending on Personal Preference Complete 1 or 2
Depending on Personal Preference Complete 1 or 2 below:
Are you one of those people who hate debt? This is your time to pay it all off! Once it’s all paid off move onto increasing your investments. However, if you don’t mind debt then immediately start increasing your investments via the accounts listed below. Increasing your investments while you have low interest debt is statistically the better strategy because the average market/real estate return is between 7-12%. You don’t need to max out every account on the list, just contribute the amount you need to reach your goals that you outlined in Steps 1 and 2, then move on to Step 12.
Pay off all remaining debt via the Debt Snowball or;
Increase Investments by;
a. Buy stocks or index funds in this order (i.e. only move onto the next account once you've maxed out the previous accounts contribution limit);
i. Max Roth 401k – The Roth 401k is an after-tax contribution where the growth and earnings are tax-free. The 2020 limit is $19,500/yr combined total for your Roth 401k and traditional 401k. The same rules apply to your Roth 401k as your traditional 401k; 59.5 being the age at which you can withdraw penalty free.
ii. Brokerage – If you’ve maxed out all your retirement accounts and you still want to invest money, then open a personal brokerage through Betterment, Acorns (should already have an account from Step 7) or Wealthfront. These are low cost options that make investing easy.
b. More Real Estate (Primary/Rentals) – I’ve already mentioned some of the benefits of real estate in Step 9. There are too many advantages to mention but here are the most powerful: tax advantages, equity growth, leverage and cash flow. These are the four pillars that make real estate one of the best investments you can make. Here is a great read on how to purchase a successful rental property.
c. Start a Passion Project – If you’re on track to meet your goals you laid out in Step 1 then start a project you’re passionate about: get your personal training license, learn to brew your own beer, travel the globe, start a blog, etc. Your passion project doesn’t need to cost a lot of money, but it should fulfill you – meaning you love doing it!
12. Stay the Course & Spend Excess Cash OR Reinvest & Retire Early!
Now comes the fun! All your hard work is paying off! You’ve set clear goals. You’ve budgeted for those goals. You’re investing the right amount to reach those goals. What do you want to do? Invest more in the avenues laid out in Step 11 to retire early, or spend the excess cash? If you really don’t like your job then the former option might be more desirable, but if you enjoy what you’re doing then spend the excess cash guilt-free!
Enjoy the Life You've Created for You and Your Family!
You worked hard over the past few decades to achieve your goals. Are you proud? You should be! Talk is cheap, and most people will talk about what they want to do while a select few (like yourself) will go out and devise a plan to get what they desire. Most people will glance through this guide, use if for a week or a few months, then go back into their normal routine and never reach their goals. But not you! You stayed disciplined and when things got hard you remembered your goals and your “why”. So, take a second to look around and enjoy your reality you’ve created! The real challenge now is setting bigger, more audacious goals that help you grow and reach the next level. But for now, pat yourself on the back and enjoy it!
I hope you found this information valuable in creating financial success for you and your family, friends, partners.
- Cameron Tope
