To meet our goal of achieving financial freedom in 10 years, we needed to come up with a financial strategy to manage our household income and expenses. Unless we’re very lucky and manage to come into some kind of large inheritance or lotto winnings, we need to have a plan to achieve our long term goal.
My financial strategy involves 4 components:
Developing a budget is an obvious starting point for any financial strategy. After all, it’s difficult to set financial goals if you don’t know how much money you earn and where you’re spending it. Unlike government budgets, the goal is to always have a surplus. Budgets don’t have to be super detailed, in fact since most of my expenses are fixed, I keep a rolling budget on an excel spreadsheet. A budget is important because it shows you where all of your money is going and which areas of spending you can cut back on to fund a savings or retirement plan.
2. Continuously Grow My Earnings.
I believe that there are always ways that we can grow our income. We can actively pursue opportunities to increase our income by getting a second (part-time) job. But with 2 small children our lives are hectic enough and time is certainly in short supply. Alternatively, we can consistently increase our income by growing our passive income streams.
Our investments in dividend paying stocks, low-cost index mutual funds and exchange-traded funds (ETFs) produce a steadily rising stream of dividend, distribution and interest income. This passive income will continue to increase for 3 important reasons: First, we continue to save and invest in these kinds of financial assets. Second, we re-invest the income generated by these assets. Third, the companies that we invest in typically increase their dividend payouts at least once a year.
3. Save and Invest.
We follow our family budget and live below our means so that we always have a little something left over to save and invest. I believe that the true source of wealth comes from the ability to generate a monthly surplus from our earning and spending activities. If you want to achieve financial freedom, the most important thing you can do to get there is to always save a little money from month to month and to grow that amount over time.
4. Pay Down Debt.
For many people struggling to get their personal finances in order, the biggest obstacle for them to overcome is that dreaded four letter word: D E B T! I must admit that I don’t believe in such a thing as “good debt,” but certain types of debt are certainly worse than others.
My goal is to pay off our rather hefty mortgage balance as soon as possible (hopefully within 10 years). Paying off our debt is certainly a high priority but not to the detriment of our saving and investing activities. After all, this is what it means to pay yourself first.
That’s my financial strategy what’s yours?
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