10 Phases on the Journey to Financial Freedom
I’ve always loved the topic of personal finance, but I haven’t always been responsible with money. When I look back, I began at rock bottom and continued through a progressive phase. I’ve grown so much, especially in my (nearly 3) years of PF blogging, FROM a low $60k salary, $25k debt, and a negative net worth TO a low $100k salary, zero debt, and a six figure net worth. Finally, I am on my way to building wealth and establishing financial freedom, but it hasn’t been easy.
I imagine most people go through a similar growth process, so I wanted to share what I think are 10 phases on the journey to financial freedom:
1. Digging the Hole: The general rules of personal finance, “live beneath your means” and “pay yourself first,” are stupid because “means” are menial so being able to “pay yourself” first is a pipe dream. You work and pay bills, then it’s gone. Occasionally, you buy something for yourself, but money is so tight, any slight deviation will throw your finances into a tailspin. In an attempt to make things right, you rob Peter to pay Paul, write checks you can’t honor, pursue credit you can’t afford, and borrow from family and friends. Frustrated with it all, you live for the moment, and the cycle continues.
2. Desire to Improve: At some point, you realize it is possible to change. Either you have an “aha!” moment or you meet someone who inspires you. Whatever the driver, you decide to make a change for the better. You try to figure out where to begin, and out of desperation, take advice from any and everyone who will give it. You also begin to read and research (a little), speak with and mimic the behavior of others who appear to be doing well financially.
3. Debt Reduction: You finally get the courage to figure things out, so you pull your credit to see just how much you owe. Ack! You’re surprised, but not really surprised. You do more research, learn a few tips, put together a battle plan, then get started.
4. Lose Motivation: After one or two months of chipping away at your debt, you feel deprived and overworked. Borderline depressed. After all of those extra hours at work to earn more money, all of those weeks of “doing the right thing,” and all of the things you could have been doing, your total debt has only decreased by a few hundred dollars. *sigh* You think to yourself “man, this is bullshit!” So you start doing things to make you feel better. You buy that new ____ to feel better. You avoid your responsible friends to feel better. In fact, you start calling them names like “boring, miser, scrooge, cheap, know-it-all, they have no life, etc.” to feel better. You begin to spend more time with the friends who you think are living the good life - all to make you feel better. After a few months of this, you don’t feel any better. In fact, you feel worse. By the time you realize this, you are right back where you started.
5. Back on the Wagon: Feeling silly and bamboozled, you decide to jump back on the wagon to take control of your finances once more. You’re frustrated again, but this time, you’re frustrated with yourself, not your circumstances. You know you can do better and you want to do better, but you don’t really know how. Slowly, you begin to implement some of the things you learned from your previous reading and research. Then you read and research some more. You start tracking your spending and applying every extra dollar you earn towards your debt.
6. Learn to Save: After spending a little time paying off debt, you realize, you don’t have a savings account - or if you do, there’s hardly anything in it. So you try to follow conventional wisdom and “save 10% of your earnings” but that doesn’t work for long because you apply so much money towards your debt reduction that you find yourself dipping into savings just to make ends meet. Eventually, you decide to stay focused on debt reduction and only save when there’s money left. This doesn’t work either because there’s hardly ever anything left. So you commit to saving $5 per week, that’s pretty easy and reasonable. Then $5 becomes $10, and $10 becomes $20, and so on. You like the comfort of knowing you have money in the bank, so you begin saving some of your tax refund and annual bonus money too. Before you know it, you’ve saved a few thousand dollars and you’re excited.
7. Build Momentum: You never thought saving money and reducing debt could be habit forming. Finally, a good habit! So you begin doing things you never thought you would do before. You’ve been tracking your spending for a few months now, so you start “evaluating” your expenses. You identify ways to save money just so you can save more and pay off your debt faster. You start grocery shopping with a list. You turn off lights and disconnect appliances when they’re not in use. You start packing your lunch during the week. You start reading fabulous personal finance blogs. :-) And good gawd, you disconnect your cable, remove all the fancy features from your cell phone, and stop shopping with your friends as a form of “entertainment.” In fact, you rarely go shopping at all, but when you do, you head straight to the clearance racks. Name brand clothes and designer handbags & shoes don’t appeal to you anymore because something else has caught your attention - saving and debt reduction. Applying money to both has become a little game now and you like it. The more debt you pay off, the more money you can use to “pay yourself first.” With each dollar you save, you start feeling even better. And the game continues.
8. Debt Freedom: After months (or even years) of sacrifice, you begin to see the light at the end of the tunnel. You’re down to the last credit card, the last few thousand on your car loan, or the last few payments on your student loan - and YOU CAN’T WAIT. Debt freedom is so close, you can taste it. You begin to make HUGE strides to pay off the last of your debt. You pack lunch EVERYDAY. You REFUSE to buy a new ____ even though you need it. You begin recycling and reusing things to avoid buying new ones. You sacrifice almost ALL non-necessities for MONTHS just so you can make HUGE lump sum payments. And then, you make that LAST payment and it’s over. You wait for that final payoff letter, that final statement, or you stalk your bank’s online service. Then you see it. Your balance is $0. And you exhale.
9. Increase Savings: Proud of your debt reduction efforts, you begin to focus on saving. First, you increase your emergency fund, then you consider a vacation fund, and a ____ fund for all the other things you’ve wanted but couldn’t afford. Saving before you buy is important to you now because you don’t ever want to be in debt again - EVER. So you take all the money you were using to pay off debt and apply it to your emergency fund. Once your emergency fund is where you want it to be, you start having a little fun with your extra money, but you never stop saving. After all, it’s a habit now.
10. Learn to Invest: Debt free, emergency fund, extra savings, and money to spare. The only thing left to do is invest so you can stay ahead of that evil little witch called inflation. You research, read, study, and speak with experienced investors. You ignore the “get rich quick” schemes and even part of “conventional wisdom.” You’ve worked hard for your money, and you want it to grow, but you don’t want to lose it by blindly following someone else’s “advice” either. Based on your research, you decide on an investment strategy that balances the “conventional wisdom” of diversification, the “recommendations” you understand from people you trust, AND your personal risk tolerance. It’s the perfect equation! Everything else is noise so you tune it out. During the learning process, you make some good investment decisions and some bad investment decisions. Although the good outweighs the bad, you quickly learn that you shouldn’t invest what you can’t afford to lose. Then you rinse and repeat.
The ultimate GOAL - FINANCIAL FREEDOM: The day when you don’t have to operate on a schedule, yet earn thousands of dollars every month without lifting a finger. That time will come, but it could be years away. For now, financial freedom could mean working a 9 to 5 that you enjoy, earning decent money, and always paying yourself FIRST. Eating and living healthy. Not worrying about bills. Buying whatever you want or need (within reason) without incurring debt. Making ALL decisions based on their impact to your quality of life, not financial constraints.
Hmm…do I see an outline for my book? Y’all are getting a sneak peak. LOL just kidding!
Based on this list, what phase are you in right now?
Readers frequently ask “where did you start?” so I’d like to share MY personal transition through each phase. I’m going to present it in a series of posts over the next few weeks months (what? you know I’m the Queen of Procrastination! Hmph! LOL). Putting my experience into words will take some time to write, but I’m excited about sharing it with all of you.
By sharing my financial journey to date, I hope it will show you that I understand what it’s like to have been a struggling single mom with nothing. If you haven’t already, I hope it will convince you to begin clawing your way out of the financial hole. If you have already, I hope it will inspire you to move past whatever phase you are in right now. And most importantly, I hope that by writing this blog and sharing the rest of my financial journey, you can learn from my mistakes and exceed all of YOUR financial goals.
Stay tuned for more!
~*~*~*~*~*~Work to achieve, not to acquire.
And always, BE FABULOUS!
This blog is the story of my financial life as a single mom. Subscribe via (feed reader) or (email) to follow the rest of my fabulous journey.
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“For now, financial freedom could mean working a 9 to 5 that you enjoy, earning decent money, and always paying yourself FIRST. Eating and living healthy. Not worrying about bills. Buying whatever you want or need (within reason) without incurring debt. Making ALL decisions based on their impact to your quality of life, not financial constraints.”
This is pretty much where I am right now. I did not experience many of the phases you wrote about (basically 1-8) because I was fortunately able to avoid a lot of consumer debt (no car loans, paid my modest student loan off in my twenties and have never carried credit card debt).
Some of this was just being lucky with my finances, some of it was timely advice/help from family members and some of it was based in my own need for independence. A large portion of it was marrying someone who shares my financial viewpoint and goals. So, I guess as a consequence, I am further along than I would be otherwise.
But, I will say, that I do step “back” into the “Investing” and “Saving” phases as the need arises. I don’t know all there is to know about saving and certainly not all there is to know about investing. So, I still consider myself an eager student. That is part of the reason I read PF blogs and other sources. I learn things all the time that help me to get better value for my money.
Always learning, always saving, always investing - that will be me for life.
Oh, and umm, give proper credit where it’s due. Your financial success can ALL be attributed to marrying a Capricorn. Respect and recognize! LOL[-SM]
I am actually at a combination of 5, 6 and 7. I started saving a few years back and stopped for whatever reason and have since been back on the wagon for about 6 months. And while I started with small amounts being transfered into my savings account, I’ve since increased to a little over 10% of each pay (after taxes). And I’m hoping to keep this up that the momentum is built and it becomes a habit I can’t stop.
But these are really good, I’m gonna send the link to this post to a few friends.
You’re right in the midst and it sounds like you’re on a mission. You go!!
Thanks for sharing the link. [-SM]
I think i’m at 7. But there’s a twist - I flip flop. (Ha! i should run for president…j/k….) You see - i’m at the point where I can’t do 50/50 (take half of what I can and put it towards debt reduction and the other half towards savings) even though it’s a pretty smart idea. I’m edging towards the point where my wants are going to become needs very quickly - i.e. I WANT a new car but don’t know how much longer I can hold out until I NEED a new car (although - you had a car for twelve years (!!) - how did you do it?), I WANT to pay off my credit card, but I may NEED to soon, I WANT to buy a house but if ish happens, I may NEED to buy a house (or condo…something with ownership, not rental). See where I’m going with this? So it’s like, I can do 50/50, slow and steady and get there when I get there or I can do 80/20 (80 in savings, 20 towards debt reduction) and have a ton of money and still a lot of debt. Hmph. I hate that I can never stick to a certain plan because both are good.
Girl, I ran that car into the ground. LOL By the time I was done with it, it wasn’t safe AT ALL. The avg person wouldn’t have kept it for 12 yrs.
Paying off a credit card is not a bad thing. It should be a NEED anyway, so do it.
Not sure if I agree about the house thing. That is not a NEED, but if you’re financially ready, go for it.
From an emotional perspective, applying more $$ to savings than debt reduction is a good thing because you feel like the savings is yours to keep. But don’t forget, you incurred the debt for something you wanted so now you must pay it back. Further, there comes a point when saving more may hurt you. For ex: let’s say you have $100 discretionary cash every week and you apply $80 to savings and $20 to debt. If your savings is earning 3% but your debt is accruing at 15%, that doesn’t make a lot of sense. Think about it. [-SM]
I am on step 9. I also started about 3 years ago and now I have a net worth of $125K - and I am a single parent of a 15 year old girl also! Thank goodness I didn’t do step 1 as badly as others, but I definately went through all the other ones.
Wow! Our stories are so similar, it’s down right scary! But I have to be honest, I’ve touched EVERY phase on this list. I can’t say it wasn’t ‘as bad’ as others because all that matters is I was there, so I can relate.
Do you have a blog? I’d LOVE to read it. [-SM]
I really needed this post.
I’ve been an on and off lurker here for about a year or so, and while I know that your journey to financial freedom has been a difficult one, I always felt like I came in on the blog a little too far into your journey to really relate.
Reading about the actual mental/emotional journey to financial freedom step-by-step definitely helps (as I’m somewhere between 1 and 2). At 25, I’m ready to start creating the foundation of ideals on which my financial future will be built. It’s comforting to know that even if I have a slip-up here and there, I am still on the right path just by having that desire. Thanks!!
I’m glad you came back. Even if you can’t relate to me, I have a TON of fabulous readers who share their experience in the comments. No matter where you are on this list, trust me, you are NOT alone.
Having the desire to improve is great, but it isn’t enough. It takes action, consistent action, to really make a difference. I hope you hang around more often. [-SM]
Based on that list, I’m in the “building momentum” phase. I have eliminated my credit card debt, and I only owe my car loan and student loans. I have been putting lump sum amounts into savings for emergencies and a home. I’ve started a small investment account and am wading into the market. But I probably won’t hit non-mortgage debt freedom for another five years or so.
And, I hope you’re NOT kidding about that book.
Believe it or not, I had YOU in mind when I was writing 7 and 8. At the rate you’re going, you’ll get there a lot sooner than 5 years because your focus and dedication is amazing. All you need is a FT gig with bennies. I’m rooting for you. [-SM]
These are the kind of posts I love to read from you!:) I can’t tell you how many times I have gone through 4 and 5 over and over and over again. I think I’m at #6 right now. I am so determined not to touch the money I have put in savings. Hmmm. I make all these spending plans and budgets before paydays and then when it comes, I pay all the bills and then the rest is literally “disappearing”. Well not disappearing, but basically shuffling to places that ain’t written nowhere in the spendnig plan.. I’ll get it together permanently and soon.
Well I’m glad I occasionally write something you love. LOL I wasn’t feeling good this weekend and had a lot of time on my hands, so I was cranking them out. There are a few more where this one came from. So you’re gonna love me for at least a week.
As a fellow Capricorn, I’m surprised to hear that you fall off the wagon so often. We are notorious for meeting AND exceeding goals. If you don’t mind, I’d like to suggest something for you. This statement struck me…
“I make all these spending plans and budgets before paydays and then when it comes, I pay all the bills and then the rest is literally “disappearing”. Well not disappearing, but basically shuffling to places that ain’t written nowhere in the spendnig plan.”
It isn’t really a “plan” if you’re making it at the last minute (i.e. right before payday) so it’s easy to get distracted. What you’re doing is coming up with “ideas” then changing your mind. So might I suggest you create a spend plan from a macro view of your finances. An annual plan perhaps? Similar to my annual 401k, IRA, and 529 goals. But if an annual plan is too much for you, how about a monthly plan? Similar to the spend plan I created earlier this week.
The point is, your spend plan should NOT be associated with a payday. If you’re a salaried employee, your pay doesn’t fluctuate so this should be easy to do. Identify your goal, create the plan to meet your goal, then implementation on payday should be easier because the focus would be on meeting the goal, not all the other things you want that requires spending.
For example, let’s say you want to save $1,000 by the end of December. There are approx 10 weeks left, which means you need to save $100/week or $400/month - or however your pay period falls. If you get paid once a month, the $400 should come off the top. Everything left is for bills and spending. Savings first, bills next, spending last. In this order, if anything is short, it hurts your spending category, but nothing really important. When spending money is gone, it’s gone.
Look at me, blogging in my own comments. If you want to discuss further, hit me up. [-SM]
I’m at stage five with a foot in stage 6. Finally I feel at a point where I’m seeing progress. Only $450 left to go on my credit cards but still have so much more to go ($20K in student loans, $20K car loan, $6K in negative debt). It’s hard to talk about but slowly I’ve been opening up to more folks in my personal life and I’ve begun to feel so much more empowered. Just paying off two of my four credit cards has given me such a positive sense of well-being and lessened the stress.
Thanks for this post and your continual inspiration.
LOL @ “a foot in stage 6″
Money is a difficult subject to discuss, but it’s liberating when you’re not ashamed of your money demons anymore. The past is in the past, so your focus should be on what you’ve accomplished and what you plan to accomplish in the future. Although you have quite a ways to go, doesn’t it feel good to know that you’ve paid off TWO cards already? That’s progress you should be proud of. [-SM]
I’m at number 9!!! And I am so happy about that because I remember being at 3, 4 and t and don’t EVER want to go back (like you said). I must confess, I don’t put ALL the money I was toward paying down debt into my emergency fund. Although, now thinking about it, I probably could… guess I need to revisit the budget.
That’s alright honey bunch! You have made FABULOUS strides in the past year and you deserve to reward yourself. I do think you should establish an e-fund goal to help you stay disciplined though. Save a fixed amount, no matter what, and strive to meet your goal date. The wonderful thing about being debt free is, after your other goals are met, all other money is YOURS to spend however you want. Congrats on being debt free!! [-SM]
Thank you very much for your very practical post. I think if we all just did the first one and live below our means, we would be fine. However, with advertisement dso powerful in our country these days, I can see why peole over spend. It is absolutely crazy.
Hi there. Welcome and thank you for commenting. I removed your link to your christian debt reduction site. Free advertising isn’t allowed here.
And it’s ironic that your comment is about influential advertising. While I understand what you’re saying, I can’t blame advertisements for people overspending. People overspend because they are impatient and lack discipline. Your correlation is similar to someone blaming McDonald’s because they’re fat. Makes me wonder… [-SM]
I’m currently at stage 9. I need to increase my income streams to graduate to stage 10 successfully.
Great post!! I look forward to the ‘mini-series’!
Make that money honey! LOL [-SM]
Superb post! One of the best I’ve seen on your blog. I recognize the pattern in myself. When I sold my business, I got serious about paying off debt. I paid off over TWO HUNDRED THOUSAND DOLLARS in debt in a year! (Mostly business debt, which due to the type of sale, I still had to pay off.)
Now I’m to the point where I have more savings than I’ve ever had, some investments, and most importantly — I have positive cash flow every month!!!
It feels great, and I drive my friends crazy with frugal tips, but it was all worth it!
-Erica
Hi Erica. Welcome and thanks for de-lurking to comment. You’ve paid off over $200,000 in ONE year? Wow! If time allows, I’d love for you to write a guest post about your debt reduction. I need to read that story. [-SM]
We’re at a combination of 5, 6, and 7, with occasional moments of #4. Great post!
IMO, 5-7 is the hardest, but I’m sure you’re doing a great job. Keep at it. [-SM]
Based on your list, I’m in one of the rinse and repeat parts of phase 10. My version of your list looks more like this:
1. Living at my means – paycheck to paycheck, budgeting every penny
2. Graduate from college and get a real job
3. Debt reduction (pay off student loan)
4. Go back into debt (buy house)
5. Refinance house from 30- to 15-year mortgage
6. Learn to invest
7. Build momentum
8. Employment freedom (all debts including mortgage paid; enough savings to retire)
In my list, I’m at #7 (and will be for probably six more years).
This is the ideal situation. Unfortunately, life isn’t that smooth sailing for many people. But you’re doing great. Congrats! [-SM]
I’m doing 8-10 all at the same time:
I have 3 credit cards, but I only use 1 regularly and it’s to make the monthly payment/pay bills at the same time. Then I pay off that balance with the next paycheck. I pack my lunch almost every day (except today we took my boss out to lunch for Boss’s Day, to the tune of $65 pp) and while I admit that I still go to Starbucks every morning, I don’t splurge on the other indulgences that I used to. I can’t tell you the last time I bought myself something other than out of sheer necessity. (We’re talking panties and socks with holes!)
Where I live, there are a ton of activities that don’t cost much. Our local library, for example, has excellent educational programs and activities for my daughter, at low to no cost. I rent movies from Blockbuster online, which I prefer to Netflix, because if you take the time to return the movie at a local store instead of mailing it back, they check it in right away and give you a freebie while waiting for the next movie to arrive in the mail. (The plans and amounts vary.) This way I’m getting more for my money. Every season I take the higher end clothes that my daughter has outgrown and I sell them on consignment.
I’ve always recycled and been conservative with the energy consumed in my home, including hanging out many of our clothes to dry instead of running the dryer. For my business attire that requires dry cleaning, I found an even cheaper cleaners who charges $1.75/piece. I clip and use coupons every week, and while I shop at Whole Foods and Trader Joe’s for certain items and the market for fresh produce, the rest of our standard staples are bought at the less expensive grocery stores, usually on sale and using those coupons! I sold my car and paid off the one my ex used to drive so that now (for the first time in over 15 years) I have no car payment. (That was a huge sigh of relief for me.) I was also able to change my insurance coverage due to now having a less expensive, older car, and I receive a discount for having my homeowner’s insurance with my car insurance.
I own stock and have an IRA, in addition to forthcoming pensions from two companies after retirement. I haven’t looked into refinancing my home but my mortgage payment is manageable and I have sufficient disposable income in addition to socking $ away from every paycheck into my 401k and my daughter’s 529 plan each month. (She’s only 4 and I opened it when she was 6 months old.) I won’t talk about the massive amounts I’ve lost in those accounts because those losses were out of my control, but I’m optimistic about the future (if Obama gets into office) and am determined to continue saving and also increasing the amounts as soon as I receive my next raise at the end of the month. I will also save my bonus and pretend to forget about it.
Finally, I resumed my freelance business that I started while in grad school and stopped after getting married and having my daughter. But now, instead of using those payments for bills, I deposit them in my savings. I’m also writing a book which I’ll sell online, and the proceeds from that will be sent to my daughter’s 529.
It’s all a lot to juggle, but I’m proud of all that I’ve done, especially being a single parent. I enjoy this blog mainly for the parallels and also for any additional tips I can acquire. I’d love a book as well!
I’m at #5. It’s been one heck of a rollercoaster ride. I’m in the process of trying to find a new job to help pay off my debt. I recently got a copy of all 3 credit reports with my FICO scores and am ready to get the ball rolling.
I’m somewhere between 2 and 5. I decided to go back to school 2 years ago to finish a degree that I started long ago. I was doing pretty well with debt repayment but I’ll need probably a student loan to finish.
The good thing is that I only have 2 classes after this semester. So I’ll be moving to step 5 within 6 months. I can’t wait to read the rest of this series!
Ditto to ‘Skinny Black Girl’s’ ENTIRE comment. I’m at number 6.
I am at Step 5 :-). I was doing great, said eff this…went shopping and now I’m starting to sober up. I look around at new ‘toys’ in my home and say…that could have went towards my $45K student loan debt…that could have knocked a payment off of my car note. IT HURTS!!! lol
Sounds like an outline to a great book if you ask me….this is a great post.
Having climbed back on the wagon at the beginning of the year, I’m into #7. So far I’ve paid off close to 7k of my 16k debt in addition to having a little fun.
The thing I relate to in this post is the idea of being human and what happens when you have a breakdown, something that’s missing from many PF books. I’m learning to follow my own path. There’s a few areas that I’m stuck but I’m workin’ it out.
After the phase of freaking out when some of my yearly bills came due and I didn’t have the funds, I began creating ING sub accounts and deducting small amounts from my check. I’ve been able to pay my land taxes on time two years in a row and my “play” account has funded the majority of an upcoming cruise.
Looking forward to your series and the book and please keep up the “fabulous” work.
-A fellow Capricorn
Great post! And thanks for the link.
I think many people cycle from 1 to 7 over and over without ever really breaking forward into financial freedom. I know even I am guilty of this. I’ll save aggressively for a few months and not shop or splurge and start seeing real progress - and then I get bored or unmotivated and splurge on a trip or a shopping spree. Then of course I have to dig out of that hole and rebuild motivation…but as long as you’re taking more steps forward than back, you’re still making progress!