Pro-Freedom Money Management

I’ve been asked many times about my finances and I thought I’d do a write up on my pro-freedom approach to money management and financial planning.  Many people find it fascinating that I have little or no debt and that I invest into physical metals.  While my approaches certainly aren’t going to make me an overnight millionaire, I feel safe in my investments and have maintained a positive balance for nearly a decade.

I run my finances so that if something happened tomorrow, I would be OK for at least a year and probably much longer.  I have short term, mid term and long term priorities and prefer assets that are more liquid in nature.  I feel this is appropriate given market instabilities and a belief I hold that we are facing an inevitable financial meltdown at some point in my lifetime.  Regardless, I seek to protect against inflation and balance my assets so I can profit from any number of potential scenarios.

This write-up aims to be a fairly comprehensive perspective of the related elements to pro-freedom money management.  This comes at the expense of not being overtly specific about many of the given details and various theory about situations other than my own.  I have broken down the writeup into the various categories that I think need to be reviewed to attain financial freedom and to prepare yourself for a multitude of future scenarios.  Without further ado, I present my thoughts on this subject.

Spending:

To me, financial management begins with spending.  You can’t be free if you’re in debt.  I know many people who are deep in debt, straddled with the burden of financial inflexibility and have nearly no hope of recovering.  The first thing that has to be considered, whether you’re in debt or not, is whether or not you’re living within your means.  If, month after month, you’re spending more than you make or are barely breaking even, your financial future will be bleak.  But, if you can get a positive balance by whatever means necessary, then there is hope that you can be released from the clutches of debt.

There are many helpful guides out there that will help you save money. You can make your own laundry soap/cleaners, cook at home inexpensively, forgo luxuries like $5 coffees and a multitude of other things.  You can use coupons, club stores, freezer dinners and super sales to stock up on commonly used household items.  You can spend a little less on Christmas, perhaps take a less expensive vacation or reduce your entertainment budget.  Can you buy a nice used car rather than a new car?  That will save you a ton of money, especially if you shop it well.  Although I’m a guy, I’ve spent time on forums for penny pinching single mom’s to get ideas of how to save on spending.  Remember, your labor doesn’t just have to be used to make an income, it can also be used to save your income.  If you’re all ready doing all this and still barely making it, your only other option may be to work more or to seek a better paying job.

I personally don’t keep a budget, but for some that is helpful and perhaps even necessary.  The important thing is that you reign in the common consumer attitude of “I want it, I’ll have it” because that’s what gets people into trouble.  If you’re right up against the line of spending to income, a budget will probably be a good idea so you can really analyze how you’re spending your money and control it.

Banking:

If you’re still banking with a regular bank, go out tomorrow and join a stable community credit union.  I made this switch and I can personally account for it being the single most important decision I’ve  made for achieving financial freedom.  Why?

Credit unions usually don’t just offer free banking, many will offer investment bearing checking accounts with a direct deposit.  That way, nearly 100% of your money is working to make more money.  (Admittedly, it’s pennies, but still – they are paying YOU to use your money as it should be!)  Second, and I have personal experience with this, their fees tend to be a LOT less than regular banks.  In my early life, I had trouble keeping track of my finances and would constantly get overdrafts, $25 to $35 at a time.  This destroys what little money you’re making and it’s a nearly impossible cycle to break free from.  Credit unions often charge a fraction of that and also offer free transfers from a savings account.

Additionally, since they’re often smaller organizations, they can usually offer you a little bit better interest rates on savings accounts, CD’s and other interest bearing accounts they offer.  Credit unions do the same thing with your money as the big banks do by investing your deposited money into low risk, short, medium and long range investments.  Consistently, even in this bad economy, my bank is about a half a percent over what even the best banks out there are offering.  During the booms, that difference has been as much as 2-3% more than what banks can provide!  On even a small investment of $1,000, that’s a huge difference in the long term.

I will admit that credit unions are not eligible for the FDIC, which is what theoretically protects your money during a meltdown.  Most, however, do participate in a private equivalent and therefore can protect your assets even if the credit union goes under.  The real issue is, though, a financial event of serious magnitude.  If that meltdown comes, your money is going to drop in value very quickly and therefore, it’s important to have some of your assets outside your banking institution.  Even the FDIC can’t protect you from that.

Debt:

If you’re in debt, you have an uphill battle.  Often times, it makes little sense to start making investments if you have a mountain (or even a molehill) of debt.  The reason is that you’re often going to be making in the 1-5% percent range with investments, but you’ll be paying in the 10-20% range for credit and debt.  Point is, you’re still losing every month if you’re spending more on borrowed interest than you’re making on invested interest.  So getting that debt paid down is critical or you’re just freely giving your wealth to your lenders.  So how to do it?

Organize all your debts and find out all the interest rates you’re paying on each one of those debts.  Place them in order from the highest to lowest interest rates, not the balance or even the amount of interest you’re paying.  From here on out, make the minimum payment on ALL your accounts.  It’s important not to skip payments as this will result in penalties that reduce your ability to pay.  Whatever extra money you have (see spending above), place it ALL on the account with the highest interest rate.  Continue to do that until the balance on the highest interest rate account is paid off and then work the next highest interest rate.  As you pay these down, the burden of interest will be lessened and you’ll also have more money to work with.  Once you stop making payments on that first loan, all that extra money can be thrown at the next account and so on.  It will take months, or perhaps even years, but if you’re diligent, you will eventually come to zero.  One last thing – some credit agencies offer a discount in interest if you pay on the day your statement comes out versus the day it’s due.  Be sure to check on this because it could be up to a couple hundred dollars a year.

I personally recommend establishing a rainy day fund during this process. The rainy day fund is exactly what you’d use credit for – unexpected vehicle expenses, medical emergencies and the like.  You can take about 10% of the extra money and put it into a savings account once a month.  Don’t touch it unless you absolutely have to.  I’ll go more into the rainy day fund later in this article.

There are some debts where this may be impractical to practice, like with mortgages and possibly car loans.  Nevertheless, if you can get your finances to a more manageable point, you can start to whittle at these quite effectively.  Making an extra car payment or house payment per year can have significant results on the total interest you pay over the term of the loan.  First check to make sure your loans are eligible for interest breaks with extra payments.  If there’s no incentive, don’t bother to whittle these down quicker because your money would be better sent elsewhere…but if so, do what you can.  It can save you hundreds, if not thousands, in interest.

As for using credit during this period, there’s two philosophies and I’ve followed both at times. If you’re good about living within your means, you can use a single credit card for your monthly expenses and pay it off each and every month.  Paying it off every month means you won’t incur interest and therefore it’s almost like cash.  This is a little dangerous, especially for some, since there often isn’t a brick wall (like when operating with cash) that prevents you from spending more than you make.  The other option, which I prefer, is to work with cash.  If you have a budget set up, get the cash from your bank and pre-allocate the funds into envelopes and spend from each “envelope account” for the various items.  (e.g. food, fuel, entertainment, etc)  When you’re done, you’re done…but make sure you have the essentials before spending on things like entertainment and the like – bills paid, food in the fridge and fuel.  For things like house/car payments and other things that will be paid by EFT/check, pre-allocate those funds in your bank account and don’t withdraw cash.

I don’t recommend using debit cards since they feel like a credit card and can result in overdrafts and/or pulls from your savings if you go over the limit.  Ultimately, I think it’s better to see the money you’re working with so you have a better feeling for when you’re getting close to your limits.  It also helps you to spend more wisely and make better choices, since you’ll full well see the limitations of your income.  Once you get used to spending within your means, it becomes actually quite easy to manage your money.  Congratulations, you’ve learned the responsibility that comes with credit!

Rainy Day Fund:

I call this the rainy day fund, but it’s really the “everything else” fund.  There are obvious emergencies – car repairs, medical emergencies, appliance repairs and so forth. There’s also predictable, but long term expenses, such as vehicle purchases, beds, new appliances and other things you’ll spend money on, but much less frequently.  The goal of this fund is to get it to a minimum of your collective six month salary.  That may seem like a lot, but it will prepare you for the worst – a serious injury, an unexpected lay-off or other drastic turn of events.  The idea is that this money can be saved in advance, once you’re positively earning money, and it can gain interest while you’re not spending it.  The goal isn’t to spend it until you absolutely have to so you can maximize the interest earned.

Once you start to achieve lesser debt, you’ll notice that you’ll have more money to operate with and you can actually start to effectively save money.  While this can be done in a savings account, I’ve done something a little different.  What I did was set up six 6-month CD’s (certificate of deposit) in an amount roughly close to my normal monthly income and I’ve set them up at monthly intervals.  CD’s tend to earn a little more interest (not MUCH more than a savings account, but a few bucks a year at least.)  Should the worst happen, I’ll have six months of steady income.  I keep these rotating and virtually never touch them, so they just continually grow in size.  I also have a savings account that I can use to pay immediate expenses, such as new tires and other non-monthly occurrences.  Since I’m somewhat advanced at this, I also have some additional CD’s that help protect me into the six month+ territory and have scheduled them accordingly.  These are yearly CD’s and expire on the six month intervals…they’re enough for another year of top ramen meals and a lot of camping.

I also recommend keeping a reserve of cash available for unexpected expenses that must be paid immediately.

Credit & Credit Scores:

I don’t think it’s bad to have credit once you learn to live with it responsibly.  Some credit is unavoidable, like with home purchases and possibly vehicle investments.  Even credit cards can be good if you can pay them off every month or within a few months from a certain purchase.  Many, though, aren’t as responsible with them as they’d hoped to be and it gets them into trouble.

Your credit score has everything to do with what interest rates you get on any kind of loan.  This has a major impact to the amount of money that you’re sending over to your lender for the term of the loan.  A single point on a $250,000 home loan is a rather sizable amount of money.  Three points is that much more, you get the picture.  The point is that you want to have good credit.  Remember, the moment you make a mistake with credit, it will live with you for SEVEN years plus six months.

If you have bad or moderate credit, you may be able to do very little about it…but you may also be able to do a lot, including a fully clean credit report.  Pull your credit report and identify the “baddies” that are there.  These are either collection agencies or late payments, usually…but there’s a few other things that can hurt you as well, like being within a certain percentage of your total available credit.  (Example:  You’ll have a better score if you are using $15,000 of $30,000 available credit versus $15,000 of $16,000 available credit.)

Accounts that are old or have been turned over to collections can sometimes be removed with a letter writing campaign to the various credit reporting agencies.  If that fails, you can try to work with the collection agency themselves, but you have to be careful.  Whatever you do, never pay a collection agency unless you get it in writing that they will remove their claim against your credit report completely.  Your credit score will be hurt just as much by a “failed to pay” and a “failed to pay, paid in full” report, so don’t send them your money unless they negotiate to save your credit.  It’s not right, but a lot of people don’t know that otherwise collection agencies would be out of business.

If you have 30/60/90 day late payments with current creditors, there’s likely nothing you can do about it and they will hurt your credit for a time.  These are bad and will affect your credit rating significantly, but they tend to become less significant over time in terms of score and lender tolerance.  If you’ve followed my above advice for paying down debt, you should have none of these going forward.  You can try to write nice letters to your lender to have them help with cleaning up your credit, but very rarely are these letter campaigns successful.

Last thing, be aware that cleaning up your credit can be involved and will probably require a lot of insistent letter writing and careful attention to consumer protection laws.  Collection agencies specifically have very specific protocols that must be followed in accordance with the law and legally, if they don’t follow them, the credit reporting agencies are by law supposed to remove them from your credit.  I personally used a number of tactics when I was cleaning up my credit.  Some of the “baddies” were easy, some I had to coerce, trick and then threaten to sue.  It’s not a fun game.  There’s a lot of forums out there that will help you with this process.  I don’t recommend paying for this type of service, unless you’re really intimidated, since it’s something you can easily do with a few pieces of paper and stamps.  Also, the credit counseling agencies are more about consolidating your credit and making things more manageable, but it doesn’t always work in your best interest.

Once you have a clean report and your credit scores are into the 700+ territory, you’re golden as far as a borrower goes.  You can get the best credit cards with the best interest rates.  (Look to your credit union first!)  I strongly suggest, at this time, to work towards migrating your credit cards to better ones.  I suggest doing this in one fell swoop as every time you apply for credit, your score is dinged a little more.  If you do it all the same day, though, no one is the wiser.  Once you’ve got some good, high limit credit cards…cancel all your old cards immediately.  And if you’ve followed my advice above, you’ll rarely if ever need to use them.  But, you can buy that nice new TV and pay it off over three months with all the extra money you’re saving from not paying interest.

I used to argue for the point of maintaining enough debt to have a good credit score.  If you have no debt, your score will tank every time.  (Why, I don’t know…I guess it shows you’re not a very good borrower or you’re TOO good at managing credit!)  If you’re not applying for credit, you don’t need a good score and it doesn’t matter.  You’ll end up paying hundreds or thousands over the years and that’s money you can rightfully keep.  If you need to apply for credit, about 60 days out, take on about $2K-$3K of debt, or less if you have less than $10K in available credit.  If you’re in the positive, always maintain savings to pay that off once you’ve applied for the credit.  (Run your monthly expenses on your credit card(s) and save the cash to get there.  When you’re ready to apply, your credit score should return to sky-high and lenders will love you.  Always check to make sure you’re in the 700+ range before applying for credit.  Pay off that extended debt immediately once you’ve achieved the desirable result.

Investments:

You’ll notice this is the last subject here and everything else relates to getting into a position where your investments will actually start to work for you.  Again, it makes little or no sense to make 1-5% interest on investments and pay 10-20% in interest on debts.  You will be losing, every time.  I run three types of investments outside of my rainy day fund.  Long range, low risk, inflation protected.  Long range, low risk, retirement related.  Mid-term, moderate risk, gain related.  I do these in about a 40/40/20 ratio.  I’ll break these down, one by one and explain the logic and what I do.

The first, and the one I consider most important, are my long range investments that are protected against inflation.  Physical metals, like gold and silver, have historically retained their value when compared against typical inflationary rates.  I would also put firearms and ammunition into this category.  Inflation protection is important these days because the central banks intentionally inflate our currency when they expand the money supply.  This means that a dollar in the future will be worth less than a dollar today, even though it has the same face value.  In the future, these physical assets will require more dollars to purchase and will therefore maintain the original investment value.  (They do fluctuate with commodity and market prices, but overall, retain their long term value.)  The key is that you’re working with actual, tangible things, not silver/gold stocks or certificates.  (A certificate’s value is only worth the paper it’s printed on!)  With silver, which I personally prefer, I almost exclusively invest into pure 99.99% silver rounds and bars.  I do a small amount of junk silver too in the form of old US coins that actually have silver in them, but they’re not as pure.  (These are good for barter and gifts, but will retain litter or no value if facing a major currency change.)    With gold, again, it’s in coins and I’ve tried to get various 1/4, 1/2 and 1 ounce rounds.  Firearms are good, not just to protect your other assets, but also because they retain value if you buy them right.  A quality, fireproof safe is essential to protecting these investments.  Some people play the high/low game with these assets, but I personally don’t.  I buy low and sell high, much, much later.

The second relates to the typical retirement style of investments. I have a couple IRA’s (a pre-tax and post-tax) out there and long range CD’s with my credit union.  (By long range, I mean 5 year investment cycles.  Note, CD’s are terrible right now so it’s not a good time to invest into them.  IRA’s will outperform them by magnitudes.)  I try to put as much as I can into these with a mind that I’m diversifying my long range assets with physical things and also want a little play money that I can risk for high gains.

The last are my moderate/high risk investments that also have the potential for high gains.  You’ll notice that I only put about 20% of my assets towards this.  This is because I don’t have high tolerance for risk after having lost a lot of money in both my IRA’s and other investments in previous years from unstable market conditions.  Should markets achieve overall stability and inflation is kept in check, I may change my opinion on this, but for now, that’s where I stand.  I use my credit union’s investment services to manage various accounts for me in this regard and have spread out my different investments with varying levels of risk.  I don’t really keep a close eye on it and can’t even list the kinds of accounts.  It’s gambling money and it either pays or it doesn’t.  I’ve instructed my investors to invest in such a way that if I’m losing on one, I’m gaining on another, as close as practicable.  Every once in awhile, I skim off some of the profits and put it into one of the first two investments, such that my overall balance doesn’t get too out of whack.  Sometimes I have to pony up more to keep the account stable.  Them’s the breaks with moderate to high risk investments.

You’ll notice that I don’t play in stocks, other than the limited amount my credit union manages for me.  Certainly, this limits the gains that I can achieve, but it also significantly reduces my levels of risk against volatile market conditions.  Personally, and on multiple levels, I believe stocks go against the “pro-freedom” approach to money management.  Freedom, to me, means I can have access to my money whenever I want.  Stocks can be more difficult to withdraw and leverage, depending on what you’re doing and who you’re doing it with.  If I was managing a multi-million dollar estate, I probably would have more tolerance to stocks.  But until then, I’m playing my cards close.

I’m thinking about life insurance, but as of this moment, that’s not a major concern for me.  If you have any heir apparent children, this is a good idea for their sake.  Your circumstances may also be much different from mine, like you might need to account putting a child through college.  You’ll need to obviously adapt this general framework for your own set of circumstances, income and ability to execute.

Wrap Up:

Financial freedom is an achievable goal, even on a moderate income.  The goal shouldn’t be to get rich, but to get a handle on your personal finances and get to the point where your money is actually making you money.  Chances are, you may not have looked at things in this light or maybe it was never taught to you.  (The latter being my case, I’ve learned all these things with experience and diligence.)  I can assure you, if you stick with the principles outlined above, you can get there.

There’s a good feeling that comes when you’re not tied down, but I’ll warn you.  It takes discipline, a less-so consumer driven lifestyle and a desire to get there.  It’s a pretty remarkable place to be, I think, especially considering the average household retains over $35,000 worth of debt and that’s growing.  There’s a freedom when you know you could up and change your location, even to a different country, within a relatively short time frame.  It’s’ comfortable to know you’re protected against multiple failures, a level of investment redundancy, as it were.  I would say that this is almost the prudent way to do things, even in a world where you can get your essentials should you really mess up.

Oh, and lastly, I realize I’m putting risky, personal shit out here on the web for anyone to see.  I lock my doors for your protection, not mine.  And even if you could find my shit, you wouldn’t find shit.  Don’t fuck with me.  I will find you and I won’t give mercy.

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