Thursday, March 25, 2010
What is financial freedom? For my purposes I am going to define financial freedom as being debt free. A simple but useful definition. If you are debt free you are a lot harder to control. You don't need to work more to pay the bills because the rates adjusted or reset.
A lot of people call financial freedom having a enough passive income to cover all their expenses indefinitely. Passive income generally means things like interest from savings, dividends from investments and rental incomes. Let's call that financial independence, which is a good thing to shoot for.
But what about that in-between state? Where you may have paid off all your bills but that is about it. You want to get to financial independence but what do you do in the meantime.
You probably need to beef up your emergency fund. If it has $500-$1000 in it that is good but probably not enough for a major job loss. As a rule-of-thumb you can expect a job search to take 1 month per $10,000 per year in salary. So If you are making $50,000/yr you can expect your job search to take about 5 months, then a fully funded emergency fund would be $21,000. I got that rule-of-thumb from an employment specialist before the current recession, but it is makes a reasonable size for an emergency fund. Keep an eye on your industry, if it looks like it is in trouble then you may want to beef it up. Once you have your emergency fund fully funded you can and should start looking into investing the surplus wisely. You don't have to wait until you have all your debts paid off either. Once you have the credit cards paid off you can put a part (a tenth, a quarter or a third) of the savings into the emergency fund until it is fully funded.
Something not to forget is insurance, not that we can in the age of healthcare reform. Just like an emergency fund will help you get through the small bumps in the road of life, insurance will help you get through the big bumps in the road. Health, life, car, and home/renters insurance are all good and useful things. However, they are still an expense, and you don't want to overpay, so fine tune your coverage by reviewing it very year or two and especially with a major life change like a new baby or job change.
You may need some supplemental insurance. Homeowner's/renter's insurance usually covers only a limited amount of computers and electronics, review your policy or talk to your agent for details. Amateur radio enthusiasts run into this problem a lot, while it is easy to get started in Ham radio with an investment of $120, it is not hard to spend thousands and even tens of thousands of dollars on a collection of radios, cables, antennas and test equipment. The average policy doesn't just won't cover all that. Jewelry, guns and plenty of other things have the same problem. Talk to your agent about what limits and exclusions your policy has. It is also a good idea to inventory your house occasionally. A digital camera makes it cheap, fast and easy. Take a draw at a time spread it out on the bed or floor and take a picture. Save it onto you computer, save it as a group and burn it to a set of disks and save those in separate locations, like a safety deposit box or in your desk at work. If you want to keep a copy safe at home put it in a media safe not a fire safe. A fire safe keeps the interior below 451°F for a rated amount of time but that is too hot for most other forms of media like a CD-R which will melt if left in the sun too long in the summer.
Posted by Stephan at 3:07 PM