Strap yourself in. I suspect that this will be the first of many posts on the topic of personal finance. Money affects everyone. Everyone. If you are able to figure out your finances, it can change the trajectory of your life. In this article, we’ll be talking about the first 4 steps to take you from financial dependence to independence.
If your financial situation has changed, whether it’s because you are moving out on your own for the first time or if you are starting over again later in life, this article is definitely one that you’ll want to read.
Step #1 You only know what you know… so you need to know more.
Financial literacy is deplorably low in North America. You learn very little about how to handle finances in school and some of what you learn will be painfully out of date. According to a survey deployed by MNP in 2018, 39% of Canadians rate their financial knowledge as poor. We can do better than that.
Here are a few ways to build your knowledge base:
- Read books
- Watch Youtube
- Listen to podcasts
- Read blogs
- Take courses
I will be sharing the resources that I’ve been following the past few years with you in a future post but there are tons of options out there. A good place to start would be McGill University’s Personal Finance course. I took this course at the beginning of my journey. It’s basic but gives a foundation for learning more. It’s free and online so you can take it in your spare time.
Step #2 Determine where you are now… and where you want to be.
This is a place of no shame. If you are at the beginning of your journey, you may be facing incredible debt or be on the brink of bankruptcy. I’ve been there, trust me, that is just the beginning of something much, much better.
Depending on who you ask, there are a few different versions of these stages, but they are all pretty similar to this.
Financial Stages
- Dependence. This is where you are completely dependent on others for your finances. That could be your parents or your spouse or social assistance. You would also be at this stage if you are spending more than you earn and are reliant on debt to pay for your life. In that case, you are dependent on credit cards or loans.
- Solvency. At this stage you are surviving. You are earning money and able to pay your bills. You may have loans, but you aren’t adding to them every month at this point.
- Stability. You may still have debt at this stage but you are earning enough and spending less than you earn so you are able to not only pay your bills but also to put a little extra towards your debt and start to save. At this stage, you should have an emergency fund so that you can deal with setbacks like if you have to move or pay for a car repair or other unexpected expense.
- Debt Freedom. You have started to repay your debt and save into an emergency fund. At this stage you are knocking off your debts (except mortgage in many cases), especially your high interest debts like credit card balances. You would be amazed at how much further your money goes and how much better you will feel when you don’t have to pay interest every month to your creditors.
- Financial Security. If you have been saving through the past few stages, then at this point you will have accumulated enough funds to have investments that earn money for you, whether that is in interest, growth or dividends, rental income or otherwise, once you can cover your basic needs without a traditional paycheck, then you are officially financially secure.
- Financial Independence. At this point, you are able to not only cover your basic needs with your extra income, but you are able to cover your lifestyle of choice. Let’s say that you need $20,000 per year to keep a roof over your head and food in you belly, but you’d also like to buy gifts, get out and enjoy your friends and family, travel, enjoy a hobby or anything else that you value, then you will need extra income to cover these extra pieces that makes life so wonderful. That could be another $10,000 per year or another $100,000. That’s entirely up to you.
- Financial Abundance. Many people won’t arrive at this stage and that is ok. But if you’d like to be completely financially free, then financial abundance is where you should be aiming. The extra money that you earn beyond your basic needs and lifestyle wants can then be put towards: generational wealth, business ventures, charitable giving (more charitable giving than usual), or anything else your heart desires (as long as it’s good for the earth and people around you of course).
The goal here is to recognize where you are, and to start taking steps to move towards the next stage. It takes some time and perseverance but you can do it – let’s just say that if I could do it, anyone can! When we went out on our own, I was financially dependent and had to find my way out of over $500K in debt. Today, I’m almost at financial security and it feels amazing!
step #3 Get honest with your values and find your “enough” and your “why”.
The journey to change your financial situation is long and sometimes hard. It is made easier and much better if you are honest with yourself on what you really want, why you want it, and how much you need to achieve it.
Let me give you an example:
Sarah has a young child and a deep need for financial security for both of them over the long run. She faced so much uncertainty in the past from parents to spouse and she has had enough. But if she’s going to make changes, she knows that she will have to make good choices consistently and she’ll need to really believe that her choices will move her towards this goal.
Then, when she’s asked to take a wine tour inspired girl’s weekend, she may want to go but then will want to ask herself if she goes, will it move her towards her goals or away from them. She may choose to not partake in the girl’s weekend this time, but find a great free festival or community event that her and her friends can enjoy together at another time that won’t drain her bank account (and she can bring her beloved child with her – Yay).
Take some time to ask yourself these questions.
- What is your why?
- How much is enough?
- What do you truly value?
Then use those answers to drive your actions to ensure that you are spending on what you truly value and still be able to move towards your dreams.
Step #5 Take action… start today.
Once you have done the big work above, you need to start taking steps to change your circumstance. Take one step today. Then another tomorrow. And keep going.
Here are some great next steps:
- Track your spending
- Make some goals
- Start paying off debt
- Open a separate, high interest savings account and start saving the first $1,000 in your emergency fund
- Take a course, read a book, watch a youtube video, listen to a podcast
This is just the start, you are curating the life of your dreams. Life on your terms. Embrace it. Celebrate it.
Then meet me back here as I expand on all things finance and provide some great, actionable steps that you can take to keep moving forward at all stages. I will be expanding on such topics as frugal living, earning more, investing, and more.
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