Editor’s Note: This is a guest post from Janelle Allen of The Grand Life.
When I was 22, I took a free entrepreneurship seminar offered at my university. Everything was going well until we started talking about money.
As we turned our eyes and ears to the forty-something instructor, he said something that I’ll never forget: “If you want to start a business and need money, just ask your parents.”
Yeah, sure. Asking my parents for money to start a business wasn’t an option.
Eight years later, I moved to Chicago to start a new job, but I still dreamed of being an entrepreneur. By now, I had more student loan debt ($50k) and only a modest savings ($5k). But I wasn’t getting any younger, so I set a goal to fix my finances in 3 years or less.
It’s All About Priorities
I have a friend who is a well-paid manager at a Fortune 500 company. She has no kids and a husband who makes more money than her. Still, she complains about the same things every time we talk: not having enough money and not being able to quit her job.
This same friend also takes extravagant vacations every three months, goes out to eat two or three times a week and plans to buy a new car, though her old one is fine.
My point? Your financial well-being comes down to priorities.
I decided that I would do whatever it took to achieve financial freedom. No whining and no excuses, just temporary sacrifice for the long-term gain.
Before you even start looking at numbers, be honest with yourself. Are you willing to change your lifestyle to fund your freedom? If not, stop reading this article and go read some fluff.
Step 1: Learn a Skill
Having a marketable skill greatly improves your chances of making more money. It’s what helps you shift from someone else determining your worth to you setting your own price.
My first skill was to teach myself how to build websites. Every night, from 12 – 4 AM, I studied web design after working two jobs. My middle name is Hustle.
On top of that, I went to grad school to learn about a new field called Instructional Design. Turns out it was a good move. While companies were firing training departments, they were hiring Instructional Designers left and right. By the time I moved to Chicago, I had so many design skills that I was turning down high paying contract offers.
But you don’t have to go to grad school to learn a skill. In fact, there are so many resources out there that I wouldn’t bother. Take free tutorials online, go to skill-related Meetups, take a class at your local community college or even check books out from the library to learn something that you can make money from.
Step 2: Decide and Calculate
The next thing you need to do is decide how much money you want to save in your freedom fund. Is it three months of expenses? Six months? Twelve? Decide what you’re comfortable with.
Now, whatever number of months you come up with, add one extra because something will inadvertently come up causing you to spend a month of your hard earned savings.
Tip: Take into consideration your family structure. Are you young and single and comfortable with more risk? Do you have a family? Do you have a partner who will support you? Do you have a partner who won’t support you? All of these questions affect the decision.
Now it’s time to set the numbers. You can do this.
- Pull up your bank accounts online and identify your regular monthly expenses.
- Take a pen and pad and make a list of all of your monthly expenses.
- Add up the amounts. This is the maximum amount you need each month.
- Double-check your accounts (credit cards too!) to make sure you haven’t missed anything.
Step 3: Downsize
Think you’re ready to start saving now? Not so fast. Remember what I said about priorities and sacrifice earlier? This step is where those come to play. When you tell people to cut back on spending, you quickly separate the walkers from the talkers.
Notice how I said “the maximum amount” in the Calculate section above? That’s because you haven’t downsized yet. Now that you have a moneymaking skill and you know how much you spend, it’s time to cut back on expenses. Follow these steps:
- Review your expenses and identify any items that you can eliminate or reduce.
- Change your spending habits to get rid of what you don’t need.
- Make a new list of your expenses.
- Total the amount (this will be the amount that you’re going to save each month).
Saving will be much harder if you skip this step. Downsizing will free up cash that you can snowball into savings. These are the sacrifices I made to add cash to my pocket:
- Gave my car away before moving to Chicago (Money saved – approx. $4000/yr)
- Downsized from a 2-bedroom to a 1-bedroom apartment (Money saved – approx. $2400/yr)
- Moved out of a trendy neighborhood where I was shopping and eating out too much to a quieter, more residential one (Money saved – approx. $2500/ yr)
Tip: We spend most of our money on housing, food and transportation. So move into a smaller home, get a roommate, learn to cook, carpool or take public transit. Do whatever it takes to reduce your biggest expenses.
Step 4: Don’t Budget. Spend.
Budgeting is a huge time waster. Ignore anyone who tells you otherwise.
Instead, what you need to do is put together a spending plan. If you’re in freak out mode by now, don’t worry. Here’s why you’re already ahead of the game:
- You know how much you need to save every month
- You have more money in your account now because you got rid of unnecessary expenses. (Right?)
- You have a marketable skill that you can use to make extra money.
Okay, let’s say your monthly expenses are $2000 and you want to have 6 months saved up when you quit your job. That’s $12k. Now, let’s say you can only afford to save $500 a month towards that goal, so your timeline is 24 months.
Next, it’s time to automate your spending. We’re going to focus on your emergency fund and your retirement account.
Your Emergency (Freedom) Fund
- Make sure you have a checking and savings account. (If not, go set one up. I recommend Ally Bank.)
- Set up automatic transfers from your checking into your savings account. This amount should be the monthly expense number that you defined earlier.
- Never think about saving again because you won’t even miss this money.
Your Retirement Account
If you work for a corporation and have a 401k:
- Find out what percentage your company matches.
- Log onto the provider’s website and set up an automatic deduction of that percentage to come out of your check.
- Increase this percentage over time. Most providers allow you to set up an auto-increase every X number of months.
If you don’t work for a corporation or one that doesn’t provide a 401k:
- Set up a Roth IRA with a discount broker like Fidelity, T. Rowe Price or TradeKing.
- Set up automatic transfers of a specific percentage of your salary whenever you get paid.
Tip: This is your money. You can adjust the amount you save automatically at any time based on interest rates or life events. Just make sure you adjust your timeline too.
Step 5: Tackle Those Student Loans
With your savings set on autopilot and your retirement set to cruise control, freedom is near! Whatever you have left goes to living expenses and entertainment (yes, you can treat yourself). Of course, if you’re smart, you’ll reallocate some of that money where you need it the most: those damn student loans.
My Strategy for Student Loans
Here’s the thing: It doesn’t make sense for you to save money in a low-interest savings account for 3 years if you’ve got $50K in student loan debt at 6 percent interest or more.
If you can pay even $100 more a month to your student loans, you’ll significantly reduce the amount you pay in the long run.
Here’s what I did:
- Adjust – I used a free student loan calculator to see the effect and timeline of different payment amounts.
- Call Your Servicer – Once I found an amount and timeline I was comfortable with, I called my student loan servicer and told them I wanted to change my amount so that my loan would be paid in 10 years, not 25.
- Automate – I set up my student loan payment to automatically withdraw from my account each month. Plus, you get a .25% interest rate deduction for doing this!
These steps helped me pay off $25,000 in student loan debt in two years. Some people might disagree with this move, but I didn’t want $50k staring me in the face when I quit my job.
Step 6: Work the Plan
None of the hard work you’ve done up to this point matters if you decide to throw in the towel mid-stream.
My Escape Plan took 3 years. The hardest part wasn’t year one or two; it was the last three months. In fact, I almost quit my job early because of it. In the end, I made an extra $6k in retirement interest by staying put for only 3 months.
But what if you’re working the plan and it still isn’t working?
What if you still need more income?
That brings me to my special gift.
My Gift For Paid to Exist Readers
By now, you’ve read about the steps I took, but let’s take it a step further.
As a special gift to Paid to Exist readers, I’ve put together a resource kit to help you create more income and get one step closer to your dreams.
Check out this TGL page. Drop in your email address, and I’ll send you some fantastic stuff I’m preparing specially for you.
- 5 Ways to Fund Your Freedom: Exclusive and simple income tactics that will net you at least $50
- Couples and Cash: A Worksheet for Discussing Finances with Your Partner
- Not Your Parent’s Money: A bonus manifesto to help you get over your parent’s money mistakes
Make this the year you invest in your freedom! If you have any questions about any of the strategies mentioned, don’t hesitate to ask. I’m happy to help you in any way I can.
About the author: Janelle Allen is the author and founder of The Grand Life, where she interviews creative entrepreneurs and helps people discover their why so they can live their best life.
If you’re ready to take Janelle’s advice and start preparing to quit your job join me for a free event later this month. I’ll teach you a proven strategy to work for yourself that I used to offer only in private coaching sessions.
This event is extremely popular and space is limited so sign up now to reserve your spot! Click here to sign up.