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
Decide
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.
Calculate
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.
You’ll get:
- 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.
Lol @ the professor encouraging people to ask their parents for money. that’s pretty much the one thing i’ve promised myself never to do. they’ve invested so much already. barring the risk of death, it makes absolutely no sense to do that (in my opinion).
quick question for you though. what’s the difference between a budget and a spending plan?
Yeah, the professor’s response showed how out of tune he was with people who weren’t from his background. Not everyone has the option or desire to ask their parents for money.
The difference between a budget and a spending plan, IMO, is intent and strategy. Budgets are generally set upon a framework of constraint and lack, i.e. “there’s only this much money to use.” They don’t always have an intent for that money and they usually make you feel bad, which is why they fail.
Spending plans, on the other hand, are an intentional, strategic plans for where your money is going. Instead of saying “I only have $2K in income this month,” you say “here is where I want to put my money. Based on my income, that breaks down into X percentage for each goal.” It’s a plan of action, rather than a restraint.
Ramit Sethi does an excellent job of explaining spending plans in his book I Will Teach You to Be Rich, so check it out. Let me know if you have any other questions!
Thank you for taking the time to write out such a comprehensive post for us, Janelle. Money is one of *the* biggest obstacles people face when quitting their job, & it’s great that you’ve created this resource for the many of us who need it.
My pleasure, Ev`Yan. I know from first-hand experience how hard it can be, so I want to help others see that there is a way out. It just takes some intentional action.
Great post, Janelle.
The part that resonates with me most is education. You’re right, you absolutely don’t need to go to grad school to get the knowledge you need. In fact, I’d argue that often you don’t need to get an undergraduate degree either.
I earned an undergraduate degree in business marketing and found most of the knowledge to be of little value in the real world. A college education (for the most part) currently is not equipping people with what they need to succeed.
Too much emphasis is put on theoretical knowledge and too little is put on applicable skills to actually create something, build it, market it and service customers.
The skills that I use on a daily basis for my work were learned through creating things, making mistakes and adjusting course.
The worst part is that many come out of college with huge student loans that will impact them for years to come.
Once again, great post, thanks for sharing your knowledge and insights.
Glad you enjoyed it, Dustin. You’re totally right: If I had to do it all over again, I’d skip my undergraduate degree in a heartbeat! The funny thing is, I had a blast getting my graduate degree and learned so much more–maybe because it was a 1 year program and there wasn’t time to waste? Still, most of what we learn in life is through experience, failing, and relationships.
Janelle –
The world needed a post about this. So many people view money as the executioner of their dreams, and you’ve reminded us — or maybe even shown us for the very first time the power we have to fund our freedom. These 6 Steps can be applied to any dream that someone is looking to fund, making it a must-have addition to your personal freedom arsenal.
Simply put: Amazing post. Remarkably done. Thanks so much!
Aww, thanks Jarani. The best part about life is that all the challenges we encounter are teaching moments. Not just for ourselves, but for others as well. Glad you enjoyed the post.
Great article Janelle, I find myself saying those same things about not being able to leave because I can’t save enough, rather than eating out and shopping which I don’t do, I’m cutting cable and few other expenses I could live without.
The education part is pretty huge to me, I work with a lot of people who are in the process of getting their masters and they’re realizing just how much time and money they’re wasting by doing it.
Great stuff.
You can do it, Vesone (especially with your mad video skills!). It’s just a matter of planning, action and timing.
Hi Janelle,
Great words for planing in everything and especially eating. The planing is necessary part in education because it determines how you will spend your life. I keep reading the such essays so that I can do better essays and write in a catchy style. I found good source (https://www.britishessaywritersempire.co.uk/how-to-write-any-essay/) to read the essays that may guide better planning.
Hey Janelle,
I really enjoyed reading this. I absolutely love the mentality behind a “Spending Plan” rather than a Budget (can’t help but cringe when I hear that word). I’ve already email this to my friends who could definitely benefit from this post:) Thanks again!
That’s what I’m talking about, Mika! Share the knowledge with others who need it. Thank YOU.
This is a great article Janelle – you’re right about all the fluff, and I like how organized and detail-rich your writing is.
Thanks for reading, Derek! I appreciate the kind words.
Hi Janelle,
Wow! This post is so valuable and I’ve bookmarked it.
Great advice on how to be financially free. Really great practical tips for those who really want to achieve financial freedom.
The point you made about reduce the expenses really fire me up. I been eating too much (expensive meals at trendy restaurants), spending unwisely of items (fashionable clothes). So for the next twelve months, I am going to cut down all this to achieve my goals. I will let you know how it turns out in a year from now.
Thank you, thank you so much.
I love it, Susanna! Good for you for being honest about your habits and making changes so that you can achieve your goals. Looking forward to hearing about your progress.
Great article. I don’t have student debts but I do certainly have debts through a number of bad decisions over the past couple of years!
I have a pretty well paid job at the moment, but it’s on a fixed term contract which is coming to an end January 1st 2014. So I’m build my business on the side ready for when I have no job. But more importantly, I’m using my salary right now to pay off pretty much all my debts by the end of the year.
It does mean a lot of sacrifices, but every month I can see the amount I owe go down and down which reminds me why I’m doing what I’m doing.
The hardest part is remaining disciplined. Knowing that you COULD buy something happens all the time, but occasionally, you forget haha… I am still working on stopping this from happening, but it’s hard work.
All worth it though!
Will, it sounds like you’ve got it all figured out. Nice! You’re right about the discipline; it’s hard work.
One trick I’ve learned is to “window shop” online by putting things in your cart, but not buying them. I’m not a big shopper, but my friends who are swear by this tactic. BUT, don’t forget to treat yourself now and then. Just make it part of your spending plan.
For instance, I give myself $40 a week to spend on whatever I want. This is good for impulse buys or those vanilla lattes I love. For bigger purchases, I save for them–which is good because what I want usually goes on sale by the time I’m ready to buy. Never pay retail!
Something we did was: roll our student loans into our mortgage (we got a great deal on a home, so we had instant equity) – which also changed our “liability”. We not only got a better interest rate because it was lower for our mortgage, but we also transferred debt which could not be discharged in a bankruptcy over to a dis-chargeable debt (mortgage), just incase. We were able to sell our home and move on, but having a house in our case was golden. When the house sold, the student loan debt evaporated, and while we had the mortgage, the interest was still tax deductible.
Nice, I didn’t even know you could do that, Jennifer. Thanks for sharing. I’m sure this tip will help a lot of people!
Shuffling debt around can be tricky, but if you know what you’re doing you can come out ahead. I have a friend who used credit cards to pay for college, then bought a house while he was in school, sold it when he graduated and used the money to pay off all his cards.
Hey Janelle.
The best thing I ever did was get rid of my credit card. Here is Australia we have what’s called a debit card. This is used like a credit card except that when you make a purchase the amount is automatically deducted from your account. If you have insufficient funds in your account you cannot make the purchase.
Craig
Hey Craig,
That’s definitely a must for some people. We have debit cards in the US too! The only catch is sometimes banks will still let you charge even if you don’t have the funds, but I think recent legislation has changed that.
After I graduated from college, I started getting credit card offers in the mail. Two cards and more than a few swipes later, I had around $6K in credit card debt–right around the time my job cut my hours in half. Needless to say, it took a long time to pay them off but the lessons I learned stayed with me. I still use credit, but I make sure I have the cash first, then pay the bill in full every month.
It’s great article. I just quit my job and started my own journey. I struggle a long time and keep saving emergency fund but now I am free. I get rid all my loan during the struggle time. I also agree that the credit still can be used but must have cash in hand first.
Love this timely post Janelle. Thank you for writing this!
A great read and very good points. Not having a budget is one point made here I would neither agree or disagree with.
If you have a good idea about your money and are in good shape then you wouldn’t need to budget. Most people that have a clue to what’s going on, have it in there head already.
The ones that don’t have a clue and need help already shouldn’t start without having a clue where there money is already.
Again great post!
Thanks,
Yourdebtattack.com
Thanks, Duane. I see your point about budgets. That’s why I tell people to focus on knowing what they are spending and where it’s going, i.e. a spending plan. Like you said, people who know where their money is going tend to be better off. Many people look at a budget as “I’ve only got X amount of money, where can I cut back?” instead of “let me see where I’m spending my money and how that fits with my goals.”
Great post Janelle! I already used many of your advices to buy my freedom, even when I am a mother of a two-year-old boy. I found out that reducing useless expenses like going out to dinner just because was not such a problem. I made my 20/80 analysis about how I got happiness from my expenses, and I found that going out on a walk with my son and my husband was a better “investment” in happy moments than spending $100 to go out to a fancy restaurant.
Thanks for sharing!
Amazing post! Thank you for sharing what you’ve been through and what you’ve learned from all that. It helps to know there are others out there in the same situation that want to make a decent income on their own and become financially independent, and eventually succeed.
Nothing beats a focused and dedicated mind.