How Your Family Can Become Financially Free

Despite popular opinion, you don’t need a million dollars to be financially free. We’ll go over how you can create a financial independence plan that fits your family and is actually fun!

How Much Do We Need as a Family to Be Financially Free?

Simplify and Enjoy is about families working toward financial freedom using core ideas from financial independence and minimalism. 

But how does that work in times like these? 

Can we take this foundational question we talked about in an earlier episode – finding your FI number – and actually craft a plan for a family now going through the pandemic?

Let’s be honest, depending on where you were in your own financial journey, the pandemic could’ve shifted things in so many directions for you.  

I think it’s reasonable to acknowledge that a family who’s carrying debt like car payments or student loan is going to experience things much differently than a family whose paid off their

Non-mortgage debts and are using that money to invest. 

So how do you create that path for those families? Is it possible to work towards financial freedom and perhaps independence during times like these? 

First off, let’s start off with the good news. 

You don’t need a million dollars or more saved to achieve financial freedom. In fact, with some planning, you can really open up a lot of options for your family in a relatively short amount of time. And you know, what it can be rewarding and enjoyable. 

I want to show you how. 

In this episode, we’ll get into:

• Making financial independence approachable by doing it in phases
• The key numbers to watch 
• How to craft a plan that fits your family

So we’re going to start with concepts but then go into some real numbers so you can see how the process works.

Ready? Let’s get started!

Handy Tools to Start Your FI Journey

If you’re looking to get ahead with your finances as a family and look at pursuing financial independence, here are some resources to check out:

• Best Budget and Money Apps: Personal Capital, Tiller, Mint
• Grab Your Copy: Jumpstart Your Marriage and Your Money
• Join Our Thriving Families Community on Facebook
• Free 401(k) Analysis: Blooom
• Coast FI: A Better Path to Financial Independence
• 10 Lessons Learned from Accidental Slow F.I.R.E.
• How Much is Enough Money? The Levels of Financial Autonomy

Thank You to Our Sponsor Coastal!

Support for this podcast comes from Coastal Credit Union!

If you live in the Triangle area of North Carolina and you’d like someone to work with you on your goals, you really want to check out Coastal’s Wealth Management team.

They’d love to help you start investing for retirement and more!

The Phases of Financial Independence

One of the biggest barriers families have with tackling FI is the feeling that financial independence is an all or nothing deal. 

You have to go all-in until you hit that number and then you can quit that job you hate and never have to work again. 

And look, for some people that’s their path. 

But that doesn’t have to be yours. 

You can approach your finances through levels or phases. With each phase, you can adjust your plans based on what’s currently going on and give yourselves more options to improve your quality of life bit by bit. 

And if I had to break it down to the most basic stages, I would say that families typically progress from:

• Financial Stability
• Financial Agency
• Financial Freedom

An idea I picked up from City Frugal really clicked for me. It’s switching from “enough money” to “enough money to”.

‘Enough’ is this nebulous term that can be hard to pin down.

But ‘enough to’ can allow you to get a  number (ballpark or not).

And it also gets you into this mindset of money serving a purpose rather than being the goal. 

So let’s look at finances through that lens – ‘enough money to’ and line them up with a few big milestones families strive towards. 

• Phase #1: Enough Money to Cover the Bills: It might seem like an obvious goal, but many families are now experiencing hardship because they realize with even a small drop of income that they are not able to pay their bills.
• Phase #2: Enough Money to Ride Out a Financial Emergency: Look, no one could have anticipated this global pandemic, but the truth is emergencies do happen to all of us. So this would be the stage and phase where you're trying to build up a financial cushion.
• Phase #3 Enough Money to Start Investing: Now we're gaining some margin. You're able to cover your bills. You do have money that you can put towards building your financial cushion a bit more. Or paying down your debt. It's not a bad spot to be in, but there's still more phases that you can continue with.
• Phase #4 Enough Money to Switch Careers/Negotiate: Here is where your quality of life starts becoming more of a factor. You're not just trying to survive, but now you're opening up some options. You're feeling a little bit more secure and confident that when you do come up for a promotion, you can push back maybe a little bit more for better pay or better benefits.
• Phase #5 Enough Money Where Saving More is Optional (CoastFI): You've done really well. You've invested enough money to have a traditional retirement. So now you can decide, do we want to go all-in and speed up the date? Or are you looking for more quality of life choices?
• Phase #6 Enough Money to Where Work is Optional (FI): You can live off the money that you have saved and invested and your covered.

This list isn’t meant to cover every point, but instead, give you a guide of progression a family can make. 

Key Numbers to Watch to Become Financially Free

Last week we talked about credit scores. While your credit score can affect your finances, it’s not really a key metric to hone in on. At best it gives lenders an idea of how likely you’ll be able to pay back.

In the grand scheme of things, you’ll better off putting your energy towards numbers that give you a picture of your financial health. 

As you work through financial stability, agency, and freedom, you’ll see a few crucial numbers pop up. 

• Net Worth
• Cashflow, in particular, essential and typical expenses
• Saving Rate

Phase #1: Enough Money to Cover the Bills

• Your Cash Flow: How much are you losing or having at the end of the month? 
• Your Essential Expenses: How much money do you typically need each month to provide the essentials and stay current on your bills? 

Phase #2: Enough Money to Ride Out a Financial Emergency

• Your Cash Flow: How much are you losing or having at the end of the month?
• Your Saving Rate: How much can you sock away in your financial cushion? 

Phase #3 Enough Money to Start Investing

• Your Net Worth: Big picture view of your finances. 
• Your Cash Flow: Look for opportunities to optimize your expenses. 

Phase #4 Enough Money to Switch Careers/Negotiate

• Your Net Worth: Big picture view of your finances. 
• Your Cash Flow: How will it be affected during the transition? 
•  Your Saving Rate: Do you need to crank it up? 

Phase #5 Enough Money Where Saving More is Optional (CoastFI)

• Your Net Worth: Big picture view of your finances. 
• Your Cash Flow: How will it be affected during the transition? 
• Your Saving Rate: Do you need to crank it up? 

Phase #6 Enough Money to Where Work is Optional (FI)

• Your Net Worth: Big picture view of your finances. 
• Your Cash Flow: How will it be affected during the transition? 
• Your Saving Rate: Do you need to crank it up?

Creating Your Family FI Plan

So how do you create your own FI plan? 

Let’s go through the process to give you an idea. 

The first thing I would suggest is to talk it over as a family and define what kind of lifestyle you’re going for and getting a really rough estimate of the annual expenses. 

And if you don’t have an anchor point, you can use your own spending. Would you say you’re pretty happy with things? Now imagine if you had no debts, how would that affect your financial needs and expenses? 

It’s interesting because some families realize that just the debt payments alone were hindering their lifestyle.

But let’s continue…..

You can then take that amount you feel is reasonable for what you want and multiply it by 25 to get your ballpark FI number. 

• So if you need $30,000/year -> $750,000
• $40,000/year -> $1 million
• $80,000/year -> $2 million
• $100,000/year -> $2.5 million

Now it’s time for some analysis and reflection. 

If you haven’t already, look at your annual expenses for the last couple of years. Where are you in those phases? Are you financially stable? Do you have some wiggle room with your cash flow so you can save and invest? 

Do this exercise – take away all the debts. If those were gone, how much do you need now?

Now as we’ve discussed plenty of times on the podcast. It’s definitely a smart money move to go through your expenses and see where you can lower them, but keep in mind you don’t want to compromise your quality of life. 

Sure you can live on the bare minimum, but it wouldn’t either be enjoyable or healthy.  

Let’s say you can pay the bills, but you’re worried about being able to ride out an emergency. Like the one we’re in now. How much is enough to be able to do so?

So now you can craft that budget so you’re meeting that more immediate goal of getting your financial cushion solid with an eye towards that long term goal of FI! 

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This episode was originally released in July 2020.