7 Steps to Financial Freedom

In the world of personal finance, the term "budgeting" often reigns supreme. It's the go-to solution recommended by financial advisors, gurus and family members. "Stick to a budget," they say, "and your financial woes will vanish." But how many of us find budgeting sustainable in the long run? How many of us can honestly say we've stuck to a budget for an extended period without feeling the strain?   Not me, that's for sure!

The truth is, for most people, budgets don't work. They're like crash diets – promising short-term results but often ending in frustration and abandonment. Why? Because budgets rely on strict adherence to predetermined spending limits, which can feel restrictive and unsustainable.

So, what's the alternative? A money management system based on the principle of 'paying yourself first.' Instead of focusing solely on restricting spending, this approach emphasizes taking control of your finances by allocating your income into different bank accounts and automating the process. By separating your money into different accounts, each serving a specific purpose, you gain clarity and control over your financial life.  

Here's how it works:

Step #1: Set Up Your Bank Accounts

 Before you get started, you need to set up the 'three accounts system' : This comprises a Spend account, a Bills account and a Savings account.  There are many online banks were you can set these up (without fees) and it will take you less than 20 minutes.  

Here's what it looks like:

Here's how it works..

You bank 100% of your salary plus income rental properties  goes into your Bills account. If you are self-employed this would be a fixed monthly drawing you make from your business account  into your Bills account.

If you are in business,  you also need to be setting aside money for taxes and GST into a separate account.  Do this before transferring your drawings to your Bills account. As a rule, you should  base your tax bills on the previous year (for now).

The day after your salary or drawing from business hit your Bills account,  you need to set up an automatic payment to transfer 10% of this amount into your Spend account and 30% into your Savings account. This means you are left with 60% in your Bills account.  

These percentages are only a guide and yours may be different, but as a rule, if your Bills represent more than 60% of your income, you may want to review your Bills to see where you are overspending and take corrective action.   

Your Bills account will be used for things like, home loan repayments or rent, food, utilities, mobile phone, subscriptions, medical, scholl fees, rental property expenses etc.  You will also need to set up a Debit card attached to your Bills account  for convenience. 

Your Spend account is used for ‘guilt free’ spending e.g. coffees, movies, shoes, clothes, concerts, handbags, gifts, shoes etc.You will also need to set up a Debit card attached to your Spend account, for convenience .

To keep your life simple, label each one of your debit cards with a sharpie and call it 'Spend' and the other 'Bills'. or you can simply have them on your phone. 

Your Savings account let's you earn interest on your money. You can open as many savings accounts as you like and give them different names, e.g. Emergency fund, home loan deposit, holidays, childrens education, wedding, etc. , but for now you will need to set up, your Emergency fund.

Step #2: Save $2,000 in Your Emergency Fund

In this first step, your goal is to save $2,000 as quicky as possible. Your Emergency Fund is for unexpected life events you can't plan for. And there are plenty of them. You don’t want to dig a deeper hole while you’re trying to work your way out of debt. This is the most important step because this is where you commit to taking action and getting control of your finances.  This money sits in your Savings account called 'Emergency Fund'

Step #3: Pay Off All Debt (Except the House, Investment and student loans)

Next, it’s time to pay off the cars, the credit cards and any personal loans. Start by listing all of your debts smallest to largest (except for your house and student loans).  Put them in order by the amount owing from smallest to largest—regardless of interest rate. Pay the minimum payments on everything but the smallest loan . Pay that of off  first.  Once its paid out in full, take that payment and put it toward the second-smallest loan, making minimum payments on the other loans.

Step #4: Save 3–6 Months of Expenses in a Fully Funded Emergency Fund

You’ve paid off your debt! Don’t stop now. Use the money you were putting toward your debt to build an emergency fund that covers 3–6 months of your expenses. This will help you handle life's bigger surprises, like job loss or car repairs, without falling back into debt. This money sits in your savings account called  'Emergency Fund'.  

Step #5: Invest 15% of Your Household Income in Your Super

Now you can shift your focus off debts and what-ifs and start looking up the road. This is where you begin regularly investing 15% of your gross income for retirement. Because if you're still working at 67, it should be because you want to, not because you have to. An investing pro can help you build a solid strategy. 

 If you are employed your employer will already be putting in the super guarantee levy currently 11.5% from the 1^st July 2024, so you will need to ask your employer to salary sacrifice 4.5% of your salary into super.  If you are self-employed, you’ll be taking 15% of your income (after business expenses) and putting this into your super as a personal concessional super contribution.  Remember,  you cannot exceed the super limit of $30,000 p.a. as of the 1^stJuly 2024. 

 Step #6: Pay Off Your Home Early

Now, let's bring it all together. Step 6 is the game-changer! Your mortgage is the last thing standing between you and total debt freedom. Can you imagine life without a house payment?

There are two main strategies to pay off your home loan faster. First, shop around for a better interest rate. Just see what other banks are offering and call your bank to see if they can match it. If they don't be prepared to move and save yourself a lot of money.  Second, make more frequent payments. e.g. An individual with a $600,000 loan could potentially save more than $160,000 in interest over the loan's lifespan and shorten the repayment period by over five years simply by opting for fortnightly payments instead of monthly ones.  Check out the numbers for yourself here.

 Step #7: Build and Protect your Wealth

Picture the freedom that comes with having no debt—you can do whatever you want! The best part comes last: you get to live and give in ways that are special to you. Start by figuring out your current net worth, then keep building your wealth. This way, you can be super generous and leave something for your kids and grandkids. To make sure your legacy is protected, it's really important to have a tax-effective Will. This will help save on taxes and protect your families assets from bankruptcy and divorce. Now that's what I call leaving a legacy!

We hope you enjoyed reading this article. If you would like my team and I to help you implement the 7- steps to Financial Freedom , please contact us  for a complimentary
no obligation meeting  - Chris Tolevsky