Is it time for a simpler financial dream?
A number of years ago, long before the idea of me pursing a career as a Personal Finance Educator & Expert Money Coach, I watched a very compelling, insightful, and rather dismaying documentary, called Inequality for All.
This award-winning documentary was made in 2013 by Robert Reich, former Secretary of Labor under President Bill Clinton. and tells us the story, in a very clear-cut manner, about the structural issues facing our economy, the widening gap of inequality, why it is happening. and what can be done to reverse it.
Reich focuses on the distribution of income and concentration of wealth over the past 100 years. He explains how the middle-class has been significantly eroded since the 1970s as a result of consumerism, wage stagnation, and the rising cost of living and post-secondary education.
The film provides a time-line of what has transpired over the past four decades in order to maintain a middle-class lifestyle. Dual-income households, the introduction of consumer credit, rise in consumer debt, longer working hours, second jobs and side gigs, and the creation of the sharing economy, are all measures many households have taken to offset the increasingly tighter squeeze on their finances and financial well-being.
In the seven years since the documentary first aired, the financial health of the average household in North America has gotten much worse but significantly better for the top 1%. Hastened by the impact of Covid-19, we are now facing the realization that one man, Jeff Bezos, the founder of Amazon, could become the world’s first Trillionaire.
Time to focus on a simpler financial dream
In my last post, I spoke of the need to think of financial health as key to our overall health and that financial health is based on four financial behaviours: how you Spend, Save, Borrow, and Plan. Financial well-being is when your financial health provides you with financial security and freedom of choice, in the present and in the future.
The financial health crisis facing Canadians predates the pandemic and has now been exasperated by it. Canadian households continue to carry a record level of household debt and many are just $200 away from insolvency.
As a result of the devastating impact of the pandemic, combined with the continuing affordability crisis, our current economy no longer guarantees the basic needs of hard-working people.
With widespread financial insecurity and precarity becoming a new normal, it would appear we need to bring forth the idea of a simpler financial dream: financial stability for all.
The 7 stages of Financial Freedom
J.D. Roth, the blogger behind Get Rich Slowly, defined the 7 Stages of Financial Freedom. Roth calls the first stage, Dependency – stage zero. This is when you are financially dependent on others or debt. Once you are no longer dependent, such as when kids become financially independent of their parents, the path to Financial Freedom is a six-stage continuum from Solvency to Abundance.
Stage one is Solvency – the ability to meet financial commitments and you are no longer accumulating debt. The second stage is Stability – this is when you’ve repaid your consumer debt, established some emergency savings, and continue to earn a personal profit. The third stage, Agency, is the final “surviving” stage. In this stage, you’ve eliminated all debt (including student loans and mortgage) and you have enough banked that you could quit your job at a moment’s notice without hesitation.
In the final three stages, you move from surviving to thriving. Stage four, Security, is when your investment income can cover your basic needs. Stage five, Independence, is the ultimate goal for most people when your investment income is sufficient to fund your current standard of living for the rest of your life.
In the final, sixth stage, Abundance, you have enough — and then some. Your passive income from all sources will not only fund your lifestyle indefinitely, but grant you the freedom to do whatever you want.
Financial Stability is the foundation for good financial health
The second stage on the continuum, Financial Stability, is the essential level of financial health for all ages and life stages. It is when you are no longer have debt, other than a mortgage or student loans, you have emergency savings, and your expenses don’t exceed your income.
The reality in 2020 is that far too many people are lacking financial stability, which, according to the Aspen Institute and the Financial Health Network, is largely because they don’t have short-term savings. Without savings, people can’t make ends meet, are enticed or compelled to take on consumer debt, and can’t work towards their goals.
A Road Map to Financial Stability
In his book, How to manage money when you don’t have any, Erik Wecks teaches readers to do the best they can with the income they have and focus on achieving Financial Stability. He leverages a military-style approach and outlines the Mission, Strategy and Tactics necessary to achieve Stability. I highly recommend his approach and summarize it below:
Use income to secure your basic needs both now and in the future, and do nothing that will harm your ability to secure them on an ongoing basis.
Strategies to Accomplish Mission:
- Live below your income and save for a rainy day
- If at all possible, live without accumulating debt
- Follow a Financial Road Map (below)
- Use a Zero-balance budget system to manage cash-flow on a forward-looking basis
Road Map to Financial Stability:
Step 0 – make sure you are don’t spend more than you earn
Step 1 – secure your basic needs – food, housing, transportation
Step 2 – create a $1000 emergency fund
Step 3 – pay off all debts as soon as possible other than your home
Step 4 – increase your emergency fund until it reaches 6-10 months of your basic needs
Step 5 – begin saving 15% of your income for retirement
Step 6 – if desired, save for child’s education
Step 7 – pay off your mortgage early
Step 8 – express your values with your money – align spending with what is most important to you
According to Erik, and I would agree, there is no better road map to bring financial stability to a household. One of the keys to success is to avoid using debt as it undermines all efforts to increase financial stability.
A Fin$mart Zero-Balance Budget is Critical
To bring these strategies to life, Erik zones in on his zero-balance budget system which is the same type of empowering budget system I teach my Fin$mart clients. A zero-balance budget is based on cash-flow, it looks forward to the future, reflects your values, allocates every dollar, and guides you towards Financial Stability, Financial Security, and ultimately Financial Independence.
A zero-balance budget is based on what you want your money to do for you in the future. Not based on what has happened in the past. It accounts for the unknown and leaves room for human error and unexpected expense. It’s a focused and proven system to have your money serve you, not the other way around.
The Fin$mart budget system is the one I have been using continuously, or shall I say religiously, for 20 years. The system took me from Financial Insolvency to Financial Independence in 15 years. This is truly my secret sauce as an Expert Money Coach. It is also what allows me to talk the walk and walk the talk.
Financial Stability for All
Since the 1980s, our consumer society has emphasized status and luxury. It has caused people to live beyond their means, carry significant debt, generate billions in interest payments, and sacrifice saving for emergencies, financial shocks and future needs.
More and more people are expecting the need to work through their retirement years just to meet their basic needs. With this in mind, I argue we need to educate and motivate people to adopt the Financial Road Map to Financial Security. Please, let’s not accept Inequality for All. Let’s work towards Stability for All. For yourself, your family, and all working Canadians.