How I'm Achieving Financial Freedom

I believe that knowledge is power. And when it comes to financial decisions my educated guesses rule out the obvious and eliminate the seemingly wrong choices. I'm not one of those people who think that taking control of finances requires a lot of time and a great deal of knowledge. But I believe that I need to educate myself about money in terms of what money can do for me.

Here are several steps I take toward financial freedom, while considering the broader economic environment.

Pay off my credit cards

Currently, I carry a credit card debt of $12,000 for which I pay an interest of 18% and I make monthly payments of $304.72. I have calculated that it will take me 60 months to pay off, but I want to pay off NOW to achieve financial freedom. And I know what the wisest thing to do is.

I have to avoid making minimum payments. Here is the math: $12,000 on 18% requires $304.72 monthly payments to pay off my credit card debt in 60 months. By making a payment of $304.72 on day 15, my average daily balance is (15 x $304.72) + (15 x $11,695.28) = $180,000 /30 days = $6,000. The interest I'm paying on this daily balance is (18%/12) x $6,000 = $90.

If I increase my monthly fixed payments to $350, automatically my average daily balance becomes $5,825 and the interest on this daily balance becomes $87. So, for every $45 I pay extra on my credit card I save $3 on monthly interest. This means that the more I pay the more I save and the sooner I will pay off my debt on condition that I do not charge my credit card any further.

Diversify my income streams

I do not put all my eggs in one basket. I invest in stocks, mutual funds and ETFs. I'm a moderately aggressive investor looking to achieve long-term portfolio and my risk tolerance is moderate. I like ETFs because they offer me a wide variety of investment choices, including international opportunities, and higher short-term returns at lower risk. So, by diversifying my portfolio I capitalize on market opportunities and reduce risk. I also believe that, currently, the market has huge upside potential especially in long positions.

Save for retirement

My retirement worries me. A lot actually. In 2011, millions of baby-boomers will start retiring. The majority of these approximately 10,000 people do not have a traditional pension plan and 35% of them rely almost solely on Social Security payments. Moreover, 75% of Americans are claiming Social Security benefits from the age of 62. To these horrible statistics add that today, the U.S. population lives longer, and the cost of health rises dramatically.

To my view, it is highly unlikely that the U.S. government will manage to fund all these newly retiring baby-boomers. And even if it succeeds with the first 10,000, the system is likely to break down as millions of baby-boomers will pour into it year after year. This can only mean rising costs of food, gas, and health care for me as well as increasing national debt and rising inflation. The more baby-boomers will be retiring, the more worried I will be for my own retirement after 20 years or so.

In my 401k I invest in bonds for safety. My current retirement allocation is 32% bonds, 28% US small/mid cap, 22% US large cap, 13% international, and 5% REITs. I bulk up on bonds and swap out of riskier stocks and REITs as a strategy to anticipate a safe retirement.

Build a budget plan

I believe in money management more than anything because it allows me to take control of my fixed expenses. My mortgage, insurance and food expenses are 50 percent of my monthly budget. 20 percent I allocate to retirement, credit card and loan payments, while 30 percent is spent on leisure and other activities. By following this Balanced Money Formula for almost a year now I have seen real progress in my finances.

Sources:

http://investmentwatchblog.com/the-following-are-16-statistics-about-the-coming-retirement-crisis-that-will-drop-your-jaw/

http://www.transgenerational.org/aging/demographics.htm

http://www.bankrate.com/free-content/credit-cards/calculators/free-credit-card-payoff-calculator/

http://www.investopedia.com/terms/r/reit.asp

http://www.getrichslowly.org/blog/2008/10/27/the-balanced-money-formula/

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