5 Steps To Creating Financial Stability in a Politically Uncertain Time
Editor's note: Matt Becker is a listener and founder and CEO of Mom and Dad Money, a fee-only financial planning service dedicated to helping new parents make money simple. This is his first contribution to the Pantsuit Politics Blog
In November 2013, I lost the only full-time job I’d ever had. At the time, my wife was staying home with our 1-year-old son and our second boy was due in a month. We had no income and increasing expenses.
Like any reasonable person would do in my situation, I decided to start a business - from scratch - without even the official certification I needed to operate it.
If that sounds crazy, well, that’s because it kind of was! Taking on the responsibility of starting a business, supporting a family, and bringing a second child into the world all at the same time was more than a little stressful. And I haven’t even mentioned the fact that we decided to move cross-country just a few months later. (Yeah, I know.)
But from a financial perspective, it wasn’t a reckless decision. My wife and I ran the numbers and determined that we had plenty of runway to give this a shot without jeopardizing our family’s financial security.
We’d spent years making financial decisions designed to give us maximum flexibility, and this was the moment where it was paying off big time. It was the rainy day everyone waits for.
There’s Always Uncertainty
Life is full of both opportunities and obstacles.
Some of them are exciting, like the opportunity to stay home with your baby, change careers, start a business, or travel the world.
And some of them are scary, like losing a job, needing major home repairs, or wondering what crazy thing our President or government is going to do next.
We live in a particularly uncertain time right now. There’s always an adjustment period with a new administration, but many people are more worried than normal about what the next four years will bring in terms of the economy, healthcare insurance options and cost, national security, and even basic human rights.
Those are all valid concerns and we should absolutely be paying attention to them. But there’s only so much you can control and it’s impossible to know how all of this will evolve over time and how it will affect you.
What you can control is the financial foundation you build in the face of this uncertainty. Because while money can’t buy happiness, it can certainly buy you the flexibility to deal with whatever happens on your own terms.
Here are 5 steps I’ve taken to create financial flexibility in my own life, and that you can use to give yourself more options in times of uncertainty.
1. Spend Less Than You Earn
My friend JL Collins likes to share the parable of the king’s minister and the monk. You can read his version of it here, but the main message can be summed up in this exchange:
Minister: “You know, if you could learn to cater to the king you wouldn’t have to live on rice and beans.”
Monk: “If you could learn to live on rice and beans you wouldn’t have to cater to the king.”
Most people think of limiting their spending as a hardship, but there are a big benefits to consistently spending less than you earn:
It’s easier than you think - Humans are adaptable and money doesn’t lead to happiness. You might feel short-term pain from cutting back, but you’ll quickly get used to it and be perfectly content.
You can save - We’ll talk more about saving in just a bit, but it’s the biggest key to creating financial options and it’s only possible when you spend less than you earn.
You have more opportunity to make positive life choices - It’s easier to switch to a single income, change careers, or go back to school if you have fewer financial obligations. It’s also a lot less stressful to stop for ice cream on the way back from soccer practice.
You can weather bigger storms - Thinks like losing a job or need a big car repair are easier to handle when you have more room in your budget.
It’s not all about cutting back - Negotiating a raise, earning money on the side, or otherwise increasing your income are all powerful ways to give yourself more flexibility.
The bottom line is that spending less than you earn is likely to make you happier, more relaxed, AND open up more opportunities for you and your family.
2. Build Basic Savings
I’m a huge fan of building up a sizable cash cushion in a basic savings account.
On the one hand, that money can help you deal with big expenses you didn’t see coming without having to resort to debt or otherwise blowing up your budget.
And on the other hand, that money is available to help you take advantage of opportunities that come your way. My wife and I used our savings account for our basic expenses while I built my business up.
Either way you look at it, having money safe and sound in a savings account gives you a lot of flexibility.
3. Protect What You Can't Lose
My wife and I have more insurance than just about any of my friends.
We both have life insurance. I have disability insurance. We have an umbrella liability policy. And of course we have health insurance (thanks Obama!).
All of these insurance policies protect us from financial risks we couldn’t handle on our own. And with those safety nets in place, we have more freedom to take chances in pursuit of a life that makes us happy.
Because at the very least, we know that our family will always have the financial resources to handle its basic needs.
4. Pay off Debt the Smart Way
I hate debt with a passion. Every dollar I owe to someone else keeps me beholden to them and restricts my ability to make my own choices.
If you can avoid debt, do it. And if you have debt, figuring out how to pay it off as quickly and efficiently as possible will save you money and create more flexibility for you and your family.
There are a lot of debt repayment strategies, but my favorite is to pay off your highest interest rate debts first. And the reason is simple: it saves you the most money and gets you to debt-free soonest. Any other approach costs more and takes longer.
I like this free spreadsheet for creating a personal debt repayment plan.
5. Invest in Your Financial Independence
I love my job. Every day I get to help real people make good financial decisions so they can build a happy, healthy, and enjoyable life. There’s nothing I’d rather be doing.
But eventually I’d like to get to a point where I no longer need to work in order to support my lifestyle. This point is traditionally called “retirement”, but I prefer the term financial independence.
To me, financial independence is simply the point at which you’re able to make decisions based on what makes you happy rather than what makes you money.
Financial independence could lead to retirement, but it might simply free you to work on projects purely for the fulfillment and enjoyment they provide. And you could get there in your 60s, but there are plenty of people who are able to reach this point in their 50s, 40s, and even their 30s.
No matter what financial independence looks like to you, getting there requires investing. It means contributing to your 401(k) at least up to your full employer match. It means contributing to IRAs and other investment accounts. It means investing in a simple portfolio of low-cost index funds.
By taking advantage of the tax breaks these accounts provide and the long-term returns of the stock market, you can eventually create so much flexibility that no one can require you to do anything.
That’s true financial independence.
One Step at a Time
The five steps above are a lot to take on, especially if you’re new to the whole personal finance thing. Even I’m not fully taking advantage of all of them, as my wife and I are still trying to get back on track with investing as grows closer to what it used to be.
The key to creating more financial flexibility is taking it one small step at a time. Maybe start by trying to cut back on one expense, then redirect that money to a savings account each month. If you can repeat that process a few more times, you’ll quickly build up some significant regular savings. Give it a little more time and you can move on to getting insurance, paying off debt, and investing.
It’s not always easy to take these steps, but remember that what you’re really doing is buying yourself the freedom to make your own decisions, no matter what life throws your way.