296 | Levels of Freedom

Your financial journey is about more than money. It’s about freedom.

Each step forward creates more breathing room and flexibility in your life.

In this episode, let’s talk about how taking charge of your personal finances creates more freedom and peace, long before you completely pay off your debt, build a seven-figure net worth, or fully retire.

• • how getting out of the paycheck-to-paycheck cycle creates freedom
  • building your emergency savings
  • why good debt vs. bad debt is nonsense
  • lowering your monthly overhead
  • how to make your money work for you
  • the ultimate freedom

• Need help with your finances? Schedule a consultation here

You’re listening to Personal Finance for Lawyers. I’m Rho Thomas, and as a busy wife, mom, and former Biglaw associate, I know all too well the tension between the culture of the legal profession and pretty much everything else you want to do in life. That’s why each week, I’m bringing you the information and tools you need to improve your money mindset and manage your money to create true wealth. Because ultimately, it’s not about the money. It’s about the freedom and flexibility the money affords.

Hey friend. Welcome back.

Today, we are talking about freedom. I have talked before on this podcast about the concept of financial independence, and if you’re not familiar with that concept, it is the point at which you have enough invested that your assets are able to cover your living expenses so that you no longer need to work.

This idea of financial independence was really appealing to my husband and me, not because we wanted to stop working, but because we wanted to have that option. We wanted the freedom to be able to do what we wanted to do without having to worry about money.

Financial independence drove us initially with getting started with our money journey, but we stopped worrying so much about it.

If you are at all familiar with the financial independence community, there is this fixation on achieving a certain number, your financial independence number, and some people are doing all kinds of things to achieve that number faster, and that kind of thing, and we just have not been so worried about it. We have been more concerned about the freedom, the flexibility, the options, and I think about the different levels of freedom that are unlocked as you go throughout your money journey.

And so I wanted to talk a little bit about that because I think sometimes when you hear a concept like financial independence or you’re thinking about something like retirement at traditional retirement age, it feels so far away that sometimes you don’t even want to get started.

But I think that you achieve more freedom as you go along your money journey, even if you’re not all the way to financial independence, and I can stop working and retire.

So I thought today we could talk about the way that I think about freedom, and hopefully it is helpful for you and inspires you to get started on your money journey if you haven’t already. So the first level, if you will, is when you stop living paycheck to paycheck, like you actually have some money left at the end of the month.

Because when you’re living paycheck to paycheck, you’re really living on edge, and that’s not a good place to be. It doesn’t feel very good, but it also means that you are trapped, like you need that next check coming in to be able to survive.

And so one of the first things that I do with my clients is help them build a $1,000 checking account buffer. Now this buffer does not mean complete freedom from having to work again or anything like that, but it does mean a little bit of freedom from stress, from worry, because you’re no longer on edge.

You’re not getting to the end of the pay period and wondering if your credit card is going to get declined, or worrying about how you’re going to pay this bill or buy that thing. You have a little bit of breathing room.

And so I’d say that that’s a level of freedom that someone who’s living on the edge, living paycheck to paycheck, depending on that next check hitting exactly what it’s supposed to doesn’t have.

So then once you get beyond living paycheck to paycheck, where you’ve got some money left at the end of the month. You’ve cleaned up your spending a little bit. You’ve tightened up things and figured out how you want to manage your expenses in such a way that you’re not spending all of the money now you use some of that to build up your emergency savings.

And the traditional advice for emergency savings is to have three to six months of expenses. I don’t think that it necessarily has to be three to six months. I’ve seen people do as little as one month. I’ve seen people do as much as 12 months, and I’ve seen everything in between. So really, it’s a personal decision for you as to what your emergency savings will be.

Often, when my clients are first getting started, we’ll do something a little bit less than three to six months, just that they got something. They’ve got that added layer of protection so that if there’s an unexpected expense or something like that, they’ve got some money that they can rely on for it.

But we might do a few thousand dollars and then start working on paying down some high interest debt or things like that. But once you have some savings, that is another level of freedom. Now I can survive for a little while if I were to lose my job, right?

So you want to have these kind of layers of protection for yourself, like that checking account buffer, like that savings. Those are those beginning levels of freedom for you.

Then we can talk about paying down debt. And let me say this, if I didn’t say this before: I am not saying that you have to do things in a step by step fashion, like first you do this, then you do that, then you do this. This is the way that I typically work with my clients. This is a lot of what my husband and I did, but some of these things overlap as well. So don’t take this as step one, I do this. Step two, I do that. I want you to just think about it in terms of how completing each of these things helps you to achieve more freedom.

So I want to talk about paying down debt. And I’ve said before that I don’t like the good debt bad debt situation. That’s something that someone literally made up and then everyone just latched on to and a lot of people use it to beat themselves up. But I don’t think that there is such a thing as good debt or bad debt. I think it’s just debt, and we get to decide how we think about it.

And I will say the majority of our debt was so called good debt because it was student loans. But we had a lot of student loans, almost half a million dollars. And at the height of it, the monthly payment on that “good debt” was $3,500 a month, and that’s on top of our other bills, our mortgage, our groceries, our necessities.

So I tend to think about debt in terms of monthly payments because every debt you have is a monthly payment you have to make. It increases the baseline cost of your life, and the higher that cost is relative to your income, the less freedom you have. So getting rid of our student loans meant getting rid of $3,500 a month that we had to cover.

My husband was technically eligible for public service loan forgiveness because the hospital that he works for is a 501(c)(3) so his loans could have been forgiven within this last year or so. He has reached his 10th anniversary with his job, so those loans could have been forgiven at some point recently, but we paid our loans off almost five years ago now. So that’s almost five years that we didn’t have to pay $3,500 a month, which adds up to over $200,000.

So that’s why I like to think about it in those terms, in terms of the payment, because that $3,500 a month meant a lot less freedom for us if we didn’t get rid of it.

Every item of debt you have is money coming out of your pocket each month. It’s more money that you need to make and less money that you get to keep. So when your income stays the same or even increases as your baseline decreases, then that gives you more freedom.

That means that as you pay off those debts, don’t find other things to fill that income. Don’t go and spend more now because you’ve got more in your pocket because then you’re in the same place.

When that baseline cost, right, the baseline expenses that you have decrease while you’re still making the same amount of money, then you’re making money that you literally don’t need. And that opens up the door for if you do want your income to decrease, such as in the case of some of my clients, where they have taken lower paying jobs because those jobs felt more aligned than the ones that they were in, they were able to do that because that baseline cost of their life, that monthly overhead, was low enough that they could do it. Decreasing the baseline cost of your life, decreasing that baseline level of your expenses, allows you to make those kinds of decisions.

And I’m not saying that you should pay off all of your debt, and that’s the way to do it. I don’t believe in black and white rules, especially with respect to personal finance. We still have two mortgages, although we’ve been talking recently about whether we wanted to pay those off.

And this is beyond the scope of what I wanted to talk about today, but I want to touch on it, since I just brought it up. But in the personal finance space, there used to be this blanket black and white advice, never pay off your mortgages because the rate is so low, you can make more on that money in the stock market because the stock market, on average, gives something like an 8 to 10% return, and mortgages at the time were in that 3 to 4% range.

However, I didn’t like that rule, because most people aren’t putting the difference in the stock market. Most people are just spending that money. But now mortgages are not as low, right? Like the mortgage on my primary is 3.5%, but the rental property that we just bought is at 7%, so that rationale about getting a better return in the stock market doesn’t really work anymore. So that’s something that we’ve talked about, and I don’t know if we’ll actually pay them off or when, or anything like that.

But the point in all of this, right, going back to the original point, is that debt means needing more money to cover your baseline expenses. So think about that on your journey to freedom, because the less money going out in monthly payments, the more freedom you have.

All right and the final thing I want to talk about is building your savings and investments. So as you decrease the amount going out each month, you have more money that you can save and invest, and that money is going to earn money for you.

I once heard someone say that your money will work harder than you ever can, and I took that to heart. Compound interest is truly amazing. Your money is literally making money without you having to do anything. When you have a smaller balance, of course, the amount that it makes is smaller, but when your overhead is lower, then you can keep putting more money away, and that balance grows quickly, both from your contributions and from the additional money that those contributions are making in interest.

So that, when I’m talking about the compound interest and those contributions and all that, I’m thinking about investing in the stock market. I think that’s what people traditionally think about when they’re talking about investing.

But remember that you can also invest in other assets that can also make you money, like the rental property that I mentioned that we bought earlier this year or I guess last year. And then, as I mentioned at the very beginning of the episode, once you get to the point that the money you make from your assets covers your living expenses, you have reached financial independence, because you’ve replaced the need for you to actively make money, and that is the ultimate freedom.

So that is kind of how I think about the levels of freedom that the various stages of your financial journey can bring you. It’s not this zero-sum game that either you have no freedom or you have all the freedom, and you’re financially independent. You achieve more and more freedom as you go along the journey. So if you are still sitting on the sidelines, this is your sign to get started with your financial journey.

As you get started, as you move along that path, you’re going to open up more and more freedom, more and more opportunity, more and more flexibility for yourself. And if you want help along the way, schedule a consultation at rhothomas.com/call.

All right so that is it for this week’s episode. Please share this episode with or two who you think could use this information. Sharing is caring. That is how we get the information in the hands of more lawyers who can use it, and as always, I appreciate your support.

As we close out friend, I pray that you take the information you learn here, apply it in your life, and open up to the realization that wealth is available to you. As you do that consistently, week after week, you’ll continue to take steps to take back control of your time, build wealth, and live the life of freedom and choice you deserve. Talk to you later.