In Part 1 of our 5-part series, we introduced the concept of your Financial Freedom Point (article here). This is the point in your life where, if you have planned and saved well, you are able to choose to keep working, quit working, rebalance the ratio of work to leisure, or start a second career. This is also the time in your life when your money, time, and talents are most negotiable.
No matter the stage of your career, or proximity to your Financial Freedom Point, we encourage our clients to live on purpose and for a purpose. In order to do so, they must have healthy financial habits. One of the building blocks to a healthy financial life is to understand the Five Uses of Money* as well as YOUR Five Uses of Money.
Simply put, every dollar you earn can go to one of five places:
- Live – These dollars are your lifestyle expenses, the provisions you make for yourself and your family. This is your base standard of living, the core component of what needs to be recreated during your Financial Freedom years.
- Give – These are the monies that you give away. Most of you reading this article have been blessed with good fortune and plenty. It is important to give some of your monies away. Giving generously and unconditionally breaks the power money can have on you, it is good for your soul! This is so important we are going to restate it: Giving generously and unconditionally breaks the power money can have on you, it is good for your soul!
- Owe (Debt) – Debt payments include your mortgage, auto loans, school loans or any sort of debt you owe. There is responsible debt and irresponsible debt. Debt with an asset tied to it can be responsible debt. Consumer debt can be irresponsible debt. We will go into more detail on this in our next article, the Five Money Management Principles.
- Owe (Taxes) – This is the part of your contribution to society as a whole (that phrase may upset you, I know). The reality is that we are all paying some form of taxes, and some more than others. If we can take the perspective that it is part of our obligation then we can more easily embrace it. For purposes of the pie chart below, we are referencing income taxes (federal, state, Medicare, & Social Security).
- Grow – Saving and growing your monies is the only way to achieve long-term goals. These are your excess funds that you allocate to any sort of investment strategy.
Below is a table and pie chart of a sample Five Uses of Your Money, as well as the ideal ranges for each category. At P&A we have a very simple process to help our clients determine what their pie chart looks like and whether or not the Grow will get them to their Financial Freedom Point. It usually takes 10 minutes.
If the ‘Grow’ part is not enough to meet a client’s goals, we find strategic ways to reduce the Owe (both taxes and debt) or the ‘Live’ portion. Conversely, if there is already enough ‘Grow’ to get you where you need to be in the future…some of those monies could be reallocated to ‘Live’ or ‘Give’.
If you can embrace and understand your Five Uses of Money, as well as the other concepts we will cover in this 5-part series, you will be able to achieve contentment under all economic conditions, confidence in decision making, and ultimately maximize the negotiability of your time, talent and money. In our next article, we will detail the Five Money Management Principles.
*Five Uses of Money
Ron Blue Library LLC 2015
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Used under license by Kingdom Advisors, Inc. 2015
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