Life Lessons 101

Everything you needed to know, but was never taught in school.

Three ways to Financial Freedom

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If you read through many finance books each one will offer you a way to reach “millions” or “financial success”.

Of course, “their way” is the “only way” and all you have to do is follow their method. Unfortunately, the time it takes to write, edit, and publish a book, things often change and that exact way doesn’t work anymore.

With that still, you’ll find that they generally fall into one of three basic categories for helping you reach financial freedom, and I’d like to go over each of them with you.

I’ll then break it down a little further in follow articles talking about the pros and cons of each methodology.

The basics of these three ideas can be grouped into the Hustlers, the Investors, and the Savers.

Savers

Savers are the ones who can control how much they spend. They budget well, and know how to stretch it to get every penny’s worth from that dollar. They control their money, instead of letting it control them, and they do well because of it.

Let’s look at the savers, and how they get to financial freedom.

Hustlers

These are the people who look to earn more income, either through fast track promotions and raises, side hustles, or starting their own business. They’ll simply out earn the standard person and make their money that way.

Let’s look at the hustlers, and how they get to financial freedom.

Investors

Investors look to have their money make money for them. Either through the use of compounding interest (less likely) or investment in stocks, bonds, etc.

Let’s look at the investors, and how they get to financial freedom.

Inherit – is missing

There is two big reasons why inheritance is missing from this list. First, you can’t write about how to inherit money, you’ve generally got to be born into a family with wealth for that. The other option of course is to marry into that type of money, but there you are either in it for a long time, or your goal is to marry someone who is older and you expect them to die soon – this will often lead to legal battles and has various ethical issues which we don’t want to even begin to go into.

However, there is also another big reason you don’t see a lot of books for that – most millionaires (at least in America) didn’t inherit their wealth. In fact, according to Chris Hogan, the author of Everyday Millionaires, less than 10% of millionaires inherit their wealth. And over 70% inherited nothing at all. The rest had to earn it via one or more of these three methods.

That means reaching millionaire status, or some level of financial security, is generally available to most people.

Changes to FICO and what that means to you.

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FICO affects almost everyone, whether you know it or not. If you have had any outstanding debt in the last few years, you have a FICO score, even if you don’t know it.

That score is used by lenders (credit card companies, apartment complexes, and even insurance companies) to determine how likely you are to repay the money you borrow.

If you score over a 750, you are considered a low risk, and therefore will receive better offers and lower interest rates. Below 550, well, you may not get the loan you want, or if you do, you’ll have to pay more in interest through a higher interest rate. Currently, the average score is a 709.

FICO announced this week that they are tweaking their scoring algorithm, and its estimated that 80 Million people will see their score change by 20 or more points because of it. Another 100+ Million could have a minor change in their score. That means almost everyone will be affected.

Your score may go up

Your score may go up, if you have a low percentage of personal debt. This is usually things like credit cards. Credit cards, because they are considered unsecured debt are more likely to be defaulted on. However, if you have a low amount of debt, people assume that you are working to pay your bills, and your score will increase because of it.

Your score may go down…

Your score may go down, if you have a few late payments, and/or a high amount of credit card debt. This could cause your interest rates to change (for the worse) and/or it be harder to rent an apartment, get a car loan, etc.

What to do if your score isn’t great?

The good news is, your score is not permanent. It can, and does, change on a regular basis. I check my score approximately once a month, and can see if move a few points one way or the other just because of normal fluctuations like if I had paid my credit card bill already or not.

Even with this change, the basics of getting a good score hold true.

First, pay down your debt. The snowball method, where you pay all of your bills at the minimum and then put everything you can into your smallest debt works well. Once the smallest is paid off, you can work on your next smallest, until they are all done.

This is a tried and true method, and works for both financial reasons as well as psychological – you feel good watching your bills disappear.

I’ve known people who’ve held garage sales, or worked a second job for a few months to get that extra money to start the process. Once the first debt or two is paid off, and you can use that money toward larger debts, you are well on your way.

Second, pay your bills on time. I know people who just forget to send in the check/pay online. They get busy with everything else going on, and forget. It has nothing to do with how much money they have.

For them, and maybe you if you are in this situation, consider auto-bill pay. Scheduling your payments, as long as you have the money to pay them, means no more late fees, and helping, not hurting your FICO score.

Finally, don’t spend more than you make. It’s easy to do, but its the most important step to get out of living paycheck to paycheck.

https://www.cnn.com/2020/01/24/success/fico-score-changes/index.html