I was going to call this article “5 Reasons You May Never Be Rich”, but “rich” is a very relative term and doesn’t define much when we are talking about setting personal finance goals. Instead, I settled on “financially independent” as it better represents the objective most people have (in my experience) when it comes to their finances. People want to have the financial independence to do what they want to do (within reason) without having to count on someone else (employer, family, government, etc.) for support.
The reasons we pursue financial independence are as numerous as there are people in the World. One person may aspire to achieve financial independence so she can volunteer more, another may want to sail around the World, while yet another may want to spend more time with friends and family.
In my opinion, the following issues are the 5 biggest challenges individuals and couples face when it comes to achieving a life of financial independence.
You Have No Idea How Much Money You Owe:
One of the most striking things I’ve noticed over the last 7-8 years of turning my family’s finances around is the fact that most people really don’t seem to know how much money they actually owe. In other words, they have no idea where they are starting from financially to reach their financial goals. For example, I knew my family and I were going further and further into debt each year even though my wife and I were earning a very healthy combined income considering our age and stage in life. We obtained our credit report (read my tutorial on getting your real free credit reports) and listed out all of our outstanding debt balances and we were literally blown away by how much we owed!
You Don’t Keep Tracking of Your Checking/Savings Accounts:
I’m not proud of the fact that during my younger “professional life” I was very poor at maintaining the balance in my checking and savings account. This was a product of my own laziness and the fact that I took for granted that my next paycheck would come before I ran out of money. As personal finance “guru” Dave Ramsey might say, “I was trying to out earn my stupidity”. You simply cannot get ahead financially if you never really know how much money you have. It wasn’t until my family and I created an easy to use checking account spreadsheet for Excel that I finally got into the habit of keeping track of the balances in my checking and savings accounts.
You Don’t Have a Budget:
One of the fascinating habits of millionaires revealed in a landmark study and eventual book by Thomas Stanley and William Danko (The Millionaire Next Door), is that people who have actually become financially independent did so while sticking to some form of a written budget. These individuals came up with a plan on how they were going to spend their money before they actually received it. You’ll never get ahead if you randomly spend all of your money spontaneously and don’t plan to save any extra to grown as an investment or pay down high interest debt. When my family and I first started working our way through our large amount of consumer debt, we stuck to a strict budget (similar to the Excel based budget spreadsheet I created here). The most important part of the budget was calculating a “goal” of how much money we would be able to pay at the end of the month toward our “snowball” debt payment (read more about the snowball debt repayment plan here).
You Don’t Have Achievable Financial Goals:
Planning to save $1 Million or pay off your mortgage can become an incredibly daunting task if you don’t break your goal down into smaller achievable “bite sized” goals. It took my family and I about two years to pay off $90,000 of debt. Had we not kept ourselves motivated to pay off the debt by setting various goals every other month or so, it probably would have taken us much longer. For instance, about every three months I would set a target of paying off X amount of debt being careful not to set the goal too high (so we wouldn’t get discouraged) or too low (so we didn’t lose our focus). No matter how big of a financial goal you’ve set, they only proven way to get there (outside of winning the lottery) is to set goals and stick to your budget to achieve those goals.
You and Your Significant Other are not on the Same Page Financially:
Let’s face it…opposites attract! Wouldn’t life be so boring if we were all clones of one another? Unfortunately, when it comes to building a future of financial independence, both people within the relationship need to have similarly aligned goals our they will naturally pull each other in different financial directions and ultimately getting no where. This is why it is so important for couples to sit down and have a conversation every now and again about the state of the family finances and where any improvements can be made. Topics might include budgeting, savings goals, investment planning, etc. Most importantly, you and your significant other each need to have some “fun” money (budgeted each month) that can be spent on anything (hobbies, sports, entertainment, shopping, etc.).
There are many factors outside of your control or influence when it comes to obtaining a life of financial independence (economic factors, sickness, injuries, changes in family needs, etc.). However, if you take control of these 5 issues above, you’ll be well on your way achieving your financial goals.
Too Much Debt? Download our free Trees Full of Money Debt Snowball Calculator and see how quickly you can pay off your debt.