Hello,
In this forth and final part of my short series on budgeting, we will look at how to budget once you have achieved debt freedom. When you have no debt payments to make each month, you can adopt a slightly different approach to budgeting your money. With the drain of debt on your income gone, you now have significant freedom on how you funnel the money that remains after paying normal living expenses.
The most important first task after all debts are paid is to build up a reserve fund. This fund should be sufficient to pay all your expenses for a period of between 6 and 9 months. This provides a great cushion for unexpected events and also allows for great flexibility when changing jobs; Imaging being able to have enough financial freedom to leave several months between leaving one position and starting another. A good size reserve fund also goes a long way to reducing the stress of unexpectedly losing a source of income.
To build your reserve fund, simply take the total amount you were paying towards your biggest debt at the end of the pay down process, and transfer it into a money market or other safe interest bearing account. The last thing you need to do with a reserve fund is to expose it to any risk. it also needs to be instantly available. Having your fund earning great interest but in a place where you cannot get your hands on it quickly in an emergency is not too bright!
If you continue to live well within your means, it should not take too long to build up the fund. I estimate if you are at the point where you have paid off most of your existing debt, and your finances are basically under control, it should take no more than a year to save enough to live on for 6 months.
Once you are well on the way to building your reserve fund, that is the time to start building your wealth. If you do not already have one, you should now select and engage a financial planner. Remember, when selecting this person, you are the customer and you should do enough research to ensure the person is reputable, reliable and has a first rate track record. Ask and get references. Ask if they are prepared for you to talk to their existing customers. Ask to see their certificates and qualifications. Goggle them. The better you do your due diligence, the more you will find out and the deeper you can trust them.
While in the wealth building stage, you still need to cover your routine expenses, some which are yearly, bi-yearly and quarterly. If needed, you can continue to use the HELOC account to fund these. However, having a seperate money market account that has sufficient in it to cover your largest normal bill is a great idea. This just gets topped up from your income stream. This also allows you to accumulate money for vacations, the holidays, special birthdays etc. In 2006 I did exactly that to fund a vacation. I still remember the feeling of freedom I experienced knowing the vacation was 100% paid for before I left. It was fantastic!!!
I trust you have enjoyed this short series on budgeting and have been able to put some of it into practice. I would love to hear of your successes and any comments you may have.
Have a great week!
Malcolm
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