A 7 Step Plan for Financial Freedom

Every Friday my column appears in a bunch of papers in Ontario and Saskatchewan. This week, in light of the Christmas season and our spending habits, I want to share seven ways to help avoid financial stress. 

UPDATE: I wrote this for a secular audience, but it really should have an 8th: Tithe. No matter what your financial situation, give 10% off of the top. We have always done that (and made our goals higher than 10%), and it is amazing how God has always blessed us. It also helps you keep the right perspective and not be so caught up in money, but instead excited about what God is doing in your community and around the world.
A Seven Step Plan for Financial FreedomChristmas isn’t the only thing that’s fast approaching. So is indigestion, and not just because you had to eat Aunt Ruth’s lumpy mashed potatoes. It’s because after Christmas comes all the credit card bills, and those can cast a pallor over the whole season.

So I thought today I’d share seven quick tidbits that, if properly followed, can help us avoid financial stress.

One: only go into debt for four things: a house, a car, education, or to start a business.

Even some of those are debatable: it’s usually not worth $40,000 in debt for a Philosophy degree, and many people can save and buy a used car without debt. Nevertheless, these are the four things where debt may be necessary. Notice that Christmas isn’t on the list!

Two: Know your financial situation.

If you don’t know your income and expenses you can’t budget and you can’t plan, and that means debt is almost inevitable. So add up all of your assets (like a house, a car, savings) and all of your debts (credit cards, lines of credit), and the difference is your net worth. Then figure out your income and your expenses. If you own a business and don’t have a regular income, check your net income on your tax returns for the last three years. The average of that is likely pretty close to your income. Divide that by twelve, and now you have your monthly income.

Three: Make a budget.

Know how much you’re going to spend in each category on a monthly basis. Then spend cash, not credit. Stash cash in envelopes for food, entertainment, miscellaneous, etc. Include in that budget money for debt repayment, and repay debt, starting with the highest interest debt, as fast as you can.

Four: Create an emergency savings fund.

Once your debt is paid off, save the equivalent of three months’ income and put it in a savings account or money market account where it’s easy to access. That way, if you ever are out of work for a time, due to a layoff, an accident, or a family emergency, you won’t have to borrow money.

Five: Start saving for the long term.

Now that you have your safety net, take at least 10% off the top of your income and invest it in an RRSP. Pay yourself first through an automatic monthly contribution so that you’re not waiting until the end of the month to save “whatever’s left”.

Six: Budget for upcoming big expenses.

Let’s say you want to send your kids to camp next summer, but that will cost $1000. You’re unlikely to have $1000 in July, so budget for it throughout the year. Similarly, if you need $1000 for Christmas, don’t think that will magically appear in December. Let’s say you also want to take a cruise next year that’s $3000, and you want to buy clothes over the course of the year for the family for about $1000. Add that up and you need $6000, or $500 a month in savings.

If you will need another car in three years, and you want to spend about $15,000, you need to save $5000 a year. So add another $417 in savings every month, for a total of $917. Set up an automatic payment into a savings account for that amount on a monthly basis. If that price tag sounds too steep, remember: If you can’t afford to pay for it beforehand, you certainly can’t afford to pay for it after the fact, when you’ll end up doling out interest, too!

Seven: Finally, here’s the clincher. Don’t buy stuff you can’t afford.

The stress isn’t worth it. And the freedom that comes from being out of debt and having a financial plan? That’s something money can’t buy.

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My daughter actually wrote on this same topic this week, although she was writing from the perspective of how to budget as a student. I love her idea of the separate accounts. Check out how to save money as a student.


  1. Great advice! I would add tithing to the top of the list. Give first, save second, and spend what is left over. Our culture has it flipped the wrong way. We tend to spend first, save second, and give last. I know this was your column for a secular audience, but for those of us who are Christians, we can’t forget the importance of putting God at the top.
    Leanne recently posted…Adoption subsidies: Good or bad?My Profile

  2. I KNOW these . . . but knowing and doing are so very different. Thanks for the reminder and for the inspiration to apply these to my business as well.
    Kathryn Lang recently posted…Searching for ExplanationsMy Profile

  3. That’s a terribly miss leading picture. Financial talks don’t look like that! Even in my happy 11 year marriage. Wink wink. But worth the talk any way.

  4. KellyK(@RNCCRN9706) says:

    10% of my gross pay goes into my 403B plan at work…my employer matches 6% of that at 100%. I JUST started saving that this year…stupid of me, I know. I also have another 6K in another acct that accrues a scant amt of interest yearly. WISH I would’ve started saving years ago when I began working. Anyhow, I have no credit cards. If I don’t have the money in my checking acct, I don’t buy it. Student loans are long paid off. Paying a mortgage and had to replace an 11yr old vehicle this year as well so I have a car payment once again. Christmas is paid for strictly in cash.

  5. Every January I prepare a budget for the year using my financial software. We conduct a monthly review to ensure we are on track. I ensure that charitable donations top the list. Our pastor, years ago, said we should donate 10% to our home church in accordance with Malachi 3:10. I support other Christian charities AFTER this. Since we are called to give our first fruits this means to me at least 10% of GROSS income. A pastor conducting a Bible study once answered a young woman who asked, “Is it 10% of gross or 10% of net?” His reply was simply “Do you want a gross blessing or a net blessing?” I thought that was a very wise reply.

    I have a Visa Card and a Master Card. I use Visa mostly and use it for almost ALL purchases. However I ALWAYS pay the bill in full. (It is taken out of my account automatically). The net effect is to give me about 35 days free credit. I also get cash back which more than pays for the annual fee.

    Every month I set aside 1/12th of all my regular expenses which occur less frequently than monthly, such as house and car insurance and property taxes. This ensures that the money is available when needed.

    I agree with Sheila when she says “Don’t buy what you can’t afford.”

  6. I would have to disagree with going into debt for a car. We have been buying our cars cash since 2008, and not having to make monthly payments has made a huge difference.
    Debt for school is also dubious. Unless your child is in dentrstry, medicine, law , or engineering, where the payback potential is so great that you will not be in debt long once you graduate, then fine. But that BA in environmental studies?Not worth it.

    • Yes, I’d agree, which is why I put that caveat in there. It’s better to pay cash for a car, and some schooling isn’t worth it. But some is. It really just depends.

      • KellyK(@RNCCRN9706) says:

        Yes, I’d say my BSN in Nursing has paid off! My education at a State University cost me $25K and I make more than that a year :)

  7. We use credit cards for all purchases. We never sign up for credit cards with an annual fee, and we only get cards that give valuable rewards like cash back. That way it’s actually cheaper to use our credit cards than cash. This also builds our credit. We always pay the full amount every month and simply don’t put more on the card than we can pay off. Interest rates are a non issue for us because we never have to pay interest. We keep the amount on each card below 30% of the credit limit. Using cash for everything doesn’t actually save you money, it’s just a psychological tool. If you spend less when using cash because it “hurts” to see your money physically going away, then using cash works for you. But you can control your spending just as much with credit cards as long as you use self control.

    • I would agree, Mrs. P, and we use credit cards for the points, too. But for many people they just CAN’T keep track of their spending without the cash, and the use of credit cards can be dangerous then. If you’re responsible and pay it off every month, credit cards can be great. They fund our vacations every year through points! But if you’re not, then they’re not a good idea at all.

  8. Great post! Thanks Sheila! On that note… My husband and I are using a great budgeting program called You Need A Budget. It is the best program we have ever used (and we tried quite a few different ones) They offer a one month free trial to see if you like it and they also offer online webinars. Anyone looking for a way to track your money and to budget… this is the way to go :) (And no I’m not getting paid for this advertisement 😉

  9. Great post Sheila! One suggestion I would make is to have some sort of emergency savings (Dave Ramsey recommends $1000 worth) before you really start paying off debt. That way, when something happens (and something usually does) you have some money to pay for it instead of having to rely on store credit cards/loans to fix things. Also, for people starting out, don’t get into debt (aside from a mortgage that you can afford) in the first place!

  10. Pam, I don’t necessarily agree. I understand why Dave Ramsey recommends that practice – he is trying to get people out of the habit of using credit cards for emergencies. The problem is that credit card debt interest cost on $1,000 of debt can run about $180 per year. That money sitting in an emergency account will only generate $20 of interest income if you’re lucky. So, from a numbers perspective, it makes sense to pay down debt first. You’ll be $160 better off.
    Leanne recently posted…Adoption subsidies: Good or bad?My Profile

    • Yeah, I’d agree. In fact, my mom was challenging me on Facebook about the idea of an Emergency Fund outright. She says that, as long as you’re responsible with your money, it’s better to put it in liquid investments within a retirement plan, because putting away $10,000 in your 20s can be so beneficial in the long run. But if you just stick it in a savings account for a rainy day, which may never come, you lose out on the chance of that $10,000 really going to work for you. If it’s in something liquid you can always take it out if you need to. I think she’s probably right.

      All that, of course, is predicated upon the idea that you are ALREADY out of debt, though.

      • I still disagree with this thinking (and my husband and I don’t have any debt except for our mortgage). Yes, that money could grow quite a bit in investments; however, many investments don’t allow a person to withdraw money at any point in time without paying some type of penalty. It’s a fact of life that things will break, emergencies will happen. It’s important that a person has some “liquid” cash on hand to be able to get through those emergencies. Placing all of a person’s money in investment accounts and not having any (or enough) money in an emergency fund is not a wise financial decision.

  11. I am concerned over this post. Credit cards make you a slave – because they encourage habit of spending. They are major major for-profit companies that study behaviour.
    The emergency fund has no guideline to the amount needed. And Lord love you – do NOT go into debt for business, education, or car. Many people a) do not succeed at business, b) do not finish education c) cars depreciate.
    I am not sure of where this information came from – but with all due respect this is bad advice. I wonder if finances should not be dabbled with unless you are studying wholly the financial world and habits. I have done this for fun for 10 years – I have been bankrupt and back. I am not talking about stock knowledge, I am talking about HABIT!
    Please seek advice of a financial advisor – 10% is woefully way too low – especially if in a low income bracket. Cash flow education, car, and business.
    Signed – mid to low income (single income!) Canadian health care employee with over $500,000 in titled properties – and a mental disability

  12. Ps – I also support a family of four!

  13. I am concerned about the tithing 10%. This is a pressure very many cannot meet. Fact is those of us with a lower income often cannot tithe 10% because of the cost of living in Canada. When poor, we made a point of bringing our children and dog to the nursing home to be with the elderly. We have always donated baby clothes, DVD’s and toys to shelters rather than selling them. We tithe our time when there is no money. There is no “God math,” He looks at your heart. I am concerned that this is encouraged by someone not in consistent financial need.

  14. Ps – noticed error meant to say 10% RETIREMENT is way to low for retirement at the average income level.
    Yes I am passionate about finance after illness and bankruptcy. I have been there and back and cannot make any more income due to limitations in my mental illness. So I had to be smart.
    Ps – a friend of mine who is a general practitioner estimates 50% of doctors he knows have gone bankrupt due to the burden of school debt. No, education does not always pay. HABIT pays.

  15. How would you best handle a self-employed situation? My husband has his own business (woodworking etc..) and we can go WEEKS without pay and when we do get paid from a job it can be just enough or less than enough to cover our bills/food etc.. Just wondering how you would budget in this way as I know some will get bigger lumps of money later but that is usually not the case with him and I cannot seem to work with any budget out there what so ever because of our situation.

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