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Gaining Financial Freedom: Strive For The Five

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Jonathan Clements, Gaining Financial Freedom

With Jonathan Clements, Founder and Editor of Humbledollar.com

Steve had an interesting conversation with Jonathan Clements, the Founder and Editor of humbledollar.com, about his recent article on the ”five freedoms of money”—five essential ways that having enough money makes you free to pursue the life of your dreams. In addition to managing humbledollar, Jonathan is also the author of several books on personal finance, including From Here to Financial Happiness: Enrich Your Life in Just 77 Days.

Jonathan first explained how his article on the five freedoms of money was inspired by FDR’s 1941 State of the Union Address, where he talked about the four essential human freedoms: freedom of speech, freedom of worship, freedom from fear, and freedom from want. Jonathan’s article presents a slight variation on FDR’s theme, in that five freedoms come from having enough money. The basic premise of the article is that our pursuit of money is ultimately about the pursuit of freedom. As Jonathan explained, “If we think about money, it’s really a tool to enhance our lives. The goal isn’t just to have a big pile of money—it’s to make our lives better.”

Freedom From Fear

Freedom from fear is number one, and, unfortunately, most Americans don’t have that. They live paycheck to paycheck, constantly worried about whether they’ll just be able to pay their bills each month. The solution, the way to escape this fear, is to build up an emergency reserve account. Most financial advisors say to aim for six months’ worth of expenses as a cushion against financial worry. In his research, Jonathan discovered that “The Consumer Financial Protection Bureau found that the biggest driver of financial wellbeing is simply having a little bit of money in the bank. If you can accumulate $5,000 or so in a checking or savings account, that can measurably improve your sense of financial wellbeing.”

Steve concurred with that idea, stressing that just knowing that you can handle any reasonable financial emergency that might come up, like a major car repair bill,  can make a huge difference in how much peace of mind you have and how easily you sleep at night.

Freedom From Financial Dependence

Freedom from financial dependence refers to being financially dependent on others, whether that other is a family member or a government assistance program. And that’s fundamentally tied in with the first freedom, freedom from fear. If, for example, you’re dependent on the government’s food stamp program in order to have enough food to eat, you’re always going to have that fear in the back of your mind that the food stamp program might be cut or changed in some way so that you don’t qualify for it anymore.

Having enough money to handle all your financial needs and wants independently of others gives you a real sense of freedom. It’s what drives a lot of people to start their own business—they don’t want to be dependent on someone else for a job.

Steve admitted that was certainly true for him. “I didn’t really want my livelihood to be dependent upon changes in direction of a company or a capricious boss. I wanted to have more financial security than that. One reason that I really enjoy the investment advisory business so much is the fact that there is a measure of independence. I look at each of my clients as being my “boss” in a way, but if one boss fires me, I’ve still got hundreds more who are happy to have me working for them.”

Freedom From Financial Obligations

You’re, obviously, always going to have some  financial obligations. But you can free yourself from a lot of the burden and anxiety about, those obligations if you make an organized effort to minimize them. The short version is to minimize your fixed monthly expenses—mortgage or rent, car loan, utilities, etc.—and avoid taking on excessive debt. Jonathan advises people to ”Avoid committing to monthly costs that deliver little happiness to you. One rule of thumb is to try to keep your fixed living expenses under a total that equals half of your gross income. And the lower you can get it under that line, the more money you’re going to have for discretionary spending, the fun stuff in life, like going on vacation or out to dinner at a nice restaurant.”

Steve mentioned the danger of becoming what’s sometimes called “house poor.” That’s where you’ve got this really big house, but your mortgage payments are so high that you can hardly afford to buy anything to put in that house. It’s kind of sad if you’ve got a 40-foot by 40-foot entertainment room and can only afford a 20-inch TV to put in there.

Freedom From Our Own Wants

This is an interesting one since you might not think that you want to be free from what you want. Jonathan uses the term “miswanting.” We get stuck on wanting something—perhaps a really expensive sports car—that we think will vastly improve our lives. But it often turns out that, other than the brief thrill we have when we first get the car, it doesn’t improve our life all that much or make us any happier. What it does usually do is make us a lot poorer and deeper in debt. We burden ourselves with big monthly debt payments and all we get in exchange is maybe a few minutes or a few days of fun.

Jonathan informed listeners that the way to avoid getting trapped by “miswanting” is to simply be more thoughtful before making a major purchase. He advises people to try to envision their future self, the one doing without the money spent and saddled with payments five years from the purchase of an extravagance.

Freedom To Use Our Time As We Wish

Freedom number five sums up the real freedom that we’d all like to have: the freedom to do what we want to do with our time. To not have to go to work every day, the freedom to go on a cruise, or just go play golf because it’s an absolutely gorgeous day outside.

How do you get there? You get there through good financial planning and investing. As Jonathan sees it, true financial freedom is getting to the point where you’re “able to call the shots on how you spend your time each and every day.”

To learn more ways to enrich your life, both financially and personally, take a look at Jonathan’s book, From Here to Financial Happiness or visit humbledollar.com.

Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.

Read The Entire Transcript Here

Steve Pomeranz: My guest is Jonathan Clements. He is the founder and editor of Humble Dollar. He’s also the author of a fistful of personal finance books including From Here to Financial Happiness and How To Think About Money. In a recent article on how, in his words, what he calls “the five freedoms and the pursuit of money” are so intertwined, I thought it was a terrific article and I’ve asked Jonathan to come on to speak about it. Welcome back to the show, Jonathan.

Jonathan Clements: Hey, Steve. It’s always a pleasure to be on your show.

Steve Pomeranz: It’s great to have you. In your article, you referenced the inspiring speech given by FDR at the beginning of World War II, the four essential freedoms were listed there and they were called…what were those four essential freedoms that FDR spoke about?

Jonathan Clements: Yeah. This was a speech that FDR gave in early 1941. It was actually the State of The Union Address and he talked about four essential human freedoms: freedom of speech, of worship, from fear, and from want. And actually, I hadn’t realized this until after I wrote the article and a reader got in touch with me. This reader actually sent me a series of stickers from the 1944 presidential campaign, and the four freedoms were what FDR campaigned on in 1944, but at the time in ’41, he was really preparing America to go to war.

Steve Pomeranz: Yeah. And giving a reason to go to war in terms of what we needed to protect.

Jonathan Clements: Right. These were sort of in FDR’s mind, core American values. I think that we would all agree with that today—freedom of worship, of speech, from fear, and from want. These are things that we all want.

Steve Pomeranz: Well, you’re a thoughtful guy, and you wrote an article thinking about those four and turning them into what you’ve come up with, which is five freedoms or dimensions that money, that having money, offers a person. Let’s start with that. The first one is freedom from fear. Explain to us how money and freedom from fear are interrelated.

Jonathan Clements: If we think about money, it’s really a tool to enhance our lives. The goal isn’t just to have a big pile of money. It’s somehow to make our lives better and this list of freedoms that I drew up, really an aspirational list, things that I think people should strive for. Freedom from fear is at the top of the list. I mean, we all want a sense of financial security and yet, the data tell us that many Americans don’t have that, that they live paycheck to paycheck. They worry about how they’re going to pay the monthly bills. They worry how they would fare if they lost their job, but the research also points to an interesting solution to all of this.

The Consumer Financial Protection Bureau has done surveys to measure America’s sense of financial wellbeing, and what they found is the biggest driver of financial wellbeing is simply having a little bit of money in the bank. If you can accumulate $5,000 in a checking account or a savings account or some other kind of cash account that you have easy access to, that can measurably improve your sense of financial wellbeing.

Steve Pomeranz: The idea of knowing that if there is an unforeseen circumstance, a financial hit of some kind, that there’s money there to cover it, can offer you a lot of peace of mind.

Jonathan Clements: Absolutely. One of the things that we know is that we’re not very good at predicting the future and that I’m not just talking about the stock market and the direction of interest rates. We’re also very bad at predicting what’s going to happen in our own lives. We’re not very good at anticipating that we will have rough times, and yet, the fact is there are very few normal months. Almost every month, there’s a surprise expense that we somehow have to cope with, and if you have that money in the bank, you’ll be in a better position to cope with those surprises.

Steve Pomeranz: I don’t think there’s any question that having excess money will reduce our fear of what the ramifications of an uncertain world and so on. Let’s move to number two, freedom from financial dependence.

Jonathan Clements: As I explained in the article, we’re all dependent on one another to some degree, right? We expect others to help us by providing us with goods and services. None of us are completely free of other individuals and certainly, we wouldn’t want a world where that was the case where we all lived isolated existences, but to the extent that you are financially dependent on others, it does create some level of anxiety. I mean, I certainly don’t want to be dependent on charity. I don’t want to be dependent on the kindness of strangers, on a government program. I don’t want to be dependent upon my family. To the extent that you can ensure that you have the monies that you are not dependent on others financially, that is a good thing.

I would take this one step further, Steve, which is this financial dependence can even be extended to being employed. To some degree, if you’re relying on a company, a government institution, whatever it is to provide you with a regular paycheck, that is a level of financial dependence. Now, if you love your job and you have a great boss, all’s well and good, but if you have a bad boss, and I’ve had a few of those in my lifetime, being dependent on that paycheck can feel sort of uncomfortable. That’s one of the pleasures that comes with being retired or running your own business is that you are far less dependent on others in terms of that paycheck you have month to month.

Steve Pomeranz: It’s one of the reasons I never entered the corporate world. I didn’t really want my livelihood to be dependent upon the vagaries of politics or of changes in direction in the company or a capricious boss. I wanted to have more financial security, and in the business I was in, which was the investment advisor business, I had hundreds of bosses so to speak. If I were to be fired by one, it didn’t hurt my livelihood. I felt much more secure, and that was one reason that I really enjoy the investment advisory business so much is the fact that there is a measure of independence from a singular source of power, let’s say.

Jonathan Clements: I absolutely agree with you, and I would say that being an employee of a large institution, go back a couple of decades, that was actually considered to be relatively desirable. Large institutions were considered to be relatively stable. You could stay in the job for many decades as long as you did a half-decent job. That simply isn’t the case anymore. Even if you’re excellent at what you do, in the next restructuring, you could be out of a job no matter how good your employee reviews are, no matter how many hours you put in. Being an employee has a downside and in certain situations that can be very uncomfortable and lead to a lot of financial distress.

Steve Pomeranz: The third freedom is freedom from financial obligations. What are you referring to there?

Jonathan Clements: Well, again, we all have regular financial obligations, the mortgage or rent, the car payments, whatever it is. We do need to buy goods and services to keep ourselves going, but to the extent that those financial obligations consume a large part of your income, it’s going to create anxiety. It’s going to make your life seem more tenuous.

One of the rules of thumb that I often suggest to people is that you should make sure that your fixed living expenses, the mortgage, the rent, the insurance premiums you pay, the utilities, the regular grocery bill and so on, that those should not be eating up more than half of your pretax income. To the extent that you can get it even lower, all the better because the lower your fixed costs are relative to your income, one, you’ll find it much easier to save money, but two, you’ll also have extra money for so-called discretionary expenses, the fun stuff in life, going on vacation, going out to dinner, taking the family to an amusement park, going with your spouse to a concert or the theater. Those are the things that make life special and you want to have the money to do those things. The way you do that is by keeping your fixed monthly financial obligations as small as possible.

Steve Pomeranz: Yeah. Yeah. This idea of being house poor is the way we used to say it. You may have a large house and you may enjoy that house, but there’s really no room for anything else in your life for discretionary spending. You don’t want to be house poor. You want to keep everything within. Everybody has financial constraints. I mean, millionaires don’t have unlimited resources. You might think a billionaire, which it’s kind of stupid to talk about them, but if they’ve got 17 homes all over the world, they’re going to come up against some financial constraints. Resources are not unlimited really for everybody. We have to remember that.

Steve Pomeranz: Let’s move to number four, which is freedom from our own wants. That was an interesting one. Tell us about that.

Jonathan Clements: In the psychological literature, there’s this word, I only came across it last year, but I love the word. The word is miss-wanting, and what academic psychologists mean by miss-wanting is that we set our sights on something, often a material good, and we want it so badly ‘cause we’re sure it’s going to vastly improve our lives, and yet, more often than not, even if we get this possession that we desperately, desperately want, we might get a brief thrill out of it, but often it doesn’t improve our lives. Instead, all it does is lead to a much smaller bank account.

We need to become much more thoughtful about how we spend our money so that we avoid this miss-wanting. One of the things that I encourage people to think about when they contemplate spending money on a major purchase or something else is to say to themselves, what will my future-self think about the money that I spend today? Because when you spend money today, what you’re doing is not only buying something that your future-self is going to have to live with, but also spending money that your future-self will not have to spend and, worse still, if you go into debt to make this purchase, your future-self is going to have to repay the money involved. As you spend money today, think about the implications for your future-self and to the greatest extent possible, try to make sure that your future-self is not unhappy.

Steve Pomeranz: Well, if you think about making decisions to take care of your loved ones, then I guess you should include your future-self as one of your loved ones. Get this idea in your head that looking back, your future-self is going to say, either you did good for me, thank you, or why did you do something so idiotic?

In the interest of time, we’ve got one more here. Freedom to use our time as we wish.

Jonathan Clements: This is about, more than anything, using your money to create time because ultimately, time is the limited resource. You’re going to run out of time before you run out of money, so you want to make the best possible use of the time that you have. When you’re in the workforce, buying time might mean hiring somebody to mow the lawn or clean the house to get you out of the chores that you really dislike doing. Later, if you’re successful financially, you may be able to buy time in the sense that you leave that corporate job that you hate and up for a career that’s less lucrative but what you may find more fulfilling. Ultimately, we have retirement where your time is totally your own. I mean, that is true financial independence and it’s a goal that we should all strive for because time is so valuable and you want to be able to call the shots on how you spend each and every day.

Steve Pomeranz: Good advice from Jonathan Clements, Founder and Editor of the Humble Dollar of HumbleDollar.com. Go to Humbledollar.com to hear this and any interview again. If you have a question, we love to get your questions, and remember to visit our website, which is Stevepomeranz.com to join our conversation. While you’re there, sign up for a weekly update for upcoming live events and the important topics we’ve covered this week straight into your inbox every single week. That’s Stevepomeranz.com.

Steve Pomeranz: Jonathan, thanks so much once again for coming here and joining us today.

Jonathan Clements: It was a great conversation, Steve. Thanks for having me on.