Buying Your Freedom
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Buying Your Freedom

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According to The Wall Street Journal, our generation carries an average individual debt of $35,000, and that’s just in student loans.

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According to The Wall Street Journal, our generation carries an average individual debt of $35,000, and that’s just in student loans. With that in mind, the widening pay gap between Boomers/Gen X and Millennials is grounds for considerable worry. Our over 50-percent debt-to-income ratio (given an average starting salary of $50,556 for 2016 graduates, if they’re lucky) is unhealthy, and our wages seem stagnant. Perhaps we really are the “Stuck Generation,” as Forbes alleges. If that’s the case, then tell me again — why do we keep hearing that we need to save for retirement?
Sure, IRAs, 401Ks and other acronyms might sound nice — maybe even luxurious — but if we’re not financially solvent, retirement investing becomes just another burden. Our overarching financial goal should be freedom, not oppression.
The longer we wait to pay off our debt (like when we’re dumping money into a retirement account that won’t pay out for another four decades — or so), the longer we’ll have to wait to truly become free. In retirement, we’ll end up spending a good portion of our meticulously accumulated savings to pay for the mistakes of our youth. Let’s be smart.
Being money smart requires the skill of prioritization: rank-ordering our steps to both short- and long-run freedom. Here are four steps to both avoid losing money and gain ever-increasing financial freedom:
1. Start an emergency fund. The word “emergency” implies a lot of things, one of the biggest being its inability to be predicted. Rather than let yourself get into even more debt when your car suddenly comes to a halt in a busy intersection, start saving. Sacrifice nice-to-haves for the most critical expenses.
2. Pay off bad debt. There’s a notable difference between good debt (student loans) and bad, revolving debt (credit cards). Apply this balancing act to your repayment strategies: pay off revolving debt first, starting with the highest interest-earning amounts (interest-earning is a bad word in this context).
3. Live the modified 50/30/20 rule. Though challenging, living this rule will help you more clearly separate wants from needs — and get rid of unnecessary burdens. At the very most, 50 percent of your after-tax income should be consumed by necessities (food, housing, transportation); 30 percent, by paying off debt; and 20 percent, by lifestyle choices (we call these nice-to-haves).
4. Invest. Notice that this is the last step. After you’ve planned for disasters, escaped the shackles of credit card debt, and changed your spending habits, you’re finally in a position to plan for long-run freedom. Restructure the 50/30/20 rule: keep 50 percent for necessities, move 30 percent to lifestyle choices, and throw 20 percent into investing. Oh, and stay out of unnecessary debt.
Yes, ignoring the high-return reputation of IRAs may be difficult (e.g., if you start saving $100 a month on a 6 percent yielding account at 20 years old, you’ll have over $250,000 by the time you’re 65 — over a 500 percent return), but if we don’t stabilize our financial foundation, any riches we build for the future may just go towards another unpaid, maxed-out credit card bill.
Investing early pays off, but only if you’re working with a sound foundation. Escape the oppression of revolving debt, then start planning for a rich retirement.

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