Best Vanguard Funds

Best Vanguard Funds To Invest In

Which Index (and Other) Funds Should I Invest In?

Index mutual funds are a sound long-term investment

If you’ve read any of my material you know I’m a huge proponent of index mutual funds.  The specific reasons on why I believe investing in index mutual funds is a sound investment strategy is a topic for other articles.  This article is less about the “why” of index mutual fund investing and is more about the “what,” or what specific index mutual funds should you consider investing in.

Vanguard is the flagship index mutual fund company

Below I recommend several Vanguard index (and other) mutual funds for you to consider.  But why Vanguard?  The Vanguard Group, better known as “Vanguard,” is a U.S.-based investment management company.  Like other investment firms it sells many financial products and services, but what I’m going to focus on here is some of their index mutual fund offerings.  But again, why Vanguard?  Aren’t there other investment companies that offer index mutual funds as well?  The answer is yes, but Vanguard is a solid option because of the following:

  • Founded in 1975, it is a stable, well-run firm.
  • It has a wide offering of index mutual funds to choose from.
  • The fees to invest in Vanguard index funds are very, VERY low – some of the very best in the industry.
  • You can conveniently manage your investments using Vanguard’s well-organized website (https://www.vanguard.com).

Specific Index Mutual Funds to Consider

Whether you have $10,000 or $10,000,000, following are specific mutual funds for you to consider investing in. Now lets look at some of the best Vanguard funds out there.

Vanguard Prime Money Market Account (VMMXX)

The Vanguard Prime Money Market Account is invested in conservative, short-term, high-quality securities.  It’s an excellent place to save money that you want to be safe and yet still earn a competitive interest rate.[1]  Unlike a CD, a money market account is liquid; you can write checks against it and you can also connect it to your bank account to wire money to and from it.

Click Prime Money Market Account for an overview.

Vanguard 500 Index Fund (VFINX)

The Vanguard 500 Index Fund is the granddaddy of them all, the very first index fund for individual investors.  This fund is invested in companies comprising the S&P 500, one of the most followed stock market indices in the world.  Investing in this fund gives you broad exposure to 500 large, U.S.-based multinationals that are selected to be representative of the U.S. economy as a whole.  Consider this fund a workhorse, a common holding of most anyone who invests in index mutual funds.

Click Vanguard 500 Index Fund for an overview.

Vanguard Small Cap Growth Index Fund (VISGX)

The Vanguard Small Cap Growth Index Fund is designed to track the S&P Small-Cap 600 Index.  So while the 500 Index Fund invests in larger, more established companies, this index fund gives you investment exposure to that next strata of companies – those that are smaller, leaner, and up and coming.  This fund can also provide good balance to the 500 Index Fund because smaller companies tend to perform differently than larger companies during various economic cycles, and being diversified in such a way can make your overall investment portfolio more durable.

Click Vanguard Small Cap Growth Index Fund for an overview.

Vanguard Total International Stock Index Fund (VGTSX)

The global economy doesn’t just revolve around the U.S., and Total International Stock Index Fund gives you the opportunity diversify geographically by enabling you to invest in large, non-U.S. companies based around the world.  For example, this fund has holdings in Nestle SA, Toyota Corp., Vodafone Group plc, and literally thousands of other non-U.S. companies.

Click Vanguard Total International Stock Index Fund for an overview.

Vanguard REIT Index Fund (VGISX)The Best Vanguard Funds REITs

A “REIT” is a real estate investment trust, a corporation that qualifies for favorable tax status as long as it follows certain rules, one of which is that its assets must be concentrated in real estate.  Thus REITs hold properties such as apartments, shopping malls, hotels, office parks, etc.  Thus the REIT Index Fund gives individual investors a cost-effective way to invest in a widely diversified portfolio of professionally managed commercial real estate.

Click Vanguard REIT Index Fund for an overview.

Vanguard Energy Fund (VGENX)

Energy is a vital element of the global economy.  The Vanguard Energy Fund invests the bulk of its assets in companies engaged in the production and transmission of core energies such as oil, natural gas and coal.  It also has some investments in companies engaged in energy research and conservation.  An investment in energy can add a nice element of diversification to your portfolio because energy-related investments have the potential to go up even as the broader economy struggles.  However, while energy investments can do well, they can also be quite volatile, so they’re not for the faint of heart.  Finally, it’s also important to note that the Energy Fund is NOT actually an index fund, but since it can provide a good element of investment diversification and because its management expenses are very low I included it on the list.

Click Vanguard Energy Fund for an overview.

Vanguard Precious Metals and Mining Fund (VGPMX)

While I am not personally a fan of precious metals, for the sake of completeness I did want to point out this relatively safe and inexpensive way to invest in them (but see my definition of “safe” in the footnote below).[2]  Note that this fund does not invest directly in precious metals themselves, but in companies involved in the exploration and extraction of them.  Vanguard bills this as an investment that would be “complementary to an already diversified portfolio with a long-term time horizon.”

Click Vanguard Precious Metals and Mining Fund for an overview.

Short-Term Bond Index Fund (VBISX)

The Short-Term Bond Index Fund holds a diversified mix of investment-grade debt with maturities from 1-5 years.  This fund is passively managed to follow a common bond index by using a passively managed sampling approach.  The Short-Term Bond Index Fund is an outstanding alternative to traditional 3 month to 5 year bank CDs because it can easily be sold without penalty and because it’s invested in hundreds of underlying debt securities as opposed to just 1 CD at 1 interest rate at 1 bank!

Click Short-Term Bond Index Fund for an overview.

Total Bond Market Index Fund (VBMFX)

The Total Bond Market Index Fund is, in my view, not quite what the name implies.  Rather than include a sample of ALL bonds, this fund’s holdings are concentrated in debt securities that range between 5-10 years.   As with the Short-Term Bond Index Fund, this fund employs a passively managed sampling approach, and it’s invested in a wide rage of government, corporate, and international dollar-denominated assets in an effort to track a commonly followed bond index (related to, but different than the bond index the Short-Term Bond Index Fund is designed to track).

Click Total Bond Market Index Fund for an overview.

Other Vanguard Mutual Funds

If you don’t find the list above to be comprehensive enough or if you simply want to see the full range of the best Vanguard funds, then check out: https://personal.vanguard.com/us/funds/vanguard/all?sort=name&sortorder=asc

 

Finding The Best Vanguard Funds

Which of the above index mutual funds should I invest in?

My purpose in providing the list above is not to tell exactly which index mutual funds to invest in and what percentage you should hold of each, because I do not believe there is some “magic formula” that works for ALL people in ALL situations.  Instead, my goal is to provide you with solid investment choices that you can use as a baseline as you determine what your own investment strategy should be.  Said another way, if all that you ever do is invest in a balanced mix of the above mutual funds according to an allocation you feel comfortable with (meaning X% in this fund, Y% in that fund, etc.) in the context of your particular goals, circumstances, preferences, risk tolerance, and personality then you’re doing what’s right for you.   It really doesn’t have to be any more complicated than that.  So make your investment choices, let your money start working for you, and then get on with the rest of your life!

What if my company’s retirement plan doesn’t offer Vanguard mutual funds?

Vanguard funds may not even be offered as choices in your company’s retirement plan (e.g., your 401k plan), and even if some are then it’s probably not going to be all of the ones you would be interested in.  So then what do you do?  Fortunately the management expenses in mutual funds offered by retirement plans usually much lower than the rates you could get on your own, so just pick investments that come as close as possible to what you’re looking for.  For example, you may really like the idea of putting some of your money in the Vanguard Small Cap Growth Index Fund, but if it’s not an investment choice then it’s likely your retirement plan offers another fund that would enable you to invest in smaller companies.

Should you invest in anything else BUT Vanguard’s index mutual funds?

Thinking beyond your company’s retirement plan, of course there are other investment options aside from Vanguard’s index mutual funds.  You could choose to invest from among hundreds of actively managed mutual funds, ETFs, raw land, rental real estate, individual stocks, gold, covered calls, etc.  So the question isn’t CAN you invest in things other than Vanguard’s index mutual funds, but SHOULD you do so?  The short answer is that if you’ve got an opportunity to invest in something that you know is comfortably below market value (meaning you’re almost sure you’ll make a profit) then it’s worth considering.  Examples might include discounted company stock or stock options, land purchased at a discount from a friend or relative, or something along those lines.[3]  However, if you’ve got no such obvious “can’t miss” investment opportunities then, again, if all you did was build a portfolio with a sensible mix of Vanguard’s index mutual funds then that alone would be a good, solid, long-term investment strategy.[4]



[1] Note that while this money market account is not FDIC insured, it is still considered to be quite safe.

[2] Note that “safe” in this context does not mean this investment is without risk.  What I do mean is that owning a publicly traded and marketable security is vastly more secure than having some gold coins stuffed under your mattress (or even in your safe deposit box!).

[3] Note that I am NOT talking here about gimmicky, “click here or call this number and I’ll tell you the secrets of getting rich using my ‘secret’ method” schemes.  No, I am talking about straightforward, real investment opportunities that you can understand up front before committing any money.

[4] This article does NOT constitute investment advice.  See the site’s legal disclaimer here.

leasing vs buying a car pros and cons

Leasing Vs Buying A Car Pros And Cons

When it comes to their money, some people do inexplicable things. I came across an appalling figure the other day. The average length of a car loan today is 70 months – nearly six years! Now couple that stat with the fact that, on average, people only keep their cars three to five years. If you do that, it doesn’t take a calculator to figure out you’re digging yourself into a hole.  Now lets look at leasing vs buying a car pros and cons.

Upside Down

Being ‘upside down’ is the term used to describe when you owe more on something than it’s actually worth. When you’re talking about cars, it can happen surprising easily.

As a rule, new cars immediately lose value as soon as they’re driven off the lot. It takes several months or even a year of payments to owe less than the resale value of the car. For that period of time, you’re upside down. The longer your loan term, the longer it takes to get to the break-even point.

So it seems that what more and more new car buyers are doing is not entirely paying for a car before they turn around and sell it. Then they buy another car and roll the old loan balance into the new loan. After a few cycles of this, you’re driving a Chevy with a Mercedes-size loan.

The Numbers

To put numbers to the point, let’s say you want to buy this nice new Toyota Camry with a loan of $25,000. If you finance for five years at 5.09% (what my bank offers), you’ll be paying $3,369 in interest over the life of the loan. If your loan term is three years, total interest is $2,789. Financing for the longer term nearly doubles the interest you pay.

If you decide to trade in that car after four years, you still owe over $5,520 on the loan. No problem – just roll that into the loan for your new car.

Do this a couple of times and you’ll quickly be driving a car worth half what you owe on it.

Lease Instead

Since evidently a great many people are doing just that, it seems they should be leasing instead of buying. At least at the end of a lease you don’t owe any money (assuming you fulfill the terms of the lease). Not only that but you’ll be able to afford more car than you would by buying outright.

Like I said, people do unbelievable things when it comes to money.

Saving Money For Travel

Saving Money For Travel Tips

Many families take a vacation as a reward for working hard and making it through the preceding months. Vacations create unique memories that everyone will share for years to come. Coming up with the money for a trip is not always easy. There are five budgeting tips that any family can use when saving money for travel.

1. Create A Savings Account

Creating a separate savings account for vacation money will help in a number of ways. It allows families to see the actual amount of money saved without having to deduct current expenses. A separate account also makes it harder to access the savings. This reduces the chances that it will be used for an impulse purchase. A dedicated savings account is useful because it is safe and separate from the main accounts used every day. Fees or other charges on a checking account will not affect the vacation savings.

2. Temporarily Eliminate Extras

A vacation is a time to relax and to have fun. One way to save money for a trip is to reduce the extra services in a home temporarily. Sacrificing a little entertainment or fun while saving will make the vacation much more enjoyable. Some extra services that could be cancelled include premium cable channels, housekeeping and expensive cell phone perks that do not affect service. These services can be reactivated after the vacation. The money from the cancelled services can be put directly into the savings account each week or month.

3. Lower Credit Card Payments

One way to help save money is to try to lower credit card payments before the vacation. Lowering interest rates will reduce monthly spending on bills. Credit card companies will sometimes lower rates for good customers who call and negotiate. This is not always possible for people with credit problems. A reputable credit repair service can often fix credit history problems quickly. This can make it possible to negotiate with a credit card company for lower rates.

4. Reduce Vacation Costs

An alternate way to help save money for a vacation is to lower the cost of the trip. This will make each dollar saved more valuable. Reducing the cost of a vacation can take some work. It is helpful to check regularly if there are new deals or discounts available. Finding less expensive hotel rooms or airfare will make it easier to save and will give the family more spending money once the vacation starts.

5. Create And Follow A Budget

The most effective way to save money for a vacation is to create a budget and then follow it as closely as possible. The budget should account for food, gas and other spending. Unnecessary expenses like eating out should be removed from the budget. All members of the family should resist spending money that is not listed in the budget. A good budget will predict exactly how much can be saved each week. It also shows expenses that could be reduced.

Hulu Or Netflix

Hulu Or Netflix: Which One Is More Worth Your Dollars?

Most consumers used to just sign up for cable without thinking about the alternatives, but the era of cable bundles may be coming to an end soon. Many people are finding that they would rather watch television online using their mobile devices as well as their gaming consoles and computers for a flat-rate that is much lower than cable.

So Hulu or Netflix?  Well, netflix currently has about ten times as many subscribers as Hulu, but their service has also been around much longer. Netflix has pledged to spend five billion dollars on acquiring new content throughout the next five years. They will be focusing on acquiring all of the most popular movies and television shows.

Hulu is owned by ABC, NBC and FOX. They currently offer customers the current season of shows from these networks for streaming. In addition to their large selection of television offerings, Hulu is currently experimenting with the addition of movie titles.

Hulu & Netflix – Accessibility and Content

Hulu or Netflix can both be streamed on many different devices, including smartphones, tablets, gaming consoles and Blu-Ray players. They both allow customers to stream content over mobile broadband 4G and 3G networks.

Netflix is currently stocked with about 100,000 streaming options and their movie collection is constantly growing. They offer a variety of television shows, however most of the shows they offer have been cancelled. Their options for current television series usually don’t include the current season.

Hulu offers many current television shows and most current episodes are available the day after they air on television. Most people who watch Glee and other current television shows opt to subscribe to Hulu. The have shows from many networks, including ABC, BBC America, FOX, The CW and USA. The movie selection at Hulu is sparse, but their selection of television shows is excellent.

Hulu and Netflix Users Watching Habits

Hulu and Netflix Users Watching Habits

Graph Credit –www.nielsen.com

Price

Netflix streaming costs just $7.99 per month for unlimited streaming of any of the content on their site on any supported device.

Hulu offers customers many shows for free at Hulu.com, but these shows are interrupted by substantial advertisements. Customers can choose to subscribe to Hulu Plus, which costs $7.99 per month and allows customers the ability to download mobile apps and access Hulu content through gaming consoles. The amount of ads is substantially reduced for Hulu Plus customers, but a few ads still appear during streaming.

The Bottom Line On Hulu or Netflix

Many people who get rid of cable spend $15.98 per month to subscribe to both Netflix and Hulu. This gives you the best of both worlds, with a variety of movies and television shows available for streaming at any time. Netflix is generally the best option for customers who want to keep their cable bundle while giving themselves the option of instant streaming and more movie choices.

First Time Home Buyer Guide

First Time Home Buyer Guide

5 Things to do Before Moving into Your First Family Home

When a couple moves into their first family home, they want to make sure everything goes as smoothly as possible. As such, here are five things every potential homeowner should do before moving into their first family home.  This first time home buyer guide should not only be used for your first home, but any additional homes you may purchase down the road.

1. Secure A Great Mortgage

Every applicant has a certain style of mortgage that is right for them. For instance, veterans can take advantage of A VA hybrid loan, or can research a VA hybrid review to see if this type of loan is right for them. Many first time home buyers take advantage of mortgages that cater to their budgets and needs. Still others look for a larger mortgage that can be paid off in less than 30 years. Every person has a different type of mortgage that works best for their needs, and they should know the varieties available before they settle on one.

2. Have The Home Inspected And Evaluated

A professional inspection and evaluation may cost potential homeowners a little bit of money, but it’s worth every penny for the peace of mind in the end. An inspection can detect areas of concern that can affect the value of a home, including rotting wood, unauthorized additions, and even a sinking foundation. An evaluation of the home lets potential homeowners know what their new home is actually worth so they can better bargain price at closing.

3. Know The Neighborhood

Along with knowing the safety and value of a home, a couple wishing to buy their first family home should learn about the neighborhood as well. Knowing crime rates, actual neighbors, proximity to schools and parks, and other things that can affect children is something every person should know about any home they are interested in.

4. Choose A Home A Family Can Continue Growing In

Many couples choose a home with only a few bedrooms, only anticipating the immediate future. If homeowners choose a home they can see themselves living in for 15 years or more, they are more likely to go with a home they can have several children in for the entirety of their childhoods.

5. Stay Within Budget

As a general rule, new homeowners should stay within their income level when buying a home. If a home exceeds more than twice a family’s annual income, they should seriously consider the affordability of their new home. In choosing a real budget right away, new family homeowners can keep themselves from drowning in debt from a house they cannot really afford.

 

Traditional IRA vs Roth IRA

Traditional IRA vs Roth IRA – Understanding The Difference

It’s good to invest for retirement.

It’s even better to invest for retirement if you can also pay less in taxes during the process. That’s what the traditional and Roth IRA provide. They allow you to pay fewer taxes. But they have a few differences, which I will explain below.

The federal government has decided to encourage you to do your own saving for retirement. You see, back in the good ole days, everyone either had a pension from their employer, or they just worked until they died. Only the rich were investing in the stock market.

In the modern era of investing, the pension started to go away. Thus, the government started feeling pressure to take care of older citizens. Because social security isn’t supposed to be a complete answer to your retirement needs, and because Americans started living longer, they needed a solution. They needed something to encourage do-it-yourself investing.

Traditional IRA

Along came ERISA and the traditional IRA in 1974. The traditional IRA is a retirement account in which the contributions you make to that account are tax-deductible. In other words, if you contribute $1,000 to a traditional IRA, you will be able to reduce your taxable income for the year by $1,000. Depending on your tax bracket, this could mean up to $250 in tax savings. All that just for saving for your retirement.

Over the years, the traditional IRA has seen come changes. We now have limits to the amount that you can contribute each year towards your IRA. Also, if you participate in an employer sponsored plan, like a 401K, you will not typically be able to invest tax-deductible dollars into a traditional IRA. Additionally, if you make over a certain amount each year, you will not be able to contribute tax-deductible dollars to your account.

When you pull money out of your traditional IRA (called a distribution), you will have to pay taxes on the money. So even though you skipped the taxes on the way end, you will make it up in retirement. Your contributions and earnings from those contributions will be taxed when you pull them out.

Lastly, you should know that there are penalties if you pull money out of your traditional IRA before you retire, and there are also required minimum distributions you must make starting in retirement. The traditional IRA has a lot of restrictions, but it’s the best place to save for retirement for those without a 401K who are looking for an instant tax deduction.

Roth IRA

That brings us to the Roth IRA. The Roth IRA was created by the in Tax Act of 1997, which was authored by William V. Roth, Jr., a Senator from Delaware. The Roth IRA was aimed at helping people save outside of their employer 401Ks.

You contribute after-tax dollars to a Roth IRA, but when it’s time to withdraw those funds in retirement, you can do so tax-free. Nice, right? Just like the traditional IRA, the Roth has income limits and contribution limits you must deal with. See more at the Roth IRA explained.

Other than that, there’s not much downside. Since the funds are after-tax (meaning you’ve already paid taxes on them), you have a lot more flexibility. You can withdraw your contributions without many limits and you can withdraw them in retirement any time you want. No required minimum distributions.

Traditional IRA vs Roth IRA

A good thing to keep in mind is that if you qualify for both accounts you can certainly contribute to both. There’s no rule saying you can’t. Keep in mind that if you do, you need to watch your contribution limits as those will be spread across both accounts.

The traditional IRA and Roth IRA are both excellent tools to help you get started with your retirement savings effort. It’s more important to get started with something than stopping down because you are stuck deciding which one of these is the best.

As a quick rule of thumb, I like to tell people that if you don’t have a company 401K, then consider the traditional IRA if you want to see some savings to your high tax bill. If you do have a company 401K, then just go with a Roth IRA to do all of your extra investing. That’s what I do.

Once you decide which account to use, you can start thinking about what to put inside your IRA. Good luck.


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Can You Contribute to 401k and IRA

Can You Contribute to a Roth IRA and 401K?

Can you contribute to a Roth IRA and 401k?  Yes, you can contribute to a Roth IRA and 401K at the same time.

In this post I’ll share my experience of simultaneously contributing to a Roth IRA and 401K, as well as the requirements you’ll need to meet in order to do the same.

When it’s time to get serious about your retirement, it’s not a stretch to imagine you might start thinking beyond your 401K. If you have a 401K at work, that’s great. Your employer cares about you and your ability to support yourself in retirement. If your employer is offering a matching contribution, well, you’ve struck gold. That’s free money. The next logical step is to consider a Roth IRA.

Before you consider a Roth IRA, you should be fully taking advantage of your company 401K. By that I mean contributing enough annual dollars to get the full match that the company offers. It’s likely that you are already doing that so let’s dive into the next step of also investing in a Roth IRA.

As a side note, if you don’t have a 401K, then consider reviewing the Difference Between Roth IRA and Traditional IRA.

Difference Between 401K and Roth IRA

Remember that the Roth IRA and 401K are just accounts where you keep your investments. They aren’t actual investments. They are just the account (or vehicle, as some put it) where the money is held. These accounts are great because they get special tax treatment.

You are able to contribute pre-tax dollars to a 401K. This means that no tax is taken from your money that is placed into the 401K. If you earn a dollar and put it in your 401K, you pay $0 in taxes on that dollar. If you earn another dollar and put it in your checking account instead, you have to pay taxes on that money.

There is a limit to your contribution though. It changes every year usually, but right now you can contribute $18,500 (2018) to your 401K.

You can’t contribute pre-tax dollars to a Roth IRA. You can only contribute dollars that have been taxed already. However, unlike a 401K, when you distribute that money to yourself in retirement, you don’t have to pay a tax. Nice, huh? For more on this account see the Roth IRA Explained.

401K and Roth IRA

Because the Roth IRA and 401K have opposite tax treatments, the IRS allows you to contribute to both at the same time. The only thing you have to worry about is the income limitation set on the Roth IRA. Your ability to contribute to a Roth IRA starts to “phase out” at $189,000 (2018) for those who file “married filing jointly”.

Here’s a strategy I follow. To contribute to both of these accounts, just make sure you start with contributions to the 401K to get the match. Then, switch to contributing to the Roth IRA. Once that is maxed out for the year ($5,500 for 2018), then you can go back to the 401K until you reach your annual limit there.

I did that for the tax years 2016 through 2017 and saw significant increased in my tax-advantaged retirement investing accounts. Not to mention, I have two different account with different distribution rules. So now I can consider things like using my Roth IRA for a down payment.

How about you, do you contribute to a Roth IRA and 401K at the same time?


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The Path To Financial Freedom

Unlimited Financial Freedom, Financial Bondage, & Everything in Between

Whether you’ve done a formal budget or not, what if it’s clear to you that you’re on a financial path that’s unsustainable?  What should you do?  Well, you’d better do something, because your financial freedom is at stake.

What is Financial Freedom?

Money is a form of freedom because it provides you with the ability to make choices with respect to things that have a financial cost.  Financial freedom is measured in dollars, so the more money you have the more financial freedom you have.  Spending money is an expression of your financial freedom and, paradoxically, each time you do you actually reduce the amount of freedom that you have, because spending money on one thing deprives you of the ability to spend it on something else.

For example, let’s say that you have $100 that you’re completely free to use; you don’t need it for housing, food, transportation, or any other living expenses.  In short, you have $100 of pure financial freedom to do with as you wish.  If you save it you continue to maintain that freedom, and it will even grow over time as your $100 earns interest.  If, however, you choose to spend it on something then you’re free to do so, but once you make that choice then you’re no longer free to buy anything else.

The Myth of Unlimited Financial Freedom

There are varying degrees of financial freedom.  On one extreme end of the scale is unlimited financial freedom.  Unlimited financial freedom is the ability to do or to buy anything that costs money.  Nobody in the history of the world has ever had unlimited financial freedom.  The Pharaohs, the Khans and the Caesars didn’t have it anciently and, despite the many billions certain people have amassed in our time, nobody has it now.  In fact, nobody is even remotely close.  The bottom line is that even the richest of the rich have financial limitations.  Thus unlimited financial freedom is a mythical goal that can never be achieved, so you can go ahead and scratch it from your life’s “to do” list.

Financial Security

Since unlimited financial freedom is unattainable then I recommend that you strive for financial security.  You achieve a state of financial security when you can comfortably meet both your needs and all of your reasonable wants without having to work and without going into any kind of debt.  Financial security is what most people visualize when they think about the ideal form of retirement.  Again, it’s the ability to do what(within reason), when you want, without having to worry about money.

Having a true understanding of the concept of financial security is vitally important, because you’ll never be able to obtain it (much less be able to appreciate it) if you don’t even know what it is!  And how might you not recognize financial security even if you obtained it?  The reason is because “financial freedom” is such a heavily cited yet rarely defined goal in personal finance guides and literature that it’s easy to misunderstand what the term really means.  Again, if taken literally, one can easily be led to believe that financial freedom is the ability to do anything that costs money.  But remember, that’s the definition of unlimited financial freedom, which you just learned is an unobtainable goal!

Does that mean that all personal finance literature that uses the term “financial freedom” is wrong?  Of course not!  It’s just important to remember that whenever you encounter the term “financial freedom” you should interpret it in your mind as “financial security.”  If you do that then things you read on personal finance and money management will make a lot more sense.  Having said that, know that I myself will sometimes use the term “financial freedom” as a substitute for “financial security” in my own writing because in the context of certain discussions the idea of freedom actually conveys more meaning.  But again, to have the right understanding and expectations, in the context of money it’s always important to interpret financial freedom to mean the ability to do what you want within reason (as opposed to doing anything you want), when you want, without having to worry about money.

Financial Stability

Achieving a state of financial security is an ambitious goal that could take you many years of wisely applied learning and sustained effort to achieve.  Fortunately along the way there is another worthwhile and satisfying goal to strive for: financial stability.  You achieve a state of financial stability when you can comfortably meet all of your needs and some of your reasonable wants without going into any kind of debt.

Those who achieve financially stability are generally thought of as “getting ahead.”  What exactly does that mean?  It means you reach a point where you consistently spend less than you earn, and by doing so you generate what’s commonly referred to as “discretionary income.”  Discretionary income is what’s left to save or spend after you have met all of your financial obligations.  For example, in a typical month if you have income of $4,000 and your standard monthly expenses are $3,500 (housing, transportation, food, etc.) then you would have $500 of discretionary income ($4,000 – $3,500 = $500).  Granted you can’t walk away from your job just because you’ve achieved a state of financial stability.  After all, using the previous example, you can’t exactly retire to an island paradise on $500.  But that aside, financial stability is a nice place to be because it means:

  • You can comfortably meet all of your needs.
  • You can meet some of your reasonable wants.
  • You can put some money in an emergency fund and/or investments with an eye towards eventually achieving financial security.
  • You can weather financial disruptions without undue stress (precisely because you have set aside some money to deal with such situations).

Financial Instability

Financial instability is a state where you have just enough income to meet your needs, along with perhaps a few meager wants.  In other words, you’re barely scraping by living at the subsistence level, right on the edge of your income.  Here are some signs that you’re financially unstable.

  • You feel a substantially heightened degree of stress if anything out of the ordinary happens that might cost money.
  • You can’t take advantage of good deals and opportunities even though you would like to because you don’t feel like you have enough extra money to do so.
  • Long periods of time can go by as you wait to be in a position to do or buy even modest wants (with higher level wants being out of the question).

Do you see the pattern?  Remember, financial freedom is the ability to make choices with respect to things that cost money, but when you’re financially unstable you have very little of such freedom.  It’s hard to be happy on a day-to-day basis in such a condition, because so much of your money is tied up just keeping your head above water that there’s little to nothing left to do anything satisfying or enjoyable.

If you ever reach a state of financial instability, and especially if you’re there for a long period of time, it can be tempting to compensate for your lack of discretionary income by turning to credit cards or other forms or borrowing to finance purchases for things that you want.  While that may feel satisfying in the short term, it’s just an illusion.  As time goes on the finance charges associated with your debts will mount, pushing you closer and closer to the brink of the worst state of all: financial bondage.

Financial Bondage

If financial instability represents a state where you have lost the ability to make choices with respect to things that cost money, financial bondage is a state where others actually have control over you.  In other words, you not only lose the ability to act financially, but you’re subject to being acted upon in ways that are beyond your control.  Following are some examples of things that can happen to you when you’re in financial bondage, whether you want them to or not.

  • You can be forced out of your home due to foreclosure (or you can be evicted from your apartment).
  • You vehicle can be repossessed.
  • Your wages can be garnished (which means they’re taken out of your paycheck before they ever even hit your bank account).
  • Your electricity, phone, Internet connection, gas and water can all be shut off.

It can be severely debilitating mentally, physically and emotionally to be in a state of financial bondage, but don’t give up hope!  If you combine the knowledge you gain from this website with other good resources and work hard to intelligently apply the things you have learned, I am confident that you can progressively gain more freedom until you find your feet financially…and then you can build from there.