It’s when ordinary people rise above the expectations and seize the opportunity that milestones truly are reached.
– Mike Huckabee

There are stages or phases that we go through as we learn to leverage our finances. Some may call them stages or phases, I will refer to them as the 4 Milestones on your personal finance journey. Milestones are used to identify where you are on a certain path or the distance traveled. The personal finance journey is filled with twists, turns, curves, detours and even uncharted territory. Chart your course and use the milestones to identify where you have been or set the course for where you are going.

ACCOUNTABILITY (1)

During this phase you will “own up” to whatever debt you may owe. It is when the head comes out of the sand and you realize ignoring financial problems is not a viable solution. Assess the situation, determine how you got there, and map your plan. Identify bad financial habits and poor choices, reflect on what can be done to prevent the same mistakes in the future.

Action steps:

• Look at income & expenses for the last 3 months. If the expenses are greater than the income then see what can be cut out
• Determine how much debt you actually have
• If you are behind on any payments, call the creditors to make arrangements. Don’t promise more than you can afford, stay courteous & professional
• Reflect on what caused your debt. Bad choices? Unforeseen circumstances? Ask yourself, how can you prevent it from happening again in the future?

RESPONSIBILITY (2)

Once you wake up and realize you need to change your financial situation it is time to modify your behavior. Personal Finance Guru Dave Ramsey says in Total Money Makeover that personal finance is 80% behavior and only 20% head knowledge. Most people know what they need to do to get their finances in order, at this milestone they start to do it!

For some, that may mean automating finances so bills are paid on time. For others it may mean using a cash only system. Perhaps it is cutting spending or finding ways to increase the cash flow. It is at this milestone that behavioral changes are put into action and press towards the next milestone.

STABILITY (3)

What would happen if you lost your primary source of income today? If the very thought sent a chill up your spine, you are probably not at the stability phase. Depending on the source, between 40-60% of Americans are living paycheck to paycheck. With unemployment on the rise these statistics are scary…but they don’t have to be.

Finance experts disagree on the amount that should be stashed in an emergency fund, but all agree you should have one!

My personal definition of the stability milestone is a person in there finance journey who has:

• Eliminated all high-interest debt (higher than 10% interest rate)
• System in place for paying off any other debts (mortgage, student loans, etc)
• Emergency savings fund that will cover at least 3 months expenses
• Started retirement savings
• Possibly created multiple streams of income
• Possibly saving for children’s college education

It is at this stage that the burden of debt dissolves. Breathing room has been created because your money can go to what you want instead of debtors. Without the additional weight traveling the journey becomes a little easier. Many will live out their lives on the stability track. Financial responsibility becomes a lifestyle. There is a working method in place for spending and saving. Adjustments are made as necessary. However, a subset of individuals will reach the final milestone…

LIBERTY (4)

Once you are financially stable, that frees up more of your money for investments and spending on what matters to you. Some people define liberty as not having to work. Others define it as letting your money work for you. For others, it may be when your net worth hits the magical million.

My definition of the liberty phase is simply when your time & finances are freed up so you can continually do what you love without impacting your lifestyle. At this point you are no longer working for money, but your money is working for you. You have multiple streams of passive residual income.

You hard work has paid off! But remember, this is the journey of a lifetime. It is not time to kick off your shoes and throw your feet up. Perhaps you hire a finance manager or you pick and choose your own investments. You’ll continue to monitor them and make adjustments as necessary.

At this milestone life affairs are in order such that whatever assets you leave behind are allocated according to your instructions.

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There is another phase worth mentioning, it is not a milestone…I call it the lost stage (0). Individuals at this stage are wandering aimlessly with no direction or real distance traveled. They do not see the road signs warning them of the impending danger ahead. When it comes to finances there is more debt being accumulated with little motivation to pay it off. Planning for a financial future is not a consideration. These individuals are in need of a financial awakening.

So where am I on my journey?

I’m glad you asked! At the time of this writing I am trekking between the responsibility (2) and stability (3) milestones. If I stay on this course, I’ll hit the stability milestone in November 2010. By that time, I will have no more consumer debt and reached my emergency savings fund goal.

Your turn…

Where ever you are on your own personal finance journey, I’d like to encourage you to join along to encourage others and be encouraged.

I’d love to hear your thoughts in the comments section!

Where are you on your personal finance journey?