A popular movie plot often involves a main character who throws caution to the wind, leaving everything behind to follow a lover or to pursue a passion that's been left unattended for too long. We’re always rooting for this individual, no matter how unlikely success might appear. The reason we cheer them on is because those decisions make life unbelievably exciting. What a rush!
Life's not like the movies.
In reality, the majority of us are not the free spirits we see on the silver screen because in real life there are consequences when things go wrong and we don't have a financial or emotional cushion to help soften the blow. Without that cushion, our own fear of the unknown, our fear of failure, our fear of being alone, our fear of not being able to fend for ourselves holds us back. From staying in a job we hate to staying in an unfulfilling relationship, the list of things we keep doing out of fear is nearly endless. That's where liquid courage comes in.
Unless we’re talking about a treasure map, the liquid courage I’m talking about is not the kind you find in a bottle. I’m talking about having liquid assets you can tap into to float you through a change that will—hopefully—leave you richer, happier, more fulfilled on the other side. It’s about having the financial padding you need to enable you decide how you live your life.
No matter what your starting point, there are five steps to building up your liquid courage reserves:
- Live Below Your Means
- Have No Debt
- Plan for Retirement
- Own Your Home
Here's more detail regarding each of these steps.
1. Live Below Your Means
This one's straightforward. It starts with differentiating between needs and wants. If you're overdrawn every month, you need to take a hard look at your spending habits and cut into what you like to do but don't need to do:
- Eating out: Brown bag it, have people over to your place for a potluck as opposed to eating out and make meals at home.
- Entertainment: Go for less expensive versions of your current entertainment choices. No, cable is not a necessity.
- Travel: There's no room for globe trotting if you can't pay for it without credit.
- Clothes: Rediscover what's in your closet.
- Memberships: Don't renew them.
- Commute: Downsize or get rid of your car. Walk, bike or use public transportation (those options are all better for you anyway). Even consider moving closer to work or school.
- Professional/personal services: A mani/pedi, highlights, waxing, massage, personal trainer and others are not a necessity.
If you don't think you can cut back on anything, ask a trusted friend to give you ideas about how you might be able to get by with less. Sometimes someone with no emotional attachment can help point out unnecessary expenditures.
2. Have No Debt
Debt is a curious creature and having it in our lives is an understood part of living in the 21st century. But it didn’t used to be that way. Debt instruments—thanks to financial innovation—have experienced an unprecedented proliferation, reaching exponential growth in both number and complexity (credit cards first appeared in the 1950s and adjustable rate mortgages, home equity loans, personal lines of credit, etc. are relatively new phenomena).
These days, we consider that having the following debt is relatively normal:
- Credit cards
- Car loan or lease
- Student loan
- Medical debt
- Cellphone contract
- Gym membership contract
- Home equity loan or debt consolidation loan
- Possibly loans from family/friends (scary, but a reality for many)
- Borrowing against your retirement accounts
- Income tax
Here’s the issue with the above: each creditor we deal with is an additional party we need to answer to. That means the vast majority of us have more than one "boss". If you don’t believe me, I challenge you to tell me that you don’t feel the obligation having a debt represents. If you don’t feel the obligation, try not paying for a while and see how that goes for you. If you’re a very good slave to your creditors, the world will know because it leaves you with a terrific credit score that invites others to trip over themselves to lend you money. Creditors love debtors who only pay the minimum, which ensures they make a good return on their money.
If you have debt, which would make you part of the majority, I would invite you to look at your total take home pay and carve out what percentage of it is spoken for* before you even worry about food, entertainment, clothing and other regular monthly expenses you pay with what’s left. That will tell you exactly what percentage of your paycheque you have control over (aka your disposable income). You may be surprised by what you find.
Do you have more than 25% left over? Disposable income has been steadily decreasing as a percentage of a household's take home pay since the 1970s, despite more women entering the workforce. This isn't a healthy trend and it means more of us feel trapped in our current situation and, if anything goes wrong, we'll have no cushion, no resources to help us stay afloat.
Based on where you are currently, my question to you is can you handle a bump in the road? A job loss, the end of a relationship, a temporary disability or medical mishap? If not, It’s time to get rid of some of your masters. The moment you get rid of one, the desire to reduce or, better yet, eliminate the list of creditors grows. It’s a great feeling. It’s the feeling we experience when we’re regaining control over an ever-growing portion of our monthly spending decisions. Getting rid of debt can happen in many ways: paying it off with cash on hand, selling off assets to pay it down, downsizing your home or apartment, car(s), habits, lifestyle, etc.
Getting rid of debt is step one, because having a lot of savings and a fair amount of debt will just keep you in bondage longer because it can make you complacent. Of course, you want to have some savings to address the unexpected, but don't forget that every additional creditor you get rid of frees up some of your monthly cash flow.
Once you have no debt**, you’ve gained the freedom to use your money in a way that can help you handle just about any curve balls that come your way, whether life throws them at you or they’re self-inflicted. It makes you calmer and more focused on the big picture because you stop worrying about the day to day.
Now that you have no debt masters and you've regained a spring in your step, it’s time to save. Not only do you now have more monthly income available to put towards savings, but you know that you don't need your whole take-home pay to make it to the end of the month. That means there will be more you can put away when you either get pay increases or when you receive an unexpected windfall.
How much do we need to save for a rainy day? I’m a big believer of starting with 3 months of expenses*** and moving to 6 months over time, along with saving up for big purchases we know we can expect in the shorter, medium and longer term, such as buying a car, going on vacation, buying furniture, making a down payment on a home, etc.
Every additional dollar you stash away increases your freedom from obligation. It’s a ticket to spending your time in a way that’s most valuable to you. It gives you your voice back. You realize that you have more freedom to choose what you want to do.
Once you've saved up per the above, it’s time to keep increasing your options by saving for your future self.
4. Plan for Retirement
Planning for retirement doesn’t sound sexy, but it’s because we don’t think about it in the right way. Instead of thinking about it from the point of view of putting money away that you’ll use decades later, you can think about it as a freedom fund of sorts. The greater your freedom fund, the more flexibility you have in how you manage your life now and in the future. As it grows, a freedom fund makes you think differently. It helps you:
- Understand that you can change, not just your job, but your career.
- Feel you’re in control of your future and not beholden to an employer's golden handcuffs.
- Overcome your fear of the future and makes you more open to decisions that will make you more satisfied with life.
- Avoid the regret of not having taken care of your future needs.
A big part of getting the benefits I list above is saving way more than the typical 3-5%. That level of savings, though better than saving nothing, is NOT enough. You need to see your nest egg grow in a meaningful way, in a way that far outpaces the growth your investment returns offer.
How do you go about saving the right way? Max out your tax-free and tax-deferred savings vehicles. Make the transfers to these accounts automatic to ensure you pay yourself first before any other expenses are addressed. You can do this with little to no effort now because you’ve given yourself much more control over your disposable income.
Even though you’re not going to touch these investments, their mere presence and healthy growth provides a great deal of satisfaction. This financial security makes you a better version of you: more confident, outgoing, patient, kind, giving, and yes, happy.
5. Own Your Home
Unless you choose to rent over the long term, once your retirement savings are growing nicely with double digit yearly increases, it’s time to get rid of the big elephant: the mortgage.
There’s very little that can compare to owning the property where you lay your head to rest at night. The security of knowing that no matter what happens you’ve got a roof over your head is the last piece of the puzzle. You don’t worry about its market value, you don’t worry about mortgage rates as refinancing comes up, you probably don’t even think much about the economy because, no matter what, you’ll be ok…even if you decide to flip burgers for a living.
It’s easy to think of a mortgage as a debt obligation that you're supposed to pay down over decades, but that’s a fallacy and it makes the home owner more likely to buy a bigger home than necessary.
There are a few ways to handle accelerating your mortgage repayment:
- Accelerate repaying your existing mortgage by making additional payments (check your mortgage contract for early repayment penalties).
- Force yourself to repay early by refinancing your mortgage to shorter repayment period.
- Downsize! Revisit whether or not you really need the space/location you currently live in and see if you're getting a good return on having that much money tied up in a single asset. Owning a home might be part of almost everyone’s dream, but the beauty & size of your home has very little to do with your level of personal happiness, so it's worth spending a bit of time evaluating whether your home is the right fit for your needs.
6. BONUS - Your Net Worth Just Keeps Growing!
Well, there’s no question your level of liquid courage will be at an all-time high once you have no debt, short and long-term savings AND no mortgage. If you haven’t already done so by now, you’re likely to invite some more positive changes in your life. You’ll have a permanent grin on your face...and you’ll want more of that feeling.
Step #6 is just a bonus, and it basically happens all by itself. Once you’ve experienced a state of being where you're beholden to no one, including your future self (see retirement, step #4 above), you just want to keep going for more. At this point, you can pretty much do anything you want because you’ve managed to keep your desire for stuff and lifestyle in check. Why? Because people who are in need of nothing tend to want little more than they have. You actually feel you have “enough”.
That’s right. You’re officially wealthy. You keep growing your wealth and experience more out of life. You also know that personal growth and satisfaction don’t come from the material world, that life satisfaction comes from what you choose to do with what you have. You’re in control. You can choose to participate in the system in whichever way suits you.
Congratulations! You have a level of liquid courage most people only dream of.
How Does Our Household Measure Liquid Courage?
I calculate our level of liquid courage by figuring out how many years we’d be able to live on our current nest egg, without making a cent of interest or any earned income whatsoever****. I guess you could call that a conservative, doomsday type of scenario.
Here's what our simple math looks like:
Net Assets / Avg Yearly Expenses = # of Yrs of Liquid Courage
Using the recipe we’ve outlined above, at time of publication, the F2P clan has built up over 25 years of liquid courage, and last year we outlined our plan to increase it further. Mr. F2P’s told me he’d like to have over a century’s worth. Wow, that seems rather extreme to me but, hey, everyone’s comfort level is different. Based on how we’re doing, he may get his wish ;).
What’s your number? Where are you on the liquid courage continuum? Have you made life changes as a result of where you are and where you’re headed in your pursuit of financial security?
*I would include mortgage & utilities in this list, given they are a fixed expense that is due to external parties. I address mortgage in step #4, but it a debt, though a less offensive one.
**Other than a mortgage, which should not be a large portion of your take home pay. Of note: what the bank is willing to lend you is always WAY more than anyone can reasonably afford.
***Expenses, not pay. By this time, you're living well below your means, which means it takes you less money to make it to the end of the month.
****We do assume that our investments would at least keep pace with inflation.