9 Steps to Financial Freedom (Steps 1-3)

Click here to see all of Andrew’s 9 Steps to Financial Freedom or click on them individually as Steps 1-3, Steps 4-5, Step 6, Step 7, Step 8, and Step 9.

No tricks, no gambles, no far-out ideas. Just nine tried and true, simple but not easy steps to financial freedom for Americans abroad. While I originally wrote this for teachers, the basic financial tenets are suitable for every US expat nonprofit worker, missionary, or limited-income worker. I hope you will benefit from it and take the next step. So, without further ado, here is… 

Step #1 Always pay off Credit Card Debt

We all know how essential saving money for retirement is. But too many people invest or save money while still owing balances on credit cards. The average U.S. household strangles itself with $8000 in outstanding credit card debt (The Bogleheads, by Larimore, Lindauer, and LeBoeuf, p. 10). In this respect, being average is hazardous to your wealth. In short, if you owe money on a credit card that charges 18%, and you’re investing money that you expect to make 9% per year on, then you’re condemning yourself like Sisyphus—the character in Greek mythology who was forced to roll a boulder up a slope, only to have the Gods knock it down before he got to the top.

Credit cards
Pay ’em off or cut ’em up!

For international US expats, paying off credit card balances in full at the end of each month offers a fabulous “return” on investment: better, in percentage terms, than what the stock market or the real estate market offers. Paying off an 18% interest bearing loan provides a tax free gain of 18%. Money that isn’t paid out in interest can be considered money earned. Even if you could make exorbitant returns in the stock market, you’d be paying tax on those gains. So you might need to gain 25% on your money in the stock market to equate to the after tax gain that paying off an 18% interest bearing credit card balance would provide (Larimore, Lindauer, Leboeuf, 2007, p. 10). Not even Warren Buffett, arguably the world’s greatest investor, has compounded money at 25% per year over his lifetime (P Robert Miles, Warren Buffett’s 101 Reasons to Own The World’s Greatest Investment, New York, NY: John Wiley & Sons Inc., 2001, pp. 52-53). So ensure that you pay off your credit card debts in full, before saving money towards your retirement.

Step #2 Establish a six-month contingency fund

Teachers are generally experienced at establishing contingency funds. We don’t always receive paychecks throughout the entire year, so we have to put aside money for times (often during the summer months) when we’re living off our savings. And throughout our careers, we can be collared by bills when we least expect them: a new roof for the house, another car to replace the one that just died, etc. What’s worse is that we can end up getting sick, laid off from work or need money to bail a son or daughter out of a tough financial jam.

International teachers should establish a contingency fund with more than enough for their typical summer expenses. They should have enough money to cover at least six months worth of living expenses in a high-interest savings account—one they can withdraw from whenever they want, without financial penalty (Larimore, Lindauer, Leboeuf, 2007, p11).

Step #3 Pay Yourself First

Once you’re free of credit card debt, and you’ve established a strong contingency fund for emergencies, you should start investing a significant amount of your pre-tax income. You’d need to save significantly more than a stateside teacher because you might not have a pension at the end of the day.

Click here to see all of Andrew’s 9 Steps to Financial Freedom or click on them individually as Steps 1-3, Steps 4-5, Step 6, Step 7, Step 8, and Step 9.

This post was originally the chapter “The International Teacher’s Nine Steps to Financial Freedom” in the book Reviving, Retooling and Retiring for Teachers (published by Michigan State University). It was graciously reposted here by Andrew Hallam, public speaker, author of Millionaire Expat: How To Build Wealth Living Overseas, and webmaster of andrewhallam.com where this post also appears. The word “teacher” was sometimes replaced with “US expat.”  

Andrew Hallam

I’m the author of the best-selling personal finance book, Millionaire Teacher—The Nine Rules of Wealth You Should Have Learned in School (Wiley 2011, 2nd Ed. 2017) and The Global Expatriate’s Guide To Investing – From Millionaire Teacher to Millionaire Expat (Wiley, 2015). My website can be found at https://andrewhallam.com/.