Financial Freedom means different things to different people. For some it’s having extra in the account at the end of the month. For others it may include having the funds to start a business. Still other it may be the ability to retire debt -free and travel. Whatever your definition of financial freedom is depends on your personal preference, lifestyle and goal. Many people assume it’s about making tens of millions and living a lavish Hollywood Lifestyle, but this simply isn’t true. For most, it’s simply having the ability to live financially stress-free and enjoy life a little along the way.
So, what do you need to do to obtain financial freedom? Well…that depends. Everyone’s situation is different. The important thing to remember is it’s something we can all achieve with a little knowledge, good habits and patience.
The first thing you need to do is figure out your starting point. What is your current financial situation? You can’t figure out a plan to achieve financial freedom without knowing what your income, assets and debts are relative to your desired end goal. You can do this by tracking your income and expenses. If you’re good at bookkeeping and accounting, great! If not, there are many templates you can download to assist, or a simple spreadsheet will do. There are also apps available like Rocket Money, Mint or You Need A Budget.
Take note of all your financial accounts and cumulative debt. Your accounts include checking, savings, stocks, any retirement accounts or investments you have in your name. Debts include but are not limited to mortgages, loans, credit cards or any installment payments. Also include what you typically pay for entertainment, travel, dining out your daily coffee or whatever. You may be surprised how much you’re spending once you have your spending habits laid out in front of you. Those smoothies, coffees and weekly dinner and drinks with friends may tally up to way more than you think!
The next step in your journey is setting financial goals. What are your priorities? Typically, you want to set up you short term and long term and devise a plan for both.
Short term goals are defined as financial goals you want to achieve within the next 6 months to a year. Such goals may include saving for your emergency fund, paying off a particular credit card, saving for a vacation or buying new camera equipment. These things could be achieved by possibly prioritizing things such as cutting back on dining out, taking lunch to work, not going out as much and focusing on just purchasing the necessities over a short period of time. Making some short-term sacrifices in spending will typically uncover a surprising amount of additional funds we have available to reallocate towards our short financial goals.
Long term goals are defined as financial goals you want to achieve over the next 5 to 10 years or more. Such goals may include starting a business, buying a home or investment property, saving for your children’s education or saving or retirement. These goals take a little more planning but are often achievable with a solid strategy and the discipline to stick to it. Maybe you want to max out your company’s 401K matching option, additionally put a certain amount of each paycheck into an IRA or other retirement account or take advantage of government education programs like the 529 Plan. Small strategic steps done consistently over time can help you achieve those long-term financial goals.
The next big thing we need to do is a create an accurate and realistic budget. Your budget needs to honesty reflect your income and expenses. We need to divvy up into three main components: necessities, investments and discretionary. As you may think, necessities include things like mortgage/rent, food, utilities, loans, credit cards, insurance, etc. Investments include any investment accounts, savings, investment properties or anything that accumulates value you own. Finally, your discretionary spending should include everything else. Go ahead and buy that cute outfit and shoes, enjoy that night out with family and friends, take that much needed vacation to relax and unwind. Budgeting doesn’t mean you stop enjoying life, it means you strategically set aside money for play and to have fun. You work hard…play hard! Just don’t break the bank doing it!
A good rule of thumb for budgeting is the 50/30/20 Rule. This easy budgeting method suggests taking 50% of your take-home income and allocating it towards your needs, 30% towards your wants and 20% towards your saving and debt repayment. An example of this may be the following. If your net monthly take home income is $5,000 allocate $2,500 toward rent or mortgage, food and utilities. You may use $1,500 for things you want but may not be necessities like the new iPhone or taking a trip to Hawaii this summer with friends. Finally, allocate $1,000 to paying a credit card debt, investing in your company’s 401K program or putting money in an IRA for your retirement. The percentages can be adjusted for our specific situation, the key is to set a budget and stick to it.
If you are reading this, you’re a smart cookie and have probably been able to detect a theme in …. Saving and investing is the key to obtaining financial freedom. You need both to complement each other as you journey down the road to financial freedom.
First start saving for an emergency fund which is typically 3 to 6 months of your living expense. Life happens and having a buffer if you lose your job, have an unexpected car or home repair or a health emergency. This money will be your lifeline so you don’t incur credit card or loan debt that could be a huge setback financially. The best way to guarantee you are saving is to set up automatic transfers from your paycheck directly into these accounts. This way, you never see it and thus don’t miss it. These accounts will grow independently and provide a welcome safety net when you need it most. Never estimate the security this will provide knowing you have a cushion if some should occur.
Investing is essential to obtaining financial freedom. You must make your money work for you! You’re the boss! There are many types of ways to invest from stocks, bonds, mutual funds, real estates…. The list goes on and on. Educate yourself on different options and seek professional advice if you feel the need. Also, you can check out online investing courses or platforms like Vanguard or Robinhood. The key is to find what works for you and diversify so you don’t put all your eggs in one strategy basket. Stick to an investment budget and be consistent. This can quickly grow into a substantial amount and have you with a six, seven or eight figure or more nest egg waiting for you in retirement!
We all learned in science class for every action there’s an equal and opposite reaction. That’s kinda true with navigating finances as well. Saving and investing is imperative to achieving financial freedom, but so is managing debt. We all will incur debt and if not properly managed it can be detrimental to your goal of obtaining financial freedom – but it doesn’t have to be! Two popular debt repayment strategies you can implement are The Avalanche Method and The Snowball Method
The two debt repayment methods work as follows. The Avalanche is where you pay off the debt with the highest interest rate first saving your money in interest payments over time. The Snowball Method is when you pay off the smallest debt first and then take care of the larger debts.
Consolidating debt with a debt consolidation loan is a good option if you have multiple loans with high interest rates. Using one loan with a lower interest rate to replace multiple loans with unfavorable interest rates can save you thousands or ever tens of thousands in interest payment which can considerably cut down your time to achieve financial freedom.
The road to financial freedom is one we all can achieve with strategic planning and the self-discipline to stay on course. It involves creating a financial plan, knowing when to seek professional advice, staying motivated and celebrating wins along the way. Remember this is a journey and not a destination. It’s a marathon and not a sprint. There will be ups and downs, but the goal is to be prepared for the unexpected curveball along the way and not have bumps in the road derail your progress.
Make sure you plan for the important things in life that make you happy and are a priority both big and small. This includes outings with friends, vacations with family and the small things you enjoy as well. It’s all about maintaining a healthy balance along the way.
Financial freedom is about having the security to live life on your own terms without the stress that accompanies financial hardship. So, what are you waiting for? Let’s take the first step on a lifelong prosperous journey toward financial freedom. There’s no better time to start than today!