We’ve all had that feeling. The pit in the stomach that wells up when you get notified that your credit score went down. It happened because you charged something you couldn’t afford to your credit card, again.
Many Americans suffer from crushing consumer debt while living paycheck to paycheck. The ongoing pandemic and resulting recession have helped expose our collective financial struggle, and something needs to change.
What would it feel like to have financial freedom? To have a safety net so sturdy that an unexpected repair bill or a sudden loss of income would be no sweat to you? Achieving financial freedom is a goal for many, but it can feel so hard to get there. Financial freedom is absolutely attainable if you’re ready to commit and practice discipline. Today, we’ll show you how to construct the perfect financial freedom plan.
What Is Financial Freedom?
Financial freedom is the ability to make life decisions without having to worry about money. This can take on a different meaning, depending on whom you ask.
For one, it could mean switching to a career they love without having to consider the salary. For another, it could mean buying a fancy new car or retiring in their 30s to travel the world. By achieving financial freedom, you could live the life you want by taking money out of the equation.
Here’s a fun exercise. What if you won the lottery tomorrow? If money weren’t an issue for you, what would you do? What would be your first action item, and what would you spend the rest of your life doing?
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How To Achieve Financial Freedom In 6 Steps
There are a number of ways to achieve financial freedom, but there are some basics that everyone should get down. Below are the 6 critical steps to achieving financial freedom. If you stick to these tips, you’ll surely be pleased with the results. The hardest part is keeping up good habits:
Wisely Manage Your Money
Pay Off Your Debts
Evaluate Your Career Choice
Start Short-Term Saving & Investing
Begin Long-Term Investing
Focus On Your Future Financial Freedom
1. Wisely Manage Your Money
The first step to achieving financial freedom is learning how to manage your money wisely. Instead of spending freely, you’ll need to become mindful of your spending habits. Financial guru Dave Ramsey strongly recommends accounting for every last dollar of your paycheck each month.
You can do this by tallying up your income and listing out expenses. This way, you’ll know exactly how much money you can spend in categories like gas, groceries, personal care, and entertainment. Your budget should include room to pay off debts, as well as to pay yourself, in terms of savings and investments.
By coming up with a zero-based budget, you might be surprised at how much you’ve been spending carelessly. If you have a partner with whom you share your finances, be sure that you’re both on the same page and agree to stick to a budget.
2. Pay Off Your Debts
Everyone has committed some financial mistakes in the past, and it can be scary to face them. However, know that you can never get on the path toward financial freedom unless you face some skeletons in the closet.
Most of these “skeletons” come in the form of debt: credit cards, student loans, car loans, personal loans. You should always make it your priority to pay off your debt first. This is because each time you make a credit card payment or loan payment, you’re giving away chunks of your hard-earned paycheck to someone else. Worse, most loans have steep interest rates, meaning that your debt is growing while you sleep.
By paying down your debt as quickly as possible, you’ll prevent it from growing beyond your control. It will also help improve your credit worthiness, which will open new options, such as qualifying to purchase a fuel-efficient car. (Get rid of that old clunker that keeps breaking down and eats up gas!)
Once you pay off your debt, you’ll free up a significant amount of funds. You can then increase your budget for savings, long-term investing, or both. The fastest way to pay off debt is to allocate a moderate to aggressive amount of your monthly income toward debt payoff. You’ll likely need to practice restraint and cut down on your “fun” spending significantly. Financial experts recommend using the debt snowball method – read more on it here.
3. Evaluate Your Career Choices
Are you stuck in a dead-end job? Do you feel like you are getting paid your worth? Have you aligned your skillset with your purpose?
The income provided by your job is the basis of your budget, so make sure to evaluate your career. If there are opportunities to increase your current income or potential income, seize them! Here are some questions you can ask yourself. (Hint: If you answer “no” to any of them, it’s time to re-evaluate your current situation.)
Does your current job align with your long-term goals?
Do you have potential to make your dream salary?
Are there opportunities for you to grow?
Does your job make use of your gifts and skills?
Do you enjoy the work that you do?
Does your employer support your goals of financial freedom by offering solid retirement savings and health insurance plans?
4. Start Short-Term Saving For Emergencies
Once you’ve paid off your debt and freed up some of your income, it’s time to start creating your safety blanket. Start small by setting a goal of saving up three months’ worth of your monthly expenses. Once you’ve hit that goal, move up to six months.
By saving up, you are providing yourself with a buffer in case the unexpected happens. The unexpected could be anything ranging from natural disasters to sudden job loss. When something detrimental happens, and you don’t have an emergency fund, you’ll be forced to rack up credit card debt and derail your finances again.
Once you have a fully-funded emergency buffer, you’ll enjoy being able to say “yes” to that extra latté or two without any guilt. It’s also a smart idea to build up savings for non-routine expenses, such as vacations or weddings. This can include anything that you would otherwise have to put on a credit card. By creating a “rainy day” fund, you’ll help yourself significantly by staying away from your emergency funds.
5. Begin Long-Term Investing
The path towards financial freedom starts with getting your ducks in a row: creating a budget, paying off debt, and starting an emergency fund. Once you’ve gotten yourself into a stable place, it’s time to start growing some wealth!
The most tried and true way to grow wealth is through long-term investing. Here are some investment opportunities that you don’t want to miss out on:
Retirement Savings: First, explore whether or not your employer offers a retirement savings plan, such as a 401(k). This means that they are sponsoring your account, and you can usually set up automatic pre-tax contributions from each paycheck. Make sure to meet the minimum contribution to qualify for free employer matching! Once you’ve maxed out your annual 401(k) contributions, boost your retirement savings by tucking funds away into a Roth IRA as well. A Roth IRA offers great benefits; read all about them here.
College Savings: You can ignore this option if you don’t plan to have children, but otherwise, it’s a smart idea to save up for your children’s education as early as possible. Paying for tuition, books, and living comes with a hefty price tag, and it’ll take years to save up enough so that both you and your kids can live comfortably during their college years. You can set up an Education Savings Account (ESA), which allows your savings to grow tax-free. The only caveat is that the funds must be used to cover college expenses. By paying for your children’s college, you can help them avoid student debt and set them on their path toward financial freedom as well!
Real Estate Investments: Here at FortuneBuilders, we’re partial to real estate investing, and for good reason. Real estate is a solid investment that increases greatly in value, and it will help you obtain a passive income stream. First, focus on using any extra money to pay off your mortgage as quickly as you can. Having no mortgage payments left is a significant leap toward financial freedom. Then, you can start thinking about buying rental properties. If you make the right move, you may not necessarily have any mortgage payments. After putting down the initial payment, your rental property tenants can pay your mortgage for you. Even better, look for opportunities where you’ll turn a profit from the get-go.
Taxable Investments: Once you’ve paid off all debts and mortgages and have built up an emergency fund, you can start allocating a portion of your income towards investments. That is, in addition to your tax-advantaged retirement investments. These are taxable investments such as market stocks and mutual funds. However, be prepared to pay taxes on any capital gains or dividends that you make. The best way to get into the investing game is to work with a financial advisor.
6. Focus On Your Future Financial Freedom
Once you’ve reached the investment phase, you can pat yourself on the back. If you followed your steps in order, it means that you’ve paid off your debt, built up an emergency fund, are contributing toward a retirement savings account, and are making other investments. You may not have achieved financial freedom yet, but you’re well on your way. Instead of working hard for your money, your money is now working hard for you.
Your job is not yet done, however. Your financial freedom depends on your continued commitment and hard work. Be careful not to feel so relieved that you start getting yourself into debt again. As life goes on, you’ll want to keep reassessing your budget and financial commitments. This might mean adjusting your budget to meet shifting needs or restructuring your investment strategy. Whatever it may be, the key is to keep in touch with your financial performance.
Tips For Achieving Financial Freedom
Now that you know the steps to achieve financial freedom, it’s time to bolster your strategy with some pro tips. Be sure to keep the following pieces of advice in mind as you get started on your financial freedom journey:
Set Life Goals
Consider A Financial Advisor
Live Within Your Means
Setting up a financial plan without a clear vision is like setting yourself up to fail. Spend some time journaling about life goals, and try to be specific as possible. You can then take these goals and work backward so that you have a set of small and achievable mile-markers. That way, you’ll set your financial goals with an intention and be less likely to go astray.
Some experts suggest working with a financial advisor once you’ve amassed some wealth, but why not start at the get-go? Today, various financial advising and coaching companies are available for individuals at any point in their financial journey. The right financial advisor could help you create a budget, provide guidance on prioritizing debt payoff, and hold you accountable so that you’re more likely to reach your goals.
Meeting your financial goals likely means that you’ll have to live frugally. This is tough for most people to do, and precisely why we get ourselves into financial messes in the first place. By making purchases and lifestyle decisions above our pay grade, we begin to rack up debt quickly. (Champagne taste on a beer budget, anyone?)
Facing your exact buying power can be a humbling experience, but necessary nonetheless. If you’re serious about paying off debt and creating savings, you’ll have to be realistic about how much you can spend. Sticking to a discretionary budget within your means will be hard at first, but with some practice, you’ll be able to start developing some good financial habits.
Once you start saving and investing, you can develop some financial sophistication by educating yourself. Read up on tax laws to make sure you are maximizing your deductions. Subscribe to financial and stock market news so that you’re keeping your portfolio in competitive shape. Work with a financial advisor and get a working knowledge of financial terms and strategies. By increasing your financial knowledge-base, you’ll start becoming a financial expert yourself.
Bringing up physical health during a financial freedom talk might seem like a non sequitur, but it is, in fact, closely related. Medical bills are one of the biggest sinkholes for your finances, and the best way to avoid them is to take preventative care of your mind and body.
Achieving financial freedom is hard work. it takes commitment and diligence, and you’ll have to have the discipline to say “no” to temptations that don’t serve your financial goals. That’s why it’s important to have a clear vision with attainable goals along the way so that you can stick with your plan. However, if you can carry out your plan, you’ll be thanking yourself. Get started today so that you can get one step closer to whatever your version of financial freedom looks like — perhaps it’s early retirement or jet-setting around the world — or both!
Do you have any financial freedom books or quotes that you swear by? Please share them by leaving us a comment below!
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