Having “financial freedom” means different things to different people. But, generally, it is understood as being able to live the lifestyle of your choosing while responsibly managing your finances. In other words, it means having enough savings, investments and cash on hand to live as you desire, both now and in retirement. Additionally, many people qualify financial freedom as having their money work for them rather than having to work for – and stress over – their money. Those interested in making a plan to achieve financial freedom should consider working with a professional financial advisor.
4 Steps to Achieve Financial Freedom
Once you’ve decided that financial freedom is your goal, you can start taking steps to achieve it. The first step toward achieving financial freedom is to define exactly what it means for you. For some, it might mean becoming debt-free and paying all your monthly expenses with your cash flow while others might just mean they have the independence to make their own financial decisions. You can’t generally achieve something that you haven’t defined. So, once you’ve defined what financial freedom means to you, you can start taking steps toward your goals.
1. Select a Budgeting Method
The first step is making a budget that fits your goals. It is vital to understand where your money is going. While budgeting can sound like a cumbersome task, you have multiple options. You may want to start by using a budgeting calculator to get a feel for how you are currently spending your money and how you’d like to change your spending.
Before you start budgeting, you may want to do some research on which budgeting method is best for you. Here are three popular budgeting methods:
- 50/30/20 rule: The 50/30/20 rule is a way to divide your post-tax income based on your needs, wants and savings. The rule states that people should spend 50% of their income on their needs. This includes health insurance, housing, transportation, and groceries. Then, the guideline states that people should spend 30% of their income on wants or non-necessities such as entertainment, travel, and more. Finally, the last 20% of a person’s income should be saved or invested. This might include retirement savings and building a stock portfolio.
- Zero-based budgeting: Zero-based budgeting instructs practitioners to assign every dollar they earn to a specific line item. For example, if a person needs to pay rent, buy groceries, pay off student loans, and invest, and he earns $1,000 per paycheck, the person will need to deduct each of these line items from the $1,000. If the person’s expenses only added up to $950, he would need to assign the extra $50 in their budget to a specific line item. For example, the person may want to contribute an additional $50 toward student loans.
- Cash-only budgeting: Also called “envelope budgeting,” this method instructs people to take out cash each time they receive a paycheck. Then, they allocate specified amounts of cash to each of their envelopes or budget line items. The idea behind cash-only budgeting is that when a person runs out of cash, they can no longer spend money until they receive their next paycheck.
2. Automate Your Payments
Automating your payments is one of the easiest steps you can take to ensure that you are on the path to financial freedom. You can set automated payments toward your mortgage, auto loan and credit card balances. You can also set up autopay for your utility bills. Additionally, you may want to make sure that your employer-sponsored investments are automated, including your 401(k) contributions and employee stock options.
An added benefit to automating your finances is that you will decrease the chances of you missing a payment. This will help you to save money on fees. Paying your credit card and other bills on-time and in-full every month will help to improve your credit history and boost your credit score as well.
When your payments are automated, you will be able to eliminate the time it takes to pay your bills every month. You can also automate your savings and investments, which means that your money will continue to grow without you having to think about it. This will help you to reach your financial goals easily and quickly.
For some people, automating monthly or quarterly payments can also weaken the temptation to cheat when they suddenly want to spend some money their budgets don’t allow them to.
3. Enlist the Help of a Professional
Managing your money isn’t always an easy task. As you age, you may grow your family, take promotions that change your income and make other decisions that affect your finances. With this many moving parts, it is wise to enlist the help of a financial advisor or financial planner who understands your goals as well as the market.
Financial planners and advisors have worked with people in your situation before. They will be able to help you navigate the market and make recommendations based on your goals. You can search for a certified financial planner in your area with our financial advisor matching tool.
4. Complete Regular Financial Check-Ups
It’s important to check in with yourself and your finances along the way. You may need to adjust your financial plan or re-evaluate your goals as life changes. One way to check in with yourself is to monitor your credit score.
Many banks and apps will allow you to check your credit score for free as often as you’d like. When you regularly monitor your credit, you will be able to quickly identify what helps you build your credit score, and what can harm it. If you do have negative marks on your credit score, you will be able to resolve them quickly or identify if you may be the victim of identity theft.
You can also monitor your investment accounts and have regular check-ins with your financial advisor. They will be able to help you pivot as needed and help you adjust your investments based on your goals and how far you are from reaching them. You can also regularly evaluate your budget to ensure that your daily, weekly and monthly activities are helping you move toward your goals.
It is important not to obsess over these financial landmarks as well. While you could choose to check your credit score daily if you wanted to, being overly meticulous about your finances may end up being stressful for you. Therefore, set time aside every couple of weeks or each month to go over your finances. This way, you’ll be able to keep a pulse on what is happening with your finances without letting it take over your life.
Is Achieving Financial Freedom Worth it?
When you decide that you want to start working toward financial freedom, it is important to remember that you will not become financially free overnight. It will likely take years to reach your goal. During that time, you may become worn out or discouraged. Therefore, it is important to remember why you want to achieve financial freedom. Keeping the bigger picture in mind will help you navigate the day-to-day decisions.
As you pay off your debt, you will have more money in your budget to invest or spend. Depending on your unique relationship with money, this might be very attractive to you. If you achieve financial freedom sooner than expected, you may be able to retire early, vacation more or spend more money on things and activities that you enjoy.
The Bottom Line
Financial freedom means different things to different people but generally denotes having enough savings, investments and cash (coupled with little to no debt) so you can afford the kind of life you want. Individuals can take small steps each day toward this goal by following a budget and paying close attention to their finances. This will lead them to take leaps toward a more secure financial future.
Tips for Financial Planning
- Consider talking to a financial planner about your goals and the steps you’re taking to reach your goals. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Financial freedom is different from financial independence, which means having enough money so you can stop working for a living if you want to. One key to achieving financial independence is wise asset allocation, which a free calculator can help you accomplish.
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