10 Steps to Financial Freedom
What are the steps to financial freedom? Imagine waking up every day without the financial burdens of this life. What would it look like to work at a job you love, instead of one that simply pays the bills? Or to not have to work at all. To live your life without economic limits. To retire early if you so choose. But what are the steps to reach this reality?
In the most general terms, financial freedom is the ability to live off of the savings and investments that you’ve accumulated throughout your life. By having enough money in the bank as well as other accounts, you’ll be able to take back the steering wheel of your life. The direction your life takes is now completely up to you. Now that doesn’t mean there won’t be problems… there most certainly will. What it means is when those problems arise, you’ll be much more equipped to deal with them. Your new found financial freedom will allow you to make smarter decisions, without the stress of financial burden.
The goals and steps to financial freedom aren’t just about early retirement or quitting your job. In fact, many people who support the F.I.R.E. (Financial Independence, Retire Early) movement, don’t actually want to retire early. They just want the direction of their life, including their job to be dictated by them and not by their employer. They want to focus more on their health and family. More time to travel. More time to learn new skills. To give back to the world. All of these amazing things can be possible if you are willing to put forth the effort.
10 Steps to Financial Freedom
Unless you’re holding out for some future inheritance or you’re one of the lucky few who wins the lottery, you’re going to have to do it the old-fashioned way. Hard work and discipline. Here are 10 basic steps to financial freedom:
Find Gainful Employment
Income is a huge part of reaching financial freedom. Paying off debt gets a lot easier if you have a job that pays well. If your current job pays very little, you may want to consider a side hustle or pursuing a more lucrative career field. In the future, once your savings reach a certain point, you will have more job options that aren’t so dependent on income.
Become a Budgeting Expert
Before you can start paying off debt or saving, you need to master budgeting. John Bogle, founder of Vanguard says you can triple your returns if all you do is control your expenses and emotions. Budgeting can be difficult. Many times it involves a great deal of sacrifice. But budgets aren’t all bad. Make sure to include some flexibility in your budget or you might risk burning out before long. Put your budget to work for you and it will be your best friend.
Manage Your Credit
Pay off your credit cards every month. Many people say to completely get rid of credit cards, while others maximize their benefits with rewards programs. There are many approaches to managing credit. Managing your credit is huge step towards financial freedom. Here are the pros and cons of credit cards.
Pay Down Debt
The first step to paying off debt is to make a list of all of your debts. No matter how big or small, any money you owe someone else should be on this list. There are many types of debt that you may have. Here are some of the most common:
- Credit card debt
- Car loan debt
- Student loan debt
- Medical debt
- Personal loan debt
- Mortgage debt
- Home equity debt
Read the full article: How to Pay off Debt Fast
Create an Emergency Fund
Having an emergency fund means you have enough money on hand when an unforeseen event occurs. Think of it as a financial safety net. In a perfect scenario you should have at least three months of income saved. This will allow you to continue to pay the bills if you or a family member loses their job, gets sick, gets fired or if you have a car or a new roof that needs to be replaced. There are many things that happen in life that are unexpected. You will want to be prepared when the time comes. DO NOT TOUCH THE EMERGENCY FUND. It is there for an emergency… not so you can take a nice vacation.
Maximize Retirement Funds
Tax advantage vehicles like Roth, IRA, SEPs and 529 accounts are a crucial step in reaching financial freedom and building wealth. If your work offers a 401(k) or a 403(b) retirement account, take full advantage of it. Not only are these funds tax advantaged, they’re also a source of free funds if your company matches.
Invest Extra Funds
Anyone can be an investor, no matter the size of your bank account. And the longer you wait, the more you miss out on compound interest, which can grow your original investment exponentially. Take those extra funds and put them to work. Many people are so intimidated by the idea of investing, that they put it off or even worse… don’t do it at all. The sooner you start investing, the sooner you’ll reach financial freedom. We’re here to help!
Create Passive Income
Many of the people who have reached financial freedom have done so by creating passive income streams. This can be done in many ways. For instance, on the investing side you have dividend stocks, bonds or real estate. But you can also create passive income by creating goods or services that continually generate sales. Digital artwork, books and music royalties are all examples of this. Whatever your method, passive income is a hands-off way to let your work, work for you.
Understanding taxes is a huge step towards financial freedom. Working with a tax professional can save you thousands of dollars each year. Contribute to retirement accounts. Donate to charities with retirement funds. Also, arrange your investments based on tax efficiency. To learn more, read Marc Lichtenfeld’s 3 Tax Saving Tips.
Stay Financially Engaged
You know the old saying… “you can do anything you put your mind to”? It may sound silly, but it’s as true as it ever was. Being actively engaged in your financial future is our last and arguably most important step to financial freedom. The hard work and discipline you show now will lay the buildable foundation for wealth creation and your financial freedom.
For more information on steps to financial freedom, sign up for our free Investment U e-letter. Additionally, explore the Financial Freedom section of our site. This is only the beginning. Start your journey to financial freedom today and never look back!