Ask anyone if they want financial freedom and the answer is sure to be a resounding “Yes!” But what is financial freedom, really? Depending on who you are, it can mean different things. Life without student loans. Enough money to retire comfortably. Passive income so you never have to go to your day job. These are all examples of financial freedom, to a degree.
Listen to the audio version of this article:
The core premise of financial freedom is the same: Having the fiscal stability to live the life you want. When you aren’t burdened by debt and have enough income to live independent of a paycheck, you’re financially free. It takes a lot of smart decision-making, self-control and hard work to become financially free. But the rewards are worth it.
Here’s your guide to financial freedom, from learning what it really means to the steps required to achieve it.
Financial freedom from a fiscal perspective
It’s called “financial freedom” for a reason! The cornerstone of being financially free is having a personal balance sheet with little or no debt, plenty of assets and liquid capital. But that means reaching some lofty goals like investing in the stock market, real estate or business ventures. Or not having a mortgage or car payment. These things take time, patience and discipline.
Most of us start in the red. We have student loans fresh out of college, a car payment and, soon, a mortgage that’ll stick with us for 30 years. An entry-level job barely pays enough to live paycheck to paycheck. As we start a family, we accrue more expenses. At this point, financial freedom can seem a long way off. And it is! But it’s not impossible. The key is realizing the importance of every dollar.
Every extra dollar you use to pay down debt is a day closer to living debt-free. Every new job or promotion adds more to the income side of your personal balance sheet. And every investment is liable to appreciate, instead of depreciate like most consumer goods.
Thinking about your life in terms of cash flow is a great way to see freedom from a financial perspective. How much money is coming in? How much is going out? Where is it all going?
The freedom to live your life
The other side of a financial freedom plan is the freedom to live the lifestyle you want, without financial barriers. It’s as simple as buying the things you want without worrying about your bank account or sending your kids to college with no concerns about the burden of tuition. When money isn’t an obstacle, you’re free to live.
To achieve financial freedom, you need to know what you’re working toward. Focus on the things in life that are important to you and understand the level of income needed to attain them. How much does your dream car cost? What’s the cost of a four-year degree from a particular institution? What will you need to spend to take that European vacation?
Remember, these are individual costs. Financial freedom isn’t just about affording these things – it’s about affording them while maintaining your everyday lifestyle. If you empty your bank account to pay for something, you’re no longer financially free. Affordability is not freedom; sustainability is.
Pillars of financial freedom
If you’re wondering how to get financial freedom fast, you need to understand the foundational pillars financial freedom is built on. Each of these is essential for achieving and maintaining financial independence:
- Debt: It’s impossible to be financially free if you have debt, because debt means your money isn’t yours. You owe it to someone else. Even “good” debt like a mortgage is still debt. To be financially free, you need to be debt-free.
- Income: You need enough income to not only pay your bills but also to save money and make long-term investments. In the beginning, this means striving for a high-paying job and working hard. As you become more financially independent, it’ll mean having passive income from things like rental homes or dividend stocks.
- Savings: Accessible savings are a cornerstone of financial freedom. Call it a nest egg or a safety net – whatever the case, it’s money you can have tomorrow if you really need it. It’s for emergencies, unforeseen expenses and sudden opportunities.
- Investments: There are many ways to make investments that push you farther down the path to financial freedom. The stock market and real estate are the most convenient. Business investments and private equity investments are other options. Regardless of the vehicle, these are the main drivers of your personal wealth and the keys to maintaining your financial freedom.
These pillars aren’t the only contributors to financial freedom, but they’re definitely the biggest. You’ll also need to consider things like spending control, tax planning, estate planning and entrepreneurship – all of which play a vital role in building and preserving the wealth necessary for financial freedom.
10 steps to financial freedom
Learning how to achieve financial freedom is simple – it’s the execution that requires perseverance. Depending on where you start, the climb to financial freedom can be a steep one. Here are the 10 basic steps to financial freedom:
- Find gainful employment. You can’t save or pay down debt without a job. Find one with upward mobility prospects or stay active in a job market that allows you to increase your salary over time.
- Become a budgeting expert. Before you can start paying off debt or saving, you need to master budgeting. Learn how your personal cash flow works month over month and develop a rigid plan for squeezing every dollar out of your budget.
- Manage your credit. Your credit score is the key to things like buying a home or getting a good interest rate on a loan. Cleaning it up and boosting it early in your journey to financial independence will lessen the bumps in the road ahead.
- Pay down debt. Use any extra income you earn to pay down debt as fast as you can. Start with high-interest rate debt first (car payments, credit cards), then tackle your lowest balances. Every extra dollar toward the principal amount counts!
- Create an emergency fund. Stick money into a traditional savings account until you’ve compiled about three months’ worth of income. This is your emergency fund – accessible money that’s always on hand.
- Maximize retirement funds. 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. If you don’t have access to these accounts, consider a Roth IRA or self-directed 401(k) if you’re an entrepreneur.
- Invest extra funds. After maxing out your retirement accounts, invest any remaining disposable income you have in the stock market or real estate. There are diverse strategies for both of these investments. Choose one that matches your risk tolerance and actively manage these investments over time.
- Create passive income. You don’t want to depend on a paycheck for the rest of your life. Passive income sources require an upfront investment, but will (hopefully) pay off for as long as you hold them. Consider rental properties, business investments, dividend-paying stocks or exchange-traded funds.
- Tax planning. Don’t amass wealth only to get taxed heavily on it every year. Minimizing your tax burden is a crucial part of planning for financial freedom. It’s best to work with a tax professional or CPA throughout the year, not only during tax season.
- Stay financially engaged. Just because you feel financially unburdened doesn’t mean things will stay that way on their own. Stay on top of your finances or pay someone to make them a priority. This helps you stay ahead of both micro- and macroeconomic changes that might affect your wealth.
It may seem overwhelming, but if you take it step-by-step, the path to financial freedom is more linear than it seems. Build a good foundation, make smart decisions with your money and stay focused on the long-term goals. If you do, financial freedom awaits!