Most people hear the word “financial freedom” and assume it is about having a fat bank account (though that’s nice too)
But in reality, financial freedom means having enough money and income to live the life you want without having to worry about running out of funds or relying on a job for survival.
When you are financially free you are not tied to “a regular job”.
That means you have more time to do things that add value to your life like,
- Doing what you love: You have more time for hobbies and things that make you happy.
- Traveling: You can go on trips and see new places.
- Spending time with family and friends: You get to be with the people you care about.
- Helping others: You can give back to your community and support causes you believe in.
- Learning new things: You have time to learn and grow.
- Taking care of yourself: You can focus on staying healthy and feeling good.
- Starting your projects: You can try out new ideas and maybe start your own business.
However, becoming financially free is a tough journey. Especially because being financially independent means different things to different people. There is no one-size-fits-all approach to this.
The good news is some key principles can help you build the life you love by guiding you on how to manage your finances. Think of these principles as the building blocks of financial freedom.
So in this blog post, I’ll be sharing nine basic steps I’m practicing to reach financial freedom. I like to think of these nine simple steps as the backbone of good financial health. In other words, they are the basics of good money management.
Hopefully, these tips will help kickstart your own journey to financial independence!
If you are still unsure about the importance of financial freedom just take a look at this article by empower.com
Our data shows that a “Return on Happiness” (ROH) isn’t just about reaching a far-out net worth – it’s achieved by addressing money milestones like being able to pay bills on time (67%), living debt-free (65%), affording everyday luxuries without worry (54%), and owning a home (45%). For over half of people, contentment is found in spending on experiences with those they cherish (53%) and in optimism for what’s next, including retiring on their own terms (37%).
– Can money buy happiness? (empower.com)
Table of Contents
SET FINANCIAL GOALS
Ever wonder why some people seem to be so good at managing their money? Well, it’s because they set goals.
If you want to achieve financial freedom, you’ve gotta have SMART goals. (Specific, measurable, achievable, relevant, and time-bound)
When you set actionable financial goals you can,
- Make informed decisions
- Track your progress effectively.
- Stay accountable and motivated
- Achieve financial freedom within a given time frame
Short-Term and Long-Term Financial Goals
Short-term goals are like stepping stones that lead you closer to your long-term objectives. They are typically achievable within a year or two and can include things like:
- Creating an Emergency Fund: Setting aside enough money to cover three to six months’ worth of living expenses.
- Paying Off Credit Card Debt: Tackling high-interest debt to free up more money for saving and investing.
- Saving for a Vacation: Putting money aside each month for that well-deserved getaway.
Long-term goals, on the other hand, require patience and sustained effort over several years or even decades. Examples include:
- Retirement Savings: Building a comfortable retirement fund through contributions to a 401(k), IRA, or other retirement accounts.
- Buying a Home: Saving for a down payment and securing a mortgage to purchase your dream home.
- Investing for Education: Setting aside funds for your children’s college education or getting further education yourself.
Tips for Setting Realistic and Achievable Goals to Achieve Financial Freedom
Setting goals is one thing, but making sure they’re realistic and achievable is equally important.
Here are some tips to help you set yourself up for success:
Be Specific: Instead of saying, “I want to save money,” specify how much you want to save and by when.
Make it Measurable: Define clear metrics to track your progress. For example, aim to save $5,000 for an emergency fund within the next 12 months.
Prioritize Your Goals: Determine which goals are most important to you and focus your efforts on those first.
Break it Down: Divide larger goals into smaller, manageable milestones. Celebrate your achievements along the way.
Review and Adjust: Life happens and priorities can change, and it’s okay to adapt your goals accordingly.
Here is an example of what a good financial goal looks like compared to a bad one.
CREATE A BUDGET
So, what’s budgeting? Well, think of it as making a plan for your money. It helps you see where your money comes from and where it goes.
If you don’t have a budget, your chances of achieving financial freedom are very low. So think about that before you skip this step.
That’s because a budget allows you to decide what’s most important to you financially.
You can use it to pay bills, buy things you need, and save for the future. A budget helps you avoid spending too much on things you don’t really need.
It also helps you stay focused on your goals, like paying off debts or saving up for something special. When you stick to your budget, you’re in control of your money. Over time, this can lead to financial freedom.
And to make things easier here is a complete guide on how to create a budget that suits you and your financial goals: A BEGINNER’S GUIDE TO BUDGETING: AN EASY 5 STEP GUIDE TO MANAGING YOUR MONEY
BUILD AN EMERGENCY FUND
Setting up an emergency fund has already been mentioned in this post. So you probably must have guessed that it is very important. That is because your emergency fund is your financial safety net.
What’s the Purpose of an Emergency Fund?
Imagine this: your car suddenly breaks down, or you have a surprise medical bill to pay.
Without an emergency fund, situations like these could leave you feeling stressed and scrambling for money.
That’s where your emergency fund swoops in to save the day! An emergency fund is a savings account specifically set aside for, you guessed it, emergencies.
Having money set aside for unexpected expenses can give you peace of mind and help you face life’s challenges.
There are many good reasons to create an emergency fund. To me, the most amazing thing about having an emergency fund is the ability to avoid debt even during an emergency.
I know for a fact that when there is an emergency, many people turn to credit cards or loans to cover expenses. According to an article posted by CNBC, this is what financial experts have to say about using debt to cover emergency expenses.
“Of those with credit card debt, 43% say they carry a balance because of an unexpected or emergency expense, most commonly medical bills or car and home repairs. However, financial experts don’t recommend financing these costs with your credit card, if you can help it.” Additionally, David Haas, a certified financial planner in Franklin Lakes, New Jersey, emphasizes, “I tell clients all the time that a credit card is not an emergency fund and it’s not a way to spend more than you earn.”
– 43% of Americans with credit card debt say it’s due to emergency expenses—here’s how much it’s costing them by Mike Winters (CNBC)
Now that you understand the importance of an emergency fund, are you ready to start building yours? It’s never too late to get started!
Remember, even small contributions can add up over time and make a big difference when you need it most.
Learn how to start building an emergency fund regardless of your financial situation: A 5-step guide to Creating an Emergency Fund (beginner-friendly)
DIVERSIFY YOUR INCOME FOR FINANCIAL FREEDOM
One of the smartest ways to achieve financial freedom is by diversifying your income.
But what does that mean exactly, and how can you do it?
First things first, let’s talk about what diversifying your income actually means.
Essentially, it’s about not putting all your eggs in one basket. Instead of relying solely on one source of income, like a job, diversification involves creating multiple streams of income.
Now, you might be wondering, why is diversification important?
Well, think of it like this: if one source of income dries up, you’ll still have others to fall back on.
Having different sources of income lowers the risk and make sure you have a steady income, especially when things are uncertain. So, how can you diversify your income? Here are a few ideas to get you started:
Side Hustles:
Consider starting a side hustle, something you’re passionate about or skilled at, that can bring in extra cash. It could be freelancing, tutoring, selling handmade crafts online, or even driving for a ride-sharing service.
Investing:
Explore different investment opportunities, like stocks, bonds, mutual funds, or real estate. Investing allows your money to work for you and can potentially generate additional income over time. (more on this later)
Passive Income Streams:
Look for ways to generate passive income, where you earn money with minimal effort on your part. This could include rental properties, dividend-paying stocks, or creating digital products like printables or online courses.
Monetize Your Hobbies:
Do you have a hobby or skill that others might be interested in? Consider monetizing it! Whether it’s photography, writing, cooking, or gardening, there are countless ways to turn your hobbies into income-generating opportunities.
Explore Different Industries:
Don’t limit yourself to just one industry or job sector. Keep an open mind and explore opportunities in various fields that align with your interests and skills.
Remember, diversifying your income takes time and effort.
So don’t get discouraged if you don’t become successful on your first go.
Many people try various ways of generating more money before finding an income stream that suits them well.
By diversifying your income, you’re taking proactive steps toward achieving financial freedom. So why wait? Start exploring new income opportunities today and take control of your financial future!
MANAGE YOUR DEBT
Let’s kick things off by understanding why debt management is so crucial.
Picture your finances as a puzzle: each piece represents an aspect of your financial health. Debt, unfortunately, can be a rather pesky puzzle piece, often slowing down your progress toward your financial goals.
For example, debt eats away at your income through interest payments. By minimizing debt, you can redirect those funds toward savings and investments, ultimately building wealth for the future.
Also, your credit score is very important in securing loans to renting an apartment. Effective debt management can boost your credit score, opening up doors to better financial opportunities.
Methods for Prioritizing and Paying Off Debts
Now that we understand why managing debt is essential, here are some practical methods for managing debt properly.
List Your Debts:
Start by making a list of all your debts, including balances, interest rates, and minimum monthly payments. This snapshot will help you see the big picture and understand your debts effectively.
Snowball vs. Avalanche:
There are two popular methods for paying off debt.
One is snowballing debt and the other is the avalanche method.
With the snowball method, you focus on paying off the smallest debt first while making minimum payments on others. Once that debt is cleared, you move to the next smallest debt.
The avalanche method, on the other hand, prioritizes debts with the highest interest rates first. This method will actually help you to save the money you have to pay as interest.
Budget Wisely:
Take a close look at your monthly expenses and identify areas where you can cut back. Redirect these savings toward debt repayment to speed up your progress.
Consider Consolidation:
If you have multiple high-interest debts, consolidating them into a single, lower-interest loan can streamline your payments and save you money in the long run.
Prevention is often the best cure when it comes to debt.
So do your best to live within your means and manage your credit card wisely. Regularly reviewing your financial situation and making adjustments can also help a lot.
Keep an eye on your spending habits and be proactive about addressing any potential issues before they escalate.
INVEST WISELY
Investing is crucial for achieving financial freedom because it helps your money grow over time.
When you invest, you’re putting your money to work for you, instead of just letting it sit in a savings account where it might not grow much.
Investing can help you beat inflation, which is when the cost of living goes up and the value of money falls over time.
If your money isn’t growing as fast as inflation, it loses value. Investing in things like stocks, bonds, and real estate can help your money grow faster than inflation, so it keeps its worth.
It also helps you build wealth gradually. Additionally, some investments, like rental properties or dividend-paying stocks, can give you passive income.
Diversification is important if you want to invest wisely. This is because diversification helps reduce the risk of losing all your money if one investment doesn’t do well. So, if one investment goes down, others might stay stable or even go up, balancing out your overall investment.
Investment options you should know about
Stocks: Buying shares of a company means you own a tiny part of it. Stocks can offer high returns but come with higher risks.
Bonds: These are like loans you give to governments or corporations. Bonds generally offer lower returns but are less risky compared to stocks.
Mutual Funds: These are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets.
Real Estate: Buying property or investing in real estate funds can provide both rental income and potential appreciation in property value.
ETFs (Exchange-Traded Funds): Similar to mutual funds, ETFs allow you to invest in a basket of assets, but they trade like stocks on exchanges.
Retirement Accounts: Accounts like 401(k)s and IRAs offer tax advantages and are specifically designed for retirement savings. Even if you don’t invest in the other stuff I mentioned, 401(k) or IRAs are essential for financial independence. You should prioritize building a retirement account as soon as possible.
Cryptocurrencies: Digital currencies like Bitcoin and Ethereum have gained popularity, but they come with high volatility and risks. (I would not recommend this. I know it’s becoming increasingly popular. But cryptocurrencies are way too volatile for my taste )
PLAN FOR RETIREMENT
Retirement might seem far away and you might not be in a hurry to plan it (not so far away if you want to retire early)
Either way, starting early with a solid retirement plan can make all the difference down the road.
You might have been dreaming about the ideal retirement for quite some time.
But wait, have you actually planned for this phase of life?
Retirement planning isn’t just about saving money; it’s about securing your future and maintaining your lifestyle when you are not working daily.
Without a proper plan, you might find yourself struggling to make ends meet or missing out on the experiences you’ve always dreamed of.
Options for Retirement Savings
You’ve probably heard of 401(k)s, IRAs, and maybe even Roth IRAs.
These are powerful tools in your retirement planning process, each with its own pros and cons.
401(k)
401(k) is a special savings account for retirement that you can get through your job. When you sign up for a 401(k), you can choose to set aside a portion of your paycheck before taxes are taken out. This money goes into your 401(k) account, where it’s invested in things like stocks, bonds, and mutual funds.
One of the cool things about a 401(k) is that sometimes your employer will match a portion of the money you put in. (a sweet deal if you ask me)
The money you put into your 401(k) grows over time, hopefully making more money through investments.
However, you can’t take it out until you’re older, usually around retirement age, without paying penalties. When you do retire and start taking money out of your 401(k), you’ll have to pay taxes on it then.
IRA (Individual Retirement Account)
An IRA is another type of retirement savings account, but this one you set up on your own, not through your job. You can open an IRA with a bank, brokerage firm, or other financial institution.
This is a great option for freelancers, people who have other income streams apart from their regular jobs, and people who want to retire early
With an IRA, you can contribute money from your earnings, similar to a 401(k).
There are different types of IRAs, but the two most common are Traditional and Roth IRAs.
- Traditional IRA: With a Traditional IRA, you may be able to deduct your contributions from your taxes now, which can lower your tax bill. The money you put in grows over time, just like with a 401(k), and you don’t pay taxes on it until you start withdrawing it in retirement.
- Roth IRA: A Roth IRA works a bit differently. You contribute money after taxes, meaning you don’t get a tax break now. However, the big perk is that when you withdraw the money in retirement, you don’t have to pay taxes on it, including the earnings you’ve made over the years.
Both 401(k)s and IRAs are great tools to save for retirement, helping you build a nest egg while potentially taking advantage of tax benefits along the way.
How to Choose the Right Retirement Plan?
So, how do you choose the right retirement plan for you? It’s like picking the perfect pair of shoes—not one size fits all. Here are some important things to think about when making this choice:
- Goals: What do you want your retirement to look like? Consider your lifestyle and financial needs during retirement.
- Timeline: How many years until you retire? The time you have left will affect how much you can save and what investments you can choose.
- Risk Tolerance: How comfortable are you with the possibility of losing money? Different retirement plans offer different levels of risk.
- Tax Implications: Retirement plans have different tax rules. Some allow you to save on taxes now, while others let you save on taxes later when you withdraw the money.
LIVE BELOW YOUR MEANS
Living below your means simply means spending less money than you earn.
For example, if you earn $2000 a month, but you only spend $1500 on your expenses like rent, food, bills, and other necessities, then you are living below your means.
This leaves you with $500 that you can save or use for other important things like emergencies or future goals.
Living below your means is a smart financial habit because it helps you avoid debt, build savings, and achieve financial stability. You’re not stretching your budget too thin and you’re prepared for unexpected expenses or changes in your income.
Tips to live below your means
- Think before you buy: Pause and ask yourself if a purchase is necessary. Consider if it aligns with your financial goals and priorities.
- Avoid impulse buying: Give yourself time to think before making a purchase. This can help you avoid buying things on a whim.
- Track your spending: Keep tabs on where your money is going. This helps you identify patterns and areas where you can cut back.
- Embrace Frugality: Look for ways to reduce costs without sacrificing quality of life. This could mean cooking at home more often, shopping for bargains, or finding free or low-cost entertainment options.
- Automate Your Savings: Set up automatic transfers from your checking account to your savings or investment accounts. Treating savings like a monthly expense helps make it a priority.
REVIEW AND ADJUST REGULARLY
Just like maintaining a car or taking care of your health, regularly checking in on your financial well-being is crucial.
We already discussed 8 crucial steps you have to follow if you want to become financially free.
But if you don’t regularly review your financial situation and make necessary changes, all the other steps you have taken might not take you where you want to go.
Regular check-ups help you spot problems early, make sure everything’s running smoothly, and fix any issues before they become hard to handle.
Start by looking at your short-term and long-term money goals. Have there been any big changes in your life, like getting married, having a baby, or changing careers? These things can change your financial situation. Adjust your goals to fit your current life.
Next, think about how your investments are doing and how your finances overall are looking. Are you still on track to meet your goals, or do you need to make changes? Be realistic and open to changing your plans as needed.
Life is full of surprises, and being flexible is a big part of managing your money well. Whether it’s losing a job, unexpected medical bills, or a lucky windfall, being able to roll with the punches is key.
Embrace the idea that life doesn’t always go as planned. Instead of fighting change, see it as a chance to learn and grow, even if it’s not what you expected.
