Financial independence is the ability to live comfortably without having to actively work to pay for essentials. The majority of us envision the day when we can leave our day jobs and pursue our passions, but few of us are taking the necessary steps to make that dream a reality. Many people are unsure of where to start when it comes to achieving financial freedom because it seems like an overwhelmingly impossible task.
It is best to divide the tasks into smaller steps in order to achieve financial freedom:
9 steps to financial freedom
What Is Financial Freedom?
Financial freedom allows you to make decisions without being overly concerned about how those choices will affect your finances. This is due to the fact that you are financially ready for anything life throws at you—you have no debt, cash in the bank, and you’re making investments for the future.
In other words, you are in charge of your finances rather than having them in charge of you. You have choices when you have financial freedom, or as we like to say, financial peace. You don’t need to worry about whether your finances will allow you to replace your hot water heater or purchase groceries for a single mother who recently lost her job.
1.Evaluate Your Specific goals.
Goal setting is crucial. Do you desire independence? Would you like to retire early?
You’ll gain the focus and motivation required to achieve financial freedom by deciding what you want for your financial situation.
Not just would-be millionaires, but everyone should manage their personal financial objectives. Your entire income from working towards financial independence will one day be used to live a much more prosperous life.
So, take a seat and list your objectives. then devise a strategy to get there. Every few years, be sure to re-evaluate your objectives because plans and circumstances can change.
2.Monitor Your Spendings
When calculating your emergency savings, take into account your yearly income, living expenses, and current financial cushion. Consider your ability to save money overall and the number of “want” rather than “need” purchases you make each month. Consider how much of your income is left over after paying your debts, as well as how much you spend overall.
You must keep track of your monthly income and expenses if you want to advance on the path to financial freedom. Do you spend money carelessly? Are you accumulating real wealth?
The biggest surprise may be that you have much less money in savings than you realized when you add up how much of your income you choose to spend and how much you save.
Let’s say you aim to financial independence and want to have enough money in your bank account to do so. In that case, you’ll need to keep track of how much of your income is spent on regular expenses each month.
3.Consolidate your credit card and other debt.
If credit card balances are not paid off completely each month, debt can become overwhelming and frequently snowballs out of control. The true cost of making minimum payments is broken down in this informative article from Nerd Wallet.
Making minimum payments every month might take years to pay off. Because they make more money by charging interest, credit card companies don’t mind if their customers only pay the minimum amount due. You then continue to pay interest on interest by adding that interest to your remaining principal balance and accrued interest.
By increasing your monthly payment on the credit card with the highest interest rate, you can end the cycle. When you have paid off that balance, repeat the process with the card with the next-highest interest rate until all of your credit card balances are paid off. You can then use the money you were wasting on interest to settle other debts. You will be able to start making purchases that you can actually afford once you are debt-free.
4.Create an emergency fund.
Everyone should place a high priority on saving money for emergencies. The main factor separating those who are able to avoid debt from those who get sucked into it may be maintaining an emergency savings account. A good rule of thumb is to have three to six months’ worth of expenses covered. You can easily handle unforeseen financial challenges by having emergency savings, such as:
- auto repair
- job loss
- extensive home repairs
- unanticipated dental work
- Unexpected travel costs
- a trip to the emergency room
- replacement technology devices or computers
At the end of each month, there is rarely extra money, but there are resourceful ways to raise money to fund your emergency fund. You can improve your spending habits by making gradual, small changes.
Here are a few ideas:
Create a payroll savings account that is automated. Since the money never reaches your checking account, you won’t miss it. When your emergency fund balance starts to grow, you’ll be more inclined to save more money.
- Place your tax refund in a bank.
- Request that family members put their spare change in a savings container.
- Have yard sales every two years.
- Switch to Netflix or Hulu streaming instead of cable.
- acquire a second job.
- To cut down on eating out, prepare meals on the weekends and pack lunches for the week.
- Once you make these small changes in your life, you’ll be pleasantly surprised by the results.
5.Start putting money into investments right away
People may question the wisdom of investing during bear markets, but historically there has never been a better way to increase your wealth. Your money will grow exponentially thanks to the magic of compound interest alone, but you’ll need a lot of time to see real growth.
However, keep in mind that trying the type of stock picking made popular by billionaires like Warren Buffett would be a mistake for anyone other than professional investors. Instead, open an online brokerage account that enables you to easily learn how to invest, build a manageable portfolio, and automatically add funds to it every week or month. To assist you in getting started, we’ve ranked the top online brokers for beginners.
6.Identify mentors (Or Talk with A Financial Advisor)
One of the most crucial advices for achieving financial success may be this. You should seek out a mentor or mentors and closely observe everything they do. Reach out and ask as many questions as you can, even if you are not sure if they will cooperate with you. You might be genuinely surprised by how willing older, wiser people are to instruct and assist you.
If you don’t think any of your friends or family would make good mentors, search online for professionals and, even if you don’t contact them, pay attention to their blogs and advice.
(Note: Never follow advice blindly; always conduct your own research in addition to what you learn from others.)
I was fortunate to have two friends who I’ve known for a long time and who have been financially independent since they were in their mid-20s. I drew near to them and picked their brains about how they make money aside from running their business and where they invest their money. We continue to discuss real estate, investment opportunities, and different revenue streams.
7.Maintain a Spending Diary
You need to keep track of where your money is going after you start tracking your net worth. Whether this relates to credit card debt, bills, entertainment, food, etc. You should carefully keep track of all your expenses.
Even though it might not seem exciting, doing this is crucial and actually becomes more exciting as you make more money and watch your investments increase! Budgeting is important, but knowing where your money is going is more crucial for accountability and embracing an optimization mindset. Your spending may be put into perspective as a result.
Savings equals earnings. The ratio of $1 earned to $1 saved, however, is not equal. Because you end up making much more money when you invest that one Doller ($1).
8.Always keep your career progressing
One of the quickest ways to achieve financial freedom is to increase your income while keeping your spending levels constant or under control. This necessitates constant effort on your part to advance your business or career.
For instance, by developing new, valuable skills and increasing your value to your employer, your career and, consequently, your income, may advance more quickly. If you work for yourself, this entails developing growth strategies to keep your company expanding.
Therefore, if you’ve been letting your career progress happen by chance, it’s probably a good idea to think about how to hasten the process right away. Your income levels will rise as a result, and you’ll take closer to financial freedom.
9.Take Good Care of Your Health
Taking excellent care of your physical health has a significant positive impact on your financial health as well. The principle of proper maintenance also applies to your body.
Investing in your health is easy. It entails going to the dentist and doctor on a regular basis and adhering to medical advice for any issues you experience. Simple lifestyle adjustments, like increasing exercise and eating healthier, can help—or even prevent—many medical conditions.
On the other hand, poor health maintenance has adverse short- and long-term effects on your financial objectives. Because some employers only allow a certain number of paid sick days, once those days are used up, income is lost. In addition to forcing early retirement with a lower monthly income for the rest of your life, poor health can cause insurance premiums to skyrocket and cause obesity and other dietary illnesses.
Final Thoughts Regarding Financial Freedom
These nine steps are broken down into varying levels of complexity, so you might find that some of them come naturally to you while others take a lot more effort.
Simply creating a plan with precise dollar amounts and due dates strengthens your resolve to accomplish your goal and protects you from the urge to overspend. Relief from the constant stress of mounting debt will come once you start to make real progress.
Financial independence is the ability to live life on your terms without being reliant on a job or salary. It is unrelated to wealth, influence, or status.