The term “financial freedom” is a mantra for millions. Who doesn’t want to live free from the burden and stress associated with money? But, in order to know you’re financially free — you must first define it.
Ask a room full of people what “financial freedom” is and you’ll probably get ten different answers. The fact is, financial freedom means different things to different people.
Financial “experts” also define it differently. One well-known financial wiz said financial freedom is “having the monetary stability to do what you want in life without having to worry about your bank account.” Another defined it as “having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others.”
These are good textbook definitions. But what’s yours? Here are some definitions that may resonate with you:
- Not having to work
- Owning your house and cars outright
- Not having any debt
- Traveling extensively
- Funding charities
- Giving generously to people in need
- Doing mission work
Hopefully, after seeing some of these possibilities, you’re sitting down comfortably with a smile on your face and saying, “Ah, yes...that’s what I’m talking about!” Now, back to reality.
You probably wish you were at that point in life where you could honestly claim to be financially free. Who doesn’t? But, that begs the question, “How am I going to get there?”
Not to worry; we’re not going to leave you without answering that critical question. Here is a 5-step process that you can use as a guide to get you where you want to go in life financially. You’ll find it simple, but not easy.
1. Know “the number”
What is “the number?” It’s the amount of money you need to meet your definition of financial freedom.
For example, if it’s paying off all of your debt, you’ll need to sit down and do a balance sheet listing all of your assets and liabilities. You’ll then have a clear picture of what you owe and your liquidity situation, which is how much cash you could raise today to put towards your debt.
Liquidity encompasses money in checking and savings accounts, IRAs and investments not in retirement accounts, collectibles... anything you could quickly turn into cash. The difference between that number and your total debt will paint a picture of how far you have to go to meet your definition.
At this point, don’t be concerned about the size of the number (it’s probably a bit intimidating). And don’t worry about being too young and having too many obligations. Many people in their 30s and 40s have joined the FIRE (Financial Independence Retire Early) movement and are making good progress towards hitting their number.
2. Face your financial fears
Even people who have plenty of money in the bank have financial fear. We all do.
Financial fears are thoughts about money that discourage you from having dreams about financial freedom and that you avoid dealing with. For example, it may be the thought that no one in your family has ever been financially free, or maybe you think that you don’t have the education to earn enough money to hit your number, or that you’re not talented enough, or that you’re in the wrong career, and on and on.
This isn’t an article about the power of positive thinking, but until you start thinking of reasons you can do it instead of reasons you can’t, you’ll never achieve financial freedom.
“What the mind can see and believe, it can achieve.”
[ Related read: Money & mental health, a complicated relationship ]
3. Start reducing your debt — today
Let’s not worry about long-term debt right now, like your mortgage. Instead, you need to focus on your shorter-term debt, like credit cards, personal loans, student loans, etc. You may need to make some spending cuts that could be painful (think coffee shops, dining out, and pizza delivery), but all of your debts can be paid off, and probably sooner than you think.
Try the “snowball method.” Pay off your smallest debt first, then use the money you would have put towards that debt to start paying off your second-smallest debt, then take what you saved on debts one and two, and put the total towards debt number three. Keep doing this until all of your short-term debt is gone.
4. Have a short-term strategy for building savings
As you’re dropping your level of debt, you need to be building up savings at the same time. Emergencies happen, and you need to be prepared. Take a portion of the monthly debt amount you’ve reduced, and start to build up an emergency fund.
Your emergency fund should be the equivalent of six months of your family income. It will be there for the “it just happened” moments in life, like a sudden income loss or a major medical issue for you or a loved one.
Asking yourself how you’re going to pay off your debt and build savings at the same time? Start by taking as little as 10%-20% of the monthly payments you’ve eliminated using the snowball method and put that into your emergency fund or savings account. Any raises or bonuses should also be earmarked for one of those accounts.
[ Related read: How much money should I have saved by 30, 40, 50 & 60? ]
5. Take massive action
Now that you’ve been taking action to eliminate debt and start saving, it’s time to accelerate your earnings. Your emergency fund and other savings give you the breathing room to be more aggressive with your career path. We’re not saying quit your job immediately, but you now have some tuition money to learn some new skills to advance your existing career or make a transition to something you’ve always wanted to do.
Maybe a side hustle can generate more income for you. For example, can you do some computer programming for small businesses during your non-working hours? How about photography? Writing? Mystery Shopper? There are tons of resources online to help you evaluate possible side hustles that fit your interests and experience.
And, don’t forget passive income. Can you rent out a room in your home? Buy rental property? Get a better return on your investments? You don’t have to take on a second job; just let the money you do have work harder and smarter for you.
As we said earlier, this 5-step plan for financial freedom isn’t easy to do. It will take time, maybe years, to achieve your goals and live your dream. You’ll need to be patient with yourself and work your plan.
And, promise yourself you won’t quit until you’re “either at the top of the mountain or dead on the side from trying.” Many people have walked this path before you; it can be done. So, go for it — start today.
Having grown up in upstate New York, Bob Phillips spent over 15 years in the financial services world and has been making freelance writing contributions to blogs and websites since 2007. He resides in North Texas with his wife and Doberman puppy.
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