Financial freedom allows you to live a comfortable life and pursue your dreams without stress over budget constraints. It’s essential to quality of life, yet too few people experience it. Take control of your finances today with these 7 key steps to achieving financial freedom.
Assess Your Current Financial Situation
Before implementing changes to improve your financial health, take stock of your existing finances.
Does your income exceed your regular expenses, or are you struggling to pay your monthly bills? How much debt do you have, and what type of debt is it (credit card debt, student loans, personal loans, etc)? Do you have any money in savings or investments?
Review your income and assets, as well as your expenses and debts, to create a detailed financial snapshot.
Set Clear Financial Goals
Set some financial goals. Whether it’s your company’s client lifecycle management strategy, achievements, or finances, setting clear and actionable goals is crucial for a successful outcome.
Your goals reflect what matters most to you. These can be short-term, such as saving up for a car or vacation, or long-term, like building a college fund for your children or a nest egg for your retirement.
Use the SMART goals approach:
- Specific
- Measurable
- Achievable
- Relevant
- Time-bound
Your goals should be specific (e.g., saving for a car) as opposed to generalized (saving money) to your needs. They should be quantifiable, realistically possible, and relevant to your needs. And they should preferably have a deadline, by which time you hope to have saved the money.
Create a Budget and Stick to It
The next step is often the most challenging, but it is crucial to achieving financial freedom. Create a budget and stick to it. Online budgeting tools make this simpler, but the simplest way to create a budget is as follows.
- Calculate your net income. This is your total wages or salary minus any deductions for taxes and employer-provided retirement plans or health insurance coverage.
- Categorize your expenses. List your regular, fixed expenses. like mortgage payments or rent, utilities, car payments, etc. Also, list your variable expenses, such as groceries, entertainment, clothing, gas, etc.
- Implement the 50/30/20 rule. Divide your net income into three categories — 50% for “needs,” 30% for “wants,” and 20% to cover debt repayments or be added to savings. If you need to cut down on expenses, do this in the “wants” category.
Build an Emergency Fund
Life’s unpredictability is one reason people find it so difficult to stick to a budget. Emergencies can arise at any time, and they can decimate your savings. That’s why it is so important to have an emergency fund.
You’ll find this much easier by setting up a direct deposit to save a predetermined sum every month. You can gradually increase this amount as your income increases or as your debts are reduced, freeing up more for savings. Save any unexpected income, such as employee bonuses or cash winnings.
Reduce and Manage Debt
Credit can help you to purchase things that you need, even though you don’t have all the necessary funds at the time. Some purchases are much easier with credit, like buying a home or a car.
It’s tempting to buy non-essential items on credit, too. But those purchases add up, and before you know it, you’re heavily in debt and paying high interest. Avoid using credit unless necessary.
There are different strategies for paying off debt. One is the snowball method, which pays off debts in order of smallest/lowest balance to largest/highest balance. The avalanche method entails paying off the debt with the highest interest rate first.
Invest Wisely for the Future
There are many different investment options available, such as stocks, bonds, and real estate investments, to name just a few. However, diversifying your investments will reduce the risk you’d face by sticking to just one option.
Investing can be lucrative, but it can also be very risky if tied to the stock market. So, if you have limited knowledge about investments, speak to an expert before taking the plunge.
Preferably, look for investment opportunities that are lower in risk, even if they offer more moderate earnings. Reinvest your investment earnings to grow your investment amount with much less risk and effort.
Plan for Retirement
Retirement planning is more important now than ever, and the earlier you start, the better. Research the different retirement savings options available.
Employer-sponsored 401(k) and 457 plans, Individual Retirement Accounts (IRAs), and Simplified Employee Pension (SEP) plans are just some of the options available. Your employment status and income will typically determine your choice.
A typical figure to aim for is 75% of your current salary, but people’s financial needs during retirement vary. A financial planning expert can conduct a financial needs analysis to determine how much money you will need to sustain your lifestyle during your retirement.
