A Guide to Financial Freedom Success
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As millennials, it can often feel like we’re shouldering the entire weight of the world on our shoulders. Rising inflation is outpacing salary increases, we have crushing student loan debt, and it’s more expensive for us to afford necessities like housing and transportation than it was for our parent’s generation.
So financial freedom might appear to be a pipe dream that only the rich can achieve. But what if I told you that you, too, could pursue financial independence? Is financial freedom possible?
Yes. You can achieve true financial independence, even if it feels like you’re currently drowning. But first, you have to do some hard work.
Determining What Financial Independence Means to You
The first step to achieving financial independence is asking yourself, “What does financial independence mean to me?” It’s going to involve some lifestyle dreaming. If money were no object in a perfect world, what would you be doing?
For instance, if money were no object, I would spend a year as a digital nomad and then settle down, buy a house, and grow roots. But I need to create a financial lifestyle that supports this. That’s my first step toward financial freedom.
Maybe you already have a house and your dream is to take time off work to pursue a sport you’re interested in. Or maybe you want to put your time and energy into different, non-money-producing projects. That would be what financial independence means for you.
Whatever your life goals are, they will be the framework for your financial independence.
Financial independence looks different for everyone
Just as there’s no one right way to earn money, there’s no one right way to pursue financial independence. As you create your plan, check shame at the door. It’s not helpful here.
It can be so easy to compare ourselves to others and feel small about our dreams. If your vision of financial independence makes you feel inadequate, then it’s up to you to either work through your mindset around money or come up with something that feels more genuine and exciting. You won’t be motivated to achieve financial independence if you’re not thrilled about where it will take you.
Take some time to get excited about this goal — that motivation will carry you a long way. And once you achieve financial freedom, the psychological effects will be huge.
Why financial independence is beneficial for you
The moment you achieve financial freedom will be a glorious one. Whether you choose to celebrate quietly and go out to dinner or throw an all-out rager to mark the milestone, one thing is clear: Your life will change forever when you achieve true financial freedom.
Financial independence allows you to live your life without being worried about money. It takes a long time to save, invest, and create passive income that supports this goal. But the destination is worth the journey — even if that journey is a long one.
Remember not to compare your journey to your peers’, because you don’t know their entire financial picture. And be happy with your path in life.
Tips for Making Financial Goals
Start with where you want to be, and then work backward. This strategy might seem counterintuitive. But when you make goals, you want to have the bigger picture in mind.
If I want to be a digital nomad for a year before buying a house and settling down, my financial plan needs to reflect that. I need to have expenses saved for a year of travel, a house, and living expenses after I purchase the house.
I would focus on that first year first. Then, since I want to continue working, I would need to set a natural buffer between me and the world. I’m a bit of a worrywart, so my goal is $50,000 — or a year’s worth of my expenses. Your goals are allowed to be different. But, again, you must try not to compare your journey to someone else’s.
The next part of my goal would be to purchase a house. I live in a pretty rural area of America, so I’m looking at $150k-$250k for a place. I’m okay having a mortgage while I pursue financial independence, but I would want to put 20% down on a home. So that’s another $50k.
Finally, I’d need to save for my living expenses. They’re $50,000 a year, and let’s say I set a 25-year time horizon. That’s $1.25 million. Add everything together, and I’m looking at $1.35 million to be financially free.
Your numbers might look similar to mine — or they might not. The idea here is that you want to…
Ensure you’re setting realistic goals
Notice that everything in my goals is realistic. Financial planning needs to be. These are things that people have done before and will continue to do. I didn’t decide that I wanted to fly to space and live on the moon — something I could never afford, even if I saved for it.
You have audacious goals. But they shouldn’t be unrealistic.
That means the math should work out. There are plenty of retirement calculators that can help you determine if what you want to achieve is practical or not. One of the most popular calculators is cFIREsim. It allows you to run different scenarios to check and see if your retirement goals are accurate. Another one that I love is the “When can I retire?” calculator.
What happens when you set unrealistic goals
Setting unrealistic goals can harm your financial health and psyche. For example, say you’re trying to save $10,000 on a $40,000 salary, but you spend $35,000 on bills and living expenses. You’re going to drive yourself crazy. Or let’s say you can afford to save $10,000, but it means cutting out everything but essential spending. You might burn out.
Financial burnout is a scary thing. It’s when all of your willpower to make good choices is gone. You leave yourself vulnerable to bad spending decisions and might wind up in debt when this happens.
The last — and only — time I’ve been financially burnt out, I bought a $2,000 gym membership that I barely use. It wasn’t the best use of my money. I could have easily avoided making this purchase if I had taken a moment to breathe and ask myself what wasn’t working about my current financial situation.
Critical Elements of a Strategy for Financial Freedom
There are three critical elements to putting together your financial freedom strategy. Ensuring you check all your bases will set you up for financial success further down the line.
1. A thorough discovery process
You’ll really want to sit down and ask yourself what matters in life. If your map to financial success is also a map toward your dream lifestyle, it makes sense to spend some time pondering what that includes. Ask yourself who, what, where, and why questions to get your mind thinking about the future.
2. A timeline
All great strategies involve a timeline. This is a great time to use the calculators I mentioned above . For example, it can be easy to say, “I want to be debt-free in two years.” But if you’re making $12 an hour and have $50k in student loan debt, that might not be a realistic option.
On the other hand, a realistic timeline is going to keep you motivated to keep the pace — and as a bonus, you might even finish faster than you thought you would.
3. A strategy to make and invest money
If you don’t have a clear idea about the money you’re going to be making, it doesn’t matter how many dreams you have about your future life. You have nothing to fund them.
So instead, have a great idea about your funding. Is it coming from your day job? Your side hustle? A trust fund your parents started when you were a kid? There’s no shame in where the money comes from, as long as you know what that is.
If you don’t, you need to sit down and formulate a plan. Do you want to be a barista? Go into tech? Work in customer service? See if you can find a role that suits your goals and pays a comfortable salary.
Steps to Achieving Financial Freedom
Once you know what you want your goals to be, it’s essential to take steps to meet them. Otherwise, you’ve done all this mental work for nothing.
But don’t worry that this will be painful — in fact, good money management can be fun and rewarding.
1. Get familiar with your finances
The first thing you want to do is look at your finances. If you’re already a pretty good budgeter, give your budget a good once-over to make sure everything is in the right place. If you’re a newbie to budgeting, that’s okay. Just take some time to pull up your bank and credit card statements and get familiar with them.
Comb through the last three months of your expenses. Are you earning more than you spend? If you are, that’s good! If not, you need to commit to living within your means.
2. Make a budget
If you’ve never done this before, don’t worry. We have plenty of guidance to help you out.
When making a budget, consider what current expenses you can cut out. For example, if you spend a lot of money on books, consider getting a membership to the library. If you spend heavily on eating out, see if you can cook more at home. You want to find the most significant weak spots in your budget and eliminate them.
This culling does not mean that you need to cut out every fun thing you enjoy. If you did that, the road to financial freedom would feel like a slog, and you would fail. Set yourself up for success by giving yourself money for fun things and focusing on cutting down overall spending.
One resource we recommend for first-time budgeters is You Need A Budget, or YNAB!
3. Track your spending
Budgets are helpful only if you stick with them. Tracking your weekly spending gives you powerful reminders of where your money is going. You’ll be able to categorize your spending and see where you might be going over-budget before it becomes a problem. There are plenty of apps that can help you do this. I’d recommend using one of those if manually tracking your spending feels overwhelming.
Personally, I create a spreadsheet in Google Drive every month to track my expenses and build pie charts of my data. It’s helped a ton to help me stay on budget. But you don’t have to be as nerdy as I am.
Tracking your spending is one of the best habits that can go a long way toward achieving financial independence.
4. Build an emergency fund
This step is the first significant piece of financial independence. An emergency fund is a fund that will protect you against life’s mishaps. Generally speaking, you should set aside 15% of every dollar you make into this account until your fund equals 50% of your gross annual salary.
Say I make $20 an hour, or $41,600 a year. I would need to set aside $3 for every hour I work until I had $20,800 in savings.
5. Pay off any debt
Once your emergency fund is set up, you need to focus on decreasing your debt load. For example, do you have student loans? Credit cards? Car loans? Medical debt? Make a list of all the debt you have and create a strategy to pay it off. The two most common strategies are the snowball strategy and the avalanche strategy.
Regardless of the strategy you use, you need to have a plan to get rid of the debt, including credit card debt and other high-interest debt. You’ll sleep better knowing it’s gone.
6. Open the correct accounts
After saving your emergency fund, you can start diversifying your savings vehicles. I always recommend setting aside money in retirement accounts first. Whether they’re 401(k)s, 403(b)s, IRAs, or something else, retirement accounts will be tax-advantaged accounts. So you’ll get benefits for investing money into them.
You can also set up a brokerage account, where the money can be taxed, but you can use it to access the stock market.
If this seems overwhelming, talk to a fiduciary financial advisor to set up your accounts. They’ll help you and answer your questions. Your employer might also offer financial resources.
7. Set up a deposit schedule
Set up the investment and forget about it. You don’t want to think about transferring money into the stock market every month. Instead, you want to focus your efforts on more meaningful projects. And if you set up recurring deposits into these accounts, you’ll be less likely to talk yourself out of transferring the money if things get tight.
Most likely, if you start with small amounts, you’re not going to notice the difference in your lifestyle.
A good rule of thumb with retirement accounts is to invest 15% to 20% of your paycheck to retire on time. But, of course, if you want to retire early, you’ll need to invest more.
8. Increase your salary
One of the best ways to fund your financial goals is to increase your salary. If you’ve been at your job for a while, maybe it’s time to ask for a raise. Put together a list of concrete reasons you think you deserve a raise and ask to speak to your boss. Together, you can see if that’s a possibility to explore.
Or look for a new job. With a new job, you have the potential to negotiate a higher starting salary than you currently have.
Another way to increase your salary is to change fields. Some fields, such as tech, have a low barrier of entry, but you can make really good money if you get certified by any number of online programs.
9. Start a side hustle
If increasing your salary isn’t in the cards for you, consider starting a side hustle. You can make money writing on the internet (like I do), building websites, tutoring math, etc. Almost any skill is marketable. You just need to take the time to do it.
10. Create passive income
Passive income streams are a massive boon to financial freedom. Once you’ve done the work of setting up a passive income stream, you can earn money without doing anything. People enjoy investing in real estate, creating Etsy shops, designing courses, writing books, etc., to build their passive income streams. So get creative and see what you can put together.