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If you’re tired of being imprisoned by your finances, learn how to take ownership of your money and — ultimately — your life with these six steps to financial freedom.
Here’s the thing, most of us are financial prisoners. Day in and day out we have to work to pay the bills and overcome debt. We half-heartedly follow a budget, infrequently set aside money for retirement, and don’t expect a break — or the opportunity to live the life we want — until we’re 65, if we’re lucky. Many of us can’t imagine that there’s another way.
There is. It’s called financial freedom.
What Is Financial Freedom?
Financial freedom is when your finances no longer control your life.
It means you no longer need to work to survive — and most importantly — thrive.
True financial freedom isn’t just about paying the bills, but about creating the financial security to live out your most important life goals and dreams. Achieving financial freedom means living without worrying about debt or having enough to cover your expenses.
What does financial freedom mean to you?
Beyond the textbook definition, the meaning of financial freedom ultimately depends on you. It’s your life, and you get to decide what makes you happy.
You don’t need to be rich to be financially free. You don’t need to own fancy cars and houses (unless you want to). Part of the process of figuring out what financial freedom means to you is assessing your life and understanding how much it will cost to create the life of your dreams.
To get to financial freedom, it’s best to work with a financial advisor. Here are six steps to financial freedom that you can get started on in the meantime.
The Steps to Financial Freedom
Here are the six steps to financial freedom.
- Change the way you think about money
- Determine your current financial situation
- Set your goals for financial freedom
- Make that budget and stick to it
- Create additional sources of income
- Invest your money!
1. Change the way you think about money
A lot of us have negative views of money, our ability to make it, and what it means if we do. And we aren’t necessarily wrong.
Our system is flawed. It enables the rich to get richer, often at the expense of the poor. We are used to employers exploiting workers. It’s the norm to be overworked, underpaid, stressed, and unhappy.
A lot of us are disillusioned by this system. Why do we need to work to survive?
Becoming wealthy or wanting more money can seem like a way to directly support a system that doesn’t look out for everyone. A system that leaves a small percentage of people rich, and a large sum of people unable to make basic ends meet.
While some people pursue wealth in a predatory manner, you don’t have to.
Making money is not inherently evil
You shouldn’t feel ashamed for making money if you are doing it in an ethical way. Feeling guilty about wanting more money will limit your ability to find financial freedom for yourself.
The truth is that, in America, if you don’t have money, chances are you won’t have the opportunity to live life on your own terms.
Becoming financially free is not about exploiting people to get there. There is a sustainable, honest way to grow your savings so you can live a better life.
You’re not lazy or selfish to want more money
Because we live in a capitalist society, the aspiration to live a life without work is often met with resistance from the status quo.
Don’t let them get you down. It’s not lazy to want to build a better life for yourself, and it’s not selfish to care about your finances.
News flash! Life is not about work. Life is about what you want it to be about.
You can, and will, become financially free
Most of us don’t believe we can make money. But anyone can become financially free with the right plan. Try saying these positive affirmations:
- I will be the first person in my family to achieve financial freedom
- I am smart enough to earn the money to be financially free
- I am worthy of a stress-free life of my dreams
2. Determine your current financial situation
Once you have overcome your limiting financial beliefs and are fully committed to becoming financially free, you’ll need to face the facts. It’s time to look into your current financial situation. Why? You need to know where you are in order to know where to go.
Understand your current personal finance by finding out your:
Do this by subtracting your debts (student loans, credit card debt, mortgage, etc) from your assets (cash, investments, etc).
Note that it’s okay if you are starting out with a negative net worth. Remember, this is your starting point.
Do this by dividing your monthly debt payments by your monthly income. A “good” debt-to-income ratio is widely considered to be 30% or lower. If your debt-to-income ratio is 40% or 50%, your debt is controlling you. Overcoming this debt can be one of your first financial goals.
What do you spend your money on? You can assess your spending either manually or by enlisting the help of an app like Mint, Personal Capital, or YNAB.
This is the percentage of your income that you save each month. Find this number by dividing your monthly income by the amount of money you save each month. A saving rate of 20% is considered good, but the higher you can get it, the better. But don’t become so frugal that you can’t enjoy your life!
Unlike the rest of these, you can’t calculate this yourself. Determine your FICO® credit score by using one of many free online credit score tools. The tools will tell you if your credit score is bad, fair, good, or excellent. Here are the best credit cards to get.
3. Set your goals for financial freedom
Now that you know where you are financially, it’s time to dream up where you want to go.
Here are a few prompts to get you started.
- What would you do tomorrow if you didn’t have to work for money?
- What gives your life meaning and purpose?
- What have been the happiest moments of your life?
- What are you most looking forward to in life?
- Write down your ideal lifestyle.
Now you need to determine how much that dream lifestyle will cost you per year. This will take some time, but it’s really important.
Next, per the 4% rule, multiply this annual cost by 25. This is your financial freedom number.
For example, if your dream life costs you $100,000 a year. Your financial freedom number would be $2.5 million. Every year, you could use 4% of your wealth for your living expenses without making too big of a dent in your investment accounts.
Now, that’s a lot of money. Maybe your dream life costs less, or more. It depends on you. Either way, once you’ve set that number, it’s time to get to work.
4. Make that budget and stick to it
Now that you have your financial freedom number, you need to save that money. If you have debt, you’ll also need to pay it off. A budget can help you with all of this!
If you’ve never budgeted before, an easy way to start would be to follow the 50/30/20 method. You’ll set aside 50% of your monthly income for living expenses, 30% for your wants, and 20% for savings and debt payments.
But if it feels too complicated, there are also ingenious free and paid tools online that can help you spend less.
5. Create additional sources of income
If you don’t have a high-paying job, it can seem impossible to hit your dream financial freedom goal. Even if you do have a high-paying job, creating additional sources of income will get you to financial freedom sooner.
Here are some places to start. Consider these passive income streams to make more money.
6. Invest your money!
Investing is the only way you’ll be able to grow your money to reach your magical financial freedom number. It’s the practice of putting your money into something that should make you more money.
This is the king of all passive income streams. The ultimate make-money-while-you-sleep plan.
Here are some investing tips to keep in mind as you begin your investing journey.
You can absolutely do this. Financial freedom is within your grasp. You just need to get organized, set your financial goals, and watch them happen.
This is your starting point, but if you want to reach financial freedom you’re going to have to keep learning, reading, and thinking about this!
Our team has put together a comprehensive course all about financial freedom and how to achieve it. Called Financial Freedom in Uncertain Times, it can help you prepare yourself for the future of your dreams.
When you sign up, you’ll receive detailed lessons, exercises, and interviews to get you ready for whatever comes next.