What is Financial Freedom?
Financial freedom is not one thing to all people; it’s a personal set of values that you are committed to.
For some, financial freedom may be the ability to work whatever kind of job they want without fear of breaking the bank.
For others, it may be early retirement.
Some people may view financial freedom as the ability to travel, or give generously to charity, or buy a new car or boat without going into debt.
That is the key to financial freedom: to be able to do what you want, when you want, without fear.
Of course, this isn’t an easy task.
It will require work on your part, and sacrifice and organization, but it is possible, even for people starting under a mountain of debt and a low income.
- Read more about what financial freedom could mean to you: What is Financial Freedom?
Elements of Financial Freedom
There are four elements to financial freedom: produce, protect, profit, and prosper.
Producing is how we make money and how we create more for our life.
Protecting is how we keep that money that we’re making.
Profit is how the money grows over time.
And prospering is healthy, wealthy living.
In this blog we’re going to look at how we can reach these elements of financial freedom.
Taking Stock of Where You Are
How Much Do You Owe?
This is the first question you need to tackle when it comes to financial freedom.
If you don’t know how much you owe, you can’t make a plan to alleviate that debt and move forward in a more responsible manner.
This isn’t just a matter of adding up all your credit card bills; it’s a matter of figuring out how much you owe each month, to everyone.
(This is also the first step in setting a budget.)
As you go through the exercise of determining how much you owe, you can begin to see patterns of what is necessary, what is flexible, and what can be removed altogether.
How Much Do You Make?
In today’s “gig economy”, the amount you make may be flexible.
Gone are the days where an employee went to a nine-to-five, paid all the bills, and went home.
Now we all have side gigs that contribute a little here and little there.
When calculating how much you make, look at net, post-tax income, minus the amount of your withholdings.
It’s useful when determining what you make to look at 401k, insurance (health and life) and other withholdings.
You want to know how much you really make, not necessarily the next post-tax paycheck.
You may find that some of your withholdings are not things you really need to be holding back, and a place to save cash.
How Much Do You Need?
How much you need will vary greatly based on your goals.
You want to spend your financial freedom truly being free, however, so you need enough to meet your goals and do so comfortably.
This may not mean a big house and a fancy car and Michelin-star restaurants.
If you plan to travel extensively, you may just want a simple apartment or condo as home base.
If you want a place for the grandkids to run and play, you may want that house with the large yard.
But once you begin budgeting, and after you’ve set your goals, then comes the task of determining how much money you’re going to need and you can do the things necessary to get you there.
Building a Budget
Why a budget is vital to financial freedom?
You can be making plenty of money–—more than you’d ever need to meet your goals—but if you’re not budgeting it properly, then it’s just going to waste.
If your goal is to travel, but you’re spending all your spare money on fine dining, then that’s going to hamper your goal.
You must first set goals, then follow through on them to reach your version of financial freedom.
Steps to Create a Budget
Our steps to create a budget have been written elsewhere [insert link when available] but the process is simple.
First, you set goals.
Then you determine your expenses, then calculate your income, then design a budget that will use your expenses and income situation—cutting here and adding there—to meet your goals.
Finally, you look toward the future and adjust as needed.
A budget creator is a valuable tool, and while there are literally thousands of budget creators available online both for free and as part of software packages, we have our favorite.
We feel that this budget creator meets the needs outlined above, and you can find a link to it here [insert link to budget creator.
Other Resources for Proper Budgeting
What Are Your Financial Goals?
The best life where you currently are (short term)
Looking at the best life where you currently are is about examining your income and expenses, and seeing how you can maximize the former while minimizing the latter.
Maybe it’s not the right time to change jobs for a better income, or it might not be the time to cut essential expenses.
But as long as you get yourself on a goal-oriented budget, you can live your best life in the present and achieve financial freedom.
Your future life
It is essential to always keep in mind your future life.
Setting a goal does not mean that tomorrow you’re going to reach it—it means that you’re going to work and save, cutting expenses and increasing income, until you can achieve that future goal that you have set for yourself.
This is not to say that life is one long slog through penny pinching and struggle until you can reach your dream; on the contrary, you can live a wonderful fulfilling life as you pursue that goal.
But keeping an eye to the future and envisioning what is on the horizon will help you get through the days of sacrifice and enjoy the journey.
Financial Freedom Comes One step at a time
No matter what you do, you’re not going to reach all your financial goals at the same time and have your life change in an instant.
Budgeting, planning, achieving financial freedom is all about taking small steps over a long period of time, getting better and better, continuously improving, until you reach your financial goals.
How to Reduce What You Owe
One of the important aspects of financial freedom is reducing the amount that you owe.
Every debt is a bill that has to be reckoned with, and the more debts that you can get rid of are going to increase your financial freedom.
Paying down a debt is the most straight-forward method of getting out of debt: simply making the payments until you’ve met the obligations of the debt and it’s no more.
One tip with pay down is continually paying the same amount to your debts, but transfer the payments as you pay each debt off.
So, if you pay $100 in credit card debt every month, and $250 in student loans, once you finish paying off that credit card, instead of adding that $100 to your income and spending it, add it to the amount you pay on your student loan: pay $350 a month now.
As you work through your debts like this, you’ll be able to pay them down faster and faster.
Debt settlement is where you can settle your debts for less if you can’t afford to pay what you owe.
If you are struggling to make ends meet and falling behind on your minimum payments then debt settlement may be a good option for you.
When you enroll your debts into a debt settlement program, your credit score will lower temporarily.
However, once your debt is negotiated for less and settled then you can start working on improving your credit score.
Debt settlement is also improving the way they do things.
Some programs give you the opportunity to qualify for a loan within 6 months of being in the program.
This can take a lot of the stress of creditor calls, potential lawsuits and worry out of the picture.
Debt consolidation is where you arrange with a lender or agency to take all of your debts and pay them off immediately (to get those creditors off your back) and then you owe the money to the debt consolidator at hopefully much more manageable terms.
Debt consolidation is a good tactic if you’re facing steep interest rates and do your homework to make sure your consolidation lender is not predatory.
Debt resolution is similar to debt settlement, but in the case of debt resolution, you retain the services of an attorney.
Debt resolution also doesn’t always need the missing of payments, which may help you maintain a better credit score.
In debt resolution, the attorney negotiates with the creditor for lower interest rates and fees.
The downside to debt resolution is that attorneys do not work cheap, and you may end up paying a lot in fees.
Credit counselors are either for-profit or nonprofit, but they are counselors that help you determine how to negotiate better terms from your credit card companies.
For-profit agencies earn money through fees, while non-profits are supported through grant money.
A good non-profit credit counselor can be a big help, and not lead to additional expense.
Debt Management Program
A debt management program is different from a loan or a debt consolidation.
Instead, debt management companies work with creditors to lower their interest rates and fees, but the debtor makes monthly payments to the debt management program to pay toward their debts.
Your monthly payment is tailored toward what you can afford, as determined by the debt management program.
The most common form of debt settlement is bankruptcy.
There are three forms of bankruptcy filing.
The first is Chapter 7, in which all non-exempt assets held by the debtor are sold to repay your debts.
Chapter 11 allows you to keep your assets as you make a plan to pay off your creditors.
Chapter 13, the “wage earner’s plan”, allows debtors to develop a plan to repay part or all of their debts within three to five years.
All three methods of bankruptcy filing will hurt your credit and stay on your report for 7 to 10 years.
Other Resources for Managing Your Debt
How to Not Increase What You Owe
Credit Card Best Practices
First and foremost, don’t spend what you can’t afford.
It’s easy to think of a credit card as “free money” or an extra source of income, but there will always be a day of reckoning when that card has to be paid down.
Think of a credit card as a loan you’ll have to pay off, and you’ll be in a more rational state of mind.
Growing your credit card debt is the easiest way to eliminate your financial freedom.
To improve your credit score, make sure that your credit utilization is as close to 20-30% as possible.
Continually using 50% or more of your available credit is a sign to creditors that you’re a risky debtor, and your credit score will take a hit.
Never miss a payment!
Whether you’re paying your balance in full or making the minimal payment, any time that you miss a payment the credit card company can raise your interest rate.
If you can, pay your full balance every month, as then you’ll never end up paying any interest at all.
- 10 Myths About Settling Your Credit Card Debt
- How To Consolidate Credit Card Debt Without Hurting Your Credit?
- How to Cancel Your Credit Card in 7 Easy Steps
- 4 Tips on Lowering Your Credit Card Interest Rate
Living Within Your Means
Above all, this may be the most important piece of advice we can give.
Once you set a budget, live within that budget.
Again, having credit doesn’t mean that you have extra income.
Living within your means means that you will be spending less than you’re earning.
It means that you will be working your way out of debt rather than going into more debt.
It may be attractive to splurge for a fancier car or an expensive vacation, but unless you know exactly how you’re going to pay for that, you could be in a world of hurt when the bills come.
Other Resources for Living Within Your Means
How to Make More Money
How to Ask Your Boss for a Raise
There are many things to consider when asking for a raise.
Some of them are to ask for a raise after you’ve just achieved a big accomplishment, go into your meeting with concrete examples of how you have excelled and gone above and beyond, ask professionally (schedule a meeting—don’t ask over email or during a high-stress time when your boss may have more things on his or her plate), and definitely don’t give an ultimatum unless you’re willing to look for another job.
It’s also not wise to discuss other employees’ salaries, unless that information is public, as coworker conversations about salaries are often against HR policies.
It’s also important to explain why you deserve a raise, not why you need one: don’t be too personal about your own finances; just focus on what you’ve done to earn the raise.
How to Make Additional Income
In this age of the gig economy, there are numerous ways to earn additional money if you’re willing to work for it.
Sometimes a side gig might be a hobby that you monetize, such as photography or art, but other times it might be taking your professional responsibilities and using them to pursue private clients: become freelance or become a consultant.
And if you’re concerned about earning enough to keep food on the table, there’s nothing wrong than taking a night job delivering pizzas or driving an Uber.
Best Habits of High Earners
High earners take responsibility for their actions, they don’t blame others.
It’s easy to blame your coworkers, your boss, the government or the economy, but owning up to your actions is the first step toward success.
This is a vital aspect of financial freedom
High earners also focus on investing, not on saving.
While it’s important to have money in savings, and to cut out unnecessary expenses, it’s also important to let interest work in your favor and let your money grow.
There are responsible ways to invest and irresponsible ones, but an investment account will be more beneficial in the long run than a low-yield savings account.
Having an action mentality, not a lottery mentality.
An action mentality is one that looks at routine work and results as their path toward success, while a lottery mentality looks for get-rich-quick schemes and hopes of a large windfall to save the day.
How Much Should You Save to Achieve Financial Freedom?
The size of your emergency fund will change depending on your expenses, so there’s not a set number, but it’s recommended that your emergency fund be enough to cover three-to-six months of your monthly expenses.
This money should only be used for true emergencies, not dipped into for Christmas or vacations, and should be in an accessible account rather than one with penalties for withdrawing money.
Saving for a Home
When saving for a home, have realistic expectations about what you can afford.
Ideally, you don’t want to be spending more than 25% of your monthly income on your mortgage payment.
So you can use that to plug into mortgage calculators to give you an idea of how much your mortgage payment should be.
And then once you know the amount of house you can afford, a good rule of thumb is to save 10%-20% of the home’s cost for a down payment.
Best Ways to Save
The most important rule of saving is to pay yourself first.
Have an amount of money that you put into savings and set it aside first thing, before you pay any bills.
Whether it’s $50 or $500, putting this money into savings and investments immediately will take away the temptation to spend it.
Cut out the little things.
Do you really need that $5 cup of coffee a day?
The $2 bottle of soda from the vending machine?
Can you pack your lunch instead of buying it? Quit smoking.
These little things can add up to hundreds of dollars a month.
Try looking at your spending and multiplying it out for a year: $20 a week for snacks is $1000 a year.
Lastly, set up an interest-bearing account for savings.
If you’re wary of investing in the market, look into CDs or Money Market accounts.
Let interest work for you, not against you.
Investing in the Future for Financial Freedom
Easy Ways to Invest, Even with Little Money
Investing even a little money can reap big rewards in the long run, and can lead to passive income that helps you achieve financial freedom.
Start with a 401k. If your company matches, then absolutely contribute up to their match—if you don’t, you’re throwing away free money.
Put your money into low-risk investments, like mutual funds or treasury bonds.
Experts’ Advice on Safe Investing
The best places to put your money in an uncertain economy are high-yield savings accounts, certificates of deposit, money market accounts, treasury bills, corporate bonds, dividend-paying stocks, and preferred stock.