What does financial freedom mean for you? We have all these talks and articles on why you should save and invest to achieve financial freedom.
But, have you taken a step back to really think about what that means for you?
The truth is, financial freedom can never be the same for everyone. It is personal. What I want, for example, is different from what you want. Maybe I want to retire early in 5 years or so with a particular amount in assets and investments. Perhaps you want to live without worrying about emergencies that could lead you to a pit of debt—or being debt-free.
Whatever the reason, it still narrows down to this: financial freedom is the ability to go through life or make life decisions without worrying or panicking about its impact on your finances. It is not about having millions and billions of money in the account. It’s about having enough to cover your expenses, living comfortably, and doing what you love.
How To Achieve Financial Freedom
What’s Your Current Situation
There is always a starting point when you are starting any journey. The same applies to achieving financial freedom. You first need to understand where you currently are. What’s your situation when you look at the core pillars of personal finance?
- How much debt do you have? Think about your student debts, mobile loans, credit cards, personal loans, mortgages, auto loans, and money you owe shylocks, friends, and families.
- How much do you have in savings accounts?
- Do you have investments?
I know it is scary and disheartening, especially when starting with high debts and low or no savings. However, having a clear picture of your current situation will help you create a financial plan that gets you out of the situation.
For instance, if you have debts, you can easily adopt a debt management strategy that will help you manage and pay off your debts by listing them down.
You can start here: Financial Checkup: Take Stock of Your Financial Health
Now that you know where you stand, it is time to set your goals. For example, are you looking to eliminate the pile of debt you have or perhaps make it manageable? Do you need a better job with a higher income to help you meet your expenses? Should you get a side hustle for the extra income? Or maybe you need to save more for your fast-approaching retirement?
Whatever goal you set, ensure it meets the SMART criteria: Specific, Measurable, Achievable, Relevant, Timely.
For example, if your goal is to repay debt, don’t say you want to clear your debt. Instead, put it like, “I want to get out of debt by paying off my $2000 debt by 31st December of this year”. You know the specific amount of debt you want to pay, by when and it is relevant as it gets you out of debt. You can measure it by tracking your monthly progress. Plus, it is achievable compared to saying you want to live on a foreign planet.
Learn Money Management
All this talk about meeting your goals and attaining financial freedom is for nothing if you do not manage your money.
The best way to go about this is to have a budget. It is your map or guideline to these goals that you set and to achieving financial freedom.
List all your expenses, from rent to grocery spendings and money you pay for comforts like coffee and movie dates. Track every penny that you spend. This way, you can easily tell where your money goes and what you can cut off to save some coins.
Pay Your Debts
Now that you know how to manage money, it is time to get yourself out of debt. Imagine how much you could save or invest if your money did not have to go into repaying loan interests, fines, and penalties for late payments?
I would encourage you first to get rid of all digital, shylock, and credit card debts that you have. These have high-interest rates and are very unpredictable. Also, don’t forget the high harassment people face from some of these lenders. If you have other debts, like auto loans, mortgages, and other personal loans, have a plan to eliminate these, too.
With a budget in place, look at where your money goes. Cut off unnecessary spending and put that money into repaying your debts. If your budget tells you you need extra income, get a side hustle and put that money into clearing your debts. Don’t rush to get that piece of technology you think you need if you get a windfall. Instead, put it into repaying your debts. The sooner you can pay off the debts, the faster you can start building your wealth.
Build Your Savings Account
PS: I would recommend building an emergency fund, even as you try to pay off your debts. It will help you avoid borrowing more if you hit a bump along the way.
Once you have this, find a way to increase it to an amount that can cushion you for at least 6 months if anything goes wrong. Then start building savings for various spendings, like purchasing electronics, repairs, out-of-pocket medical expenses, and even your vacations. Just do a simple calculation in your budget to see how much you need to save each month for these expenses.
For example, if you need $1000 for a vacation and you have 5 months to save, that means you need to put aside $200 every month ($1000/5). This way, when you need to get away in those 5 months, you will not be getting onto debts for it.
Get Additional Income Sources
Even if you do not have debts, an extra income source will get you closer to achieving financial freedom. You do not have to work if you do not. Find ways to create passive income.
We have already talked about this here. No one became a millionaire with only one source of income.
It is never late to start investing; the problem is if you never begin. So, start learning about investing avenues and options that will help you meet your goals and financial freedom. The first option is to have a retirement account. If your employer doesn’t provide you with matched contribution, there is no reason why you should not get an individual pension account. Then, start early and benefit from the power of compounding.
Read more about: What to Consider Before Making Investment Decisions
Manage Your Risks
What would happen if someone broke into your house and stole everything? Or if your house burned down? If you feel sick, would a hospital bill of a few thousand get you into debt?
Insurance products are a must-have to help you mitigate certain risks. So, get home insurance, medical cover, and other insurance covers that protect you from certain risks.
Have The Right People In Your Corner
You will need a strong support system to get you through. Your loved ones are an excellent start. But do you have professional advisors? Get a financial advisor, a tax consultant, and even a lawyer. Every financial advice or product you need must be customized to your situation, objectives, and goals.
Related post: Here’s Why You Need a Financial Advisor
Finally, the road to financial freedom is an active one. Never stop budgeting, learning, and planning. Even when you have paid your debts and have enough in your emergency kitty, do not stop there. Keep learning. New investment products are coming up now and then. How can they help you get closer to your goals? You have achieved one goal; what next, and what can you do to get there?
This is a never-ending journey.