What exactly is financial freedom?
If you ask a room full of individuals to define financial freedom, you’ll probably receive a dozen different responses. For some people, financial freedom is being able to pay expenses with money left over each month or having a filled emergency fund. Others may choose to retire early and travel widely.
Taking a holistic approach to money management may help everyone, regardless of how you define financial freedom. “It’s critical to think about your finances as a whole,” says Elisabeth Kozack, co-head of Marcus by Goldman Sachs’ consumer lending division.
The 10 stages that follow will assist you in realizing your future vision.
Decide to live within your means
The road to financial freedom starts with a step that many people ignore. It all starts with adopting a mentality that prioritizes establishing a solid financial foundation of saves before moving on to spending and investing. “If you continually put the cart ahead of the horse, you’ll never get ahead,” says Charles Czajka, CEO of Macro Money Concepts in Stuart, Florida.
People must review their attitudes toward money and their connection with it. Rather than believing that wealth is exclusively accessible to people with high salaries, keep in mind that even middle-class families may go from living paycheck to paycheck to a financially secure existence by spending less than they earn.
Make sure you’re aware of your present financial status
It’s critical to know where you are financially right now, whether you’re fresh out of college or getting ready to retire.
According to Dave Kilby, CEO, and president of FinFit, a financial wellness employee benefits platform, “completing an honest evaluation of your own financial position is a vital first step on the path to creating financial well-being.”
This entails summing up debts, estimating projected income, and detecting financial gaps, such as a lack of insurance or emergency reserves. Consultation with a professional may be beneficial in this process, especially if your finances are complicated or you are approaching retirement.
Keep an eye on your credit report
A person’s credit score influences whether they can get a loan and at what interest rate. Employers in some places can look at a job applicant’s credit history when making employment choices and insurance companies in other regions may use credit to calculate rates. Two strategies to improve a sinking credit score are to reduce debt and pay bills on schedule.
Keep track of your spending
Setting away money for an emergency fund and retirement savings might be difficult if you’re presently living paycheck to paycheck. To figure out how much you can save, you must first determine how much you spend. “It’s tough to recognize where you have opportunities to make modifications if you don’t know where you’re spending your money,” Kilby adds.
Trim your spending
Now that you know how you spend your money, it’s time to cut costs where you can. That doesn’t always imply skipping your morning cappuccino or canceling your gym membership. Instead, people should contemplate big lifestyle adjustments to make a significant improvement in their financial status.
Selling your home or purchasing a used automobile at a low price may appear to be a major sacrifice. It may, however, be useful if it assists you in achieving your ultimate objective of long-term financial freedom.
Make a strategy to pay off your debts
For the majority of individuals, financial independence is paying off debt. While owning a home without a mortgage might be challenging, eliminating credit card debt or even vehicle loans may be more feasible. When you’re debt-free, Coffman adds, “you can accomplish a lot.”
It’ll be easier if you start by putting all of your excess cash toward one loan and make minimum payments on the others.
Make sure you have sufficient emergency money
It might be tempting to spend down funds to pay off debt faster, but this strategy can backfire. If you don’t have an emergency fund, you risk getting into high-interest credit card debt if anything unexpected happens.
Examine your alternatives for a career
When it comes to achieving financial freedom, don’t underestimate the importance of your work. While money is clearly vital, a job is more than just the money you bring home every week. “You must evaluate all advantages given by your employer when determining your total remuneration package,” Kilby adds.
Put money aside for the future
Many individuals believe that to attain financial freedom, they need a substantial salary, but this isn’t always the case. Some high-income families may be heavily in debt, ensuring that they will never be affluent. Other affluent families, on the other hand, may have low earnings. Many people become wealthy because they continuously save and invest money throughout their lifetimes, rather than via their income or an inheritance.
Prepare to leave a legacy
This third stage is more about guaranteeing the financial independence of your successors than it is about building your own. After a lifetime of prudent financial management, you don’t want your money to end up in the hands of unintended relatives or, worse, Uncle Sam.
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