What do you mean by Financial Freedom?
Financial freedom is dependent on what a person defines as financial freedom. TIAA’s Shelly-Ann Eweka states that “money can be a touchy subject for many people.”
For some people, financial freedom means being able to pay the bills with money left over each month. Others may want to retire early or travel extensively.
Regardless of what you think about financial freedom, following these 15 steps will ensure that you are able to follow your vision for the future.
Determine your financial goals.
Liz Ewing, CFO at Marcus by Goldman Sachs, recommends creating goals and considering what those goals require financially before trying to achieve financial freedom.
Short-term goals can include vacations and specific purchases. Long-term goals can include retirement. It may also be helpful to examine the relationship that people have with money and understand that wealth is something attainable no matter what level of income you earn.
What are you current financial goals?
Regardless of what your age is, understanding your current financial situation can help you identify areas where you are doing well and those where there is room for improvement.
According to John Pelletier, a financial literacy expert, you should create a net worth statement that tracks your debts and associated interest rates.
Also read: Guide to long term investment.
Open the right accounts.
For different expenses, you need to open different accounts. Examples are retirement, college savings and health expenses. You can save for retirement in a tax-free account, for example in a 401K or IRA.
You want your emergency fund to be liquid and insulated from market losses to make sure you can access it if needed. You could put your emergency fund in a high-yield savings account, but the most important consideration is that it is liquid.
Follow these tips to free yourself from debt
A system for ensuring your accounts is fully funded. When you have multiple accounts, it is easy to keep them full of money by directing a portion of your paychecks, or contributions to the account directly.
For additional financial goals like emergencies or retirement, you may want to set up regular transfers from your bank account. Finance experts often recommend saving 10% of your income for emergencies and another 10% for retirement.
To plan your retirement saving, you need to go for automated saving process. With this system in place, you can avoid the temptations of expenditures.
Always track your spending.
To save, you need to know how much you spend and where your money is going.
Kelly LaVigne, Vice President of Allianz Life Insurance Company, stated you need to “start writing things down”
Track your spending with a free app, like Mint or Marcus Insights. These apps could reveal hidden expenses and make managing your budget easy.
Reporter Bill LaVigne says that you have to be aware of the difficulties in tracking expenses. To do this, it will take vigilance and a significant shift in daily living for some people. But gathering the financial data over time is crucial to understanding where money is going.
How to budget your expenses to save money
Having a budget is important to predict what you can spend each month and make sure your main goals are fulfilled.
If you have completed the guided inventory, it is time to take stock of what you actually need and don’t need.
Once you have set a budget, using an App can turn budgeting into something that is done quickly and easily. Along with making budgets, these apps also track your expenses so you will always know how much money you are spending.
Half of the steps to financial freedom is cutting your budget
To have a clear and sustainable budget, you should keep track of your money by creating budgets and tracking your expenditure. If you’re not able to survive at your current level, trim down your expenses with services and unnecessary expenses.
During the pandemic many people signed up for multiple subscriptions. Now is a right time to decide whether you still need all those services? One question you can ask yourselves is, “Do I really need four streaming services?”
Instead of just cutting out your morning coffee and gym membership, try to make more significant lifestyle changes, such as downsizing your living space. These large-scale, long-term adjustments will affect your financial situation in a significant way.
Financial Freedom Getting ‘Surprise’ Expenses Ready For
It’s a mistake to only budget for household expenses over the course of one month. Many households will encounter monthly expenses beyond just rent and food, such as insurance premiums or car repairs.
Planning for irregular expenses is not, according to Nelson. You can plan ahead and mark on your calendar when irregular expenses are going to happen. This way you will be prepared with enough funds for these events.
Having all small expenses automatically taken from your checking account on a monthly basis ensures that you are always prepared and will not be surprised by an “urgent expenditure.”
Create a debt payoff plan
Generally, people have financial freedom when they don’t owe anyone money.
If you have a large debt, it may be helpful to focus extra money on paying one of your debts to motivate yourself.Paying off debt with the smallest balance first can help build momentum and then motivate the person that pays off debts to accumulate more money.
Learn how to build an emergency fund.
Don’t exhaust your savings when you’re paying off high-interest debt. With an emergency fund, you can avoid going into more expensive credit card debt in case of an unexpected situation. Instead of putting your money on different priorities, put a portion of it on flexibly in each priority every month.
Start saving with small goals to cover one month of expenses. If saving for six months is too intimidating, try to replace the income from a single paycheck.
The emergency fund saves you money in the event of an emergency. The funds can be saved to replace one paycheck or to cover several months worth of expenses if you were unable to work for some reason. Once the emergency fund has enough funds, divert a small amount over to retirement.
Monitor your credit.
One of the most important parameter for your financial freedom is your credit score. It plays important role in your day to day financial calculations to achieve freedom.
Credit scores are important because they can determine who has access to loans and what interest rates people with loans receive, as well as provide insight for employers when making hiring decisions and setting mortgage insurance premiums. One way to boost your credit score is to reduce debt and pay bills on time.
You can receive a free credit report by going to AnnualCreditReport.com, as well as weekly updates through Experian, TransUnion and Equifax. You can also access your credit score for free from various credit card companies.
Evaluate your career options and find a way to do what you love.
Don’t overlook the importance of your job when it comes to achieving financial freedom-businesses need to pay employees more than just money.
Eweka suggests that when speaking to employers, people should be discussing what the employees may be missing. Eweka claims that these benefits will help the workforce without them even knowing it.
How investing now can lead to a prosperous financial future
People with high incomes may believe they will never be wealthy, but is that true? Some high income households carry substantial debt and are never able to grow their wealth. Meanwhile, those who save regularly throughout life are often the most financially secure.
A 401(k) is ideal for retirement savings, but other accounts such as 529 plans and health savings accounts may be necessary for other expenses like college or medical bills. A financial advisor can help you understand the variety of investment options, or online advisory firms can simplify the process for those without access to an advisor.