Who doesn’t want financial freedom and the end of money stress? For most people, the dream of financial freedom means having enough savings, investments, and cash to enable the lifestyle of your dreams. Now, we don’t mean living like a Kardashian or another fantasy of wealth.
What financial freedom looks like will of course vary from person to person. Maybe it means owning your own home within five years or paying for your toddler’s higher education in 15. Or having enough money to start a business, travel to Japan, or just dine out somewhere nice every Friday night. Or never getting a call from a collection agency — ever.
What Stands Between You and Financial Freedom?
Unfortunately, too many people never find their way to their definition of financial freedom. Even if you don’t experience financial emergencies, you can find that rising debt due to overspending can prevent you from reaching your goals. And then, when a whammy like job loss or medical expenses hit, you can find yourself in a real bind.
But back to financial freedom and how to achieve it: These 10 habits can put you on the right path. You’ll learn how to set and reach goals, budget wisely, manage debt, and automate your finances to help you get where you want to be.
1. Plan Your Life Goals
What is financial freedom to you? Plan out what that means, how much money you'd need, and by when. The more specific your goals, the more likely you are to achieve them.
Write down these three objectives when in search of financial freedom:
What your lifestyle requires
How much you should have in your bank account to make that possible
When is the deadline to save that amount
Next, count backward from your deadline to today, and establish financial mileposts at regular intervals between the two dates. Write all amounts and deadlines down carefully and put the goal sheet at the front of your financial binder.
2. Make a Monthly Budget
Making a monthly household budget — and sticking to it — is the best way to guarantee that your bills are paid, your spending is on target, and savings are on track. It provides guidelines that reinforce your goals and tracks progress towards them, which can shore up your willpower against the temptation to splurge.
3. Pay off Credit Cards in Full
Credit cards and other high-interest consumer loans can be the enemy of wealth-building. Make it a point to pay off the full balance each month whenever possible. Student loans, mortgages, and similar loans typically have much lower interest rates; paying them off is not an emergency. However, paying these lower-interest loans on time is still important. On-time payments are the single biggest contributor toward building a solid credit rating.
4. Automate Your Savings
You know that saying, “Pay yourself first”? Do it. Some specifics:
Enroll in your employer’s retirement plan and snag any matching contribution benefit, which is basically free money.
It’s also wise to set up automatic withdrawals on payday to funnel money into an emergency fund. This can be tapped for unexpected expenses.
Set up an automatic contribution to a brokerage account or something similar. This can help you build wealth and achieve short- and long-term financial goals.
Ideally, the money for the emergency fund and the retirement fund should be pulled out of your account the same day you receive your paycheck, so you don’t see it sitting in your checking account, tempting you to spend it.
Keep in mind that the recommended amount to save in an emergency fund is three to six months’ worth of basic living expenses, but you’re not expected to have that saved in one fell swoop. It takes time. Also, tax-advantaged retirement accounts come with rules that can make it hard to access your cash should you suddenly need it, so that account should not be your only emergency fund. Start small, but start: even $20 a month turns into hundreds of dollars after a little time.
5. Start Investing Today
Crummy stock markets — known as bear markets — can make people question the wisdom of investing, but historically there has been no better way to grow your money. The magic of compounding dividends alone will grow your money exponentially. However, you do need a considerable amount of time to achieve meaningful growth. So get going!
You might open an online brokerage account that makes it easy for you to learn how to invest, create a manageable portfolio, and make weekly or monthly contributions to it automatically.
6. Build Your Credit Score
Your three-digit credit score is a critical number that determines everything from whether you get approved for a rewards-packed credit card, if you are greenlighted for a loan, and what the interest rate you are offered when you borrow money. It also impacts the amount you pay for an array of other essentials, from car insurance to life insurance premiums.
Why does your credit score matter so much? Someone with less-than-stellar financial habits may be considered unreliable in terms of paying their debts. They may also be perceived as reckless in other areas of life, such as not looking after their health—or even driving and drinking.
This is why it’s important to check your credit report for free annually to make sure that there are no mistakes or fraudulent activity that could lower your score. It may also be worth looking into a reputable credit monitoring service to protect your information. And you’ll want to take steps to build your score, such as always paying bills on time and watching your credit utilization ratio and the length and mix of your credit accounts.
7. Bargain for Goods and Services
Many people are hesitant to negotiate for goods and services, because they're afraid that it makes them seem cheap. It’s smart to get over this worry: You could wind up saving thousands each year. Small businesses, in particular, tend to be open to negotiation, as well as some online sellers who list items on eBay, Etsy, and the like.
While we’re on this topic, know that you may be successful negotiating for a lower credit card interest rate and the amount you owe a medical provider (if you truly can’t pay).
8. Educate Yourself on Financial Issues
Review relevant changes in tax law to ensure that all adjustments and deductions are maximized when it’s time to file your taxes. Keep up-to-date with financial news and developments in the stock market, and adjust your investment portfolio accordingly. Knowledge is also the best defense against fraudsters who prey on consumers to turn a quick buck.
9. Live Below Your Means
Mastering a frugal lifestyle means developing a mindset focused on living a good life with less—and it's easier than you think. It involves learning to differentiate between the things you need and the things you want. Then, you can make small adjustments that drive big gains for your financial health.
You might start with these two ideas:
Be wary of FOMO (fear of missing out) spending. Just because your coworker seems to be taking a lavish vacation several times a year doesn’t mean you should follow suit. (Who knows what their financial situation is?) And just because you see lots of bright, shiny things on social media doesn’t mean you have to buy them.
Look out for lifestyle creep. This happens when you get a raise or windfall and you ratchet up your expenses because you feel rich. For instance, if you get a promotion, you might buy a small splurge item but otherwise funnel the extra money into savings for your longer-term goals.
10. Get a Financial Advisor
Once you’ve gotten to a point where you’ve accumulated some wealth—either liquid assets (cash or anything easily converted to cash) or fixed assets (property or anything not easily converted to cash)—consider consulting with a financial advisor to help you build on that and grow your net worth. Their intel could help kick things up a notch or two.
The Bottom Line
These 10 steps can help you develop the good habits that get you on your way to financial freedom. As you start making progress, getting out from under the burden of debt and seeing your savings grow can be powerful motivators — and spur you on to continued success.