Can you imagine a world where you don’t have to stress about money? What about the idea of being able to go on a vacation whenever you want?
There are people all over the world that live like this right now and it can become your reality.
The below 7 steps will show you how to achieve financial freedom.
What is Financial Freedom?
Before diving into how to achieve financial freedom, you may be wondering what is financial freedom?
There are several definitions of financial freedom but, I define it as being debt-free and worry-free about money. There are two elements to this:
The best way to avoid worrying about money is to not answer to anybody about your money. Therefore, you should be 100% free of debt at the end of each month.
This idea may sound extreme to you. However, even if you don’t realize it, the payments towards your debts are holding you back. Do you sit around dreaming of a bigger home, a newer car, or quitting your J-O-B? Those debts are keeping you from those dreams.
Given today’s housing prices not everyone can afford to pay cash for their house. That is why a mortgage will be the one exception. However, a mortgage can still create a lot of unnecessary stress. Let’s say you are let go from your job or you have a huge surprise expense. Do you really want to worry about losing your house?
To truly achieve full financial freedom you should be 100% debt free including your mortgage. Until then, at the very least have several months or years of mortgage payments saved just in case.
Worry-free about Money
This is possibly the most important part of achieving financial freedom. You must find out what being worry-free about money means to you. This will be different for each person as we all have different financial goals and emotions towards money.
To me, being worry-free about money means having three things in place. First, a fully funded emergency fund. Second, being able to pay all my bills in full each month. And finally, money left over at the end of each month to save towards a goal.
Imagine having $300, $400, even $500 left at the end of the month to use towards whatever you can imagine. After several months of saving you could finally go on that dream vacation or buy that new gadget. What a dream come true.
Step 1: Define Why
The first step in how to achieve financial freedom is defining why you want to embark on the journey.
For me, not having to worry about paying the bills, travelling, and retiring in my 50s is my “why”. Every time I don’t purchase something or put in extra hours in my work week I think about this future.
For you, the reason “why” you want to achieve financial freedom may be completely different. Maybe it is the idea that collection agencies aren’t harassing you anymore. Perhaps you can finally quit your job and start freelancing instead.
Whatever your reason, write it down. Studies show that you are 42% more likely to achieve a goal if you write it down. Beyond writing the reason why down, hang it up somewhere you will see often. Also, if you are like me, create a vision board. This way you can visualize your dreams and find inspiration.
When life gets tough and you are exhausted after a long work week take a breath and remember your “why”.
Step 2: Create a Budget
Budgeting is truly the heart and soul of finding how to achieve financial freedom. If you don’t know where your money is going then how can you take control over it?
In the past it has been found that people who budget spend less and save more. I can personally vouch for this. When my wife and I started budgeting our savings immediately went up and our spending was reigned in.
This occurs simply because you understand where your money is going. I have spoken to countless 6-figure earners who have no savings and are in debt. They can’t even tell you what they are spending their money on.
You can’t out-earn bad money management. If you are mindlessly spending then it doesn’t matter if your salary is $50,000, $150,000, or $1 million you will spend every penny.
Budgeting changes all that. You now have a record if you spent $300 last month on lunches or $1,000 on clothes. But, budgeting isn’t just about expenses, income is there too. This is especially helpful for people with variable incomes such as frontline employees and freelancers.
Before I started budgeting, I just assumed I was earning enough if there was money leftover each month. Once I started tracking everything I was able to actually verify my income was indeed in a good place. However, sometimes I may be over budget or will under earn and I can adjust accordingly.
There are numerous different ways to budget. I personally love and use the zero-sum budget. In the zero-sum budget you account for all of the money you anticipate making in a given month. Whether you are paying towards a loan, buying groceries or saving for a vacation it must be counted. The zero-sum budget has a built-in accountability system. If you go over budget in one category you must take it from another category to keep it zero-sum.
A second budget option is the 70-20-10 budget (also known as the 50-30-20 budget). In this budget you simply spend 70% of your income, save 20% and donate 10%. This is effective if you don’t want to keep track of every expense, but want to ensure you aren’t overspending.
Another budgeting system is the anti-budget, which was made famous by Paula Pant. With this system you first determine how much you want to save. Then you take the savings off the top and spend the rest however you see fit.
There are numerous other budgeting systems and just as many apps and tools to help you follow through. The important thing is to find a system that you like, then make sure your expenses never exceed your income.
Step 3: Establish an Emergency Fund
The emergency fund is probably the second most important step in how to achieve financial freedom. Anyone who thinks they will make it through their financial life without an emergency is crazy.
You are probably going to have a fridge die, get a flat tire, or have a medical emergency at least once. The emergency fund exists to save you from these emergencies and many more.
By having an emergency fund, you are able to avoid a loan or credit card and instead pay with cash. It is much cheaper to pull money from a savings account than to pay interest month after month.
These expenses can really be the difference between achieving your financial dreams and not. Why gamble?
As you stock money away I recommend only looking at required expenses. Think of things like rent/mortgage, groceries, electricity, daycare, and gas to/from work. Definitely not things like streaming services, gym memberships, or anything else that you can cancel if times are difficult.
The purpose of an emergency fund is not to carry you for months at your current lifestyle. It is specifically there so that you can continue to get to/from work or to not lose your house if things get really tough.
Step 4: Nominal Retirement Planning
The most important thing to focus on at this point is to just get started. Like a lot of people I put off planning for retirement. But you will soon find out, in most cases the earlier you start the more you can gain.
When you put something on a credit card, you are charged compound interest. Every month that the charge sits on your credit card you are charged more interest. But you aren’t just charged interest on the original amount. Instead, you are charged interest on the original amount plus any interest already accrued.
Retirement investments can be thought of this same way. Except instead of being charged interest you are earning the interest. Doesn’t that sound nice!
Additionally, depending on how your retirement account is set up, many automatically reinvest the dividend payouts. This helps you continue to invest and hopefully make even more from those dividend payouts.
Therefore, retirement planning can be an alphabet soup of confusion, but putting it off too long can be a huge money mistake.
How Much To Save Towards Retirement
It is still early in your financial freedom journey. Start by contributing only 2%-5% of your annual household income towards retirement. Which is about $50 for every $1,000 you make. This is meant to be nominal but enough to make an impact later.
If you are asking how you are going to find 2%-5% of your household income to contribute, let’s do some quick math. On a household income of $40,000, this is a $2,000 contribution. That is less than the cost of eating lunch out every day.
Furthermore, many employers offer what is called an employer match program. In these programs your employer will match your retirement contributions up to a certain percent of your
annual income, usually 3%-5%.
This is free money that your employer is giving out and can be used towards your 2%-5% contribution. If your employer offers a match program you should maximize the benefit. To do this contribute the maximum amount that your employer is willing to match.
Once you are out of debt and on your way towards retirement, the amount to invest does get more complicated. I recommend meeting with a financial professional and discussing your goals in retirement. That professional will also look at your current financial situation to ensure you are investing the amount you will need.
Step 5: Pay Off All Small and High Interest Debts
What Debts Should You Focus On?
You have knocked out the first four steps to how to achieve financial freedom. That means it is time to start chipping away at your debt. At this stage in the process we are only going to focus on small debts and high interest debts.
There aren’t any hard and fast rules to what debts fit here. However, I prefer to focus on debts less than $40,000 and debts with an interest rate over 10%. These are generally going to be auto loans, credit cards, or medical bills. But this category can include any and all types of debts.
When looking at student loan debt, I only include individual loans under $40,000 if their interest rate is over 7%. Otherwise, we will include all student loan debt in a later step.
Debt Payoff Methods
When paying off your debt there are two mainstream methods, the avalanche and snowball methods.
The avalanche method is where you pay off your debts in order from highest interest rate to lowest. While the snowball method is where you pay your debts from smallest debt amount to highest.
Some financial experts insist the only way to be effective at getting out of debt is to use the snowball method. This is because as you pay off debt you experience a “win”. This psychologically gets you even more excited and may inspire you to keep going. Plus, each debt that you pay off gives you more money to throw at the next debt.
Other experts maintain you are wasting money by not paying off the highest interest rate first. This is because by not paying off the highest interest rate first, you are actually paying more on a debt than you otherwise need to.
I do not think any particular method is better and see the positives and negatives of both.
Personally, I believe the best method is the one that works for you and your family. Therefore, look at your own debt and pick the method that will keep you motivated and fit your financial situation.
As you pay off each debt, don’t take the extra money and apply it to a vacation or expensive gadget. Instead increase the payment on the next debt you plan to tackle.
Step 6: Eliminate Large Debts, High Interest Debts, and Your Mortgage
You have made tremendous progress on the how to achieve financial freedom steps!
Before you begin this next step, sit back and reflect on how far you have come since you began your financial freedom journey. Go relax, grab a nice meal as a family or take a small family vacation and celebrate. You are doing great, keep it up!
Since you embarked on this journey you have paid off your small debts, built up an emergency fund, and become a budgeting master. At this point, watch out for common pitfalls, such as lifestyle inflation or getting complacent. Depending on how much debt you have, it may be alright to improve your lifestyle a bit but don’t get sidetracked.
Keep in mind, any money you aren’t putting towards your debt is slowing down your financial freedom journey. This in turn is stopping you from achieving your goals and dreams. You have made it this far, focus on the path forward, keep this momentum going.
It is now time to start tackling any large debts, high interest debts, and ultimately your mortgage. Much like in step 5 there can be many definitions to which debts fit here. I generally include debts over $40,000 and debts with an interest rate under 10%. I also recommend including your mortgage (no matter the size or interest rate).
Just like you did in step 5, order your debts to the payoff method you want to use. Either from smallest to largest for the snowball method or highest interest rate to lowest for the avalanche method. There is one exception though, your mortgage should always be the last debt you tackle.
Make sure you continue to pay the minimum payments on all your debts. Then take all the extra money you have each month and hammer away at the first debt.
Individually and collectively these debts may seem very daunting. It may even feel like they will be around forever, but they won’t. At this point on the journey you figured out how to create a lifestyle that works for you and your family. You also should have money left over at the end of each month to put towards these debts.
Because of everything you have learned and put in place this step shouldn’t require too much adjustment. However, it may be the longest step in your financial freedom journey depending on how much large debt you have.
Stay focused, keep hammering away and know financial freedom is right around the corner.
Step 7: Grow Retirement, Give Back, Build Wealth
Congratulations, you have achieved financial freedom!
After working so hard to get to this point, you and your family should take a vacation and relax. You have done what most people only dream of and now the fun part begins. Now it is time to grow your retirement, build wealth, and give back.
In regards to growing your retirement, this will vary from person to person. Start by thinking about what retirement looks like to you. Next you have to determine when you want to retire. Finally, you have to estimate how long you will need to live on your retirement.
Now you have an idea of what your retirement will look like. And you also know how much you need to save. Now you need to find out how much you’ve already saved from your step 4 contributions.
If your head is spinning, that’s OK. All of this can get complicated. It is usually best to sit down with your significant other and a professional to discuss the different options. There are also great online tools you can use if you wish.
Each person who achieves financial freedom will experience a life like they never thought possible. You will be able to buy cars with cash, not have to worry about surprise expenses or life’s curve balls. It is an incredible feeling and one that I encourage you to share with someone else.
No I am not saying you should give someone money. Rather, find someone who is in debt, heading down the wrong path, and show them the way of financial freedom. There is no greater feeling than being part of the change that improves someone’s life.
Provide support to this person when they face obstacles they think are impossible to overcome. Celebrate with them as they successfully complete each step of their financial freedom journey.
Additionally, look at your finances and determine how much you are able to donate to a great cause. This could be your church or temple, your alma mater, or your favorite charity. I encourage you to choose a cause that is near and dear to your heart. However, there are so many great causes that you really cannot go wrong with whatever you choose.
You have been given an opportunity to live a life without financial stress or worry and enjoy financial freedom. I encourage you to share that spirit with a cause much bigger than yourself.
You have paid off all your debt, built up an emergency fund, given to a greater cause, and are contributing to retirement. What should you do with the rest of the money?
Any money that is still unallocated in your budget goes directly towards building wealth. Building wealth is one of the greatest accomplishments in life and will forever change your family tree.
This remaining money could go towards a trust fund, college fund, investment account, or a savings account. No matter what you do with the money, it is important that you do not throw it away on useless things. You have achieved financial freedom, don’t let old habits sink in again. Do whatever is necessary to avoid going into debt ever again.
Benefits of Financial Freedom
You have completed the steps on how to achieve financial freedom. Do you have an idea of how you want to enjoy your freedom?
Many people think about the ability to buy what they want when they want it (assuming it fits your budget). However, there are many other great ways to enjoy this freedom.
Are you slogging your way through a 9-5 but aspire to go out on your own and become a solopreneur? This can be incredibly difficult when you are struggling to keep up with your bills. It can be even harder if you don’t know how long it will take to be profitable. But now that you have achieved financial freedom this dream can become a reality.
Or what if you are an empty-nester and are tired of working. Why wait until you are 65 to retire? With the right planning you can join the elusive group of people who retire early every single year.
Imagine you are currently paying $1,500 per month towards student loans. That is $18,000 per year. Once those loans are out of your life you can easily take an annual trip to Disney World. If you save, you may even be able to purchase a nice beach house. The money can also be used to buy your first batch of eBay inventory or your first rental property.
You have achieved financial freedom! Now that your money isn’t going to random items you don’t need or interest on your debts, the possibilities are endless.
The Differences Between Financial Freedom and Financial Independence
Financial freedom and financial independence overlap in many ways. In fact, many people use them interchangeably, however, they are not the exact same thing.
Financial independence means that you are in a financial place where you never have to work. Your passive income, assets, and any investments will cover your current lifestyle without ever working again.
In many cases financial independence is paired with early retirement (the FIRE movement). This is because financial independence implies that you are free from having to earn an active income and you have enough passive income opportunities to meet your needs. Not all, but many individuals within the FIRE movement tend to live a minimalist lifestyle. This lowers their expenses to fit the passive income they have available.
Financial freedom on the other hand means that you don’t have to worry about money and are debt free. Your mortgage may be the exception. However, people who are financially free are most likely still working. Many use financial freedom as a starting point to become a solopreneur or go part-time at their current job. However, individuals who are financially free are still earning an active income in some way.
Due to the fact you are still employed under the financial freedom umbrella it is a bit more flexible than financial independence. For example let’s say you decide you want to increase your lifestyle and purchase a travel trailer. With financial freedom you can. All you have to do is increase your salary through a job or solo-venture.