Financial freedom looks slightly different to everyone. However, I think we can all agree that a life filled with security and the ability to do what we want, when we want, all the while not being tied down to our debt is a great starting point. While it doesn’t matter what financial freedom means to you, there are certain steps you can take to put yourself in the best position to succeed financially.
The CGS Team is sharing 10 steps to help you open the door to financial freedom. You can work on each of these steps simultaneously, or you can focus on one and move on to the next once it is achieved.
Steps to Financial Freedom include…
#1 Set and follow a budget
In order to fully understand what you can afford to save, put towards debt, and enjoy life on, you need a budget. Your budget should include your take-home pay each month and how that pay needs to be allocated.
You will need to start with all of your recurring living expenses, then your recurring debts, subscriptions, and payments, then your savings, then the things that don’t have a set amount because they change based on use, but they are necessary (groceries, gas, etc.), then your discretionary spending.
Does your income cover all of the items you spend money on each month? If not, you will need to pinpoint areas that can be cut back. Discretionary spending should be the first to go, followed by any subscriptions that you aren’t using or don’t need. If that still doesn’t help, you need to bring in more money.
If your income does cover everything you spend money on, great! That puts you in a better position to move onto the next steps for financial freedom.
#2 Save at least $1000 for small emergencies
Before you focus on aggressively paying off debt, and even if you don’t have any debt, you need an emergency fund. Start small with $1000. This amount is completely reachable in a rather short amount of time, and it’s a great base to cover unexpected setbacks while you are working towards the others steps.
If you don’t have any debt, but also don’t have much in savings, start with putting $1000 into a savings account for small emergencies. This savings is not to be touched until a true emergency comes up. The goal is to not have to use debt to cover unexpected expenses. This savings shall serve as the answer to those financial setbacks.
#3 Pay down your high-interest debt
Once you have your $1000 set aside for small emergencies, you need to focus on paying down all of your high-interest debt. This includes any credit cards, personal loans, or other forms of debt with high interest rates. If you don’t have credit card or personal loan debt, think about how you can pay down your auto loan, student loans, or mortgage faster.
Can you contribute more to the monthly payments? Even an extra $50 can reduce the amount of time you need to pay and save you in interest.
The ultimate goal is to be debt free, with everything. No mortgage payment, no car payment, no month-to-month credit card balances, and no student loans. Imagine how freeing your life would be if you didn’t have any debt to worry about?
#4 Contribute 10-15% to a 401k or IRA
I want to preface this step by saying that you should ALREADY be contributing to a 401k plan or IRA. You should at least be contributing what your company will match (if you have a 401k plan) or what you can afford (if you have an IRA). There’s no denying that the sooner you start saving for retirement, the more you will have when the time comes to retire.
The reason why this is step #4, even though you should already be contributing to your retirement fund, is the goal contribution amount to work towards is 10-15%.
If you aren’t contributing that much yet, complete the first 3 steps, then up your contribution amount to what will be comfortable in your budget. Never stop working towards a higher retirement contribution number, until you reach the annual limit of $18,500 (as of 2017).
#5 Save 3-6 months’ worth of expenses
Once you have your budget sorted out and followed, paid off your high-interest debt, and increased your contribution amount, you should start saving for your true emergency fund. Experts recommend 3-6 months’ worth of living expenses for your emergency fund.
The ultimate goal for this amount is that if you lose your job, you will be able to afford your bills while you look for a new one – hopefully not taking longer than 3-6 months.
If you are struggling with how much to contribute to your emergency fund or aren’t quite sure how to start saving for one, read How to Successfully Build an Emergency Fund. I share some of the best tips for building up your emergency fund.
#6 Set your goals and assign monetary values to them
Next, you will want to start thinking about the goals you want to achieve in life. This step can be done any time, but shouldn’t be the focus until steps 1-5 are covered. What do you want out of life? Do you want to own a home? Travel the world? Start a business? Whatever your goals are, write them down and assign values to them. What will it cost for you to achieve your goal?
Once you know what it will cost to achieve your goal, you can start thinking about deadlines and how to approach saving for each goal. The sooner you can start saving for each of the goals, the sooner you will be able to achieve them.
Make sure to prioritize your goals. Whatever needs to happen first should be saved for first. Read Effective Goal Saving: 8 Ways to Save for your Next Goal for more details on planning and saving for your goals.
#7 Start investing to reach your goals
One of best ways to build true long-term wealth is through investing. There are plenty of options available to an investor of any level. If you are a beginner and don’t know where to start, consider a company like Betterment.
If you want a more formal way to invest, you can’t go wrong when working with Vanguard or Fidelity. You can also take on trading and investing on your own, just open up a brokerage account.
To really get ahead with your goals, with your retirement, and with life in general, you need to invest. Not only does investing yield exceptionally great long-term gains, as you continue to contribute to your investments, your money will make more money on top of itself. Thank you compounding interest!
#8 Enjoy life, within budget
If you’ve made it to the point where you have no debt, a solid emergency fund, a 10-15% retirement contribution, and investments set up, now it’s time to enjoy the fruits of your labor (within budget, of course).
Start planning your next vacation. Think about where you want to go and what the cost will be for the entire trip. Will you need to save up for it? If so, adjust your budget to save exactly what you need before you go.
Not sure if a vacation is what you want to do? Well, what about a shopping spree? Take a look at your current wardrobe and pinpoint some options for new pieces.
Budget and save for it, then have at it! Whatever “enjoying life” means to you, make sure you take the time to do so. Life is too short to work so hard and not enjoy it.
#9 Bring in more money
What is the one thing that will ensure your financial freedom continues? Money! Think about how you may be able to bring in more money. Do you have a passion for painting? Open a paint studio or sell your paintings online. Starting your own business is a great way to bring in more money, especially if you keep your normal job.
One thing to keep in mind when starting a business to bring in more money is that it takes money to make money, especially in the beginning.
There will be some costs associated with starting and running your business in the beginning stages. Make sure you properly plan and budget for those costs. You don’t want to hinder your other successes (steps) because you failed to plan properly
#10 Help others
Last, but certainly not least in your steps to financial freedom, is helping others. You can help others by donating to charity, volunteering, or starting a business and hiring people who are struggling. When you reach a level of financial success and have the means of doing so, it’s your duty to help make the world a better place.
You don’t have to follow traditional paths of helping others. Do what feels best to you. As long as you are making a difference, you are bringing goodness to the world.
I know, I know. Easier said than done, right? Well, let this article serve as a guideline for reaching financial success. Work through each of the steps until you’ve hit them all and financial freedom is yours. You can do this, no matter what your situation looks like right now.
Have you completed any of the steps listed above? What steps are you currently working on? What does financial freedom look like to you? Share your thoughts with myself and other CGS readers by leaving a comment below!
2 thoughts on “10 Steps to Financial Freedom”
This is gold! I’ve always had the question of if I should save an emergency fund first or pay debt off. I have a lot of debt so it make sense to get the emergency fund in place first just in case. Thank you so much for sharing this. I’ve saved it to my Finance board on Pinterest!
Thank you so much Anika! So glad you found it valuable!