Financial Freedom

Financial freedom is about the freedom to be who you really are and do what you really want in life. It’s about following your passion, making choices that aren’t influenced by your bank account, and living life on your terms. 

Exercise: Know Where You Stand Financially

In the following worksheet, “Know Where You Stand Financially,” write your Average Monthly Income figure in the first row. Write your Average Monthly Expenses figure in the second row. Subtract your expenses from your income. Record the resulting figure in the “Difference” row. This figure reflects your monthly deficit or excess.

You may have already known what you’ve just put in writing. If so, I’m proud of you! If you’re like most Americans, however, you’re either pleasantly surprised or (more likely) at least a little shocked. In fact, I’ve found that before doing this exercise, most people underestimate their average monthly expenses by at least $500 to $1,500 a month. So consider this a “Thanks, I needed that” moment. With the information you’ve just gathered, you’re ready to get busy to protect your financial future and those you love.

Set Financial Goals

Everybody dreams about achieving financial freedom. It’s a great dream! But a dream without a goal is just a wish. That’s why setting financial goals—like getting out of debt or saving up for retirement—is so important on your journey to financial freedom. They give you something to work toward! 

How do you know if you have a good goal to go after? Here’s how to set goals that actually work:

• Be specific.
• Make your goals measurable.
• Give yourself a deadline.
• Make sure they’re your own goals.
• Put your goals in writing.

Let’s say you really want to get out of debt. That’s a fantastic goal to have, but that’s not enough. How much debt do you want to pay off? Is it $20,000? Good, now we’re getting somewhere! When do you want to be debt-free? How does 12 months sound? Done!  

And just like that, you now have a specific, measurable goal that’s personal to you with a hard deadline attached to it: I want to pay off $20,000 worth of debt in 12 months. Now all you have to do is write it down and keep it front and center as you go after it.

Track Where Your Money Goes

Tracking your spending is often the first step in getting your finances in order. By understanding what you spend money on and how much you spend, you can see exactly where your cash is going and areas where you can cut back.

It’s easy to make this part of your everyday routine thanks to expense tracker apps that help you manage your money on the go. These apps certainly overlap with budgeting apps, but while the latter provides a big-picture view of your finances, expense tracker apps put more of an emphasis on your spending. These apps usually categorize your expenses and help you get a good idea of your purchasing behavior.

Whether you want an expense tracker app that easily captures all your transaction data, one that automates the expense reporting process at your job or one that holds you accountable by requiring you to manually input each one of your transactions, there’s an app out there for you.

Spend Less Money on Useless Junk

Here’s how to spend less money so you can improve your personal finance situation and meet your long-term financial goals. 

Pay off Debt ASAP

Here are some common strategies to boost your payoff speed:

• Debt snowball: You focus on paying off your smallest debt first (while paying minimums on the others), then roll the amount you had been paying on it into payments on the next largest.
• Debt avalanche: You pay off your debt with the highest interest rate first (while paying minimums on the others), then the next highest rate, and so on. It may save you time and money over the course of your debt payoff.
• Debt consolidation: Combine multiple old debts into a single new one, ideally at a lower interest rate, making payments more manageable or the payoff period shorter. There are a few ways to consolidate debt, including balance transfer cards and personal loans.
• Debt management plan: If you’re facing a mountain of credit card debt and not making much progress, a nonprofit credit counseling agency can set up a debt management plan to cut your interest rate and put you on a repayment plan.

Save Surplus Money

Whether you’ve come into an inheritance, earned a bonus at work or made a profit selling your house, having extra money gives you a chance to grow your savings and maybe fulfill a goal, such as saving for a down payment on a new car. But deciding on the best place to stash your cash isn’t always easy.

Return on investment is an important factor to consider, but liquidity and the length of time before you need to access the cash are also important. Safety and investment costs should also be considered when determining where you should save your money.

With that in mind, here are some options to consider:

Create or build up an emergency fund

If the pandemic taught us anything, it’s that the unexpected can happen, and it pays to be ready for it. The first step you may want to take with any extra money is to ensure you have a financial cushion for when those unexpected events come around. To make this money extra effective, you can put your emergency fund into a high-yield savings account. That way, your cash may benefit from a higher interest rate, but you’ll still have quick access to it.

Get your 401(k) match

If you’ve been holding off on investing in your 401(k), now is the time to start — especially if your employer offers a match. Say your employer offers a full 3% match on your contributions and you make $50,000 a year. If you contribute 3% of your salary, or $1,500, your employer will also kick in $1,500, upping your total annual 401(k) contributions to $3,000. If you don’t have access to a 401(k), don’t worry. There are still plenty of ways to invest for your future.

Pay down high-interest debt

If you’ve got extra money lying around, you might as well use it to save yourself money in the future. If you carry a balance on a credit card or loan and have a high interest rate, your best investment may be to pay off that balance. Generally speaking, if your interest rate is higher than you can expect to earn in the stock market or any other investment, you may get a better return on your money by paying off that debt.

Start funding an IRA

If you don’t have a 401(k) or you’ve already contributed enough to get your employer’s matching contribution, consider investing through either a traditional or Roth IRA. Individual retirement accounts aren’t investments; they’re specific types of retirement accounts that come with tax advantages, which you can use to buy investments. Contributions to traditional IRAs are often tax-deductible, and Roth IRAs allow you to take out qualified distributions tax-free in retirement, which means you don’t pay taxes on your investment earnings. Once you fund an IRA at an online broker, you can start filling it with investments. It’s often considered a good idea to primarily invest in diversified funds such as mutual funds. Funds are made up of many different stocks or bonds, so if one company doesn’t perform well, your portfolio is buffered by the other companies you’re also invested in.

Both traditional and Roth IRAs have contribution limits, so you can contribute only a certain amount each year. The IRA contribution limit is $6,500 in 2023 ($7,500 if age 50 and older). IRAs also have limitations on who can contribute. For both types of IRAs, you must have taxable compensation, and for Roth IRAs, you can contribute only if your modified adjusted gross income is below certain thresholds.

If you don’t want to choose your own investments, you can open an IRA with a robo-advisor. Robo-advisors use computer algorithms to build and manage an investment portfolio for you, usually for a fee of between 0.25% and 0.50% of your assets under management.

Save for your other money goals

According to the Pew Research Center, about half of nonretired Americans say that the economic impacts of the coronavirus pandemic will make it harder for them to achieve their financial goals.

Retirement isn’t the only thing in your future — take some time to outline what you want your money to do for you. Do you want to save for a down payment on a house, or start a college fund for your kids? Goals that are at least five years away can typically involve investing at least a portion of your savings so that money grows. For short-term goals, it’s often wise to keep the money close at hand in a savings account where you won’t risk losing your principal.

Explore additional investment options

Once you have investments that set you up for the long term, you may want to start expanding your repertoire.

If you’re looking to buy individual stocks, you can research companies you’re excited about and believe will perform well in the future. If you’re interested in real estate, you could explore investing in real estate investment trusts. REITs are companies that own or finance income-producing real estate. Many REITs trade on stock exchanges, so you can buy them within your IRA or a taxable brokerage account.

To have your investment dollars go toward causes you care about, you can look into sustainable ESG investments. If you’re intrigued by the constantly evolving space of alternative investments, you could consider cryptocurrency.

While these investments may be more exciting than your other investments, they should generally make up only a small percentage of your portfolio — they often carry a higher degree of risk than more diversified investments like mutual funds.

Create More Sources of Income

Why is it so important to build multiple streams of income?

It is commonly said that the average millionaire has SEVEN sources of income. This means that the average millionaire has money coming in frequently from multiple sources. This is such a big deal because it protects you and your family financially, and it allows you to build a sense of financial security that you won’t find from just having ONE job.

Avoid Lifestyle Inflation

Lifestyle inflation, also known as lifestyle creep, refers to spending more money as you earn more. When we get a pay raise, most of us immediately start imagining ways to splurge. That could mean moving into a larger or more expensive home, buying a more expensive car, buying more expensive clothes, going out for costlier meals — are you sensing a pattern here?

Define Your Long-Term Goals

Before you spend another cent, spend some time outlining your long-term goals. Spending less doesn’t have to mean suffering. But it does require a more intentional mindset and approach to your budget and lifestyle.

Lock Your Budget to Pay Off All Unsecured Debts

Unsecured debts, such as credit card debt, student loans, and personal loans, are wealth killers.

It doesn’t make sense to invest and actively build wealth and passive income while you still have expensive debts hanging over your head. If you can earn a 10% average return from the stock market but you’re paying 24% interest on a credit card, the highest and best use of your money is paying off the credit card debt rather than investing.

That means your first financial priority must be paying off all unsecured debts.

Beware Structural Expenses

Housing and transportation consistently make up around half of the average American’s household spending, per the Bureau of Labor Statistics. And they’re not easy to trim once you buy a home or car.

It’s far easier to spend less on food and beverages and discretionary costs like entertainment and apparel.

As you look to avoid lifestyle inflation, focus first and foremost on holding the line on housing and car payments. Don’t move into that larger apartment or buy that new house. Don’t buy a brand-new car to show off how successful you are.

By keeping your structural expenses low, you can manage your discretionary budgeting through other means, such as automating your savings rate.

Automate Your Savings and Investments

You can’t spend what you don’t have in your checking account without taking on credit card debt. So don’t let money earmarked for savings ever touch your checking account.

First, decide on your target savings rate: the percentage of your income you want to save. Then talk to your employer’s human resources department about splitting your direct deposit to send some directly into a high-yield savings account. If they can’t do that, set up automated recurring bank account transfers to your savings to take place the day after each payday.

From there, you can either set it aside for your emergency fund, put it toward early debt repayment, or invest it through your investment account. You can further automate your investments with a free robo-advisor such as SoFi Invest or M1 Finance.

You can then adjust the savings amount when you get a raise to avoid spending it.

Lock Away Your Credit Cards

If you run into trouble paying your credit cards off in full each month, stop using them. Lock them away in a drawer somewhere or even physically cut them up.

That forces you to change your spending habits and only use your debit card and cash, which only lets you spend the money allotted in your checking account each month.

But this strategy only prevents lifestyle inflation if you adjust your automated savings each time your income increases.

Plan Your Goals and Budget With Your Spouse

If you’re married, your spouse must be on board with your spending and budget plans. Otherwise, it doesn’t matter how committed you are to avoiding lifestyle inflation and reaching your financial goals faster. They could just keep spending every extra dollar as you each earn more.

Talk through your long-term goals and ideal lifestyle together. Don’t stop until you agree on a vision for how you want your lives to look.

Then talk through how you plan to achieve it and how quickly. Put all budget categories on the chopping block. Nothing is sacred. And then discuss how future raises fit into your budget and long-term goals.

Ideally, don’t lift your spending until you’ve achieved at least some of your long-term goals. But whatever your agreement, ensure you both commit and follow through.

Reinvest Your Passive Income

Many investments generate passive income, which adds your active income and boosts your household revenue. But that creates a temptation to spend it.

Avoid that temptation.

Instead, reinvest your passive income back into more investments. With dividend-paying stocks, you can do this automatically through dividend reinvestment plans. Many real estate crowdfunding platforms such as Fundrise and Streitwise also let you reinvest dividends automatically.

Other investments require a little more effort on your part. For example, if you own rental properties, you need to set aside your rental cash flow in a savings account to put toward the down payment on your next property.

By reinvesting your returns, you take advantage of the power of compounding, a power that can grow your wealth exponentially if you give it even a few years to build on itself.

Socialize With Like-Minded People

The impulse to keep up with the Joneses and feel jealous about money is simply human nature. Because you want to prove you can afford the same things as your friends, you spend more than you want to, especially when you get a bump in salary.

That’s precisely why it pays to spend time with friends who have similar lifestyles and budgets as you.

Consider an evening out with friends. Your spendthrift friends typically go to an expensive restaurant, order pricy drinks, then hit up an upscale cocktail bar or club after dinner. Your friends who live more modestly prefer a homemade dinner and drinks around a beach bonfire or at someone’s house. That could mean a hundred or more dollars in savings for a single night of socializing.

The same goes for cars, houses, and other possessions. Expect to feel pressure to keep pace with your friends’ lifestyle habits, good or bad. Depending on which friends you hang out with, that could mean overspending on housing and transportation or reaffirming your commitment to a more frugal, high-savings lifestyle.

Cultivate friendships with like-minded people who share your financial goals. Hang out with people who don’t mind driving an older-model car or living in a less posh zip code to achieve their ideal lives sooner.

Aim for “Stealth Wealth”

If there ever were a financial epidemic in the United States, it’s the obsession with material goods as a means of proving our wealth and success. We want our neighbors and friends to see our success, so we use pricey possessions to flaunt it.

But we also live in a country where luxury goods aren’t limited to the wealthy. Almost anyone can qualify for the necessary credit to purchase expensive goods like cars, homes, and boats without having the money to pay for them. In the end, you often find yourself competing with someone in a completely different tax bracket.

Stop measuring your success in life with material goods — yours and your neighbors’. The true measures of success are health, love, friends, family, and experiences. You don’t need to prove anything to anyone.

The paradox of wealth is that the more you spend on the trappings of wealth, the less wealth you actually build. Fancy homes, cars, and clothes might make you look and feel wealthy, but they drain precious dollars from your real wealth: your investments. It’s why financial experts encourage “stealth wealth” rather than spending as much as you can technically afford.

Ironically, by building true wealth faster and focusing more on experiences, those still living paycheck to paycheck will envy you when they see how quickly you can achieve the quality of life you want. You’ll be doing things like retiring early, traveling, or sending your kids to college debt-free while they’re still paying off debt into their later years, a major regret of many older Americans.

If You Must Spend More, Set a Percentage

You may be wondering what the point of working so hard to earn more money is if you can’t spend it. The answers are plentiful. Examples include:

• To build wealth faster
• To help your kids with college costs
• To cover the cost of training for your ideal career rather than your current high-stress career
• To retire a few years from now and travel the world

But not everyone finds those reasons as compelling as I do. Most people need at least a little bit of immediate gratification.

If you can’t help but lift your spending when you get a raise, set aside a percentage of it to spend and enjoy now. But not all of that raise is yours to keep. Uncle Sam takes more of it than you necessarily realize. And unless you live in a state without income taxes, your state and even city might skim some money off the top as well.

So calculate that percentage set aside for spending as a portion of your extra take-home pay after all income taxes have been taken out. A $1,000 monthly raise might only leave you with $600 net extra income, so spending a third of it means $200, not $333.

Luckily, you have plenty of options for tax-advantaged accounts, such as individual retirement accounts, 401(k)s, health savings accounts, and education savings accounts, if you want to invest your extra money where Uncle Sam can’t reach it.

Invest in the Future

Your future depends on the investments you make today. If you start early, time can be your friend and not your enemy. Consider investing your money in more than just stocks and bonds, and save specifically for the future.

Build your financial foundation.

Like it or not, your personal finance plays an important role. Many people can’t reach their dreams because of financial constraints. They are overwhelmed by debt. They live paycheck to paycheck. They have no space to pursue their dreams.

A strong financial foundation, on the other hand, opens a way for you to reach your dreams. It gives you the freedom you need to pursue them.

Build your knowledge.

To reach your dreams, you need knowledge. You need to know how to get to your destination. Knowledge is power. The more you have of it, the more power you have.

So keep building your knowledge. As Steve Jobs once said: stay hungry, stay foolish.

Build your relationships.

You can’t get to your destination alone. You need others to be with you. For that reason, you should build your relationships.

The most important relationship is the one with your family. So make time for them. Don’t let it become something that you regret later.

Make time for your friends as well. Help them without keeping score, and in turn they will help you.

Build your spirituality.

Like it or not, there will be difficult times. In such times, it’s your spirituality that helps you through.

Build your spirituality through spiritual habits. These habits could be praying, reading the Scripture, or something else that works for you. The important thing is that you do it now before a difficult time comes.

Build healthy habits.

Your physical health is essential for your productivity. If you are healthy, you can be productive for a long time. If you aren’t, you will have to spend your resources dealing with health issues.

Build healthy habits in three areas: the way you eat, rest and exercise.

Repeat the Process

If you do these 9 things, you are investing in your future and on the pathway to financial freedom. You might not feel the benefits now, but you will later.