In this post, we will look at ten simple ways to achieve financial freedom, but first, here is our disclosure
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What Does Financial Freedom Mean?
Obtaining financial freedom takes time and requires a lot of self-discipline, hard work, sacrifice, and perseverance. However, many people think you can get rich fast and owning many things makes you wealthy. This usually includes fancy cars, big houses, and expensive gadgets. But if you believe you can gain financial freedom quickly and material things make you rich, you are wrong.
Gaining financial freedom takes a long time, and spending a lot of money on things that do not appreciate in value will not lead you to financial freedom. Instead, it is a surefire way to go broke. Remember that true wealth isn’t measured by accumulating expensive things, like a fancy sports car. It’s about growing your wealth over time by maximizing growth and minimizing risk.
Here are 10 simple ways to help you achieve financial freedom. With these ten simple steps, you can take control of your finances and work towards achieving financial independence. Remember that this list is not meant to be all-encompassing but a great starting point on your journey toward financial freedom.
1. Determine Your Financial Freedom Number
Would you jump in your car and drive aimlessly for years without a specific destination? As time passes, your vehicle will eventually break down, and you may find yourself stranded in a place that you never intended to be in the first place. To embark on your journey toward achieving financial freedom, you must first determine your destination.
This is the amount of money or net worth you need to achieve financial freedom. This number is unique to your financial goals and serves as a guiding force to help you attain financial success. By identifying your personal number, you can create a customized plan that aligns with your specific financial aspirations and empowers you to make informed financial decisions.
Putting a number on financial freedom is one of the most important actions you can take now. It may be having $2 million saved and owning a home outright or having $500,000 saved and renting a comfortable apartment in an affordable area. This number may also change over time as your life changes. The crucial point is to establish your own financial goals. It is hard to plan and reach financial freedom if you do not know the ultimate goal you are hoping to achieve.
If you are not sure where to start, check out this FIRE calculator at Millennial Money. FIRE stands for Financial Independence, Retire Early. You do not need to be part of the FIRE movement to benefit from this calculator.
2. Set SMART Goals to Reach Financial Freedom
Once you determine the amount of money or net worth you need to be financially free, the next step is establishing SMART goals. SMART stands for Specific, Measurable, Achievable, Relevant, and Time-Bond. You can have short, medium, and long-term SMART goals. So, what does a SMART goal look like? First, let’s see what it isn’t.
Let’s say you are 25 years old, single, and renting an apartment. You work in an accounts payable department, making $60,000 per year. You can’t stand your job and daydream of bigger and better things while sitting at your desk at work. So you come up with a goal to be a millionaire by 30 and ditch your current job. Is this a SMART financial goal?
It is specific, measurable, and time-bound but not achievable or relevant. You will not become a millionaire in five years, earning $60,000, unless you win the lottery or get a big inheritance. So, what SMART goals could help you in this situation?
Your short-term SMART goal can be finding a new position within a year earning 10% more than your current salary. You will achieve this goal by updating your resume within three months and applying for ten new positions within six months. Your longer-term SMART goal can be to save $1 million by age 50. You will do this by investing $500 per month, or $6,000 per year, into a low-cost S&P 500 index fund that historically has returned 10% yearly. These goals are specific, measurable, achievable, relevant, and time-bound.
The key takeaway is that daydreaming about financial freedom gets you nowhere closer to being financially free. You need to establish a realistic plan by setting SMART goals that help you accomplish your short, medium, and long-term financial goals.
3. Avoid debt
Good Debt. Bad Debt. It is all debt, and when you borrow money, you have to pay interest on the money you borrow. If you want financial freedom, you must limit when and how much you borrow. Don’t get caught in the trap of thinking you need to have the newest phone, car, or TV. You don’t.
No one ever got wealthy using credit cards when they could not pay off their balances in full each month. The same is true if you buy a $40,000 car when making $60,000. Or you are trading in your old smartphone for the latest version every year. This is not to say you should never have nice things. Instead, you need to prioritize paying down any debt and focus on saving and investing before you start buying things you do not need but want.
You may not always be able to avoid debt, like when buying a home. However, you can lessen your mortgage payments by putting 20% down and buying a home you can comfortably afford, not one based on your preapproval amount. Your home should appreciate over time, outpacing your mortgage in the long run, but don’t let that be an excuse to over-extend yourself financially.
Always remember that debt is the enemy of your financial success. It acts as a kryptonite to financial freedom, sapping your money and weakening its ability to grow. Like Superman, who loses his strength around kryptonite, the burden of debt can make it difficult to achieve financial freedom. Every dollar you spend on debt repayment is one less dollar invested that can be making money. So be like the powerful Superman, and avoid surrounding yourself with debt.
4. You Need a Fully Funded Emergency Fund
I am sure you are tired of hearing you need a 3 to 6-month emergency fund. Well, I am here to repeat it once more. You need a fully funded emergency fund if you hope to obtain financial freedom. It needs to be a top priority. Without an emergency fund, you are always living close to financial ruin. Life’s unexpected expenses, such as car repairs, medical bills, job loss, or home repairs, can easily lead you to financial disaster.
If you do not have a fully funded emergency fund, and the unexpected happens, you must borrow money to cover the expense. When you borrow money, you are taking on more debt and paying interest on that debt, driving you further and further away from financial freedom. Remember, debt can weaken you like kryptonite weakens Superman. Strive to be like the powerful Superman. Get that emergency fund in place. You can do it. It is possible.
There are many emergency fund calculators that can help you determine how much you need to set aside. I like PNC Bank’s emergency fund calculator. It goes in-depth on your expenses and income to calculate the size of your emergency fund. The calculator can estimate how long it takes to reach your emergency fund goal based on your monthly amount of savings.
5. Appreciate, Not Depreciate
When making large purchases, you must understand the difference between appreciating and depreciating assets. Appreciating assets gain value over time, and depreciating assets lose value over time.
Most large purchases you make in life are going to be depreciating assets. These are things like your car, TV, phone, and furniture. All will lose money the second you leave the store or lot. Therefore, you want to avoid taking on debt and overspending when purchasing depreciating assets. For example, consider what happens when you buy a new car.
A new car will lose around 20% in value in the first year alone. Over the next few years, it will keep losing value at about 15% annually. Your losses worsen if you take out a car loan, as you will pay thousands of dollars in interest over the life of the loan.
A car loan will result in a $35,000 car costing you closer to $40,000. Meanwhile, the vehicle will depreciate to around $20,000 after a few years. If someone pitched you an investment that offered you a negative 50% rate of return over three years and you had to pay them 5% interest for that opportunity, you would run away as fast as possible.
Therefore, do not overspend when buying a car or other depreciating assets. In the car example, you need one that will safely and reliably get you from point A to point B. You do not need all the fancy bells and whistles.
The true path to financial freedom is prioritizing and maximizing investing in appreciating assets like high-quality funds, stocks, bonds, and real estate. You want your money to be making money. You can only do that by investing in appreciating assets.
6. Spend Less Than You Make
If you want to achieve financial freedom, it’s crucial to spend less than what you earn. Overspending can make it harder to reach your goal and lead to more and more debt. The more debt you have, the more money you’ll need to pay it off. This can make it challenging to make more than just the minimum payments, which only prolongs the cycle of debt. This is why it is so important to distinguish between needs and wants.
You need fuel in your car for your daily commute, but not the coffee you buy daily on the way to work. You need internet access but not endless streaming apps you must pay for every month. So, if you spend more than you earn and are stuck in a debt spiral, it is time to take evasive action.
To take control of your finances, it’s essential to closely examine your spending habits and understand where your money is going. This means creating a budget. There are several budgeting methods available that can cater to your specific needs. If meticulously tracking every penny you spend seems overwhelming, you can opt for another approach that allows you to review your spending habits without recording every dollar, like the 50/30/20 budget.
This process can help you see the reality of your expenses and motivate you to make better choices. Seeing how much money is spent on small purchases is often surprising. Always remember, every dollar you spend is one less dollar being invested. This is called opportunity cost. With the power of compounding, little dollars today can be big dollars tomorrow if properly invested. The difference over 30 to 40 years can be hundreds of thousands of dollars, leading you to financial freedom.
7. Invest Your Way to Financial Freedom
You will never have financial freedom if you do not invest.
Life has taught me many lessons about investing, and the biggest one is to start.
To quote the Chinese philosopher Lao Tzu: “The journey of a thousand miles begins with one step.”
Even a small investment, like investing $25 each month into a low-cost S&P 500 index fund with an average yearly return of 10%, can potentially return over $100,000 over 40 years. Increasing that number to $200 per month can make you a millionaire after 40 years. This is why it is so critical to control your spending and debt. The more money you can put toward investing and maximizing the power of compounding, the faster you can reach financial freedom.
That is not to say that investing is without risk. All investments have risks, and past returns never guarantee future returns. Even a high-quality S&P 500 index fund will have some big down years. There is no guarantee it will continue to average 10% yearly returns.
The truth is you need to take smart risks in order to earn higher rates of return. Investing is about maximizing returns while minimizing risks. It considers your risk profile and the stage of life you are in. Ultimately, investing and your investment choices are unique to you and your circumstances. Just because I mention a low-cost S&P 500 index fund in this post does not mean it is the right choice for you.
Once you begin investing, you should consider using a low-cost brokerage company. Many low-cost brokerage companies offer low-cost funds with minimal expense ratios and don’t charge you for having an account. It’s a smart money move that can keep more of your dollars working for you.
8. Keep it Simple and Diversified
When it comes to investing, it’s best to keep it simple. Your objective should be to maximize returns and minimize risks with a diversified yet straightforward portfolio.
Depending on your age, this may entail allocating most of your investments into a low-cost S&P 500 index fund or ETF to capture the broader market. Furthermore, you can gain exposure to bonds through a total bond ETF or index fund. You can also incorporate funds and stocks specializing in small and mid-cap stocks, foreign stocks, commodities, and real estate if you wish.
Regardless of your investment choices, always remember investing is about maximizing growth and minimizing risk. If you can’t explain an investment in a sentence or two, or you invest in highly speculative stocks, you are not investing. You are gambling, and most of the time, you will lose.
Therefore, don’t overcomplicate your investment strategy; consult with a financial professional about your investments if needed. Your investment strategy should be unique to you and not what someone posts on a website or TikTok video. Don’t gamble with your future. Remember, your goal is financial freedom.
9. Set it And Forget It
Automating your investments is a powerful strategy for increasing your wealth. Whether you have a 401K, Roth IRA, or brokerage account, automating your investments will guarantee that you make regular investments and benefit from dollar cost averaging and the power of compounding. This will stop you from timing the market. Instead, it will ensure you invest a set amount of money regularly, regardless of price or market performance.
Automating your investments is straightforward. You already do it if you have an employer-sponsored retirement account, like a 401K. Setting up automatic investments for your Roth IRA, brokerage accounts, or savings account can be done by scheduling regular deductions straight from your checking account. This method is similar to paying any other recurring bill and offers convenience and consistency in your investment strategy.
Why does automating investments work so well? It works so well because it takes advantage of human nature. Let’s look at a common practice many companies use: Free trials.
Despite being labeled as “free,” many of these trials require a credit card to be linked. Why is that? Simple: Most people forget about the trial and fail to cancel before the recurring fee kicks in. Companies know this and take advantage of this behavior. The same goes for all the different apps and streaming services you are paying for that you may no longer use. Automating your investments leverages this same principle for a much more positive outcome.
The key takeaway is that stopping once you start automating your investments is hard. Lump sum investing might be better in the long run, but who has tons of money lying about waiting to be invested? Automating your investments ensures you have time in the market to grow your money by maximizing the power of compounding, leading you to financial freedom.
10. Never Stop Learning
As I stated at the beginning of this post, this list for achieving financial freedom is not meant to be all-encompassing. There is no way it can be. That is why it is important to keep seeking knowledge and never stop learning. Be curious. Be hungry for knowledge.
Many individuals spend more time searching for their next binge-worthy show or scrolling endlessly through social media than when making financial decisions. However, true financial freedom can only be achieved through knowledge about personal finance, money management, and investing. You could read informative books or follow credible news sources. You could also consider taking online courses to expand your knowledge.
I spend significant time each day reading articles on finance, ranging from money management to investing. It is my money, so I better know how to manage it. The only way to do that is to continue to educate myself. As someone without a finance and investing background, I even completed several certification programs via Coursera to become a more knowledgeable investor.
Even if you are using a financial advisor, it is essential to understand your finances clearly. If you’re unsure about anything, don’t hesitate to ask questions and conduct some research. Mindlessly following advice that you don’t comprehend isn’t wise.
Conclusion
I hope these ten steps serve you well on your way to financial freedom. The key is to create a plan with realistic goals, spend less than you make, avoid debt, and save the rest.
Remember, ultimately, it’s your money, your future, and your financial freedom. Knowledge and financial freedom go hand-in-hand. Both are very powerful, and both take a long time to accumulate. So, never stop learning and never stop practicing good money habits.
Good luck on your money journey, and may you reach financial freedom.
