Are you spending the best years of your life trapped in a soulless cubicle? Do you struggle to save money or make ends meet? Perhaps you’re overwhelmed by debt and just don’t know how to get ahead.
Do you know that you can actually develop a financial strategy that would make you financially independent without gambling or receiving a massive inheritance?
In this article, we’ll explore the best tips for financial independence, so you can start creating your own roadmap to financial freedom.
Table of Contents
What Is Financial Freedom?
The concept of financial freedom refers to the ability to make life decisions without being overly concerned about financial consequences. It’s because you have no debt, you have money in the bank, and you invest for the future.
In other words, you control your finances rather than letting them control you. If you have financial freedom, or perhaps we should say financial peace, then you have options.
Here are a few criteria for defining financial freedom:
- Finances under control and a reliable income
- Staying on track with your financial goals
- Having enough money on hand in case of an emergency
- Having enough money to enjoy a particular lifestyle
All these things add up to a sense of financial well-being and confidence-having enough for what you need and want.
In one word, our broadest definition of financial freedom is managing your money and life according to your preferences.
How to Achieve Financial Freedom
1. Learn How to Budget
Creating a budget and sticking to it is a crucial part of meeting your goals.
Budgeting brings up the idea of cutbacks and sacrifice, but it’s really about the opposite: having enough money to afford the things you want without building up debt.
A classic budget consists of setting up spending categories, tracking your expenditures, monitoring your progress, making adjustments, plugging spending leaks, and staying motivated. There are different ways to achieve all of that, and you’ll find the one that works best for you.
Your chances of being financially successful increase substantially once you put a budget in place. It takes a little time and effort to get started, but the rewards are tremendous.
It’s a good idea to create a worksheet to get started in setting up your budget. Use the basic common categories that apply to everyone, such as housing, utilities, insurance, and food, but customize the other categories to fit your situation.
Your categories should be detailed enough to provide you with useful information, but not so detailed that you become bogged down in trivia. First, list all your sources of income, making sure to use the amount of money you actually get (take-home pay, for example, rather than gross pay):
- Wages from your job(s)
- Income from side gigs
- Child support or alimony
- Social Security
- Rental income
- Interest income
- Dividend income
- Capital gains income
- Other income
Next, list the expense categories you want to track. Start out with a little more detail rather than a little less. You can always combine categories later if you find that expenditures in one category are so small they don’t warrant being tracked separately.
Some sample expense categories include:
- Emergency savings
- Retirement savings
- Mortgage or rent
- Auto expense
- Other transportation
- Credit card payments
- Student loan payments
- Other loan payments
- Home maintenance
- Child support or alimony
- Out-of-pocket medical expenses
- Computer expenses
- Eating out/groceries
- Clothing and shoes
- Gifts and donations
- Household/personal care products
- Property tax
- Pet expenses
Don’t forget things that come up throughout the year but are not monthly expenses, such as subscriptions, holiday gifts, birthday gifts, maintenance agreements, car repairs, and so forth.
2. Get Debt Out of Your Life
Super-high interest debt, with rates topping 36 percent (and sometimes more than 100 percent), can sabotage your finances and block you from reaching your financial goals. It’s extremely difficult to pay off these loans, even if you make regular on-time monthly payments because those payments go almost entirely toward interest. These debts are considered toxic because they do serious harm to your financial position.
Even though paying off these toxic debts feels next to impossible, it can be done. It will take some extreme budget moves, including deep expense cuts and income boosts, but those temporary pains are worth it. Make getting rid of this damaging debt a priority, and watch your budget and net worth benefit.
Once you’ve decided to tackle your debt, you’ll need to pick the best paydown plan for you. The best plans have you focus on one debt at a time until all debts are paid off. This system works because it’s much easier and less stressful to deal with a single debt than a giant mountain of debt all at once.
3. Set Financial Goals
Everyone dreams of achieving financial freedom. However, a dream without a goal is nothing more than a wish. To achieve financial freedom, you must set financial goals, such as paying off debt or saving for retirement. It gives you something to strive for!
Whatever your goal, simply dreaming about it won’t make it happen. A goal should be written down and reviewed regularly. Written goals give you something to work toward and make your efforts to save more meaningful.
Figuring out how to achieve your goals is just as important as stating them.
When you put a goal in writing, include the following:
- A description of the goal
- The time frame for achieving it
- The amount of money needed
- The amount already saved
Your plan for achieving the goal (for example, putting aside $100 a month, working ten hours of overtime a week, cutting entertainment costs in half, or getting a second job)
Having a deadline for achieving your goal creates a sense of urgency that makes it easier to stay focused.
4. Save For Large Purchases
Basically, you have a choice: You can either make monthly payments to yourself (and possibly earn interest) before you buy, or you can make monthly payments with interest to someone else after you buy.
Plus, delaying a larger purchase until you can afford it gives you plenty of time to change your mind about whether it’s something you really need or want. If you run right out and charge the item to your credit card or take out a loan, you’ll be stuck paying for the item for a long time, and you’ll end up paying a lot more for it because of the interest charges.
5. Pump Up Your Savings
To increase your savings, you can set up a separate savings account. If you mingle your day-to-day funds with your savings, it’s almost inevitable that you’ll end up using some or all of the savings, and you may never repay them. There’s also a mental component.
Seeing your savings balance grow from month to month and your financial goals becoming more of a reality is highly motivating.
If you have direct deposit at work and your employer allows you to split your deposit between multiple accounts, consider having a set amount deducted from your paycheck each pay period and deposited in your savings account.
It’s much easier to save when the money doesn’t have to take a detour to your checking account before reaching your savings account. If you don’t have this option at work, set up an automatic transfer into your savings account. Online bank accounts will do this for free—they’ll even pull money from a different bank.
After a while, as you adjust your budget and spending, you won’t even miss the money you’re putting into savings.
6. Get Insured
When you’re young and healthy, imagining yourself feeling otherwise may be difficult. But because accidents and unexpected illnesses can strike at any age, forgoing health insurance coverage can be financially devastating.
When you’re in your first full-time job with limited benefits, buying disability coverage, which replaces income lost because of a long-term disability, is also wise.
Most working-age folks obtain health insurance through their employer. Employer-provided coverage eliminates the hassle of having to shop for coverage from scratch. Also, thanks to the purchasing power of a group, employer-provided coverage may provide a higher level of benefits, given the cost, than individually purchased coverage.
If you’re self-employed, out of work, or working for an employer that doesn’t offer health coverage, you need to shop for and secure health insurance. And even if your employer does offer health policies, you may well have choices to make.
7. Create An Emergency Reserve
You should have a “rainy day” fund to deal with emergencies and the inevitable curveballs that life throws your way. I suggest keeping it in a money market fund or savings account, and it should cover at least three months’ worth of living expenses.
The standard recommendation from financial advisors is to have enough savings to cover your living expenses for three to six months, but this doesn’t apply to everyone.
There may be a need for more than six months of expenses in an emergency savings account for your family depending on how many breadwinners there are in your household.
When you have this financial safety net, you won’t have to worry about how you’ll meet your basic financial obligations if you suffer from illness, lose your job, incur unplanned expenses such as house or car repairs, or incur medical expenses not covered by insurance. If you’re uncertain about your job and the job market, an emergency fund is especially important.
When you have a budget in place, you can easily calculate how much money you’d need to cover your basic, no-frills living expenses if you had a sudden loss of income. Write down your goal for your emergency fund and decide on an amount to contribute to it each month, using the “pay yourself first” rule.
Keep the fund in a separate account, such as a money market account (not a money market fund, which is not FDIC-insured), so you’re less tempted to dip into it for nonemergencies. Since emergency funds might be needed without notice, they should be kept in liquid accounts that are easy to cash in quickly.
8. Live Below Your Means
It’s the number one most important thing you can do to take control of your money and build lasting wealth, but it’s also one of the hardest things for most people to do: spend less money than you make. There’s constant pressure, both external and internal, to buy more, and it can be very hard to resist. In fact, the only way to thwart that pressure is to be aware of it and turn away.
Spending more money than you make does more than blow your budget. It puts your financial future at risk, forcing you to keep paying for the past instead of saving for the future. Overspending means that you are in debt, usually high-interest credit card debt, which shrinks your budget and traps you in a debt cycle.
By putting an immediate stop to overspending, and committing to spending less than you earn, you’re taking the most critical step toward getting your finances under control.
One way to knock down spending is with a temporary spending freeze. Here’s how it works: for a preplanned period of time, usually no more than a month or two, you spend money only on absolute necessities. A move like this will bring your budget into sharp focus, which can help you weed out excess spending and jumpstart progress toward your goals.
9. Invest In Your Career
In my work with financial counseling clients over the years and from observing friends and colleagues, I’ve witnessed plenty of people succeed in their careers. What did they have in common? They invested in their careers, and you can and should do the same. Some time-tested, proven ways to do that include
- Networking: Some people wait to network until they’ve been laid off or are really hungry to change jobs. Take an interest in what others do for a living and you’ll benefit and grow from the experience, even if you choose to stay with your current employer or in your chosen field. Online services like LinkedIn enable you to network and see what jobs you may qualify for.
- Making sure you keep growing: Whether it’s reading high-quality books or other publications, learning from experts in a particular field, or listening to good podcasts, find ways to build on your knowledge base.
- Considering the risk in the status quo: Many folks are resistant to change and get anxious thinking about what could go wrong when taking a new risk. When I was ready to walk away from a six-figure consulting job with a prestigious firm and open my own financial counseling firm, a number of my relatives and friends thought I was foolish. I’m glad I didn’t allow their fears and worries to dissuade me!
10. Start A Small Business
Small business has generated more wealth than investing in the stock market or real estate.
When you have self-discipline and a product or service you can sell, starting your own business can be both profitable and fulfilling. Before you start, consider the following:
Determine what skills and expertise you possess that you can use in your business. You don’t need a unique idea or invention to start a small business.
Begin exploring your idea by first developing a written business plan. Such a plan should detail your product or service, how you’re going to market it, your potential customers and competitors, and the economics of the business, including the start-up costs.
Of all the small-business investment options, starting your own business involves the most work. Although you can do this work on a part-time basis in the beginning, most people end up running their business full time — it’s your new job.
In most people’s eyes, starting a new business is the riskiest of all small-business investment options. But if you’re going into a business that uses your skills and expertise, the risk isn’t nearly as great as you may think. Many businesses can be started with little cash by leveraging your existing skills and expertise. You can build a valuable company and job if you have the time to devote to it.
11. Plan Your Investment Plan
Everyone should have some money in stable, safe investment vehicles, including money that you’ve earmarked for your near-term expenses, both expected and unexpected. Likewise, if you’re saving money for a home purchase within the next few years, you certainly don’t want to risk that money on the roller coaster of the stock market.
The three best ways to build long-term wealth are to invest in ownership investments: stocks, real estate, and small business. I’ve found this to be true from my own personal experiences and from observing many clients and other investors over the decades.
Investing in the stock market involves occasional setbacks and difficult moments (just like raising children or going mountain climbing), but the overall journey is almost certainly worth the effort. Over the past two centuries, the U.S. stock market has produced an annual average rate of return of about 9 to 10 percent.
However, the market, as measured by the Dow Jones Industrial Average, fell more than 20 percent during 16 different periods in the 20th century. On average, these periods of decline lasted less than two years. So if you can withstand a temporary setback over a few years, the stock market is a proven place to invest for long-term growth.
You can invest in stocks by making your own selection of individual stocks or by letting mutual (or exchange-traded) funds do it for you.
12. Understand The World’s Number-One Universal Language: Business
I think everyone can benefit from gaining a background about business. It’s the universal language of the workplace. Even if you want to work for a nonprofit, you should understand concepts such as revenues, customer acquisition and service, marketing, expenses, financial statements, and so on.
If you’ve already completed your college degree or are attending a college that doesn’t offer business courses, don’t despair.
You can take some free or very-low-cost online business courses from leading colleges and universities. You can do this through Coursera (which offers online courses from top universities like Northwestern, Stanford, the University of Pennsylvania’s Wharton School, and Yale), EdX, MIT’s OpenCourseWare, and Udacity.