Financial freedom can be a difficult term to define, but at a very basic level it simply means controlling your own finances entirely.
In order to gain financial freedom, you not only have to be free of debt, but also be able to provide for yourself and prepare for your future. However, achieving those goals is often easier said than done — particularly in times of economic hardship such as those that much of the world is currently experiencing.
With that in mind, here are six steps that can help you on your way to financial freedom:
1. Keep Thorough Records
If you are living on your own and trying to achieve financial freedom, it can be tempting to rely on automated credit card statements and receipts to track your finances. Keeping track of these things is better than ignoring your records altogether, but it is an even better idea to meticulously track your income and expenses. If at the end of each day or week you record everything you spent and everything you made, you will generally have a far clearer understanding of your own finances.
2. Focus On Relieving Your Debt
If you have significant debt, it is very important to get rid of it as you seek to achieve financial freedom. The best way to do this is to develop a fund used to pay debts every month, and stick to that fund until all of your debts are paid. This is effective, particularly if after paying off one debt, you keep the fund at the same level – allowing you to pay off the others relatively quickly. You should also look to eliminate debts with high interest first.
3. Start A Fund For Emergencies
Even if it’s something relatively small, such as $50 or $100 per month, it is vital to set aside funds for emergencies. You never know when something completely outside of your control will force you to spend money, and having an emergency fund can help to lessen the financial burden.
4. Create A Budget
Once you have set up funds for paying debt and managing emergencies, and you have begun to track your expenses, write up a thorough budget. This will help you when you need to judge whether or not you can spend money on a certain thing. Knowing what you can responsibly spend helps you to achieve financial freedom.
5. Earn Extra Income
Earning extra income is never automatic. However, by looking into investment opportunities, you may be able to generate some additional income. Consider learning stock market strategies, or investing in gold, or even real estate. A successful investment can lead to a great deal more financial security.
6. Plan For Retirement
Finally, it is also important to plan for your retirement. Most retirement plans operate with compounding interest, which means that the earlier you start contributing funds to your plan, the more those funds will grow over time. This can keep your financial freedom effective later in your life, which is an invaluable luxury.
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This is a very useful and supportive piece however I cannot help but think that, it is all to easily said than done. despite the end of recession; banking lending is still restricted and until the situation not only for those struggling but savers improves, it will remain difficult for many. What’s more is that, costs are rising faster than wages which is why business lending is crucial to ensure success. Once small medium and large businesses are comfortable enough to increase salaries then everything should very much fall into place.
I like all your tips except the budget tip. I have found that with a budget there is still so much room for human error that its not practical. My preference is on automation of savings/debt repayment and then living frugally.
But I am a big fan of #5, having some side income is a great way to meet unexpected costs.
Thanks for sharing!
As a matter of opinion, I prefer the debt snowball method to paying off debt rather than paying on high interest debt first. It’s more about the psychology and getting into your head than it is about the actual math.
OK, retirement is important. But…
Isn’t what makes you ‘financially independent’ money making enough money so you don’t have to sell your labour any longer? If this is the case, having an emergency fund, budgeting and keeping records are secondary means. These allow one to accumulate a sum that can be invested. So where is investment?
Saving and investing your money to generate passive income is the key to financial freedom. Ideally, you have millions in the bank, safely producing 2% interest that you can live off. Since it is real life, you probably should look into real estate, stocks… to produce a higher passive income, obviously at a higher risk, there is no free lunch.
I agree with Pauline. Investing is the key. However, please AVOID investing in Credit debts.
And in particular, avoid debt as much as you can! The banks are the ones that create this ‘crisis’ by lending much more than what they possibly can to people that cannot pay back and they do it for a reason.
The little banks sell those debts to a bigger bank so they get the interest and capital back right away and they have money to keep lending.
When the person pays back, they get the interest first (it is always the interest first) and then part of the capital. Then, the banks raise the interest rate to make sure the people they know that cannot afford to pay won’t be able to do it.
Nest step is to combine all kinds of credit debt that can be credit cards, student loans, car loans, personal loans, corporate loans, etcetera, and they change the names to CDOs (Collateralised Debt Obligations) or any other similar denomination. The way they ‘balance’ this CDOs is by mixing very safe investments with very dodgy investments, to be said, if the bank knows that client A is very likely to pay because of the stability and level of income then it is a low risk client, and if they know for sure that person B cannot and will not pay then it is a high risk client (they give that person the credit and often more than they can pay back). They combine several of such clients debts and in average it is a mid level risk option… So they make it look OK and the rating agencies say the risk is moderate.
The banks then sell those CDOs to investors (common people like us that want to make extra money) and by doing so, the banks are getting the interest and capital back, reducing their risk and perpetuating the cycle again.
And worse of all, once the borrowers cannot pay, the bank does not really care because they have gotten the capital and interest back already, the one that loses is the investor (that means us) but also the borrower because they lose the house, car, assets or whatever guarantee they gave when requesting the loan.
So, the banks take the houses, the cars, the money, the profits. The infamous foreclosure.
And not happy with that, they also cry poor! And then the government comes in and gives them the BAILOUT fund… what a joke. So they give them more of our money to keep ripping us off.
So, this is the current situation in a nutshell.
As I said, avoid investing in credit debt!
Great tips! It is important to keep thorough records to be able to get a better understanding of your finances. Creating a budget is also important if you are starting out or if you need it, doing this would help you spend within your means. Personally, I also find having a side-job great as it is where I usually have the most fun and earn a little money while having fun aka blogging 🙂
These are great tips.
My strong point is #5. I have always found ways to earn extra income. I think people undervalue skills that they. They also can take a hobby and passion and turn it into a passive income blogging about it.
#6 Is a week point for me. Its hard for me to put away money it always seems like when I’m just getting ahead. Something comes up. A doctor bill, car problems etc. Story of my life.
Great post! Feeling very inspired! Last year was my get out of debt year. Mission accomplished, but now I have no debt, steady income and quite a bit of disposable income. I’m 24, just about to move out of home and I know I want to save, but I don’t have any direction. Your blog is helpful mostly, but when it comes to investment/super, I am in Australia. Do you have any suggestions for books or blogs for someone in Australia? As all the talk of 401k and IRA means little to me, as we have compulsory superannuation, and government co-contribution schemes and such.
Thank, Charles. Unfortunately, I do not give investment advice to anyone — even folks here in the US.
I like that you try to provide people with basic financial living advice, and not a get rich quick scheme. Usually, it is the tortoise that wins the race. The tortoise sure is ugly but it’s your faithful friend.