What is financial freedom?
Ask a room of people to define financial freedom, and you’re likely to get a dozen different answers. “Money means a million different things to a million different people,” says Matt Higa, a financial representative with Northwestern Mutual who lives in the San Francisco area but serves clients nationwide.
For some, financial freedom means being able to pay the bills with money left over each month or having a fully funded emergency account. Others may want to early retire and travel extensively. Regardless of how you define financial freedom, the following 5 steps will help you achieve your vision for the future.
No.1 Commit to living within your means.
The path to financial freedom begins with a step many people overlook. “First, it starts with mindset,” says Nev Harris, a financial expert who works with agency owners, small business owners and freelancers. “Now that’s normally not something people want to hear, but it’s an absolutely critical foundational piece to achieving financial freedom.”
People need to analyze their beliefs about money and examine their relationship with it. Rather than assuming wealth is something attainable only by those with high incomes, recognize that even middle class families can move from living playcheck to to a financially comfortable lifestyle so long as they spend less than they earn.
No.2 Consider using a financial advisor.
Not everyone needs a financial advisor. For instance, if you’re just starting out in life and don’t have any savings or investments, an advisor may be limited in the type of assistance they can provide. However, for everyone else, an advisor can help you make smart money decisions that will advance your financial goals.
“There’s a reason professionals exist,” says Andrew Rosen, partner and lifelong advisor at Diversified Lifelong Advisors in Wilmington, Delaware. They have both experience and expertise that other individuals may not. What’s more, they aren’t emotionally invested in your money, which means their advice should be neutral and objective.
No.3 Set up a deposit schedule.
Once you have your accounts set up, you need to create a system for ensuring they are fully funded. “A dollar can only be split so many ways,” Rosen says, but that doesn’t mean families should neglect one type of savings – such as retirement or emergency – over another.
Many employers will direct deposit paychecks into multiple accounts, so you can divert a portion of your income to checking, regular savings and your emergency fund. You can also through a payroll deduction. For other savings goals, you may be able to set up automatic, regular transfers from your bank account to other financial accounts. Finance experts often recommend saving 10% of your income for emergencies or other goals and another 10% for retirement.
No.4 Track your spending.
If you’re currently living paycheck to paycheck, setting aside 20% of your money for emergency and retirment service can seem daunting. However, “the name of the game in wealth management is how much are you able to keep and hold onto,” Higa says.
While putting 20% of your income in savings is ideal, you may have to start with a smaller amount. To find out exactly how much you can save, you first need to understand how much you spend. Take a month to track where your money goes, from major bills to the couple bucks spent on coffee in the morning.
No.5 Trim your budget.
Now that you know how you’re spending your money, it’s time to trim wherever possible. That doesn’t necessarily just mean cutting your morning latte or gym membership. Instead, people should think beyond the small expenses and consider making major changes in their lifestyle to make a major change in their financial situation.
Selling your house or buying a cheap, used car may seem like a significant sacrifice. However, it can be worthwhile if it helps achieve your ultimate goal of lifelong financial independence.