In the U.S., we’ve just celebrated our nation’s birthday. Independence Day is associated with barbeques, fireworks, relaxing at the beach, and, of course, freedom. In a nation that touts a free-market economy and values personal autonomy, freedom is a core principle. In many ways, personal freedom is attainable for any U.S. citizen, but what about financial freedom?

Financial freedom is a different story. This isn’t a right—most of us are not born into financial freedom—but it is something everyone can eventually achieve through conscientious planning.

What is financial freedom?

This term has a different meaning for different people. For many, it means having the financial means to afford a specific lifestyle and be able to pay any bills or emergency expenses without issue. You’re in control of your finances, and you have a reliable cashflow that you can tap into when needed.

There isn’t a single “target goal” for attaining financial freedom. This figure will look different for everyone. For example, if you live in an expensive city, have several dependents, and have high medical bills, you’ll need to save more than a healthy, single person who lives in an inexpensive city.

How can you attain financial freedom?

Most journeys to financial freedom are not haphazard. It generally takes an intentional plan and dedication to get there. To get started, try these 5 basic steps:

  1. Understanding Your Spending

You can’t develop a logical savings strategy unless you have a good handle on how you spend your money. Start tracking your dollars and map out how much you spend on different categories each month. How much of your income goes toward bills? How about groceries? What about items that are typically nonessential, such as clothing, electronics, and restaurant meals?

Create a spreadsheet or use a money tracking/budgeting app such as Mint or Goodbudget. Once you’ve collected several months of data, you can begin to gain a picture of your typical spending. Some items, of course, are fairly fixed, such as your monthly rent/mortgage, but other items are more fluid. If your utility bills are high, for instance, you could choose to install energy efficient lights, timers, or efficient appliances. If your restaurant bills are high, you might choose to dine at home more often or, perhaps, skip that $12 glass of wine.

  1. Set Goals

After you’ve familiarized yourself with your monthly spending, you’ll have a better idea of how much you’ll need every month to maintain your current lifestyle. You can then calculate how much you’ll need to save in order to practice this lifestyle for a certain number of years. That figure might seem daunting, so it’s a good idea to set some short-term goals as well. One goal might be paying off your debt by a certain date; another goal might be reaching a specific net worth by a certain date.

  1. Tackle Debt

One thing that stops financial freedom in its tracks is debt. Many of us have some form of debt, whether a home mortgage, a car loan, college tuition debt, or credit card debt. There are two main methods for tackling debt: the snowball method and the avalanche method. The snowball method involves paying off your smallest debt first. The avalanche method involves paying off the debt with the highest interest rate. If you have one credit card with $1,000 of debt and a 12% interest rate, and another credit card with $4,000 of debt and an 18% interest rate, you would pay off the $1,000 one first with the snowball method and the $4,000 one first with the avalanche method. Even though it might make financial sense to make payments toward the high-interest credit card first, the psychological victory of completely paying off one credit card might cause you to tackle that debt first. Both methods have merit.

You might also try advanced ways of easing debt, such as credit card balance transfers or refinancing your home mortgage. I highly recommend consulting a financial advisor before getting started.

  1. Trim Spending

Those who are serious about financial freedom understand the importance of living frugally. Billionaire Warren Buffett, for example, has lived in the same modest house since 1958. After you’ve mapped out your monthly spending, look for ways to cut costs and live below your means. Becoming conscious of how you spend your money is half the battle. The other half involves making conscientious spending decisions.

  1. Invest!

As a financial advisor, this tip is absolutely foundational. If you want to build wealth, it’s important to make smart investment decisions. It’s not enough to throw your money at the stock market and hope everything works out. You need to have a sufficiently diversified plan that reflects you and your financial goals AND you need to revisit that plan regularly and update it when your life circumstances (or the market or economy) change. Work with a financial advisor to create an investment portfolio that works for you.

 

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