Achieving financial freedom means taking ownership of your finances, so that you feel empowered to make the best decisions for your money and your life. Ultimately, financial freedom is all about living with less stress and more choice. While financial freedom isn’t necessarily hard to achieve, like anything worth having, it can take some work.
That's why we have put together five key steps you can take toward financial freedom. Plus, make sure you check out GreenPath – a free resource for HUECU members – for more financial wellness tips.
Step 1: Know Your Money Personality
Have you ever noticed that your attitude toward money might be different from friends and family? Understanding your money personality will help you to better grasp what natural advantages and challenges you’re starting out with, so you can make smarter choices in the future. There are eight basic personalities:
The Hoarder likes to save, budget, and prioritize
The Spender likes to spend
The Planner is detail-oriented and takes things one step at a time
The Dreamer has big plans…but may have trouble realizing them
The Merger is focused on pulling together money as a couple
The Separatist prefers to keep at least some money of their own
The risk-taker loves adventurous investing
The risk-avoider prefers a sure thing
To figure out your money personality, consider moments in your life when you’ve felt particularly positive or negative about your finances. Where have your spending and saving habits led to fruitful results, and where have things gone awry?
Step 2: Set Goals
Financial freedom is the result of meeting your goals – but first, you need to set them! Make sure your goals are specific, measurable, and realistic. Don’t commit to becoming a millionaire next year if you’re still paying off your student loans. Instead, look at reasonable goals for the short-term, which you can achieve in a year or two; the mid-term, which will take two to five years; and the long-term, which you expect to take five years or more.
For each goal, list out how much money you’ll need and divide it by the total number of months until you’d like to reach it. Then, you can orient your monthly spending and saving to ensure you’re slowly but surely chipping away at your key financial goals.
Step 3: Make a Spending and Saving Plan
It’s more or less impossible to achieve financial freedom without a budget! This is where you track your income, expenses and debt, so that you can meet day-to-day necessities while also saving for future goals.
Financial experts recommend that housing costs (i.e. rent or mortgage) comprise 25-35% of monthly income, with food accounting for around 20% and debt making up 10-20%. Around 7-10% should ideally be put aside for savings.
How does your monthly budget stack up to those recommendations? Many people underestimate their expenses, which could be impacting how much you save every month. Closely track the money coming in and out of your accounts and commit to setting aside a certain amount for savings – before it can go into discretionary spending.
Beyond simply meeting your short, medium, and long-term goals, you’ll also want an emergency savings fund to ensure you’re protected. Using some savings to purchase insurance can also be a smart option so that if a catastrophic event occurs, you’re less financially liable.
Step 4: Use Credit Wisely
Credit – such as a credit card, school loan or home mortgage – can add flexibility to your financial planning and provide a lifeline in an emergency, but on the other hand, credit can also cause serious financial problems when used carelessly.
Debt is, for many people, the biggest barrier to financial freedom, so always use credit wisely. Uncertain how your credit stacks up? Check your credit report and credit score to understand what debt you hold and if you need to take action to boost a low credit score, which can impact your interest rate on future loans. Credit counselors can help you to better manage your debt and credit; and you can speak with your financial institution about consolidating debt through a second mortgage or line of credit.
Step 5: Invest for the future
Financial freedom isn’t just about having enough money today – it’s about knowing that you’re covered in the future. Once you’ve got an emergency savings fund and you’re making progress towards short and medium-term goals, it might be time to think about diversifying your savings through other types of investments.
What investments are right for you? It all depends on your priorities, risk tolerance, and what stage of life you’re in. if you’re a young investor with a steady job, you can consider higher risk investments, such as stock funds, that offer higher potential returns in the long-run. If you’re at a more conservative stage in life, close to retirement for example, then lower-risk options like US treasuries or money market funds may be what you’re looking for. Either way, always consider how to make the most of the available tax advantages on investment and retirement accounts.
There are many, many aspects to consider when it comes to financial freedom, but the key is – keep learning! Financial education is a lifelong pursuit, and the more you know, the closer you’ll get to smart money management. So make a plan, take some notes, and never stop studying!
Did you enjoy this post? Then, check out our recent tips on coming up with a debt repayment strategy.