Do you find yourself constantly stuck in the cycle of debt, with bills to pay as well? Are you sick of having to pay high interest for your fun? Are you tired of the stress involved with living paycheck to paycheck and worrying about what money problems will come next? Are you completely unprepared for any medical crisis or job loss?
If you answered yes to any of those questions, you are not financially free. You are bound to your job, bound to your expenses and bound to your debt. Even though you may feel like you’re close to the elusive American dream, you are far from living in a dream world. You are constantly faced with the reality of your situation. If other people depend on you for support, such as a partner or child, you are affected even more by this discomfort.
Following the steps to financial freedom can help you get to a place where the everyday stress over cash is gone. You aren’t scared of potential disasters, because you’re prepared to face them in a financial sense. You sleep better at night because you know you have security you’ve never experienced before. But the steps to financial freedom can be difficult and many fall by the wayside before they finish the journey.
What are the Steps to Financial Freedom?
The steps to financial freedom seem quite simple at the outset, but it’s actually a very time-consuming process that requires a significant level of commitment. Here are the steps: you decide for yourself.
- Create a Budget and Track Your Money
Make a list of all your income and expenses. If you’re living outside your means, it will soon become very apparent: you will not have enough monthly income to cover all of your bills. Make sure you include reasonable spending limits for gas and groceries. Budgeting is all about tracking your money and knowing where it goes. If a large percentage is going towards consumer products and your savings account is empty, a budget will put a magnifying glass on this issue and make you face your spending habits and change them, week by week.
- Pay Off Your Debt
Next, it’s time to look at all of your debt. How much do you owe on credit cards? How large are your car payments? Do you have any student loans? To be financially free, you have to separate yourself from debtors. What is the point of earning a bunch of cash if it’s already promised to somebody else? Your goal should be to keep more of your money, and you have to start by paying it off.
Some experts suggest paying off the smallest loan balance first, then working your way up towards the higher balance debt. However, other experts disagree, saying it makes more sense to look at interest rates rather than balances, since interest dictates how much you will spend on the debt over the long-term.
Whichever method you decide to go with, debt payoff is a major priority in the financial steps to freedom system. Maybe you thought you became financially independent when you moved out of your parents’ home, but now it’s time to find freedom from debt and find true independence.
- Build an Emergency Fund
Making sure you have enough money saved in an emergency fund for sudden expenses is a vital part of becoming financially free. Most experts agree that you should calculate how much it costs for you to live in one month, including all basic expenses. Multiply this figure by 6. This is how much you should have saved in an emergency fund. That way, you will have all your bills covered if you lose your job or face a medical crisis.
This total could take you awhile to save, especially if you have lots of bills each month. It’s best to start by accruing at least $1,000 in an account as a starting point. That way you won’t get further into debt while you’re working on paying off debt and finishing accumulating your savings.
- Invest in Your Own Retirement
Every penny you earn now has the potential to work to your advantage years from now. If you start investing at a young age, compounding interest can multiply your money many times over. Most financial advisors suggest working towards saving 15 percent of your total income towards your retirement. Gone are the days when American adults can depend on Social Security as their main source of income when they decide to stop working permanently. Rising cost of living and cost of healthcare make that impossible.
If you want to have a comfortable end of life stage, you need to start putting money away as soon as possible, in a 401(k), Roth IRA or stock portfolio. It’s worth it to investigate if your company offers a monetary match program for contributing to your 401(k). If you aren’t taking advantage of this, you are neglecting free money. Become financially free by eliminating all worries about your future in retirement.
- Keep Furthering Your Personal Finance Knowledge
The best weapon you can have to fight against financial stress is knowledge. You might not have studied finance in school, but learning basic principles of investing, the power of compounding interest and how debt drags you down should be the focus of every adult serious about their future financial outlook.
You can start by reading blogs on personal finance matters. Take books on finance out of the library and consider paying a financial advisor to help educate you on matters involving your personal finances. Knowledge can help you understand how you can rise above the common troubles facing many people when it comes to managing their money.
What Excuses Stop People from Reaching Their Full Potential?
Sometimes, it’s easy to get excited about following the steps to financial freedom, but not as easy to stay excited for long periods of time. This could be because of any number of reasons, but the following five excuses are some of the top reasons potential savers stay careless spenders and continue to be bound by debt and money worries.
- I’m Not an Organized Person
When it comes time to construct a budget, you might gather all of the data on your bills and income and make one solid weekly plan for how to manage your money. But the process of keeping up with your records every day, week and month may begin to wear on you. You are already busy with your job and other commitments – who has time to keep up with a budget?
You make excuses for this lack of focus and blame it on disorganization. You tell yourself that your life is too hectic, there is no way you could stay organized and keep on track with your budget. Even the least organized people can change if they set their mind to it. You can set reminders on your phone for weekly budget appointments. On some bank accounts, you can also set an alert if you go over your spending limits. If you are determined enough, you will research and find ways to improve your organization skills.
- I Can’t Get Rid of My Debt – I Blame the Economy
Do you keep sliding back into debt even after you commit to a payoff plan? Maybe you rationalize certain purchases or only have your credit card to depend on when major bills come up. No matter what you do, every time you pay off a balance, another springs up in its place.
The best way to solve this issue is obvious: stop charging debt. But on the other hand, you might want to take a different approach. Why not focus on increasing your income instead? Don’t blame the economy for your troubles. Consumers are always willing to pay for good products and services, so it might be time for you to find a part-time job on top of your full-time job. This will have many benefits. First, you will be adding money to your funds instead of constantly taking money away. Second, you will be extra busy, giving you less time to spend money in general. Sometimes rather than sitting still and watching your debt continue to grow, it’s better to make every spare moment work for you.
- I Can’t Control My Impulse Buying
Every time you try to build up your emergency fund, guess what happens? You find something you really want or really need – it doesn’t matter to you. The point is that you have the money in the bank, so why not buy it? Or, more often, “wants” present themselves as “needs” and you believe that’s what your emergency fund is for, to satisfy those fake “needs.” So off your emergency fund goes and you’re left looking at a zero savings account balance wondering what happened.
What you are doing is not taking care of “needs,” you’re just satisfying your urge to impulse buy. There are many ways to avoid this, but the first is understanding what an emergency fund is for. The definition of emergency is very strict. Emergencies are when a disaster befalls you and you are unable to pay your monthly basic living expenses. Your income completely deserts you. Emergency funds could also be for a major car repair (not a car upgrade) or problem with your home, such as a leaking roof, etc.
You must be required to pay something which you are not able to. That is what warrants an emergency, not your desire for something you don’t have. Try keeping about $1,000 in an emergency savings account that is connected to your checking for easy transfer, but then move the rest to another bank. Make sure you can transfer the money, but also make sure it will take a few business days to do so. That way you can be certain you won’t have a moment of weakness and drain your whole account. Control your impulse buying and you will have conquered one of the main excuses associated with not being able to follow the steps to financial freedom.
- Retirement is a Long Way Off
Why do I need to save for retirement? I’m only in my twenties (or thirties, or forties)! I have years to go until it’s time for me to stop working. I might as well enjoy my life now and worry about the future when it arrives.
This is not only a bad excuse, it’s bad math. Starting saving now could result in hundreds of thousands of extra dollars in your accounts in the future, catapulting you from a life of financial bondage into retirement into a life of freedom now and then.
For example, if you start putting just $100 per month into a Roth IRA at age 25, with a 7% average return, you will have over $250,000 when you reach age 65, even though you only put in about $48,000. If you start contributing $100 per month into a Roth IRA at age 45, with a 7% average return, you will have only a little over $50,000 and you will have contributed a total of $24,000. Since interest compounds and grows over time, starting to save now will change your entire financial outlook. Don’t buy into the lie that it will be easier to save when you’re older – you only get more responsibilities as you get older with the arrival of children and grandchildren. Start putting just $100 a month away now and you’ll be used to the sacrifice and the commitment.
- Financial Matters Don’t Interest Me
Here’s an easy way out: “I’m just not interested in finance. I’ll leave those issues to somebody else who’s better at math and figures than me.” This is a common excuse, but a dangerous one. No one else is as invested in your financial future than you. If you can’t somehow find an interest, maybe not in math in general, but in how those calculations will affect your life, your money will disappear faster than you can blink.
Try to make connections with others who are interested in finance. Talking with your peers about common goals can help inspire you to save and make strides towards becoming your own brand of financial expert. You don’t have to know everything, but you do have to know how certain decisions will impact your life, one way or the other.
Don’t let these five excuses stop you from succeeding when trying to follow the steps to financial freedom. You have the power in you to overcome your personal struggles and make change occur in your financial life and other areas as well.