At the turn of every new year, most people resolve to improve their finances. However, like most resolutions, this goes unfulfilled. It’s no wonder that, according to a 2022 survey, more than 30 percent of adults in the U.S. depend on their parents for some form of financial support.
Like almost everyone, you want to achieve financial freedom. You want to be able to take care of your bills, travel the world, and pursue other passions without worrying about money.
What are you doing to become financially free? Although true financial freedom can be an elusive dream, achieving it isn’t an impossible mission. With the right strategies, dedication, and hard work, you can do it.
Read on as we explore some of the proven methods for reaching financial success.
- Understand What Financial Freedom Is
Financial freedom can mean different things to different people. For some, being debt-free can be such a big achievement that they consider themselves financially free. For others, being in a state where they don’t live paycheck to paycheck can make them feel they’re financially free.
While both groups of people have made admirable financial strides, they’re yet to achieve financial freedom. That’s because there’s a lot more that needs to happen for one to be considered truly financially free.
In a nutshell, financial freedom means having enough money in savings, income-producing investments, and liquid funds to live the life you desire. You can afford to quit your job for a while, or even completely, and your financial life will not be affected.
Having a good understanding of the meaning of financial freedom is the first step to pursuing it. You’ll know exactly what you’re after, and it’ll be easier to measure your progress or even know when you’ve achieved it.
- Live On a Budget
A whopping 65 percent of American adults have no clue how much they spent last month – if findings by a recent Intuit MintLife survey are anything to go by. Are you one of these people?
If you’re, you’re making it more difficult to attain financial freedom. A budget is a critical financial tool for anyone who wants to have better control over their money. Without it, you won’t have a clear picture of where your money is going.
It’s time to start living on a budget. Write down all your essential and non-essential expenses to know how much you’re spending every month. Compare it with your net income. How much is left?
The goal of having a budget is to keep your expenses below your income. A rule of thumb is to stick to the 50/30/20 formula. This means no more than 80 percent of your income should go to expenses (50 essential and 30 non-essential). 20 percent goes to savings, but you should aim to save more.
If more than 80 percent of your money is going to expenses, take measures to cut back on your spending. Start with the essential expenses. For example, if you’re renting, explore the possibility of moving into a cheaper house or living with a roommate so that you can split the bills.
Non-essential items should be the easiest to cut since they’re not key to your survival. If you’re going on long road trips every weekend, for instance, try reducing them to two or just one. This way, you’ll free up a lot of your income.
Follow your budget religiously, and you’ll see a significant change in your finances.
- Save Like Your Life Depends on It
Many Americans have a savings account, but about 42 percent of these people only have $1,000 saved up.
Saving money is an important part of your pursuit of financial freedom for a couple of reasons.
One, financial emergencies won’t catch you unawares. If you’re faced with an emergency room bill and you don’t have adequate health insurance, for example, you will dig into your savings account and settle it. Without any cash at hand, you might be forced to take out expensive personal loans, which can hurt your financial wellness in the long term.
Two, saving money helps you accumulate capital. Later on, you can use it to make investments. Investing will help you build wealth and move closer to your ultimate dream, financial freedom.
In theory, saving money sounds easy. After all, what is so hard about putting some money away every month?
Unfortunately, as soon as the paycheck lands in the bank account, most forget that they needed to save or don’t prioritize it. Soon the paycheck runs out and money has been saved
You can solve this problem by automating your savings. Figure out the amount of money you want to save from your income and set up an automatic transfer to your savings account as soon as the money comes in.
- Make the Most of Insurance
Financial freedom isn’t the first thing that comes to mind when you’re thinking of buying any form of insurance. This is why most people don’t prioritize buying insurance unless they’re legally obligated to do so, as is the case with auto insurance.
However, insurance is a useful financial tool that can make your financial life easier. The key is knowing how to make the most of the insurance products that are available to you.
For starters, you need adequate health insurance. Falling ill is part of life, and healthcare in the U.S. is expensive. When you have good medical insurance, you won’t need to spend your own money on your medical bills.
If you own a property, buy the right type of property insurance for it. If your house suffers fire or water damage, for example, insurance will ensure you don’t suffer significant financial loss. Such losses can cripple you financially and make financial freedom a distant freedom.
Life insurance is another type of insurance policy that’s a must-have. Although it’s designed to help your dependents after you’re gone, life insurance can introduce flexibility to your finances when you’re still alive.
Look at it this way:
When you have life insurance, you won’t worry about saving money specifically for your dependents. You’ll have greater freedom to take risks with your money today (such as investing) since you already know life insurance has your dependents covered should you pass on unexpectedly.
Plus, permanent life insurance has a cash value component. This serves as a savings account, which means you’ll also be saving money you can use later on for things like retirement.
- Minimize Your Debt
Fewer things feel as great as being debt-free.
Unfortunately, to be an American means to be in debt – at least for most people. In fact, the average American holds about $97,000 worth of debt as of 2022. What’s more, the amount of individual and household debt keeps growing year after year.
It’s understandable that sometimes you might have no choice but to take out a loan. Student debt, for example, is unavoidable for most people who want to get a college education.
However, the harsh reality is debt is like cancer. It’s vicious, difficult to beat, and can make financial independence unattainable, let alone financial freedom. Here’s a sobering stat: 75 percent of Americans die with outstanding debt.
As such, strive to minimize your debt. If you have student debt, prioritize paying it off as quickly as possible. Live a frugal life if you have to so that you can free up more of your income and use it to pay off your debt.
Resist the urge to take out personal loans for non-essential things like vacations and weddings. Or to buy fancy household furniture.
Loans must be repaid with interest. And if you default, your credit will take a beating.
- Maintain Good Credit
For many of us, it’s inevitable that we will take out loans from time to time. You’ll most likely get a mortgage when you want to buy a house.
Your credit will make a big difference when that time comes. The primary aim when taking out a loan is to pay as little interest as possible; otherwise, a high-interest rate will take more money from you. You need at least a good credit score for that to happen.
Maintaining good credit calls for financial discipline. Pay all your credit card balances, loans, and other bills on time. A positive credit payment history accounts for around 30 percent of your credit score.
Also, keep your credit utilization rate as low as possible. This is the amount of debt you use compared to the total amount of credit at your disposal.
If your bank has extended a $10,000 credit line to you, for example, don’t go consuming all of it even if you’re able to pay it off. It shows you’re likely under financial pressure, and that will hurt your credit score. Ideally, you don’t want to use more than $5,000.
Good credit also makes other aspects of your life easier. Some landlords conduct credit checks on tenants and can reject your application if you have bad credit. As a result, you might need to spend more on housing (like paying an extra month upfront) to entice landlords into accepting your application.
- Increase Your Income
Financial freedom is all about having a lot more money than you can spend on your needs and wants. It all comes down this: how do you get that money?
There are three sources of income: employment, investment, and inheritance. You may hit a jackpot if gambling is your kind of thing, but what’s the likelihood of that happening?
Some people have inherited life-changing wealth, but unless you’re from a wealthy family, inheritance isn’t going to bail you out. And even if you were, you’re not going to sit around waiting for your share of the inheritance.
For most people, employment and investment income are the answer to financial freedom. But even with employment, most people only earn enough to pay their bills. It’s why millions of Americans now have multiple jobs to try and increase their income.
Let’s focus on two of the most practical ways to grow your income:
Owning a business
Starting a business is a brilliant idea that can bring you great riches. Some of America’s wealthiest people are entrepreneurs.
Still, you need to have a viable idea, adequate capital, and the competence to run a successful business. Keep in mind that small businesses have a high failure rate.
Investing is the most realistic way to build wealth and achieve financial freedom. There are several investment markets in the U.S., including the stock market, real estate, and bonds and bills.
Raising investing capital is the biggest challenge, but if you’re a good saver, after a few years you’ll have a decent amount of money to start investing. When you’re ready, hire an investment adviser to help you develop an investment strategy that works for your finances.
Try to avoid high-risk markets that promise high returns, especially if you’re an inexperienced investor. Cryptocurrency is alluring, but you can easily lose your life’s savings in a matter of hours. That being said, there are a few investors who have made millions in crypto.
Financial Freedom Is Within Your Reach
In a perfect world, none of us would need to worry about money. But this world is anything but perfect, and most of us have to chase financial freedom.
It’s not an easy journey, but you can reach your destination. Developing financial discipline, being a habitual saver, and making smart investments will lead you to the promised land.
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