Attaining financial freedom seems to be a pipe dream for many people right now. Not only do they have to spend for the daily expenses like food and gas, they also have to pay off the credit card debts they have accumulated throughout the years. Living from paycheck-to-paycheck or worse, resorting to payday loans in order to fill the gap for the next payday has become a cycle that is so difficult to break. It can be very difficult to achieve financial freedom with this kind of lifestyle.
But here’s the good news: You can do something about it. You don’t have to remain financially strapped forever. You can become financially free. It is possible but it’s going to require hard work and discipline on your part. If you are ready to make some sacrifices now for a better future, you are going to be much better off down the road.
In order to help you out in your journey, we’ve outlined the path that you can take towards financial freedom. Keep these in mind as you strive to take control of your money and your life:
1. Determine what it is that you intend to accomplish.
Where do you see yourself financially, both in the near and the far future? Unless you have a clear idea of what you want to do, it would be difficult for you to work towards a goal. If you want to be truly financially free, you should know what you want to happen first of all.
2. Understand where you are at present.
In order for you to realize how close or how far you are from achieving your goal, you need to know where you are at the moment. This means knowing your net worth or the total of your assets minus your liabilities. Your assets are the things you can convert to cash while your liabilities include your debts and loans. You have to know what your net worth is so that you will know which areas you need to work on so you can achieve true financial freedom.
When determining your assets, see to it that you include everything you own—the cash you have in the bank, your investments and any cash value insurance policies you may have. Include any pieces of jewelry, art work and other vehicles you own that are already paid for. When totaling your debts, make sure that you have all your statements and loan documents so that you are able to get a total of your liabilities.
3. Monitor how you spend your money.
You can’t plan your finances carefully unless you know how you spend it. One way to know where your funds are going is to carry a mini-notebook with you and write down each item you spend and how much. You may also do this by recording your purchases in your mobile device. There are even online programs that enable you to record your purchases by simply scanning a bar code and saving it in an online account.
4. Develop a budget.
After you have tracked your spending for a month or two, you can start crafting a budget. Using the data you have collected, map out a spending plan. Some people fail to budget because they think it’s too tedious or they believe it’s not necessary. Unfortunately, this is precisely the reason why they fail to build wealth in the first place. Budgeting is essential for wealth-building because it puts you in control of your money. It is what separates millionaires from the rest of those who are just chugging along, trying to make ends meet.
You can follow an itemized budget by writing down the category, the items under each and the amounts you have allocated for each one. If you find this too taxing, you can follow a simpler method by using percentages. For instance, the balanced money formula of Elizabeth Warren suggests that 50 percent goes to needs, 20 percent to savings and the rest to wants.
5. Make adjustments to your spending.
Once you have tracked your spending, determine whether you are spending more than what you are making. If you are, it’s time to make adjustments. If you really want to pay off that mortgage in ten years, for example, you may want to reduce the number of times you eat out. It’s important that you know the kind of adjustments you need to make because if you maintain the status quo, you should realize that you are not going to meet your desired goal. No one can stop you if you continue with your old ways but you should also realize that not making any changes to your spending habits is going to be detrimental to your financial future.
6. Save up for an emergency fund.
What often derails many people from achieving wealth is that they haven’t prepared for those little emergencies that suddenly crop up—the car transmission fails, the toilet leaks or the laptop suddenly crashes and won’t start. All these unexpected events will necessitate funds. If you don’t have an emergency fund in place, chances are you’ll get the money you need to be able to deal with the problem from the other areas in your budget or even charge it to your credit card. These will set back your savings and your financial wealth-building plan.
The best way to prepare for these events is to set up a rainy day fund. Three to six months worth of your living expenses is what experts recommend. However, it’s best to save more, especially if you’re the only one working or have an unstable job.
7. Pay off debt completely and steer clear of it.
Whenever you are in debt, you are putting yourself at a disadvantage. This is because you are paying interest on the money you have borrowed. Plus, there’s that opportunity cost as well. Instead of saving the amount or investing it and earning interest from it, you have used your money to pay off your loans instead.
Thus, you need to pay off your credit card debts and other loans completely as fast as you can. Once you have paid off your debts, strive to stay away from it forever. If you must use your credit card, you should make it a point to pay off the balance completely when the bill comes.
8. Save for retirement—no matter how young you are.
You might think that you are too young to start saving for retirement but nothing could be farther from the truth. Even if this is just your entry-level job, you should sign up for your employer’s 401k plan. The savings are automatic because your contributions are deducted straight from your paycheck. See if you qualify for other retirement plans such as a Roth IRA so that you can add to the savings you have allocated for retirement.
9. Diversify your investments.
Savings alone won’t be enough to build wealth and fund your retirement. Because of the low interest rates in savings accounts, it won’t keep up with inflation. Investments in stocks, bonds and mutual funds are better in the sense that they provide returns that have exceeded the rate of inflation through the years. However, they also exhibit various degrees of risks. Stocks are the riskiest investment vehicles but they offer the highest returns while bonds are safer but have lower rates of returns. If you have limited amounts to invest, mutual funds provide you with a diversified portfolio even with the limited funds you have.
10. Look for ways to increase your cash flow.
Be imaginative and creative. Perhaps you can get a part-time job in the weekends or after your regular work is done. If you are good at crafts, perhaps you can consider making some stuff during your free time and selling your products online or at bazaars. Maybe you can start a consultancy business. The whole idea behind all these efforts is to find a way to increase your cash flow. If you only depend on your salary, you can still achieve your goals of financial freedom but when you bring in more income, there’s a chance that you could accomplish them faster.
There are a lot of areas where you can place your extra money. You can use your earnings to help pay down your credit card debts, put it inside your savings account or add it to the amount you pay for your mortgage.
Only you can chart your own path towards financial freedom. No one else can do it for you. If you are used to living without a plan, the first few attempts are going to be a little bit difficult. But as you see your hard work pay off as you put your plan in practice, you are going to be encouraged to keep up with it. Don’t be disheartened if you fail in your first few attempts. For as long as you continue to stand up after each fall, you will still be able to achieve success.
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