06:45 AM, 02 Mar 2024 (AUS EST)   The market is currently closed       

8 Steps to Financial Freedom

Do you have the dream of financial freedom? If you look up the definition of the term ‘financial freedom’ you will not see a specific amount listed...and for good reason. The amount of wealth it takes to enable you to fulfill your passions, hobbies and goals is different for everyone. Just how do you achieve this goal of financial freedom? What are the strategies? Here are the 8 steps you can take:

Step 1: Clearly Define Your Goal

How much do you need and by when?

  • $100,000 in annual income by 65?
  • $5 million total by age 40?

The amount you need and by what time is not merely picked at random. You need to sit down and calculate what your expectations. If it means having your house paid off, being debt free and an income that replaces your current job in 30 years time – you begin to come up with a plan. A goal without a plan is just a dream.

Step 2: Track Your Expenditures

Now that you have your goal you need to get a clear picture of where money is being spent today. You may think you know ‘how and where’ the money goes, but all too often we look at our account at the end of the month as we scratch our heads wondering why there isn’t more left over.

Start by going over your transactions in your bank statement and any credit cards you may have including any bills. Keep your eye out for cash withdrawls that leave no paper trail. This first step may be the biggest eye-opener as to where you can save and cut expenses.

Step 3: Make a Budget

After step 2 you should likely have a good idea where the money is flowing and where you can cut back. Are you eating out too much and could save by being a little more conscious to pick up the necessary foodstuffs at the grocery time? Are those specialty coffee’s adding up? Downloading too many fun app’s on your tablet every month?

Instead of implementing a program of austerity, make sure you have enough money to still do those things you enjoy – just do them a little less. It is like dieting…too strict a diet will lead to cheating and binging.

In your budget you should have a savings account even before you pay down on debt. Why? Because you need an emergency fund to wean yourself off of using credit. When spending cash, you tend to think more carefully before buying. And you want to curb the habit of grabbing for plastic on an impulse. Have your ‘rainy day fund’ with at least $1,000 in it.

Step 4: Get a Better Rate

You may have had the best rate when you got your credit card 10 years ago, but is it still the best rate today? Make sure you have the most competitive rates by comparing the following bills:

  • Internet service provider (ISP)
  • Cable service (Foxtel)
  • Insurance premiums on car
  • Long-distance phone plans
  • Savings accounts interest rate
  • Credit card interest rates
  • Mortgage rates

If you want to get really frugal you can often eliminate some of these bills altogether. Does the TV network legally stream their primetime shows on the Internet? You may be able to cancel your cable bill. Did you find a decent VOIP service online? Give your long-distance provider the axe. Live downtown and can get by with a bus pass? Selling your car could get you to financial freedom in record time.

Step 5: Attack Debt Systematically

Next you need to really attack your debt. Carefully look at all your debt and available options. Can you roll your high interest debt into a personal line of credit at a fraction of the interest charges? Does it make sense to consolidate your debt?

When attacking your debt there are two approaches: the one that makes the most mathematical sense and the one that keeps you motivated.

The one that makes the most mathematical sense is to pay the highest interest rates first. Yet, by clearing up some smaller bills first you might be motivated to stay on your fiscal diet longer. Whatever method you use to attack debt – come up with a solid debt plan and stick to it. This should be a regular and mandatory payment much like rent. If you have extra money to pay down – go for it, but don’t get into the habit of making minimum (or skipping) payments just because you can.

Step 6: Save for the Financial Freedom

So far we have cut down on expenses and managed our day to day living more effectively. This is half of the equation, the other half is to build up a savings for retirement. Just how is this accomplished?

Start saving and investing early on. Compound interest will work in your favor over long periods of time. If you get a 7% rate of return over 40 years and invest $10K every year, you will have a total of $2.2 million. If you have only 12 years to invest since you failed to start young, you now need $100K every year to reach the same goal.

Take advantage of contribution matching by employers and any tax incentives offered by the government for superannuation funds and accounts.

Step 7: Make More Money

In addition to reducing your expenditures and saving for the future, it doesn’t hurt to make more money. What are some ways to boost your income?

Sell stuff – Go through the house and sell things that you use infrequently or not at all. It may hurt to get less than half of what you paid for it, but it’s a whole lot better than getting no monetary benefit or usage.

Ask for a raise – Even if you get regular raises to meet inflation, you are not truly getting a raise based on performance. It doesn’t hurt to schedule a meeting and discuss getting a raise, or at least getting some clear direction and time frames as to how to hit that next pay grade. Employers expect employees to ask for raises and the worst they can say is no…which isn’t bad either since the boss in now on watch that pay needs to go up at some point.

Get another job – Don’t be too quick to switch jobs, but don’t be afraid either. If you have progressed to the point where you can make a significant amount more elsewhere, it is time to move on if your boss is unwilling or unable to boost pay.

Get a second job – You only have so many hours in the week but when behind the 8 ball you may need to work that extra amount to relieve some of the mounting pressure of debt. Just don’t get in the habit of burning the candle at both ends for extra spending money.

Step 8: Keep Learning and Re-Evaluating

A great financial plan made in the 80s likely does not hold up to today’s changed economy. Every so often you need to sit down and look at your goals, expenses and income to re-evaluate. Have your goals changed? Are your investments not behaving like you wished? Is there room to cut expenses or raise income?

If you are tapped for ideas, continue to read books on investment and wealth building for new angles on how to reach your goals. Often there is a fairly straight-forward solution that’ll help you reach your goal quicker in a way that you may not have considered.

Final Thoughts

The thought of creating and implementing a financial plan can send shivers down your already battle-weary spine. Instead, turn this process into something fun. Put on some background music, grab a glass of wine and keep your end goal clear in mind. Always keep your objectives in the back of your mind and make achieving financial freedom an enjoyable way of life where the journey is just as fun as the prize.