Financial emergencies can be stressful. But what if they were just a minor inconvenience? That’s what’s possible when you’re financially free.
Dave Ramsey says that financial freedom doesn’t happen overnight. Once you have achieved it, you still have to manage your money responsibly. But financial independence means that you don’t have to be anxious about retirement, you can afford your vacation and you don’t have to freak out when the car breaks down.
What Does Financial Freedom Mean to You?
The first step to becoming financially free is deciding what that means to you. Make it personal. If you’re not excited about your big dreams, you’re not going to maintain the discipline that’s necessary to make them happen.
Therefore, consider your beliefs and goals surrounding financial independence. Here are some examples:
- You want to choose a career that you’re passionate about without worrying about your salary.
- You want to take a vacation every year without going into debt.
- You want to be able to make big purchases, like buying a boat, without feeling guilty.
- You want to give back to others.
- You want to retire early so that you can travel and enjoy your freedom.
Do you feel as though any of these scenarios are an option for you? If not, you might want to read on and learn how to be financially free.
Look at Your Bank Account
Many experts recommend setting goals and starting a budget off the bat. However, if you’re not aware of your current cash flow, how can you plan for the future?
If you’re the kind of person who uses credit cards or swipes a debit card while praying that there is enough money in your account, you probably aren’t paying as much attention to your bank account as you should. Awareness is the first step in making changes.
Spend one week to one month monitoring your bank account. Track what goes in and out. You might want to divide your expenses into categories, such as:
- Household items
- Clothes, school supplies, etc.
- Health care
Make sure that you keep track of every penny that comes in, too. If someone gives you the $25 that they owed you, write it down. Get clear on your current financial situation so that you can tweak it to your advantage.
Once you have done that for at least a week, begin to predict how you’re going to spend the income that comes in. Look at your upcoming expenses, and budget for them. You know how much you’re going to get paid this week. How can you allot that appropriately for future bills and other costs?
We’ll talk more about how to do that later in this article.
Start Saving in Baby Steps
At some point, you would like to stop living paycheck to paycheck, right? You need to create a buffer in your bank account so that you can do this. For many people, this is tough. You feel as though you need every dime that comes in.
Consider saving small amounts of money to pad your bank account. You can do this before you create a budget if you start low enough. If you’re the kind of person who wouldn’t bat an eyelash about spending $5 for a cup of coffee, consider trading that cup of coffee for an addition to your savings account.
If you saved $5 a week, you would have amassed $60 within three months. Bump that up to $10, and you will have $120 within the same period. Most people can make small adjustments to their spending so that they can save that minuscule amount of money without feeling like they can’t pay their bills.
You can make your savings work for you by investing it. Apps such as Stash or Acorns allow you to invest small amounts of money. Choose the right investments, and you could earn a decent return. Within six months, you could have $200 in your investment account and feel freer.
Another way to save without feeling a hit in your checking account is to put aside 10 percent of your income. Every time you get a paycheck, transfer the money to your savings account automatically. Set a goal that you want to reach, and don’t touch your money as it’s accumulating toward that objective.
You aren’t to create a substantial financial buffer by saving small like this, but you will begin to develop the habit of paying yourself. Financial freedom is all about investing in yourself instead of dispersing your money to creditors and bill collectors.
Create a Plan
Once you’ve become completely clear on what goes in and out of your bank account, you can create a money management plan. This takes time to progress. You need to maintain the awareness of your income and spending because you will need to adjust the plan continually. It is especially important to do this if you haven’t been good at managing your money in the past.
You should aim to have a buffer of at least three to six months’ worth of income in your savings account. However, that’s not always possible if you’re just starting to move away from living by the seat of your pants financially. Set a goal to save one month’s worth of expenses so that you don’t bring your bank account to $0 when you pay bills.
Then, make a list of all of the upcoming expenses for the next month. Factor in everything, including miscellaneous expenditures, incidentals, and savings. Look at it closely, and crunch some numbers. Will your paychecks for that month cover your outlays?
If the answer is yes, that’s perfect. Develop a spending plan and stick to it. Tracking your expenses every day and writing everything down can help you stay on track. Work with your budget every single day. If you make an unexpected purchase, factor it in.
Don’t be afraid to rework your budget on a daily basis as you get started with this. You’ll need to make many adjustments before you get into smooth sailing.
But what if the answer is no? If your income doesn’t cover your expenses, you’re going to end up in the hole at some point. You have two options in this case:
- Cut your costs
- Earn more income
How to Cut Your Expenses
Many people are resistant to the idea of spending less. Especially if you’re already pinching pennies, you may feel as though you can’t limit yourself anymore. It’s time to take a hard, honest look at your lifestyle and determine what you really need to get by.
- Try living without it for a week – If you aren’t sure whether you should cancel your cable bill, stop buying lunch at restaurants or ditch the coffee shop beverages, try passing them up for a week. Doing this may demonstrate that these aren’t necessities; you’re not tied to them. After the week is over, you might feel empowered by taking the action to cut those expenses altogether.
- Use cash – Credit cards are a slippery slope. Using cash feels more tangible and may trigger you to spend less. Because you’ve already created a plan and budget, you should know exactly how much money you need to shell out on incidentals each week. Pull that cash from your bank account, and store it in separate envelopes—one for each week. When the money runs out, you’re done; you can’t go out to dinner or buy a round of drinks at the bar until the following week.
- Delay purchases – When you want to buy something, tell yourself that you can purchase it after 24 hours if you still truly want or need it. You’ll be more mindful about your spending and will release the habit of impulse buying. You can also use the time to comparison shop so that you’re sure to get the price if you do make the purchase.
- Instill no-spend days – Choose one day every week that you don’t make purchases at all. Try not to even purchase food. You can do this if you plan ahead. Doing this will prevent you from mindlessly occupying your time in stores, where you might be tempted to spend money.
- Use coupons and discount codes – You will always have some expenses, but you can reduce the amount that you spend on necessities by looking for discounts. That’s easy with online purchases and grocery coupons. You can also call your creditors and ask them to lower your interest rates and contact utility companies to learn whether they have options to reduce your monthly bill.
- Get rid of things – For every item that you purchase, commit to getting rid of one item. When you do this, you learn that you already have everything that you need, and you might stop spending money on unnecessary products.
- Cancel subscriptions – A few dollars here and there add up. Consider canceling subscriptions to streaming services, magazines and gym memberships that you don’t use. You can always sign up again if you feel as though you really need them, but you may realize that you don’t.
- Do things for free – If you spend a significant portion of your budget on entertainment, consider how you can diminish that by taking advantage of free events. Look for concerts in the park, or take a walk with friends instead of going to the bar.
How to Boost Your Income
Increasing your income seems more daunting than cutting expenses. If you’re already working from 9 to 5 and have a busy lifestyle, you probably feel like you can’t fit more time or income into your life. But there are some ways to make more money.
- Hold a yard sale – Establish a spot to store unwanted items. When you have enough, hold a yard sale or sell them online. Put the extra money in savings or plan how you will use it to pay for expenses.
- Telecommute – Remote work is becoming a standard. You might be able to take on a part-time job working from home. Asking your current employer if you can telecommute, even if it’s only a few days a week, can help you save money on gas.
- Monetize your talents – Do you have any special skills? Whether you’re good at writing, graphic design or building websites, consider establishing a side hustle that can bring in an income from your abilities. Other ideas for side gigs include bookkeeping, digital marketing, virtual assistance, online teaching, translation, transcription, tutoring, and photo editing.
- Drive for a ride service – Services such as Uber and Lyft are becoming more popular. If you have a clean car and driving record, you could do this to earn extra money.
- Rent out your home – Do you have a guest room or garage apartment that nobody uses? Consider renting it out for extra cash.
No matter how much you earn, debt can eat away at you and make it seem as though you can never get ahead. About 80 percent of Americans are in debt. Having access to loans and credit cards may expand your opportunities. But it also prevents you from becoming financially free.
Write down all of the debt that you have. Get clear on how much you’re paying every month and how much interest is accruing. If you can consolidate your debt, that’s even better. Perhaps you can get a personal loan with a low APR so that you only have to make one payment every month and reduce the amount of interest that you pay.
There are many techniques for getting out of debt. Some methods of paying down debt include:
- Paying more than the minimum every month
- Using the debt snowball method to eliminate smaller balances first so that you stay motivated by seeing your debt get closer to $0
- Living off of a bare-bones budget until you pay off a certain amount of debt
- Sell things that you don’t need
- Negotiate your bills
- Consider transferring credit card balances to cards with lower rates
- Put “surprise income” toward your debt
Once you are debt-free, keep it up. Don’t rack up debt on another credit card. The discipline that you developed while paying off your debt allows you to move toward financial freedom.
Increase Your Emergency Fund
Once you have tackled the steps above, you can work toward increasing your emergency fund. You should have at least three months of expenses in a bank account that you don’t touch except for emergencies. If you can keep 6 to 12 months of income in there, that’s even better.
When you have the extra cash on hand, you will increase your feelings of financial freedom. Plus, you’ll be able to put money toward preventative measures, like paying for scheduled maintenance on your car or fixing the leaking toilet that’s making your water bill higher than it should be.
Some other tips for building an emergency fund include:
- Set a goal for how much to contribute to the fund
- Keep and save the change from your cash purchases
- When you have money left over in your checking account, move it to savings
- Save your tax refund
- Continually evaluate and adjust your contributions to your savings
You should keep your emergency fund in an easily accessible location. A high-yield savings account is one good option. Investing it is fine too as long as you can withdraw funds quickly.
Once you have built up your emergency fund, make sure that you’re clear on how you’ll use it. Buying a nice pair of jeans shouldn’t be a priority. But you could use the savings for things such as:
- Medical expenses
- Car repairs
- Home repairs
If you deduct money from the fund, make sure that you go back to tracking and planning so that you can replenish it. The fund won’t give you peace of mind if it’s empty.
Shift Your Mindset
Many people don’t have the kind of money that they want because they have limiting beliefs about their worth. Your relationship with money is vital for helping you become financially free.
Do you ever tell yourself things like the following?
- I will never have enough money.
- Every cent that goes in just goes right back out.
- Money is evil.
- Rich people are greedy.
Holding these beliefs indicates that you live with a scarcity mindset. You’re so busy worrying about what you’re about to lose that you aren’t putting your energy toward living in abundance. You may not even believe that you can ever be wealthy. But that’s just not true.
Shifting to an abundance mindset takes discipline and practice. Here are some things that people with an abundance mindset do and think:
- They think big – They get out of the here and now, set goals and work toward them.
- They believe that there is plenty out there for them – This world is loaded with resources and opportunities.
- They’re happy for others’ success – You’re not competing with others to improve your financial situation. Once you realize this, you can improve your vibration surrounding money.
- They embrace change – You aren’t going to get out of your financial hole if something doesn’t change. You have to get out of your comfort zone if you want to transform your monetary circumstances.
- They’re proactive – Instead of reacting to emergencies and surprises, you should prepare for them. Make strategic plans for your financial future.
- They’re willing to learn – If you think that you know everything, you’re not going to change your mindset. Being open to learning makes you more adaptable.
- They don’t cling to what doesn’t work – Recognizing what works and what doesn’t is one of the keys to developing financial freedom.
When you’re making a money management plan and creating a budget, you are consciously and unconsciously setting goals. Getting into a goal-setting habit can propel your financial freedom and success.
You don’t just have to spend time establishing financial goals. Setting goals for everything in life teaches you to move forward and take action. It’s an excellent practice for any area of your existence, including your health, relationships, and career.
The act of writing down your goals helps your brain and body recognize that they’re essential. If you have never done this with your financial situation before, now is the time. Remind yourself how essential it is to focus on your finances.
Then, take intentional action toward your goals every day. Doing this will keep you moving in the right direction.
Spend on Growth
Most people spend money on items that they use up. The value of most purchases depreciates over time. Buying things that go away is like throwing money out the window.
Of course, you have to purchase items like food and hygiene products. But you should also put funds toward things that grow, such as:
- Real estate
- Retirement plans
- Life insurance plans
- Energy-efficient home improvements
- Your health
When you shift your mentality toward spending in this way, you can begin to look around you and feel as though your purchasing decisions were worth it.
Make the Most of Free Money
Do you work for a company that offers a retirement plan? Does your employer match your contributions to the fund? If so, you can’t ignore it.
You may feel as though it’s more important to use your money to pay off immediate expenses. However, if your budget can handle some shifting of income and allocations, you’ll make out better in the long run if you take advantage of offers such as employer contributions.
Your employer may offer other benefits that can save you money. For example, if you’re paying for a gym membership, you can cancel it if your employer pays for it or has a free fitness center on the premises. Many benefits packages also offer life and disability insurance at no cost to you. You might even qualify for discounts for medical equipment and other goods through your benefits package.
You can also get free money by joining rewards programs. Whether your credit card offers cashback or you do your online shopping through a portal such as Rakuten, you can earn money from the purchases that you already make.
Don’t use rewards programs as an excuse to spend more. It’s pointless to earn a few cents for spending money that you didn’t need to dish out. But these platforms can help you put some dollars back into your pocket for living the lifestyle that you’re used to.
Pay Bills Annually
If you can, find out if you can pay bills annually. Your ability to do this hinges on how much you have in savings. By the time you’ve worked through the steps in this article, though, you should be set up to do this.
Some electric companies offer programs that allow you to estimate your power bill and pay it ahead of time. Car insurance providers discount the total premium when you pay 6 or 12 months’ worth of premiums at a time.
Financial freedom is about setting up long-term wealth. Therefore, extending your thinking to larger time periods can help you harness the independence that you desire.
Eat at Home
How much money do you spend eating out every week? If you’re not sure, go back to the first few steps in this article and calculate it. On average, an American household will spend $3,000 eating out in one year. The markup for food at restaurants is about 300 percent. You can save a lot by purchasing food at the grocery store and cooking it yourself.
Make a list of low-cost meals that you can make at home. These may include:
- Spaghetti and sauce
- Eggs and bacon
- Beans and rice
Cooking in bulk often saves money. Consider making a big batch of chili or something else that utilizes one pot. The New School Kitchen offers tips for making skillet meals that allow you to take advantage of extra food in your fridge that might otherwise go to waste.
Meal planning can help you save money too. It encourages you to plan for the week ahead so that you don’t become overwhelmed. If you don’t have a preparation and cooking strategy and your week gets busy, you might blow your budget on commercially prepared or convenience food.
Get Into a Routine
Ultimately, financial freedom requires you to ditch unhealthy money habits and take on productive ones. It takes time and practice to transform the steps that we’ve provided for you into habits.
Although most people want to make a quick buck, establishing financial freedom is about consistency and progress. You might not double your income or pay off your debt in one year, but reward yourself for every step forward that you take.
Some things that you can do consistently include:
- Tracking expenses
- Reviewing your budget
- Balancing your checking account
- Setting new goals and adjusting current ones
- Reducing the areas where you spend the most
- Talking to an accountability partner
If you have a partner or share financial responsibilities with other people, help them get on board with the routine too. You’ll be able to work together toward your monetary goals.