Too many of us worry about making enough money to pay bills and stave off mounting debt. Rather than focusing on making enough, you should focus your energy on achieving financial freedom. Freeing yourself from everyday money worries can eliminate most of your day-to-day stress and help you live longer, but few people know how to achieve financial freedom.
When we talk about financial freedom, we mean more than just being able to pay the bills. Financial freedom means you don’t have to work unless you want to, or you can take your dream job for less pay. It also means living free of debt, not just credit card debt but also student and car loans, and having a home that is paid for. Financial freedom means having enough in the bank to deal with an emergency and being able to pursue your dreams.
7 Degrees of Financial Freedom
To achieve financial freedom, you may have to adjust your lifestyle and how you think about your cost of living. For example, you may want to reduce your expenses, and your expectations, to achieve freedom from daily financial concerns.
There are levels of financial freedom:
- You’re no longer living from paycheck to paycheck. A recent study showed that 38% of employees live from paycheck to paycheck, 39% would not be able to come up with $3,000 for an emergency, and 32% have financial woes that affect their lives. If you break your dependence on your paycheck, you are on your way to financial freedom.
- You can afford to take your dream job. If you can work for less pay and do the work you dream of doing without worrying about how much you earn, that is another metric of financial freedom.
- You can afford to take a sabbatical. If you have dreamed of traveling the world or taking time off to pursue a project such as writing a book, it requires a degree of financial freedom. You need to have enough money so you can choose not to work.
- You have more free time. If you have time to pursue the things you want to do rather than having to work, that is also part of financial freedom.
- Your retirement strategy is on track. Most Americans fail to save enough for retirement. Sixty-four percent of Americans will retire with less than $10,000, and 9% say they don’t need retirement funds because they plan to keep working. Financial freedom means you have enough to retire comfortably and not worry about making money.
- You have enough for your dream retirement. If you are more ambitious, your definition of financial freedom may be retiring early or retiring to a desert island with enough money to last the rest of your life.
- You have more money than you can spend. The pinnacle of financial freedom is having more money than you know what to do with. If you accumulate more wealth than you need or can spend, that is true financial freedom.
Everyone has their own definition of financial freedom, so you can adapt the criteria to suit your situation and your needs. Whatever removes financial worries from your life is your personal form of financial freedom.
How to Achieve Financial Freedom
If it were easy, everyone would achieve financial freedom. Although accumulating enough cash to declare your own independence takes work, it is achievable if you have a plan and know the right approach to take.
Here are a few of the steps to consider to achieve financial freedom:
- Have a plan. You need to define what financial freedom means for you before you can begin. Your personal definition may change over time, but you need to have goals against which you can measure your progress.
- Start saving. If you haven’t already established a savings account, do it now! You want to have a safe place to save your money so it can earn interest, and over time you can move your savings into higher-yield vehicles such as money market accounts, certificates of deposit (CDs), or individual retirement accounts (IRAs).
- Live below your means. The biggest problem for most people is that they spend as much as they earn, and most people feel they don’t earn enough money to save. By creating a budget and spending less than you earn, you will have more money for savings. Try simplifying your lifestyle and adopting a zero-sum budget that includes money for savings.
- Don’t try to keep up with your friends. Our society thrives on peer pressure, and many people waste money by buying more than they need, spending more on travel than they should, and trying to keep pace with their friends’ lifestyles. Live your life, not theirs, and save for your own goals.
- Track your spending. In order to reduce your expenses, you need to know where the money goes first. Keeping track of your spending shows you where you can save. You might consider using a money tracking app such as Quicken or Mint.
- Eliminate your debt. If you pay off your debt, such as credit cards and loans, and don’t take on more, you will have more money to allocate to savings.
- Have an emergency fund. As part of your savings strategy, be sure to set aside enough for emergencies. You should have enough money to cover three months of living expenses or more in case you lose your job or can’t work.
- Automate your savings. Set up automatic funds transfers from other accounts into your savings and take advantage of special programs such as iQ Credit Union’s Easy Saver, which adds money to your savings account every time you use your debit card.
- Invest in the future. Saving your money is a good place to start, and shopping for the best interest rates will help you earn more on your savings. However, savings alone won’t help your money grow fast enough to achieve financial independence. It pays to make smart investments to help your money grow.
No matter how you approach it, you have to manage and track your finances to achieve financial freedom. Be mindful of your financial goals and set milestones that will help you achieve those goals. Feel free to review and reset those goals as needed when you change jobs or your lifestyle changes, such as when you have a family.
As part of your plan for financial freedom, work with financial professionals. The team at iQ Credit Union partners closely with members to understand their life goals and long-term objectives, advising them about savings as well as investment opportunities and helping them manage their money. The great thing about credit unions like iQ is that you are a member, not just a customer, so we are invested in your success.
If you want to get started on your path to financial freedom, you can check out our Financial Survival Guide.