June 1, 2022

Financial freedom means different things to different people. For many, it means having enough savings and investments to enjoy the lifestyle they want. For others, it means not having to work but still getting paid. However, attaining true financial freedom can seem like a pipe dream for a lot of people because there is no clear-cut way to achieve it.

How to Get Financial Freedom

Financial freedom is attainable regardless of your stage in life, whether you’re fresh out of college or a couple of decades into your professional career. However, you need to have a sound game plan. Know precisely what you want and the goal you want to reach. For instance, if you're going to become a medical doctor, there are steps that you have to follow, or else it won't be possible. This is pretty much the same with financial freedom because there are steps you can follow. Without a sound financial game plan, you’ll never attain your financial goal.

In this article, we discuss 7 important steps to take toward financial freedom.  

1.   Set up an emergency fund.

An emergency fund is an amount you set aside for rainy days. It acts as a defense against financial mishaps during unexpected situations like medical expenses or home repairs that you may face in the future.

Typically, your emergency fund should be able to cover 6-9 months of household expenses. The primary purpose of this is to make sure you don't end up borrowing money at ridiculous interest rates or taking money out of your retirement account.

In 2021, a study showed that about 40% of Americans can't afford a $1,000 emergency. An excellent way to make sure you don't become a part of this statistic is to check your bank statements and calculate how much you spend to keep your home running for 6-9 months. When you do this, you'll have an idea of how much you should put out for the rainy day. Now, the next thing is figuring out how to save.

The 50/20/30 rule is a known hack in finance that tells you to divide your income into 3 parts. 50% for your needs such as bills, food, and rent, 30% for your wants such as concert tickets, new shoes, night-outs, etc., and 20% for savings. From this 20%, you can choose to allocate 15% to general savings and 5% to emergency funds.

2.   Get health and life insurance.

Having health insurance is essential for people of all ages, and it can save you a lot of hassle. It stops you from getting hefty fees that can make you go totally bankrupt and set your wealth-building journey back by miles.  It also protects you from touching your emergency funds and can make the difference between getting adequate healthcare and getting a bad one.

Before you get health insurance, check the premiums, the out-of-pocket expenses, the prescription drugs it covers, and the Health Savings Account eligibility.

Life insurance may not be as important as health insurance, but it is a very considerate thing to do, especially if you have dependents. Your life insurance (term life policy) should be at 10x your salary so that your family is covered if anything happens.

3.   Contribute up to your employer's match percentage in your 401k.

Your employer match is the money your employer contributes to your 401(k) plan; it’s basically free money. And according to the US Bureau of Labor Statistics, 41% of workers in the United States contribute to their 401k.  This is a smart thing to do because your 401k is an excellent way to retire without any issues.

However, when contributing, ensure you don't overdo it; these 401ks can be expensive, and sometimes there are better uses for your money, like investing or saving. This is why it’s advisable to always use your employer's match percentage as the benchmark.

4.   Pay off higher-interest debt.

Having high-interest debt like private student loans, car loans, and credit card debt lingering for too long is generally bad for your financial freedom journey. Too much debt puts a strain on your income, and instead of creating wealth, you're stuck in a cycle of unending payments. The longer they linger, the longer you lose out on that percentage yearly. If you pay off your higher-interest debts of 7% or more early, you can focus on investing or putting your money to better use. Also, paying off your debts early means you’ll be paying less overall.

5.   Max out your Roth IRA if you are under income limits.

A way to take full advantage of your tax bracket is to max out your Roth IRA accounts. The Roth IRA is one of the best retirement accounts you can utilize for wealth building, especially for young people just starting life who are in the lowest tax bracket they will be in throughout their lives.

Open an IRA account and invest monthly in it. You can use a retirement calculator to estimate how to save monthly and how much you’ll have at retirement. Ensure you set realistic goals for how much you can invest and make sure you’re committed to it.  If you invest $160 monthly from age 25-65 at 10% ROR, you’ll be a millionaire at retirement.

Since ROTH/HSA accounts are flexible, you can set up a strategy for investment and grow your retirement income.

6.   Pay off lower interest debt.

Just like you need to pay off high-interest loans, you also need to pay off the low-interest loans. These low-hanging debts can be from credit cards or low-interest loans, and they can hinder your wealth creation.

However, if you have enough money to pay off your small debt, you may be faced with a dilemma. Either clear your debts or invest the money. However, by the rule of thumb, experts feel that if the debt has an interest rate of less than 6%, it may be advisable to invest the money you would have used to clear the debt so you get a higher ROI.

Still, it is a decision for you and only you to make at the end of the day. Choose what works best for you and gives you peace of mind.

7.   Invest 20% of your income.

After you have completed all the previous steps and gotten solid financial footing, you'll need to invest that 20%. 

Investing is the fun part once you have a solid financial footing. However, it can also be tricky. Some investments, such as IRA, are quite safe, while others may involve a bit of risk. You could consider:

●     Retirement account for tax advantage investing

●     Taxable brokerage account investing for flexibility

●     Crypto investing

●     Stocks, Bonds and ETFs

●     Real estate for cash flow, loan paydown and tax benefits

●     Treasury bonds

●     Treasury inflation-protected securities

●     Municipal bonds

●     Certificate of deposit

●     Money market accounts

With some of these, you'd have to look into the risks and potential rewards. You can also choose to diversify. For example, have an IRA, invest in real estate, bonds and, if possible, crypto. If you feel in over your head, you may need a financial advisor's services.

Follow these 7 steps to financial freedom, and before you know it, you could even be on your way to actually create generational wealth rather than making provisions for just your own retirement.