Financial freedom—having sufficient savings, investments, and cash to support your desired lifestyle—is a crucial goal for many. It involves budgeting to create a nest egg for retirement or pursuing a career without the pressure of a specific income.

However, many individuals struggle to achieve this freedom. Escalating debt from overspending can hinder progress, and major crises like hurricanes, earthquakes, or pandemics can further expose vulnerabilities in financial safety nets.

Trouble occurs for nearly everyone, but these proven habits can lead you on the right path.

1. Set Life Goals 

What does financial freedom mean to you? While many people share a general desire for it, this goal is often too vague. To make it more attainable, you need to be specific about the amount of money you want and the timeline for achieving it. The clearer your goals, the greater your chances of success. 

2. Create a Monthly Budget

Creating and adhering to a monthly household budget is the most effective way to ensure that all bills are paid and savings are progressing as planned. This regular practice not only helps reinforce your financial goals but also strengthens your resolve against the temptation to overspend.

3. Pay Off Credit Cards in Full 

Credit cards and other high-interest consumer loans can be detrimental to wealth-building. Make it a priority to pay off your full balance each month. While student loans, mortgages, and similar types of loans usually have much lower interest rates and don’t require immediate repayment, it’s still important to pay them on time. Timely payments will help you build a good credit rating.

4. Create Automatic Savings

Pay yourself first by enrolling in your employer’s retirement plan and taking full advantage of any matching contribution benefits, which essentially provide free money. It’s also a good idea to set up automatic withdrawals into an emergency fund, which can be used for unexpected expenses, as well as automatic contributions to a brokerage account or a similar investment account.

Ideally, the money for both your emergency fund and retirement fund should be deducted from your account on the same day you receive your paycheck, ensuring it never even touches your hands.

Keep in mind that the recommended amount to save in an emergency fund depends on your individual circumstances. Also, tax-advantaged retirement accounts come with rules that can make it difficult to access your cash in case of an emergency, so these accounts should not be your only source of funds for unexpected expenses.

5. Start Investing Now

Bear markets—periods when stock prices are falling—can cause people to doubt the value of investing. However, historically, investing has proven to be the best way to grow your money. The power of compound interest can significantly increase your wealth over time, but it does require patience to see substantial growth.

It’s important to note that trying to emulate the stock-picking strategies of professional investors like Warren Buffett is usually unwise for most people. Instead, consider opening an online brokerage account that allows you to learn the basics of investing. Look for a platform that helps you create a manageable portfolio and enables automatic contributions on a weekly or monthly basis. We have ranked the best online brokers for beginners to help you get started.

2. Make a Monthly Budget

Making a monthly household budget—and sticking to it—is the best way to guarantee that all bills are paid and savings are on track. It’s also a regular routine that reinforces your goals and bolsters resolve against the temptation to splurge.

3. Pay off Credit Cards in Full

Credit cards and other high-interest consumer loans are toxic to wealth-building. Make it a point to pay off the full balance each month. Student loans, mortgages, and similar loans typically have much lower interest rates; paying them off is not an emergency. However, paying these lower-interest loans on time is still important—and on-time payments will build a good credit rating.

4. Create Automatic Savings

Pay yourself first. Enroll in your employer’s retirement plan and make full use of any matching contribution benefit, which is essentially free money. It’s also wise to have an automatic withdrawal into an emergency fund, which can be tapped for unexpected expenses, as well as an automatic contribution to a brokerage account or something similar.

Ideally, the money for the emergency fund and the retirement fund should be pulled out of your account the same day you receive your paycheck, so it never even touches your hands.

Keep in mind that the recommended amount to save in an emergency fund depends on your individual circumstances. Also, tax-advantaged retirement accounts come with rules that make it difficult to get your hands on your cash should you suddenly need it, so that account should not be your only emergency fund.

5. Start Investing Now

Bad stock markets—known as bear markets—can make people question the wisdom of investing, but historically there has been no better way to grow your money. The magic of compound interest alone will grow your money exponentially, but you do need a lot of time to achieve meaningful growth.

However, remember that—for everyone except professional investors—it would be a mistake to attempt the kind of stock picking made famous by billionaires like Warren Buffett. Instead, open an online brokerage account that makes it easy for you to learn how to invest, create a manageable portfolio, and make weekly or monthly contributions to it automatically. We’ve ranked the best online brokers for beginners to help you get started.

10. Live Below Your Means

Mastering a frugal lifestyle means developing a mindset focused on living a good life with less—and it’s easier than you think. In fact, before rising to affluence, many wealthy individuals developed the habit of living below their means.

This isn’t a challenge to adopt a minimalist lifestyle. It simply means learning to distinguish between the things you need and the things you want—and then making small adjustments that drive big gains for your financial health.

11. Get a Financial Advisor 

Once you’ve gotten to a point where you’ve amassed a decent amount of wealth—either liquid assets (cash or anything easily converted to cash) or fixed assets (property or anything not easily converted to cash)—get a financial advisor to help you stay on the right path.

12. Take Care of Your Health

The principle of proper maintenance also applies to your body—and taking excellent care of your physical health has a significant positive impact on your financial health as well.

Investing in good health is not difficult. It means making regular visits to doctors and dentists, and following health advice about any problems you encounter. Many medical issues can be helped—or even prevented—with basic lifestyle changes, such as more exercise and a healthier diet.

Poor health maintenance, on the other hand, has both immediate and long-term negative consequences on your financial goals. Some companies have limited sick days, which means a loss of income once paid days are used up. Obesity and other dietary illnesses make insurance premiums skyrocket, and poor health may force early retirement with lower monthly income for the rest of your life.

What Is Financial Freedom?

Everyone defines financial freedom in terms of their own goals. For most people, it means having the financial cushion (savings, investments, and cash) to afford a certain lifestyle—plus a nest egg for retirement or the freedom to pursue any career without the need to earn a certain salary.

What Is the 50/30/20 Budget Rule?

The 50/30/20 budget rule, popularized by Senator Elizabeth Warren, is a guideline to achieve financial stability by dividing after-tax income into 3 categories of spending: 50% for needs, 30% for wants, and 20% for savings and paying down debt. We have built an easy-to-follow budgeting calculator to help you categorize and control your spending and saving—which is the essential first step toward financial freedom.

Will a Bad Credit Score Make My Car Insurance Higher?

Although some states—including California, Hawaii, Washington, Massachusetts, and Michigan—limit or prohibit the use of credit scores to determine auto insurance rates, many companies do use a credit-based scoring system to decide whether to insure you and how much you will pay.1

The Bottom Line

These 12 steps won’t solve all your money problems, but they will help you develop the good habits that get you on the path to financial freedom. Simply making a plan with specific target amounts and dates reinforces your resolve to reach your goal and guards you against the temptation to overspend. Once you start to make real progress, relief from the constant pressure of escalating debt and the promise of a nest egg for retirement kick in as powerful motivators—and financial freedom is in your sights.

Source: https://www.investopedia.com/