Being financially free allows you to break away from the immense stress of living paycheck to paycheck, and the earlier you start working towards this goal, the more achievable your early retirement dream can be.
Breaking free from financial stress starts with clearly defining your goals and diligently working towards achieving each one.
This article covers a comprehensive and easy 7-step process to achieving financial freedom.
What Exactly Is Financial Freedom?
There’s no one-size-fits-all definition for financial freedom. However, for many, this concept means being able to control your finances to comfortably pay your living expenses and afford many of your life goals.
It’s not necessarily about being incredibly rich, but rather, being able to spend more time on things that matter to you instead of allocating most of your life to just earning money.
Reaching financial freedom is the key to early retirement.
How To Achieve Financial Freedom
1. Clearly Define Your Financial Goals
Start this process by clearly defining your financial goals. Visualize what financial success would be to you and write down the measurable aspects of this goal.
The more specific you are at defining your objectives, the easier it will be for you to formulate a targeted plan. Include specific amounts, timelines, and tangible benchmarks.
I recommend using the SMART goals format for this step.
2. Track And Analyze Your Spending
By knowing exactly how your money comes and goes, you’ll have an easier time identifying areas that can reduce your expenses. So, the next step to improve your current financial standing and habits is to track and analyze your spending.
You can opt for the tracking method that works best for you, whether using pen and paper, filling a spreadsheet, or using money-tracking applications.
The more diligent you are at listing every dollar you spend, the easier it’ll be to follow the next step.
3. Create A Budget
Once you know how much you spend weekly or monthly for specific categories, create a budget that reduces unnecessary expenses. Budgeting aims to have some savings after you pay your living expenses, so be sure to allocate for a saving category.
A good rule of thumb when creating a budget is to follow the 50/30/20 rule. This rule suggests allocating 50% of your after-tax income to needs, 30% to wants, and 20% to savings and debt repayments.
4. Pay Off Your Debt
Debt is a significant stumbling block between you and financial independence. Hence, paying off your debt as early as possible is best to avoid incurring long-term high-interest payments.
Consider creating a debt repayment plan using the debt snowball method or the debt avalanche. These practical approaches can help you stay on track with your debt repayment journey and accelerate your progress toward financial freedom.
5. Start Investing
To build potential wealth in the future, you’ll want to start investing to make your money work for you.
Focus on long-term investments rather than short-term ones and diversify your portfolio. Invest in risk-appropriate assets in line with your risk tolerance and be prepared to weather the ups and downs of the financial markets.
6. Create Multiple Streams Of Income
Creating multiple income streams will help you achieve financial security and is a key to achieving financial freedom.
If you have multiple ways of earning money, you can save more and are less likely to go into debt, even if one of your income sources is compromised.
Aside from your primary income source, you can apply for a part-time job, take up side hustles, or start a small business from home to earn more money.
7. Save For The Future
After optimizing your budget, paying off your debt, and creating multiple income streams, all that’s left to do is save for the future until you reach your desired net worth.
Of course, you can always make improvements along the way by increasing your monthly savings or adding more income streams, for example. However, from now on, the odds of reaching financial freedom and early retirement are in your favour as long as you stick to your plan.
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