Certain steps can be taken to ensure your finances remain in order and debts clear
The ongoing Coronavirus pandemic has crumbled the global economy. For those living from paycheck to paycheck, it has been a never-ending nightmare. However, those who had achieved financial freedom before the pandemic are reaping its benefits. If there’s anything to learn from this, it is that we need to be prepared for any global financial catastrophe.
Money gives us a lot of options and freedom in life. We ultimately want to reach a point where our money works for us which is the basic concept behind financial freedom. It is making financial decisions based on happiness rather than money constraints. The phrase financial freedom is often used interchangeably with financial independence which leads to the question of the difference between the two concepts.
Financial independence describes a state in which one can survive and maintain one’s lifestyle from his earned income. It describes a situation where a person does not depend on anyone to meet their financial obligations. Financial freedom, on the other hand, describes a situation where one has a passive income, lives debt-free, is capable of managing bills stress-free, and has multiple savings, investments, and a retirement plan. Financial freedom is a journey that begins with financial independence.
Like many marathon runners will tell you, it requires a lot of blood, sweat, and in some cases tears to win a marathon. Similarly, achieving financial freedom is a process that requires enormous sacrifice but is quite rewarding in the end. If you are wondering where to start, here are six steps guaranteed to get you to the finishing line.
Step #1: Set your financial goal(s)
Being specific about what you want to achieve financially enables you to have a clear picture of how much you need to save or invest to realize your goal. The rule of the thumb is do not compare yourself to other people. Have a goal that is realistic and attainable, bearing in mind your income debts expenditure and savings. Calculate how much you need to save on a monthly, weekly, or daily basis to ensure you achieve your target.
Step #2: Manage your finances
If you’re just getting into the job market, you may need to sacrifice your passion and go for a company that appreciates its employees, provides stimulating work for reasonable compensation and offers opportunities for career growth. Once you have achieved your financial goals, you can make the rest of your life about pursuing your passion.
Budgeting is essential to achieving financial management. You need to know how every coin is being spent before receiving your income. This prevents overspending or impulse buying which could set you off course.
Take time to analyze your spending habits. As the financial author, Scott Rieckens advises, spend less than you earn and invest the rest. If you’re just starting off the journey to financial freedom, it is advisable to have a simple and affordable lifestyle.
Step #3: Strive to clear your debts
A startling fact is that by February 2021, the average American carried an average personal debt of $92,727. At some point in our lives we have all had debts; be it in the form of student loans, a car loan, or even a mortgage. That said, it is wise to come up with a financial plan for debt payment that will help you live the life you have always dreamed of. A great way of clearing your debt is by using the debt snowball, list all of your debts from the smallest to largest, and pay them up regularly. This will motivate you once you see the numbers getting smaller. You will also be one step closer to achieving financial freedom.
When it comes to purchasing items if you can save up cash and buy it later, it is advisable to do so.
Step #4: Develop a saving culture
Make a habit of deducting your savings directly from your income. You can open a savings account and ensure you deposit some money each month before you start spending. You can also plan for your employer to deduct directly from your paycheck and transfer the funds to your savings account. When you save what is left after spending, you will rarely have any money left to save.
Have an emergency fund kitty for unexpected events such as accidents, hospital bills, and car repairs. It not only prevents you from incurring unnecessary debt from borrowing money, but it also gives you peace of mind.
Step #5: Invest your money
Purpose to spend less than you earn then invest the rest. It is better to invest rather than let your money sit in the bank. While saving through a savings account is good, investing a percentage of your money is even better since inflation increases at a higher rate than most bank interest rates.
Investment today has been simplified with the touch of a button on your smartphone thanks to investment apps like Robinhood. These apps have a simple, well-designed interface suitable for beginners as well as experts in trading. With benefits ranging from commission-free investing, no minimum account fee, to a variety of trading options, it would be a shame to miss out on this great investment opportunity, especially during these volatile financial times.
Step #6: Take calculated risks
According to Evel Knievel, a risk-free life is a life with little reward. This is also true in the financial world. Financial risks, however, need to be based on accurate research and not just human emotion. You need to do due diligence and assess the risk of failure versus the risk of success. You also need to have a laid-out plan if the project you intend to undertake does not proceed as desired.
Finally, learn to say NO often otherwise you will not have the time, finances, or energy to make worthy investments. While the journey to financial freedom may be unpleasant, having financial autonomy certainly isn’t.