The term “financial freedom” can mean many different things. For some, it may be the ability to pay bills each month with money left over. For others, this could simply mean building up an emergency fund. Regardless of the goal, the end result typically means reaching a point that you are no longer stressed about money. Determine what financial freedom means to you, and use these steps to help you achieve it:
- Designate a Household CFO
Designate a person in your household to be your Chief Financial Officer – This could even be you! The Household CFO tracks spending and goals, monitors the progress, and provides monthly updates. Any major purchasing decisions need to make sense to the Household CFO.
- Track Your Spending
Your next step is to begin tracking your spending. You’ll need to determine how much money is coming in, how much is going out, and where your money is going. There are many free tools and apps that can help you, such as pocketguard.com, mint.com, or even an Excel spreadsheet. Track your spending for at least one month to get started.
- Trim Your Budget
After you determine where your money is going each month, decide where you can trim your budget. You may determine that you can start making your coffee at home rather than grabbing one on-the-go every morning to save you over $90 per month. You might discover a monthly gym membership you forgot you had, and can eliminate $30 per month. You may even decide you don’t want to pay your high car payment anymore and proceed to search for a less expensive car or interest rate. Either way, seek out the sacrifices you are willing to make, big or small.
- Create a Debt Payoff Plan
For many, financial freedom means eliminating debt. If you find this to be your case, there are two ways you can begin tackling your debt: The Avalanche method, or the Snowball method.
Avalanche: Take on the debt with the highest interest rate first
Snowball: Take on the debt with the lowest balance first, giving you those small wins to keep you going
Use free calculators to compare the two and decide which method is right for you and your budget. Regardless of which method you use, once you’ve paid off one of your debts you should be applying that payment to your next debt, rather than adding it back to your spending budget.
- Open the Right Accounts
When was the last time you evaluated your bank accounts? Ask yourself “What kind of retirement account do I have open?” “Do I have a separate account just for my emergency fund?” “What kind of interest am I earning?” There is no single account that is just right for all your money. Separate your accounts to not only get the best bang for your buck, but to also keep your finances organized.
- Create a Deposit Schedule
Once your accounts are set up, you can create an automatic deposit schedule to stay on track with your goals. Most employers that offer direct deposit allow you to split your paycheck. Automatically deposit a portion into your savings (however many you may have), a portion into your retirement account, and the rest into your personal checking. If your employer does not offer direct deposit, set up an automatic transfer with your bank or their online banking. “Set it and forget it” can be an easy way to grow your savings, or pay down your debt.
- Build an Emergency Fund
It can be tempting to dip into your savings to pay down your debt sooner. Be careful with this! Just remember, in the case of an emergency without emergency funds you’ll most likely increase your debt. Build up your emergency fund and leave it for just that – Emergencies.
- Educate Yourself
Along your journey to financial freedom, continue to educate yourself on financial tips, tricks, and strategies. The more knowledge you have, the easier it will be to make important financial decisions. Search for articles, seminars, podcasts, or even stop in and chat with your banker.