You likely have heard of financial freedom and wanted to achieve it. It’s a common buzzword to describe a life where you can live however you want without financial pressures. Well, you’re in the right place. This post will cover 21 steps to financial freedom.
What is Financial Freedom?
Let’s define financial freedom as becoming independent of any sources of outside income that you don’t want to have and any family assistance. This leaves you free to live on your terms without being held down by any financial requirements.
You can see by this definition why financial freedom is often called financial independence.
Living free from financial restraints sounds like a fairytale, but it doesn’t have to be. Many people reach a point where they spend a small amount of time earning income on their terms. Then, the rest of their time is spent enjoying the fruits of their labor instead of continuing to labor.
If you want a more practical example, picture this:
You have enough money saved and invested that your investment returns and income, such as dividends or rental properties, cover your expenses and then some. You work on average one or two hours per day on your laptop to maintain an online business that provides all your discretionary income. The rest of your time is spent with family and doing what you want.
That is the kind of life you can live if you’re financially free.
Read this post for more details on financial freedom/independence.
Why Isn’t Everyone Financially Free?
First off, we are all born into different situations. Many people are born without the realistic opportunity of reaching financial freedom. The world isn’t all sunshine and roses, and some people don’t have the same options. This post will focus on people who could be financially free but aren’t yet.
Inconsistency
Most of us know the basic steps to building wealth and, thus, financial independence. One of the biggest obstacles to fulfilling this goal is inconsistency.
It’s relatively easy to save one time. Skip out on one coffee or meal. However, saving every day, every month, time after time, is difficult. You are destined to fail if you don’t have the right systems around you or inhuman willpower.
The people who can build the most wealth are consistent with what brought them wealth. If it is investing, they invest regardless of how they feel about the market and what they want to buy. If it is a sport, they work out and practice regardless of how busy or tired they are.
Consistency separates the successful from the unsuccessful.
Limiting Ourselves
Think about the expected life to live in your career. More than likely, it is going to college, getting a job, and staying in that job, periodically switching companies until you retire. Now think about how many people you know who do that and don’t make $150,000+/year and are financially free. Probably no one.
This default path will not get you where you want. I’m not saying to work 15 hours/day; I’m just saying to take that artificial limit off yourself. There are many opportunities to unlock your income and make financial freedom an option.
Believing you are only good enough to earn what your day job allows you to make is limiting. We all have skills and abilities that, if used correctly, can generate massive wealth.
Especially with the accessibility that the internet provides, the sky is the limit.
21 Steps to Financial Freedom
Disclaimer: These 21 steps do not all have to be completed to reach financial freedom. Instead, they are all possible steps to take on your path to financial freedom. Everyone’s path looks different.
1. Define Your Financial Freedom Threshold
Achieving financial freedom is vague, so let’s solidify your goal.
First, you need to define your expenses. If you add up all your recurring expenses plus your discretionary spending (clothes, food, trips, etc.) each month, you have your monthly expenses.
Let’s tack on an additional 20% to cover surprise expenses.
Multiply that monthly cost by 12, and you have your annual expenses. This is the threshold you have to overcome to achieve financial independence. You are there if your passive and semi-passive income can cover this amount.
2. Pay Yourself First
A common mistake people make is to pay off their expenses and treat everything left as theirs to use as they want. You see all that money as available, so you want to spend it all.
Instead, treat your “pocket money” as an expense. An expense that you pay off just the same as any of your other expenses.
To do this, the first thing that should happen to your paychecks is to deposit your pocket money into an account separate from your savings and expenses. This way, the only money you will see as available will be the money you decide to pay yourself.
This method also helps you stick to a budget. Instead of using willpower to only spend within your budget, you lock yourself in by only paying yourself as much as the budget allows.
Adding this habit to your life sets you up to be ready for financial freedom, where you need to be thoughtful with your spending.
3. Have an Emergency Fund
You never know what expenses could crop up out of nowhere. A car breaking down or a sudden medical cost could devastate someone without an emergency fund.
An emergency fund is a savings account with no purpose other than to cover surprise expenses. Consider it a backup plan to protect you if you ever can’t afford an unexpected expense.
This account should not be considered saving towards a big purchase or spending money. It should only ever be tapped into when you have no other options.
In addition, if you ever tap into it, it should be refilled as soon as possible. If you fail to fill your emergency fund back up after it’s been used up, you leave yourself exposed.
The rule of thumb for an emergency fund is to have 3-6 months’ worth of expenses saved up. This is enough to cover sudden expenses and even hold you over between jobs. Treat this as a minimum.
Treat this as a minimum size. An excellent long-term goal for most people is $10,000. Initially, though, push for 3-6 months’ expenses.
For more information on emergency funds and how best to structure one, read this post.
4. Build a Brand and/or Business
Hear me out. When I say brand, I don’t mean as massive as Microsoft or Ikea. I mean a brand that can help you earn income outside your day job.
As I mentioned earlier in this post, people who stick to a day job for their entire lives are unlikely to achieve financial freedom. You are tied down to hours and a boss, and your income is capped.
To give yourself the best opportunity for financial freedom, you need a more flexible form of income. The kind of situation where you can uncap your income so you can:
- Work 8-10 hours/day and earn $100,000s
- Work 2 hours/day and make a solid income
- Hire employees to work for you to reduce your hands-on time
This kind of flexibility is simply impossible in a traditional day job.
This effectively uncaps your income since you can work more and scale up your income accordingly. Plus, any improvements you make over time that increase profits are entirely yours. A 20% boost to the business is a 20% raise for you.
An online brand or business is ideal for financial freedom. The machine can keep running with little to no input from you. Meanwhile, it continues to generate income that can fund your financial freedom.
This may sound unrealistic and intimidating, but it doesn’t have to be. Many people achieve this goal, and they aren’t incredibly intelligent or extraordinary. They are just people who find a way to plan and consistently achieve their goals.
Most online businesses start as a side hustle while you work a day job. Check out this post for tips on creating a successful side hustle.
5. Automate Saving & Investing
None of us are perfect. It is easy to forget something, put it on the back burner, and never get back to it. If you want to be serious about building wealth and achieving financial freedom, you must get past this. The easiest way past this is automation.
Automation takes the responsibility of remembering and taking future action off of you. You never have to remember to invest that $200 each month because Robinhood invests it for you. Tell Robinhood when, how much, and what stock to invest in, and it will do it for you.
Many rich people aren’t rich because they are excellent at remembering to be consistent. They often set up consistent systems so they don’t have to be.
This system should be set up for both saving and investing. Save automatically by having some of each paycheck deposited into your high-yield savings account Invest automatically by having Robinhood invest in an index fund each month.
6. Save the Right Way: High-Yield Savings Account
Saving is all fine and dandy. But you’re missing out on gains if all you do with your money is stuff it in a mattress. The opposite is true as well. You shouldn’t save for the short term or emergencies in the stock market because fluctuations are unpredictable.
The perfect in-between option is a high-yield savings account. Think of this as a standard savings account that also earns solid returns. You can expect 3-4% returns on a high-yield savings account.
That may not sound like much, but realize that those returns will at least outpace inflation in most years.
To learn more about high-yield savings accounts, check out this post covering our top five recommendations. My Money Marathon most recommends SoFi for its ease-of-use and solid returns. Sign up through this link to earn $25 when you deposit $10.
7. Live Below Your Means
To achieve financial freedom, saving more than you earn is essential. You can never reach a point where you are financially free from your day job income if you spend more than you can save.
In this system, “saving” includes any form of saving or investing. Any form of storing away money to grow and be spent later.
If you need help balancing your current finances, try this expense ratio spreadsheet. It will help you balance your wants, needs, and savings to achieve your goal.
If your goal is financial freedom, you must push this ratio farther than most people. Your long-term goal should be to save/invest 40-50% of your income.
8. Avoid Lifestyle Inflation
Throughout your life, you will increase your income. Many people struggle to reach financial freedom because they spend more as they earn more.
To reach financial freedom, these raises need to contribute to you saving more.
If you get a $500/month raise, don’t spend $500 more monthly. Instead, have a one-time celebration like a dinner with family, and don’t alter your recurring expenses. This will allow you to take advantage of that increased income and speed up the process to financial freedom.
To learn more about lifestyle inflation and how to prevent it, check out this post (LINK lifestyle-inflation) on just that.
9. Save Separately for Big Purchases
How you organize your savings and finances dramatically impacts how you spend them. To work toward financial freedom, you need to organize your savings properly.
To limit the savings, you spend, set up a separate account when saving for large purchases. If you plan to buy a car or pay a down payment for a house, save for it in a different account.
Nothing stops you from creating a whole new savings account for these purchases, so long as they don’t charge any fees. This will help you track your progress more easily and avoid spending it on other purchases.
10. Invest for Retirement
Most methods of investing and growing wealth come along with paying more taxes. The one exception to this is retirement accounts. Even if you plan to retire early, retirement accounts are a powerful tool.
Many retirement accounts, such as 401Ks and Roth IRAs, offer powerful tax advantages. These tax advantages grow your wealth far more quickly than is otherwise possible.
The one downside to these accounts is that withdrawals are more restricted than standard accounts.
If you want financial freedom earlier than retirement age, a Roth IRA combined with other investment accounts is the way to go. You can withdraw contributions from a Roth IRA anytime, with no penalty.
11. Maintain a High Credit Score
A high credit score gives you access to otherwise inaccessible loans and lower interest rates on loans you take out. Loans are a fact of life to get a car or house unless you are ultra-wealthy.
A high credit score gives you access to things you would never get.
Credit cards are fantastic vehicles for building your credit score. Check out this post to learn more about increasing your credit score through credit cards.
12. Keep Yourself Motivated
You need to be motivated to continue making the right decisions for a long time. You will quickly fail if you save every dollar possible, as some gurus recommend. No one succeeds at a diet if they cut out every gram of sugar and fat on day one.
To succeed at growing your wealth, give yourself spending money to enjoy. If you need a coffee every couple of days to be willing to save and invest, then get it. Don’t blow a bunch of money, but spend on the small stuff that brings you joy. Just make sure to spend on value.
13. Generate Wealth Passively
The process of building wealth is a long one. To achieve financial independence, you need to generate wealth quickly. The best way to do this is to generate wealth passively through investing.
Technically, no investment is perfectly passive. However, spending one hour a week on investing in the market is pretty passive.
The best way to invest passively in the market is to invest in the S&P 500. To learn how to invest in the S&P 500, check out this post.
High-yield savings accounts are your best option to build wealth passively outside the market.
Both of these methods will build wealth for you incredibly quickly. With minimal effort, you will see fantastic long-term gains.
14. Diversify Your Investments
To achieve financial independence, you need to be able to depend on your investments. If you don’t properly diversify, you could lose a lot of funds during a downturn.
Diversification involves having many different investments without focusing too much on one. If one investment has a downturn or fails to return, your other assets will compensate for it.
Aiming for 12 stocks is a good number in a stock market portfolio. Adding a high-yield savings account and real-estate crowdfunding is a great way to invest outside the market.
15. Plan for Expenses
Trying to save and build wealth without a solid plan and understanding of your finances is futile. The best way to plan out your expenses is to plan your expenses and savings for each month. This plan doesn’t have to be accurate to the dollar, just close enough to help you understand where you stand.
The process of understanding your finances will show you where you can improve. Everyone can improve somehow, but you must know where to improve first.
For an easy template to outline your expenses vs. savings, use this spreadsheet to set up the ratio of your expenses vs. savings.
16. Be Consistent
We all have the great idea to save and make more. But we won’t get anywhere if we aren’t consistent in working toward those goals. A lack of consistency is a primary reason more people don’t achieve financial freedom.
We all want the perfect plan to build wealth before moving forward. But an okay method consistently used for 25 years is far more effective than a perfect plan only used for 1.
To beat out most people and achieve your goals, make a plan, and stick to it.
17. Pay Off Debt
Debt is a significant obstacle to many people looking to build wealth and achieve financial freedom. You can never be free if you still owe people money you need years to pay off.
Being debt-free is one of those lifetime obstacles that feels amazing to overcome.
Investing to build wealth can help you pay off wealth, but this differs based on your debt. You must treat credit card debt very differently from a mortgage. To see whether you should invest while carrying your debt, or prioritize paying it off, read this post.
18. Choose a Career to Maximize Your Income
Now, I don’t mean sell your soul to make money. However, many people stick to a job they have had forever that doesn’t allow them to build wealth. This will be a significant obstacle for those people to become financially free.
Your day job income will likely be your primary source of income to build wealth. Making a slight career shift can make a massive difference in your income.
Look for similar positions in your field of expertise that offer higher pay. This will often be some supervisor or management role involving less hands-on work. Making $10,000 more annually in these positions will shave years off your journey to financial freedom.
19. Focus on Growth, then Income
You need to build wealth early in your career as quickly as possible to take advantage of compounding. You are young enough to absorb any additional risk, making higher returns possible. Take advantage of this by focusing on opportunities to grow wealth and investments. Examples are growth stocks, flipping properties, and building a business.
Later on, stability is more valuable closer to retirement or financial freedom. This is when investments that provide stable income become more valuable. Assets such as dividend stocks and rental properties are great options.
Follow this shift through your career to make the most of your situation at any age.
20. Pay Off Your Mortgage
To finally reach financial freedom, you must be as free of debt as possible. The largest source of debt for Americans is a mortgage. This can be $100,000s of debt that is difficult to pay off.
The longer you wait to pay off your mortgage, the more you will pay in interest. To save all of this money, pay off your mortgage early. To do this, pay more than your minimum mortgage payment. Paying as much as you can each month will chip away at the principal and save you money on interest.
21. Negotiate Rent and Other Services
Most purchases are online or with a large corporation, so prices are non-negotiable. However, there are still many opportunities to negotiate politely.
A prime example of this is rent. Most people don’t realize that simply talking with your landlord and pointing out reasons you are a great tenant can get you a lower rate.
A landlord loses a lot of money finding and vetting a new renter. They would much rather stick with the same reliable tenants.
If you have always paid on time and maintained your apartment/house, ask for a lower rate. Compare similar properties nearby with lower rates and present them to them. Be polite and understanding, and you have a great chance of them agreeing.
Saving a few hundred each month on rent makes a massive difference in the long term.
Closing Thoughts
Remember, not all of these steps are for everyone. The most efficient path to building wealth is different for everyone. Try and find the dozen or so steps that apply to you the most, and will help you the most, and put your all into it.
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