Simple Steps To Financial Freedom!
You may have heard that money doesn’t buy happiness. The person who told you that probably had a lot of money.
Well, they aren’t exactly wrong, however the topic of financial freedom is a thin line. I think what’s closer to the truth is that having money is not everything. Not having it is.
Kanye West said that. Though I don’t always take financial advice from rappers, Kanye’s got a good point. When you don’t have money, it becomes the source of a lot of pain, frustration and anger. It consumes your life and becomes the lens with which you see the world.
When we don’t have financial freedom, every problem seems to revolve around money. While being rich won’t fix every problem in your life, stacking up some money seems like a worthwhile pursuit. When you become financially free, you will no longer make every decision solely based on money. You don’t take the job just because it pays better. You don’t have to look at the price of organic groceries to make sure you can afford them.
Imagine being in a place where you never had to worry about money again. Maybe not even that far. Imagine a place where money wasn’t the major stress in your life and on your relationships.
The steps to get there are simple, but it’s not going to happen overnight.
Let’s get started.
Step 1: Create An Emergency Fund
Save $1,000 and put it into an emergency fund that you’ll only use in dire circumstances. I remember reading a story where somebody literally put their emergency fund inside a frame with the words “break glass in case of emergency”. Emergencies don’t include vacations, beer money or even an engagement ring.
This money should only be accessed if and when things get dire. When your car breaks down. When you need to replace your water heater. Basically, when your life would otherwise become completely derailed. That’s when you go to the emergency fund.
Why Create An Emergency Fund?
Because everything that can go wrong will go wrong. Instead of borrowing money from your family again or pulling out your credit card pushing yourself further into debt, you’ll have something to fall back on.
The great thing about the emergency fund is that it starts to give you that feeling of financial freedom. For the first time maybe in your adult life, you’ll have some room to breathe. This step is the quickest way to finally gain some control back in your life.
Step 2: Pay Off Your Debt
About 80% of American adults are in debt and we’ve just accepted this as the status quo. Maybe we bought something we didn’t need or furnished an apartment that we couldn’t afford. Or purchased a new car when we could have bought used.
For me, one of the biggest problems with debt is that it restricts your monthly income. So when you’re paying $5-700, even more on your mortgage, student debt or car payment, it severely restricts the amount of money you can save.
The other thing is that you’re going to be saving thousands of dollars in interest if you’re able to pay off your loans quicker. Forget about cutting back on your daily latte, this is where you’re going to take the biggest step towards financial freedom.
Let’s say you have $100,000 in student loans at 5% interest for a 20-year term. If you only pay the minimum for the entire period of the loan, you’ll end up giving the bank over $158,000. Say what?!
What’s The Best Way To Pay Off Your Debt Early?
There are a couple of takes for how you could do this. You could tackle high-interest loans first. Each loan is a different amount with a different interest rate. The smartest decision is to attack the highest interest rate first, then take the others out one by one.
Another option is called the ‘debt snowball’. It takes into account human behaviour by tackling the smallest loan first, we are able to knock it out quicker, which helps build momentum and motivates us to pay off other loans.
Step 3: Create A Runway
What would it feel like to have 6 to 12 months worth of expenses in your bank account at all times? Imagine the kind of freedom and stability you would have knowing that if you ever got injured or lost your job, that you’d be taken care of for the foreseeable future. This is why having a runway is so important.
Open up a spreadsheet and take account of all your monthly expenses: rent, groceries, internet, Netflix etc.
Pulling this into my spreadsheet was an amazing way for me to start to see, what’s the absolute minimum that I need to survive on. This was a very powerful number to have.
Step 4: Start A Retirement Fund
Retirement funds are one of those things that you should do but you haven’t yet. Retirement funds are those things your friends talk about sometimes and you just smile and nod.
Personal finance is often about making short term sacrifices for long-term gain. By saving a little bit each year, you’ll be able to set yourself up for a dignified retirement.
First, compound interest is the bomb. I’m just going to give you a quick example to show you why:
Say if you put $10,000 into a high-interest (around 10%) savings account when you’re 20 years old. If you leave it for 50-years until you’re 70, you’ll have over $1,173,908 in your bank. All that from simply putting away $10,000.
Use a compound interest calculator online to work out how much you could retire with based on your yearly savings.
For more reading like this on topics like finance, lifestyle and travel, visit Jacaranda Finance’s blog page here.
Want to know how you could consolidate your debts? Click here.
Check out these money saving tips!
Like what you're reading?
Read more like it