5 Steps to Financial Freedom

financial freedom

In today’s post, I will discuss five steps you can follow to pursue financial freedom also known as financial independence.

1. Pay off your debts

Why do you have to pay off your debts?

You might ask yourself, don’t you need debt to get rich? How can you go anywhere without getting into debt?

Yes while it is true that you can use debt to build your wealth.

There are bad debts versus good debts, and you’d want to stay away from bad debts and borrow good debts if you absolutely must do so.

What are some examples of good debt vs. bad debts?

CNBC defined good debts as,” Money owed for things that can help build wealth or increase income over time.”

Example of good debt:

  • Student loans
  • Mortgages
  • A business loan

On the other hand, bad debt is defined as,” Money owed like credit cards or other consumer debt that do little to improve your financial outcome.”

Example of bad debt:

  • Credit card
  • Car loan
  • Pay day loan

The bottom line is yes, you can use your “good” debt as leverage to gain access to assets such as real estate. i personally will utilize this avenue to gain my first rental property but overall I want to keep my debt as low as possible.

When I was in debt from my student loan, it weighed down on me and now that I am debt-free, it is such as liberating feeling.

Secondly, when you’re in pursuit of financial freedom or financial independence, you are relying on the rule of 4 percent from your investment portfolio to finance your lifestyle.

Interests from your debts will decrease your liquid cash and can throw a wrench into your monthly budgets. Thus debt will create instability in our pursuit of FIRE.

2. Calculate your FIRE number

The traditional way to calculate your FIRE number is to take your yearly expenses x 25

FI=Yearly expenses x 25

FIRE number

For example, the average American in retirement needed at least $48,106 per year, or $4,008.83 per month according to the Bureau of Labor Statistics and SOFI.

Using that figure, your FI number will be $48,106 x 25 = $1,202,650.

For this reason, it is very important for you to know where your money is going and what your monthly expenses are.

Once you know your average monthly expenses then you multiply by 12 to get to your yearly expenses.

Once your know your expenses, you can find ways to cut back, know how much money you need in your emergency fund and finally how to calculate your FI number.

3. Cut your expenses and increase your income

Cut your expenses

if you think about it, your personal finance boils down to two factors, your input (income) and your output (living expenses).

The first thing that you can scrutinize is your monthly expenses. You can use a variety of budget apps to accomplish this such as Mint or You Need a Budget (YNAP).

You can use popular methods to help manage your budgets such as the 50/30/20 rule and the envelope method.

Let’s be honest with ourselves, the pursuit of financial freedom is not easy and something’s got to give if you want to have healthier finances

I know that this has been repeated in other media outlets but it’s worth repeating.

For example, if you see that your spending a large portion of your monthly budget on eating out then you can try cooking at home more.

You can brew your own coffee instead of going to Starbucks, Dutch Bros, or the like.

In the end, you don’t want to be too ambitious that this may backfire, start with a few items and work your way to more things.

The basic tenet I follow is to cut back on things that I don’t value and still spend money on experiences that bring joy and increase my quality of life.

You still have to live a little! You have to find the fine balances and just like with everything, I believe in moderation.

Earn more money

This is very self-explanatory, you can achieve this in many different ways.

  1. Negotiate pay increase
  2. Side hustles
  3. Participate in the gig economy
  4. Online business
  5. Passive income

The possibilities is endless and you’ve got to find ways to increase your income along with cutting back expenses and slashing your debts.

These go in tandem and will help you toward your goal of financial freedom.

4. Investment portfolio

The best way to grow your money and beat inflation is to invest your money..

Which investments should you choose?

I am a firm believer in the principle of buy and hold and pursuing long-term investments.

Index funds or it’s ETF equivalents in my opinion are the best option to invest.

Index funds will you stable returns and it’s perfect for those pursuing financial freedom.

Another asset class you may want to pursue is real estate. You can look into Real Estate Investment Trusts (REITs), real physical properties, and real estate crowdfunding.

5. Post Financial Freedom Goals

Once you reached your FI goal and achieved financial freedom then what is your end game?

This can look very different depending on who you’re speaking to.

Do you want to continue with your current career? This can an option if you love your job and enjoy the companionship of your co-workers.

You may want to cut down your working hours and go part-time or on an as-needed basis.

You can switch to a different career path.

How about pursuing your hobbies such as art, hiking, traveling.

You can choose to volunteer on causes you believe in.

The possibilities in endless here, in fact, you can choose to do nothing and go on full-time retirement.

Why do you need to plan for these things?

Some who may have achieved FIRE may feel lonely, lose purpose after hustling for all of these years in pursuit of FIRE.

You want to do something to feel engaged and be a contributing member of society and lead a fulfilling life.