So you decided to be financially free. That’s a great decision. Constantly having to worry about money is bad for your health and your wallet. Living in constant fear of creditors or collection calls is a nightmare you can avoid.
But how do you start? Life is expensive, especially if you have children or previous debt. Sometimes it can seem impossible to get out of your current situation. However, if you live in a free (or relatively free) country and are willing to make some sacrifices (sorry, nothing is free these days), you can significantly improve your financial status in the very near future.
Step 1 – Get out of debt
If you have debt (except for a mortgage that pays on time), you must first get rid of it. Debt is like an investment going against you, meaning the more time that goes by, the less money you have. being in debt is a emergency, and should be treated as such. Your time and resources should be devoted to getting out of debt: paying more than the minimum payments (which are mostly interest payments), negotiating for more money, and most importantly, not going deeper into debt. If you find yourself in a hole, stop digging.
If you need help, consider contacting debt relief specialists who will create a personalized plan that will help you put the days of debt behind you. Even without them, there are several methods to get out of debt quickly (prioritizing by interest rate or total money owed). Just pick one that works for you and stick with it. Discipline is key here. When you are debt free, no creditor has power over you.
Step 2: Stop incurring more debt
When you’re debt free keep it up! Only buy what you can afford right now. Do you use a credit card? Pay it in full each month. Do not let more debts enter your life, since they only go against you. Make sure your expenses are less than your income and do not postpone any payment. Interest in them can be deadly.
More importantly, don’t take out loans for everyday expenses. Loans should be taken only to purchase assets that will increase in value or help you generate more income (such as well thought out business loans). Personal loans can drain your debt and should be avoided at all costs. If you want something, save for it. Don’t borrow now and work for years to pay it off. Remember: in debt, the interest works against you.
Step 3: Create emergency reserves
Once you owe nothing, you can start working for yourself instead of others. Calculate how much you spend each month on average and start saving to get a sum that will last you for six months. For example, if you spend $3,000 each month, you need to save at least $18,000 in your emergency reserves. These reserves should be kept in a savings account or any investment that does not diminish in value and can be cashed in almost immediately.
Use these reserves only for emergencies, if you get laid off or have a big necessary expense that cannot be paid from your regular checking account. This money is not to travel, buy a boat or buy jewelry. Its sole purpose is to save you in case of an emergency.
Can’t save? That is not true
If you think “there is no way I can save such sums of money”, you are wrong. Since you have no debt, you already have an income equal to or greater than your expenses. Now you can (and should) go both ways: increase your income and decrease your expenses. This way you will save money much faster.
First, see how you can get more money from your work. Ask for a raise, take an extra job if possible. Bargain hard and you’ll get what you want (of course, don’t burn bridges. You still need a job). If you are willing to take some risk, start a side business. Everyone has something to sell, and it’s easier than ever to sell online today. There are also many companies that allow you to work from home (for example, some telemarketing jobs), so you can also take advantage of that time. Of course, leave some time for yourself.
Second, every time you spend money, no matter how small or large, write it down. At the end of each month take a look at your list of expenses and think about what expense was unnecessary. It can be hard to lower your standard of living, but it’s always smart to live below your means. When you want more, increase your means.
Take a look at your auto and home insurance policies and see if you can save anything. You may be able to get the same coverage for less, which can save you a fortune in the long run.
Step 4 – Get your credit in order
If you were in debt, your credit score is probably very low. This is a situation that you have to solve, since much of our financial life depends on that score. It can keep you from renting a house or make you pay too much for an emergency loan or mortgage (it’s HIGHLY recommended for NEVER take an emergency loan, but when reserves run out and you run out of options, it can be a temporary solution).
Improving your score is a tall order, but since you have no debt, you should be able to pay off your credit cards. entirely each month. You can also try some credit repair services if you think they might help you. Most of them have a free consultation, so use it before you commit.
Step 5: save and invest
This is where freedom begins. You were in debt, which are investments working against you. Now you will finally have investments working for you. Each month take what you saved and put it in an investment account. Don’t go crazy: invest in stocks, bonds, real estate, and other investments that understand. After investing, just forget it’s there. It is not meant to grow tenfold in a year. But over time, as you invest more and reap the benefits of compound interest, this sum will grow. The more you save each month, the faster you’ll achieve financial freedom.
Step 6 – Financial Freedom
This is your goal. Being financially free means, at least for us, that you don’t have to go to work to maintain your current standard of living. In other words, your passive income (income not generated by being an employee but “passively” – dividends, rent, etc.) is greater than your expenses. This is what financial freedom is all about: options. In this case, you do not have to work, but you can choose to work (for an even higher income). You become the owner of your own time, your greatest and irreplaceable asset. That is the true meaning of freedom.
Of course, the term “passive income” is misleading. Nothing is ever passive. All those investments need to be managed carefully, which also takes time. However, it takes much less time than working eight or nine hours a day. The rest of your time can be spent improving your health, spending time with your family, or reading books. It’s up to you. You choose.
This list is very general, but it describes the general idea pretty well. Achieving the final step is not easy. It takes time and discipline to get to that point (and if you’re having trouble cutting your expenses, a great income). But even partial financial freedom is better than financial slavery or debt.