A Blueprint to Becoming Financial Free
What if you could take a vacation without worrying about how much you’re spending? Without feeling guilty of the money you’re splurging? And without constantly worrying about what you’ll have to sacrifice to offset the expense over the next few months? What if money was just not a factor?
For some people, these aren’t just what if’s but a reality that they enjoy every day. Being able to afford a vacation now and then is just an example of being financially free.
If you also want to live a quality life without having to worry about money, read this blueprint to financial freedom.
What is Financial Freedom and Why is it Important?
Financial freedom is being able to maintain your desired lifestyle without a regular paycheck. To many, this may sound less like reality and more like a dream. However, this “dream” has already been reached by many.
It is about controlling one’s own destiny and life. Being financially free means not being held prisoner of your own financial restrictions.
Some of these people are frugal planners who have worked and saved for decades for their dream retirement. But increasingly there are folks who are lives financial free lives much earlier and with much less sacrifice.
Why can’t we all strive for early retirement?
Reasons Why Financial Freedom Is Elusive?
The reasons why most people don’t attain financial freedom is a bit case-to-case. However, we can bucket these situations to help us understand what restricts us.
To begin with, the concept of financial freedom is not something we are taught growing up. We were expected to finish school, graduate, ideally go to a post-graduate program and then find a stable job that can cover all of our expenses, allow us to save and enjoy some vacations along the way. The concept of using investments, businesses or other vehicles to help us live financially free lives is not part of any curriculum.
We were also taught that money is scarce. Our education system told us that there are few high paying jobs and those require talent, education, commitment, timing and luck to land.
It’s not surprising the education systems tells us that we need to be educated to get paid well. Someone didn’t tell them about the the billionaire university dropouts that started Facebook, Microsoft, Google, Turner Broadcasting, Oracle, Ty Beanie Babies company, Occidental Petroleum, Vanity Fair, the New Yorker and hundreds of other successful enterprises.
The other issue is that we just weren’t explained simple financial education.
Knowing how to budget should be a critical skill like learning to swim, cook or or proper hygiene. Again this is not taught in schools and most families don’t spend time teaching these skills to their kids. Typically these are self-based on your own experiences.
This may be trickier if you grew up in a household where everything is handed out to you, and money is not an issue. You may even inherit the spending habits of your parents when you’re out shopping or when you’re planning for trips and events. They had the money to back it up!
Over time, the lack of knowledge on dealing with money branches out into multiple problems that may cause you to delay in achieving your dream lifestyle.
A real pandemic of today, is today’s consumption economy where individuals are always treating themselves and equating these expenses to happiness. There is nothing wrong with spoiling yourself now and then, but you need to be careful where your money is going. Your daily coffee, cigarettes, buying clothes, and other bad habits may snowball to more significant problems for you in the future and limit your opportunity of becoming financial independent.
Blueprint to Attain Financial Freedom (10-Step Formula)
Indeed, money can slip through your fingers with just a few wrong decisions.
In fact, a few wrong decisions are all it will take for your hard-earned money to be gone in a second. The path to financial independence can be challenging, but it is definitely worth the trip. Below is a 10-step formula to get the results of becoming financially free.
1. Understand Your Current Financial Position
The first step should always be awareness. No matter what stage you are in your life, you should first assess the financial reality you are living in. How much money do you need to survive in a week? Is your job covering the required expenses you have? Can you survive without a job for three months? Are there life changing experiences coming up that you’ll need money for?
These questions are some of the basic things you need to ask yourself to know how you can better manage your money.
Dealing with finances can be tricky, and you might feel you’re not cut out for it. However, dealing with it is inevitable. If you think this is just not your thing, then make it yours. Own it because sooner or later, you might have to rethink your choices once you realize that you’re getting nowhere from your financial decisions today.
In fact, making sure that you are at the top of your game when it comes to making money a priority. For people who are living from paycheck to paycheck, it is of utmost importance to learn how to budget. Learning how to financial plan is not be limited to those who are barely getting by. As your money grows, the more you need to learn how to control it.
Awareness grows as your money grows too
You may think that now that you’re making more than enough, it’s okay to splurge on that trip to Europe or spend some of your savings you have. That is where the illusion of having some savings can cause issues. You should focus on having your money earmarked for something long term. Will you need a car soon? Do you have an emergency fund in case you lose your job? You need to be consistently looking at where your money is going and what it is allocated to.
Aside from this, knowing where your money is coming from should also be something you must be mindful of. Your expenses should never out weigh your income. It’s quite obvious when stated on paper but many individuals don’t make ends meet. So monitor your expenses and work backwards to ensure that you can afford them.
Know where your money is from and where it’s going. But don’t lose sight of where you want to go. If your goal is financial independence, then you need to look forward to future expenses and start planning to ensure you can cover these future bills. This can help you make informed decision on your next money matter.
2. Look at Money Positively
To be financially independent means knowing the value of money and respecting it. Money has become a status symbol.
Over time, money has had a bad rap and been commonly linked to greed. It seems every movie has an villain fueled by the desire of more wealth.
However, money enables businesses to create more jobs. Money has allowed for the creation of sophisticated technology and medicine that saves your life. Money is a necessity to survive and to help others flourish. That simple fact alone can serve as a motivation for all of us to work for it.
How do you look at money positively?
By “positively,” we mean looking at managing your money as a healthy habit and not as a chore. Most of our experiences largely depend on how we see and interpret things. Dealing with money is no exception.
People usually complain about how they are not getting enough money or that they don’t have enough even if they just got their paychecks the other day. Rather than complaining about it to your family or friends, you should be change your mindset.
You need to change those statements from “I don’t have enough money ” to “Where is my money going?” or “What can I do to save more, earn more, invest more?” How do I make more money? These questions will drive more towards changing your financial situation than merely complaining about your lack of wealth. You financial position is in your hands.
Most importantly, stop denying yourself that money doesn’t matter to you. Money is everyone’s matter. It may not be your focus right now, but if get hurt, or someone you love gets sick, money will be critical. If you want to do good in this world, money will be critical.
Looking at money positively is a prerequisite to financial independence.
3. Goal Setting
Aside from asking where is your money is coming from, you must also ask yourself, where do you want it to go in the long run? If your goal is to retire early and go on a trip around the world, that’s great. But you need to be more specific.
What do you mean by “retire early?” At what age do you want to stop working? How much will retirement and travel cost you? What assets are you sitting on that produce income for you?
These questions should be at the forefront of your mind so that you can effectively plan. There would be nothing worse that running out of money half way through your trip around the world. Are you just going to choose the countries with the lowest airfares? Do you want to experience it like a tourist or as a local? Do you wish to tick off the places you want to go randomly, no matter how spread out these places are? Planning becomes critical.
Your goal should be a smart one – specific, measurable, attainable, realistic, and time-bound. If you’re going to set your sights on something, better to put your marks on it as well. Break them down into little benchmarks and make your way up by crossing things off one by one. You can’t just do it in one go. You must do your research, ask around, create a Pinterest board if you want.
Visualize Your Goals
The important thing here is, you have a vision of what your goal is, and that vision should be as clear as a day so that the little things also motivate you. Visualizing things makes your goal clearer and your motivation higher.
If there’s one thing that is a necessary ingredient in the recipe for the success of all famous people, it would be the drive to do things the way they want it to be. If you cannot even picture that, then you should start doing it right now.
The thing with goal-setting is you must also be grounded to the reality you have. The sky is not the limit all the time. You need to make sure your goals are attainable as well, given the time you want it to happen. If you are working a 9-to-5 job that is both equally challenging and time-demanding but does not pay you enough, then that trip around the world may be years away from you. If you want to make it work, make sure that you are also working hard enough for it.
Goal-setting should not be an imaginary street light you have in your head, but a tangible reminder of why you need to do what you have to do today. A goal is meant to be achieved, remember that.
4. Track Spending
It’s easier to spend money than to save it. That has been proven multiple times – throughout history and based on how much is usually left from your latest paycheck. Spending may be one of the most, if not the most fun part of financial management. It may bring you to a downward spiral until you reach a point that you’ll justify it as “retail therapy” since you had a bad day – even though it most probably isn’t.
We may just be finding an excuse in buying that one pair of shoes that we’ve been eyeing for ages, or it may be stress shopping, as what the kids these days call it. Whatever it is, spending money differs from one person to another.
People have different wants and needs, and who are we to judge their purchases? However, let this be a gentle reminder of the golden rule in spending: Spend less than you earn. Easier said than done, especially if you know you can compensate for it in your next paycheck. This kind of thinking is one of the most prominent manifestations of financial dependence and definitely a thing to avoid if you want to break free from it.
What is the right way of tracking your expenses?
To change courses, you should track your expenses, and you must do it well – down to that last unit. Thankfully, there are now many mobile applications that can help you do it. These apps include Personal Capital, Mint, and Pocket Expense – all of which are free and have been already recognized through awards for their ease of use and comprehensibility. If you want simpler apps with a more direct approach, you may also try BillGuard and Mvelopes, which use less of your own personal information for your own sense of security.
Of course, you can always rely on your trusted notebook or spreadsheet. However, keep in mind that if you opt for this choice, you need to create a system first of your own to understand and manage it all together. This can be too time-consuming, especially if you’re just starting this path, but it may be more rewarding for you since it is more personalized for your own needs and preferences. The point is, you need to trace where your money is going. Being able to track these will open you to more insights on how to better save your money.
5. Pay Yourself First
You must make yourself a priority. If you every have a goal of reaching financial freedom, then you need to keep a piece of every paycheck for you. And when we say “for you” it means putting it to work to make you more money down the road through investments.
Many folks live paycheck to paycheck and have nothing left at the end of the month. That’s a recipe for disaster.
You should keep 20% of what you make aside for investing in your future (and take that our first). That’s paying yourself first. The rest should go toward expenses and only if there is money left over after that should it be spend on more frivolous items.
At this point, if your only source of income is your paycheck and you know that there isn’t enough to allow you to take at least 10% and and still pay for expenses, then maybe it’s time to rethink your career choices or living habits.
This is the best wealth-building tool towards financial independence. If your paycheck wont continue to grow int he near future to allow you to invest 20%, then find a new paycheck. Your financial independence and retirement rests on this.
Invest in yourself
At the end of the day, you are your best investment. Using that 10% as an investment can be either in investing in assets that will produce more money for you (stocks, bonds, businesses, etc) or investing yourself through education or training to get a higher paying position.
Having a better education, can set a new lifestyle and career that puts financial independence in motion for you. The more you make at your job, the more you can save and invest in other assets that can pay you dividend and put money in your pocket for your future.
6. Spend Less
As part of budgeting your money, it is essential to point out what are your needs and wants. Set aside the money to be spent on basic living necessities, and work around what’s left. However, this does not mean that you’re free to consume everything that’s remaining. Spending less is not just about cutting your expenses, but it is about spending smart. This is an important factor in the blueprint to financial freedom. You can list down the wants you usually pay for, and gradually decrease the number of items into things that you want.
Another idea for smart spending is the allocation of expenditures. It is not ideal to spend on the things you want within a day. Pacing and distribution are essential. For example, it’s not financially healthy to dine at three restaurants for one day and compensate by eating at fast-food chains for the other days. It is smarter to dine at a restaurant every other day. In this way, you can prevent the snowballing of cravings and, thus, avoid spending more.
Although the best course of action is learning to cook for yourself and limited going out at all. This will significantly reduce your expenses and most likely drastically improve your health.
You can also lessen the frequency of spending on the things you purchase more than once. If you buy expensive coffee more than once a day, change that up. Get a coffee machine and brew your own.
Did you know the average 25-34 year old spends over $2000 a year on coffee while the average 35-49 year old only spends $1000. It’s not because the older crowd drinks less coffee, it’s because they make it themselves for a fraction of the price versus going out to coffee shops all the time.
The Budgeting Rule
It also helps to have a personal spending limit. If you’re a big spender, you might find this difficult, but it is always possible to start small. Elizabeth Warren, a US Senator and also a Harvard bankruptcy expert, initiated the 50/30/20 budgeting rule, which is an excellent financial model to begin with. This means that 50% of your income goes to your needs, 30% goes to your wants, and 20% goes to your savings (or investing as we discussed above). Once you get to know how your financial situation plays out with this model, you can make adjustments to have a better allocation for your savings.
Spending smart also comes with being resourceful. Sometimes, our expenditures may have cheaper alternatives. Also, you can make use of vouchers, coupons, and discounts to save more.
There are also promo packages for buying in groups, so if you have friends or colleagues who want to buy the same things as you, better grab the opportunity with them to spend less. If you’re looking out to buy a gadget, you can always opt to look for “used but not abused” devices from reliable and verified sellers. Although this may be a cheaper option, always check for safety and reliability to avoid fraudulent sell.
Also look at carpooling, using your bike versus driving, walking instead of taking Uber. Try packing meals at home versus going out with coworkers. Avoid tolled roads. Get roommates to share living expenses. Borrow from friends and family versus buying something if you only need to use it once. Shop around for services like insurance, banking, accounting, home repair, etc.
There are endless ways to reduce your spending, but it all starts with willingness and being conscious of where your money goes.
7. Buy Experiences Not Things
Science has proven that when we purchase material things, they only bring us happiness or satisfaction for a very short amount of time. This is the concept of diminishing marginal utility commonly used in economics. New possessions often bring about new expectations, and with the fast advancement of modern technology, being content with, for example, your latest smartphone may be getting harder by the minute. In this age, if we truly aim to be contented and happy, investing in material things is not the best way to go.
Dr. Thomas Gilovich, a psychology professor at Cornell University, conducted a 20-year study which concludes that happiness comes from experiences, not things. This is based on our ability to look back to happy memories and times well-spent as compared to buying new possessions, which we’ll eventually get used to. The anticipation for experiences is also much higher than the anticipation of purchasing new things.
Anticipating an experience makes you feel excited, but anticipating buying a new thing just makes you feel anxious and impatient. Yes, buying that new house sure is exciting at first, but as you look forward to the experiences and moments to be made in that house, and the thought of you finally being able to afford one, is exciting and a whole lot more rewarding.
Why is experience better than material things?
Experiences become part of us as humans. It can help us grow, develop, learn and bond with others. The world is too vast not to be thrilled by new experiences. To truly feel that you are financially free, you should include exploring new adventures once in a while.
Take a break, stuff your backpack, explore what’s out there and make new connections and relationships. Those moments are priceless compared to a day sitting at work and bashing your fingers on the keyboard. Now and then, we should also make time for ourselves to breathe from our usual routine and spend time with the people we cherish.
Experiences are eternal; materials get quickly outdated. You can always look back to that memory of you enjoying that sunny day on a beach, going on a trip to another country, or spending a weekend with your family rather than looking back to that first heavy laptop you bought with your first paycheck.
To be financially free is not just restricting what you have, but getting a feel of what you’ve worked for. Don’t feel guilty for taking that vacation. Indulge in it, immerse yourself into it, because you worked hard for it, and you handled your money wisely to afford it.
8. Pay Off Debt
As much as we want to live our lives to the fullest, we must not exceed our financial capability. Owing money is not what’s wrong, but the act of not being able to pay it off that causes stress and problems.
There is good debt and bad debt. Good debt is debt that provides you an ongoing benefit financially. For example, getting a mortgage (debt) for an investment property that puts money in your pocket. This is excellent debt as your borrow money from the back at a reasonable rate and make more profit from rent that what you pay the bank for the mortgage. This is sound financial maneuvering and a way to create wealth and financial freedom.
Another example would be a car loan on a car that you need to get to work and make your paycheck. Without the car loan, you couldn’t make the same money at your job.
Then there’s bad debt. Bad debt is purchasing something that will depreciate over time and never give you an real financial benefits. Buying clothes, jewelry, going on an expensive vacation all through credit card is terrible debt. Credit card have some of the highest interest rates in existence and those purchases do not help you become financial free.
Make bad debt a priority. You are not truly “free” when you still think about the money that you owe to your friend whom you’ve been avoiding for a long time.
As to how Nathan Morris, a personal finance expert, puts it, “Every time you borrow money, you’re robbing your future self.” Once you’ve paid off all your debts, it doesn’t mean you’re allowed to borrow money again. Remember that borrowing money has consequences, and it is a responsibility. Paying them off just means you’re back to square one, and you must continue moving forward. If you feel that you’re nearing the limit of your finances, learn how to slow down and trace the steps back once again.
How do you get off the wheel of debt?
There are many expert that have recommended ways to pay off your debts fast, But first and foremost, you need to stop creating more debt. You need to create a plan for yourself to not use debt for purchases that wont make you money.
If this is a major problem for you, then simply cut up your credit cards. If you don’t have them, you wont use them.
In terms of addressing the debt issue you do have, there are a couple of methods called debt snowball and debt avalanche. The debt snowball is where you list down all your debts and pay them off with an equal minimum amount. You’ll be able to pay off your smallest debt first, so roll what you’ve been paying on it onto the next more considerable debt until you can finally pay off everything.
The debt avalanche is a bit similar to debt snowball, but instead of prioritizing the smallest amount, you prioritize the debt with the highest interest rate. This one can help you reduce your cost of debt much quicker. Once you’ve paid off the highest debt, use the amount you would have paid towards the next highest interest rate debt you have. Do this until you’ve paid off everything.
Of course, these methods won’t work if you don’t push yourself onto a schedule. You can create a repayment schedule so that you don’t forget to pay off your debts on certain days, and it won’t be as hard for you to allocate money within one go. If you want to make it seem smaller, you can set aside money for debt repayment more frequently. For example, instead of paying $350 in one week, you can chop it to $50 per day. It would still amount to the same thing, but it will make it psychologically more manageable for you to set aside.
Professional debt companies will go out and negotiate a reduction in your debt for you. They can be great tools to help you get our of debt more quickly. The reality, you can do what they do, yourself and avoid having to pay them. Take all your debt (credit cards, store cards, car loan/lease, mortgage, etc) and speak to each one of them. Tell them you can afford your debt and want a special circumstance to help you pay it off.
They may be willing to reduce your interest rates, write some of it off, or work with you to make payments more manageable.
The other tactic to use, is find the debt vehicle with the least amount of interest rate to it (typically your mortgage) and consolidate all your debt onto it.
For example, say you owe $10K on credit cards at 18% and have a mortgage for $250K at 5%. Go to the bank and see if you can get your mortgage increased by $10K. Use that $10K to pay off your credit card debt (which means you will no longer have the $1800 in credit card fees per year).
Now, take that $1800 in fees that you would have paid the credit card company and put it toward your $10K of additional mortgage each year. After 5 in a half years you’ve paid off your debt without doing anything differently.
9. Look for More Income Streams
There is more than one way to earn money. Of course, we all have our primary jobs, but in some cases, what we make is not enough to cover what we need. This is where you might want to look for other sources of income, although it will, of course, cost you more time. Some people have part-time jobs, and there are also those who prefer to work from home.
Surprisingly, some apps pay you back for shopping and even answering short surveys. Some pay people for watching videos and surfing the Internet. Sometimes, some people try to make money with their hobbies such as selling their art, earning a commission for creating music, and much more. There are also opportunities for writers such as writing articles, books, proofreading, copyrighting, and being a content strategist.
Additional Sources of Income That You Can Tap Into
If you’re pretty knowledgeable in the academe, you might want to try being a tutor. You can look for all these opportunities as you search the Internet, but as always, be careful in venturing these sites to avoid fraudulent activities. The possibilities are endless.
However, not everything has to be job-related. Do you have a lot of stuff that you don’t need anymore? You might want to start decluttering and sell those unwanted belongings. You might be surprised at how many people would still like to purchase your things even though they are used already. Just be considerate of the quality and make sure that the next owner will always be satisfied with it.
If you have a flexible schedule and you also own a car, you can also engage in ride-sharing services or deliveries. These are new opportunities provided by companies such as Grab, Uber, and Lyft. If you’re wary of the safety in these businesses, you can also rent your car out with Turo.
Similarly, if you have another property, such as a condominium unit or house that has a good location, you might want to rent it out through Airbnb. Just make sure to have legal documents so that in case your properties get damaged, you can hold the renter liable and charge them for the expenses.
Nowadays, there are lots of ways to earn money other than that 8-hour shift. Technology nowadays allows you to be more creative in making more money efficiently. What’s always important to take note is to check for their reliability, integrity, and safety. After all, what’s the point of making more money when you’re not secure? These might just incur more costs to you rather than more earnings.
10. Invest In Your Future
Investing in your future is not easy, but certain things are worth setting aside money for. Aside from that goal and lifestyle you are dreaming of achieving, there are many other things you can invest in, especially today.
Nowadays, the landscape of investments is expanding. There are a lot of innovative ways for you to grow your money. Contrary to popular belief, you don’t need to have a vast amount of money to kickstart your investments.
In fact, many opportunities have been opening themselves to starting investors. But first, you must know the basics of whatever type of investment you’re going to get into. Don’t gamble your way in thinking that luck will be on your side because most of the time, it won’t be. If you’re going to commit to one investment, make sure you know the ins and outs and the legalities concerning it. Better safe than sorry in this case.
At the same time, investing in your future also means spending your time wisely. Build your relationships with people. May it be your family, friends, or even your workmates. Interacting with people can give you a sense of calm and familiarity now and then that can make you more grounded.
Don’t forget to also invest in your health. Without taking care of your body, then your plans for the future may be all for naught. Part of becoming financially free also means you can live long enough for those plans to materialize and your goals to be achieved.
Where Are You Now (Checklist)
By now, you should understand that financial independence is more than having enough money. It’s not only having enough money to spare whenever an emergency comes along but a liberation from all these worries. Now that you know the critical steps toward achieving this, use the checklist below to assess yourself what components do you have so far in becoming financially free.
Strong Desire and Determination
Being financially independent starts with a strong desire to change. Nothing can motivate you hard enough than knowing what you want to change in your life right now. If you’re already dreading going to work next Monday or if you’re painfully waiting for that next paycheck to come, then you must decide if this is the same life you want to have in five or ten years. If it is, then this freedom will not happen for you. You wouldn’t make the cut.
To overcome this, you need to build a solid foundation that will not be easily uprooted by any fleeting moments in your life. You must want it badly and continue to do so until you are already there. Building a strong foundation also makes it harder for you to give up there, and then every time you remember why you started in the first place.
A SMART Goal
Again, what is it that you want to achieve? A goal set without clear and well-defined characteristics will not suffice. It must be SMART: Specific, Measurable, Attainable, Realistic, and Time-Bound. It must be a goal that you can dedicate your mind to – a clear and tangible thing to achieve.
A Stable Source of Income
Of course, you should start somewhere, and your income is your best friend in this situation. Your income is among your first assets toward becoming financially independent. It must be stable enough to cover your necessities and at the same time, be loose enough for your savings and investments. A steady source of income is one of the essential things you need, especially when you’re just starting.
More than Enough Surplus of Money
From having a stable source of income, you must also be creative and resourceful in finding more income-generating opportunities. These opportunities should represent the things you are passionate about or the things you are skilled at, so it may still be a consistent source of money. Aside from that, having a surplus of cash also means that you have already paid off all your remaining debts and that your investments are growing so that you can create more future investments that are, hopefully, more directed towards that goal you have in mind.
A Flexible Plan
To accomplish this, you need to have a flexible plan to accommodate all the things that may change in the future. Even though you already decided on things, change can be inevitable, especially in how fast-paced our society is today. You must anticipate these changes because planning for it to happen should be a part of your backup plans.
A Steadfast Commitment and Discipline
Lastly, this whole financial independence blueprint will all be for nothing if you won’t commit to it. The path will definitely be a challenging one, but it is a path that you already determined for yourself. Stay true to your commitments. Remember where you’re coming from and make it work.
If you want to be financially free, you need to start anew and close that previous chapter of your financially dependent life. To be free means to emerge triumphant and successful in making your dreams work for you.
At the end of the day, being financially free is being able to stop yourself from asking all your what if’s in life, but just doing it. Live your life the way you want it to be. Simply because you can.
Financial freedom can’t be achieved overnight. It takes a lot of unlearning, learning, and relearning. You just have to be patient and consistent with the process. The amount of content that you’ll take in might seem overwhelming at first, but you’ll begin to see the bigger picture eventually.
If you want to explore the complicated world of financial freedom further, you may check out Financial Freedom: A Proven Path to All the Money You Will Ever Need by Grant Sabatier.