The late Jim Rohn, who spent 40 years as a sales expert and motivational speaker, would frequently discuss financial freedom in his podcasts. In his distinctive voice, he would emphasize the need to learn to work harder on yourself than you work on your job. He called making money in America “easy.” Of course, his definition of “easy” was “something I could do,” meaning that it involved quite a lot of hard work.
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Budgeting Guide: How To Create a Budget You Can Live With
Rohn also mentioned that people find it easy not to follow these steps. Unfortunately, most Americans appear to choose that version of “easy.” The U.S. holds the 11th largest per-capita GDP in the world at $62,641 per year. Despite this, only about 40% of Americans can cover an unexpected $1,000 expense. Consequently, many find it difficult to imagine financial freedom when they have to go into debt to repair their car or replace a worn-out appliance. You can change such circumstances by making a commitment and taking time to learn the lessons of paying debt, saving and investing.
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Achieving financial freedom will not happen by accident. It will take discipline and commitment, a set of specific steps that can make this goal a reality. These processes will make financial independence a concrete goal and help you avoid money mistakes. They will also help place you on the path needed to turn early retirement into a reality.
Most people you ask will say that they want “financial freedom.” But what does that mean? Going back to Jim Rohn, he defines it as the ability to live from the income of one’s personal resources. Even this leaves a lot of vagueness, as financial freedom can mean different things to different people. Does it mean a modest or a lavish lifestyle? Living in a high-cost area or a low-cost one? Will you have mortgage or rent payments, or will you live in a home already paid off? What other debts, if any, will you still have to pay down? All of these decisions will factor into your definition of financial freedom.
One way to ensure you stick to your financial goals is by making a budget. This takes every dollar of income and assigns a purpose to it. Admittedly, budgeting for that morning latte or the vacation to Hawaii might be difficult at first. But once you adjust to the discipline of living within your means, your budget can be empowering.
Income includes all the money that comes into your household. Every dollar of income needs an assigned purpose — an expense. Taxes and charitable donations count as expenses, as do irregular payments like the car insurance bill due every six months and non-essentials like dining out. Each expense goes into the budget. You should then divide expenses between needs and wants.
One approach to allocating your money advocates putting 50% toward needs, 30% toward wants and 20% toward savings. This Balanced Money Formula, introduced by Elizabeth Warren and Amelia Warren Tyagi in “All Your Worth: The Ultimate Lifetime Money Plan,” emphasizes long-term financial sustainability. “A diet that works for only a day is as worthless as lipstick on a pig. A spending plan that works for only a month is worth even less,” Warren and Tyagi wrote.
In the event expenses exceed income, you will need to find ways to meet your needs on less or find additional sources of income to make your budget work. But once you have spelled out income and expenses, you at least know what you need to do to take control of your own finances and reduce money mistakes.
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Families need more than checking and savings accounts to achieve financial freedom. Some additional account types have become critical to success, in large part because they grow your money tax-free. Retirement funds, for example, belong in a 401(k) or an individual retirement account. Saving for your child’s college? That will require a separate account for your 529 plan.
Emergency funds and even non-retirement savings might also call for a separate place to store funds.
The United Nations identifies a problem across the world called “debt bondage.” Some might choose other words, but whatever your view, debt is the antithesis of financial freedom. Hence, an integral part of becoming free involves paying off debt or avoiding it altogether.
Debt repayment requires an effective strategy. Research shows that families often utilize the balance-matching heuristic. This involves equal payment on all debts, which can leave consumers paying more in interest and eliminating debts more slowly, if at all.
Some have recommended the “avalanche method.” This involves dedicating all debt payments over and above the minimums to the debt with the highest interest rate, thereby reducing the amount of interest paid. Other experts favor the “snowball method,” which dedicates all funds above monthly minimums to the smallest debt to give debtors motivation as debts disappear.
Regardless of whether the avalanche or the snowball method suits you better, tackling debts one at a time whenever possible seems to be the most effective strategy.
Personal finance author Rachel Cruze recommends building an emergency fund of $1,000 regardless of debt levels. Once you pay off all non-mortgage debts, she recommends fully funding the account so that it covers three to six months of expenses. Why? “You don’t know what’s going to happen,” Cruze stated in a DaveRamsey.com article. The emergency fund can prepare you financially for most of these surprise events.
Cruze has also advised that you use a separate account for your emergency fund. Keep the money accessible enough to quickly pay a doctor or a mechanic but not so accessible that you will feel the temptation to spend it unnecessarily.
Unfortunately, most people complete their formal education without ever having taken a personal finance class. This limitation can make you your own biggest obstacle to financial success. Succeeding financially in today’s world is extremely difficult without some knowledge about saving, budgeting, debt avoidance and repayment, taking advantage of tax-deferred accounts and investing. Educational resources like seminars, authoritative articles and podcasts can teach you strategies that will bring you to financial freedom faster.
Warren Buffett once said that if you don’t learn to make money while you sleep, you will work until you die. Investing is one way to make money while you sleep.
You might follow differing investing strategies based on the types of accounts you have. Your retirement account might call for diversified mutual funds and exchange-traded funds consisting of bonds or a basket of stable, large-cap stocks or other assets. With spare cash and an appetite for risk, you can budget a small amount for higher-risk but potentially more profitable investments. Even then, stick to diversified, lower-risk investments for most of your wealth and do not hesitate to seek trusted advice from a financial professional who can help you assess your risk tolerance and evaluate possible investments.
Any activity that brings in money can help you achieve financial freedom. Not all of these routes involve saving and investing. Take side hustles, for example.
Side hustles range from managing social media sites or driving for Uber or Lyft to creating YouTube videos and using them to sell ads or up-sell products or services. Mike Hills, vice president of Investment Brokerage at Atlas Real Estate, recommends “house hacking.” This involves buying a property for the purpose of renting part of it out to cover some or all expenses.
Obviously, both time and talent should go into that decision, but thinking outside of the box can help you build wealth.
As mentioned before, financial education only comes to those who make an effort to learn. Even then, topics such as tax strategies or investing might require advice from professionals. It might also require you to look at your finances honestly and analytically to take a greater degree of control. Whatever need you might have, do not hesitate to use some of the resources available to help you achieve financial freedom.
Having the right financial advisor can go a long way toward helping you achieve financial freedom. Not only can these experts help with building savings, but they can also offer advice on investments. But advisors come in many forms. Be wary of those who promise “get rich quick” strategies. Consider using an advisor who is financially compensated for helping you instead of selling a specific product.
Many turn to Certified Financial Planners. CFPs must meet standards of competence and ethics to attain this designation. Another option is an advisor designated by the National Association of Personal Financial Advisors. NAPFA advisors work on a fee basis only, helping to ensure they act in the client’s best interest.
A number of apps can help you organize your budget. The good news for the budget-conscious is that most are free, and many are tailored to address specific needs.
Mint offers help for those who regularly go over budget. It does not charge a fee to users. YNAB — meaning “You Need a Budget” — helps you assign a task for every dollar available, albeit at a cost of $84 per year. Those are just a few examples. No matter the budgeting challenge, you can usually find an app with the features you need to take control of your money.
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Learning how to achieve financial freedom and making it happen are two different things. Those who want to learn can benefit from numerous resources, from books and classes to a wide variety of online tools. But in the end, success depends on you and your determination.
It takes a commitment to make sound financial habits a part of your permanent routine. Stick with this plan for the long haul, and not only will you have less debt and more savings, but eventually you’ll be applying these steps with money earned while you sleep.
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Last updated: July 12, 2021