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If you’re like many individuals, you aspire to reach a stage where financial worries are a thing of the past, allowing you to leave your 9-to-5 job. According to Bankrate’s recent Financial Success Survey, 41 percent of Americans would consider themselves financially successful when they no longer have to stress about their finances.
The majority of Americans state that they wouldn’t feel secure until they are earning at least $233,000 per year, as per Bankrate’s Financial Freedom Survey. To feel wealthy and financially free, Americans believe they would need to bring in an average of $483,000 annually.
Fortunately, attaining financial freedom is achievable. Through meticulous planning, disciplined saving, and wise investments, you can work towards your objective. Here’s a guide on how you can attain financial independence.
Understanding Financial Freedom
Financial freedom holds different meanings for different people. Some see it as never having to work again, while others view it as being debt-free.
Within Bankrate’s Financial Success Survey, 19 percent of Americans perceive financial success as having enough money to retire, while 41 percent see freedom from debt as the ultimate goal.
“Financial freedom refers to having sufficient wealth to live without the necessity of actively working for essentials,” explains Dennis Shirshikov, gosummer.com’s Head of Growth and finance professor at the City University of New York. “It entails having the resources to afford the lifestyle you desire for yourself and your family.”
“Achieving financial freedom empowers you to make decisions that aren’t solely dictated by financial constraints,” Shirshikov adds. “You can opt to pursue passions, hobbies, or even career changes without fretting over the financial implications.”
The Rise of the FIRE Movement
The Financial Independence, Retire Early (FIRE) movement is both a lifestyle and financial strategy aimed at attaining financial independence and early retirement. The objective is to save and invest enough funds to generate a sustainable income for the remainder of one’s life, allowing for retirement at a significantly younger age than the traditional retirement threshold.
FIRE gained prominence following the release of the book Your Money or Your Life by Vicki Robin and Joe Dominguez. The movement stresses evaluating each purchase by considering the number of working hours needed to afford it.
Adherents of the FIRE movement typically target saving 50 to 70 percent of their annual income and plan to retire when their savings reach around 30 times their yearly expenses, roughly $1 million. After retiring, they withdraw small amounts annually (usually around 3 to 4 percent) from their savings to cover living costs.
“One must live significantly below their means and adopt an aggressive approach to asset allocations,” notes Steven Charlton, certified financial fiduciary and founder of Wisdom Financial. “The FIRE movement can be utilized to achieve financial freedom by growing assets proportionately to sustain a lifestyle based on interest and dividends, eliminating the need to rely on work income post-retirement.”
Steps to Attain Financial Freedom
Realizing financial freedom demands careful discipline and strategic planning. The following steps can guide you in reaching this significant milestone.
Establish Financial Goals
Setting financial goals is imperative for achieving financial freedom. Initiate by defining specific, measurable, and time-bound (SMART) objectives. Instead of merely aiming to save money, set a target to save $10,000 within a year, for instance.
Differentiate between short-term (within a year), medium-term (approximately five years), and long-term (more than five years) goals. This classification aids in determining the suitable savings and investment strategies for each objective. Maintaining a budget, saving for emergencies and retirement, and reducing debt should all be integral parts of your plan.
“One of the biggest pitfalls in striving for financial freedom is the lack of proper planning,” remarks attorney and certified public accountant Mark Pierce, founder of Wyoming Trust and LLC Attorney. “Planning ahead is crucial when it comes to achieving financial freedom.”
Optimize Your Budget
Several methods can help optimize your budget, such as tracking and analyzing expenses, finding ways to reduce costs, living below your means, and meal planning. Start by keeping a record of your spending patterns. Monitoring every expense, no matter how small, will provide insights into your spending habits.
Once you have a clearer picture of your spending habits, identify areas where expenses can be trimmed. Develop a budget that prioritizes essential expenditures while limiting non-essential spending. When it comes to meal planning, create a shopping list based on your menu plan and adhere to it to avoid impulsive purchases.
Chartered financial consultant Steve Azoury, owner of Azoury Financial, cautions against being too stringent with your spending plan. An overly restrictive budget may tempt you to overspend.
“Financial freedom doesn’t have to be extreme,” advises Azoury. “Many individuals may struggle with financial freedom due to the allure of spending that we all enjoy. It’s best to strike a balance by incorporating elements of financial freedom without adopting an unsustainable approach like FIRE.”
Tackle Debt
Commence by taking stock of your debts. Understanding the total amount you owe can help visualize a repayment strategy.
“Reducing debt, particularly high-interest debt like credit cards, is critical,” emphasizes Shirshikov. “Overextending on debt, especially for depreciating assets, can impede progress towards financial freedom.”
Begin by paying off debts with the highest interest rates first, following either the debt avalanche method or the debt snowball method. Additionally, consider making payments above the minimum amount and increasing the frequency of payments to expedite reducing the principal. Embrace small savings by cutting unnecessary expenses and redirecting those funds towards debt repayment.
Prioritize Investing and Saving
Initiate by outlining all your financial goals and determining the required amount for each. Prioritize these goals by importance, focusing first on necessities such as saving for retirement, clearing high-interest debt, and establishing an emergency fund. Bankrate’s Annual Emergency Savings Report reveals that just under 60 percent of U.S. adults are uneasy about their emergency funds.
Commence investing according to the time horizon of your goals. Opt for low-risk investments like savings accounts or certificates of deposit (CDs) for short-term goals. For medium-term goals, contemplate a blend of bonds and stocks. Long-term goals should concentrate on investments with higher growth potential like stocks.
Arrange for automatic transfers from your paycheck to your savings and investment accounts to ensure consistent contributions. Regularly review your portfolio and rebalance it to maintain the desired allocation.
Increase Your Income
The swiftest methods for boosting your income include negotiating a raise with your current employer, pursuing higher-paying job opportunities, or engaging in a side hustle to generate additional revenue. A side hustle can range from freelance work to consulting or starting a small business.
If you have access to a company 401(k), take advantage of your employer’s match, which essentially translates to free money. Understand the vesting schedule and contribute enough to secure the full match.
Select the Best Savings Accounts for Your Goals
The choice of the optimal savings account hinges on your financial objectives, flexibility requirements, and the timeframe for accessing your funds. High-Yield Savings Accounts prove ideal for emergency funds due to their above-average interest rates and swift, penalty-free access to funds. At the time of writing, the highest rate among the banks we monitor is 5.30 percent, offered by BrioDirect.
Money market accounts (MMAs) suit medium-term goals as they offer higher yields than standard savings accounts and provide liquidity through check-writing privileges and debit cards. While shorter terms are available, certificates of deposit (CDs) are best suited for long-term savings goals where funds can be locked away for a fixed period in exchange for a higher interest rate. Health savings accounts (HSAs) and retirement accounts like a 401(k) offer tax advantages and can form part of a broader savings strategy.
Explore Passive Income Opportunities
Earning passive income can serve as a strategic method to generate extra cash flow with minimal ongoing effort. While it may necessitate an initial investment of time, money, or both, the returns can prove worthwhile over the long term.
“Passive income refers to money earned with minimal effort, as opposed to active income derived from working physically at a specific job, such as salaries, wages, tips, or commissions,” explains RentRedi Co-founder and CEO Ryan Barone. “For instance, when you earn interest on funds in a high-yield savings account, you are passively accruing income.”
Barone suggests that renting out property is one of the most effective ways to earn passive income. He recommends starting small and gradually expanding.
“You can begin by renting out spare space in your current residence,” advises Barone. “This technique, known as house hacking, typically involves renting out extra bedrooms in your home. Alternatively, you can lease out other areas like garages, attics, basements, yards, driveways, closets, or sheds for storage or parking spaces.”
Analyze Major Purchases Thoughtfully
When contemplating significant purchases such as a home, a new car, or a wedding, prudent planning is essential. Evaluate the repercussions of substantial acquisitions and consider their alignment with your financial goals.
For all purchases, it’s beneficial to implement a waiting period to avoid impulsive buying. This interval can also be utilized to hunt for deals and discounts. Adopting a measured approach will facilitate informed decision-making and ensure that your purchases align with your financial objectives.
Continuously Enhance Your Financial Knowledge
Enhancing your financial literacy can empower you to manage, save, and invest money effectively. Subscribe to financial newsletters, listen to financial podcasts, read personal finance literature, and follow financial experts on social media.
Additionally, consider engaging with a financial professional for personalized guidance. Proactively engaging in these activities can elevate your financial literacy and enable you to make sound financial decisions.
Final Thoughts
Realizing financial freedom is attainable through meticulous planning. It involves accumulating sufficient savings and investments to sustain the lifestyle you desire without fretting over financial matters. By following these steps diligently, you can take control of your finances and achieve financial independence.