What is Financial Freedom?
Having “financial freedom” means different things to different people. But, generally, it is understood as being able to live the lifestyle of your choosing while responsibly managing your finances. In other words, it means having enough savings, investments and cash on hand to live as you desire, both now and in your later years. Additionally, many people qualify financial freedom as having their money work for them rather than having to work for – and stress over – their money. Here’s how to achieve financial freedom.
Level 1: Not Living Paycheck to Paycheck
The first level of financial freedom is building up an emergency fund. Ideally, this will include paying off any credit card debt as well. Unfortunately, living paycheck to paycheck is the reality of millions of Americans. According to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2017, some 40% of households could not cover a $400 unexpected expense. Most of us will have some unexpected expenses pop up throughout the year such as car repairs, medical bills and nights out with friends. Having an emergency fund will come in handy during those types of situations.
Level 2: Enough Money to Quit your Job (for a bit)
Accumulating enough money to be able to take some time away from working is a big jump in that direction. This does not mean you have to quit your job, but it sure is a good feeling to know you can. For extra credit you may want to save up for an extended vacation – for instance, dream of spending a month, or two, in a foreign country each year. By no means does this suggest quitting your job, but it would take some planning in order to be away from my financial firm for that long. In the shorter term, that extra money could also serve as your emergency fund. I mentioned that just in case some of you wanted some extra motivation to get to this level.
Level 3: Enough to be Financially Happy and still Save
This is a bit more about enjoying your life and having the money to do it. There is an immense sense of relief when you are earning enough to save, doing the things you enjoy and still having extra at the end of the month. That extra cushion can be used to move up your financial freedom date. That of course assumes you avoid increasing your lifestyle and spending it.
Level 4: Enough for a Basic Retirement
Do you know anyone who hates their job? Those individuals were willing to do almost anything to retire as soon as possible. For those of you looking to retire early with financial freedom, think about what your bare minimum retirement would look like. Could you move to a place with a lower cost of living? Would you give up going out to dinner? Work towards a nest egg that will support this bare-bones lifestyle. You probably will decide against moving to that cabin in the woods without running water, but it might be nice to know you could. Considering your bare minimum retirement, and knowing you have enough money saved to at least cover some standard of living in your early retirement, will also influence other life choices you may make along the way. Would you lease a new luxury car if you knew it meant you would have to work a few more years? Downsizing your house might look more appealing if it meant you could retire now rather than in 10 years.
Level 5: Create Automatic Savings
Pay yourself first. Enroll in your employer’s retirement plan and make full use of any matching contribution benefit. It’s also wise to have an automatic withdrawal for an emergency fund, which can be tapped for unexpected expenses, and an automatic contribution to a brokerage account or something similar. Ideally, the money should be pulled the same day you receive your paycheck, so it never even touches your hands, avoiding temptation entirely. However, keep in mind that the recommended amount to save is highly debated. In some cases, the feasibility of such a fund can be a question.
Level 6: Watch Your Credit
Your credit score determines what interest rate you are offered when buying a new car or refinancing a home. It also impacts seemingly unrelated things, such as car insurance and life insurance premiums. The reasoning is that someone with reckless financial habits is also likely to be reckless in other aspects of life, such as driving and drinking. This is why it’s important to get a credit report at regular intervals to make sure that there are no erroneous black marks ruining your good name. It may also be worth looking into one of the best credit monitoring services to further protect your information.
How do we do this? Simple. We work with lots of banks and credit unions, which gives us (and you) lots of options. We ask all these partners to give us their best rates, then we bring the lowest options to you.
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