Freedom is usually the result of saving money, becoming debt free and making wise investments. This means you might have to change your behavior or make sacrifices like replacing cable tv with Hulu and Netflix, making your coffee instead of buying it at Starbucks, cancel your home phone if you have a cell phone, be content with having a used, paid off car, etc. Saving money and changing your behavior with money is a test of your mental strength (fortitude) and perseverance. If you're a married person, this also means getting your spouse and kids excited about saving money. How is that possible? Set goals with rewards that benefit everyone or each person individually. One thing that real helped me and my wife was creating a vision board. We bought a cork board, grabbed a bunch of old magazines and cut out all of the images of things we wanted to accomplished, hanged it on the wall in our room, and within a year, we did almost everything. In two years everything was accomplished. It was the constant reminder of our goals everyday that made a difference, even if it was unconscious.
- Record What You Spend:
After setting your mind down the path of financial independence, it’s time to actually do something about it. The question is ‘where to start?’ The initial few weeks will require you to sit tight and do some simple exercises. You start with tracking every single penny you spend. No matter how big or small the transactions are, record them and keep the numbers accurate. The biggest advantage you have at your disposal today is the internet. Software like Quicken can also simplify this process a lot. There are various online tools like Mint to help you record your everyday spending. The simplest way is the envelope method, which requires you to budget using envelopes and pay cash for everything. The idea here is to record your expenses and try to reduce them.
- Make a Financial Plan:
Another important exercise that you are required to do is make a plan to achieve your goals and a monthly budget. Make a list of your goals and devise a one year, three year and five year plan. Add all the details including the time frame you are allowing yourself to achieve a particular goal, and the cost of each goal.
- Make a Budget:
According to a study in the ‘The Millionaire Next Door,’ 55% of the millionaires adhere to a strict budget; in fact, budgeting is one tool that has been known to set everyone else apart from the millionaires.
After keeping a record of your spending for the past few weeks, by now you have a clearer idea of areas you can save money and adjust your budget. Things that will mess up your budget are birthday gifts, vacations, getting married, etc., so try to plan ahead by saving every month for long term goals or big short term expenses. Now you have a complete record of where your money goes every day. It's a great time to sit down with your family and make adjustments to your family budget. Analyze your expenses, are you spending more than you are making? Manage your finances such that if worst comes to worst, you end up breaking even between your income and expenditures. Overspending is the biggest roadblock in your journey to financial independence! More than money, not having a plan and executing your plan costs you irreplaceable time.
- Use the Debt Snowball:
Paying off your debt feels wonderful. No more student loans, no more credit card bills, and no more car payments. If you want something and it fits within your budget, just pay cash. If you wouldn't count out that much cash to buy the new car, then don't do it. If you're financially well on track and your monthly disposable income is great, then a car loan at 2% won't hurt you much. In order to acquire your financial freedom, you want to relieve yourself of debt as fast as you can. Start with a baby emergency fund of $1,000, than start using the debt snowball, and saving monthly for your 9 month emergency fund. You can do this while contributing 12-15% to your retirement account. At least do whatever your employer matchs. If they match 6% and you're not contributing, then you're missing out on free money.
Using the debt snowball requires you to arrange your debts from smallest to largest in an ascending order, or from the highest to lowest interest rate. If you want to be really sophisticated, you can even do it by the greatest to smallest impact on your monthly cash flow. You are required to pay the minimum for each debt every month, but the idea is to use some amount out of the money you saved each month, and start paying off the lowest debt. When that debt is paid off, you add the minimum payable amount for the last debt plus the amount you set aside earlier to the minimum amount of the next debt. This way you will be paying your debts off faster than you had imagined. There you are; one big step closer to becoming financially free!
- Don't Use Your Credit Cards:
If you cannot pay off your entire credit card balance within the grace period, then you should cut up your credit cards. Not paying off the full amount before the grace period, which is usually 20 days, means you are paying interest on using your credit cards. Paying with plastic also makes money seem trivial, and it's proven that people will spend more than if they were paying cash.
Freedom is a great way to live and not have to worry about anything. The more responsible you are in managing your finances, the faster you will be free to do what you want to do with your time.