Are you searching for ways to achieve complete financial freedom? Here are the steps you should take in your personal finance journey to set up your life to live financially free.
Don’t want to read? Click here to check out my YouTube video on this topic!
WHAT IS FINANCIAL FREEDOM?
Financial freedom is having 0 debt and enough money to live comfortably in retirement. This blog is going to cover the basic steps to do this in a traditional career path.
STEP 1: INVEST IN 401K UP TO COMPANY MATCH
First thing is first, you have to pay yourself first - this means investing for your retirement.
If your company offers a 401k match, you need to contribute up to that match because not only are you not investing in your retirement and losing out on years of compound interest, you are also not capitalizing on free money that your company would otherwise also contribute to you.
STEP 2: SAVE 1 MONTH EMERGENCY FUND
40% of Americans are not able to cover an unexpected $400 expense. You don’t want to be part of this statistic.
Now more than ever it is apparent how critical having a savings account is and having 1 month of expenses saved up will help you if you have any sort of emergency, including broken appliances, medical expenses, layoffs, etc.
I recommend putting this money in a “high-yield” savings account to keep this money liquid.
STEP 3: PAY OFF BAD DEBT
Bad debt really is anything with high-interest rates that does not contribute to your assets. Some of these include credit card debt, car loans, and yes, student loans.
You will want to pay these off as soon as possible, my recommendation is to pay the debt with the highest interest rate first, but some may prefer the “snowball method” of paying off the smallest amounts first. Either way, you want to get these financial burdens off of your plate.
STEP 4: SAVE 3-6 MONTH EMERGENCY FUND
Now that the bad debt is cleared up, we need to save for a bigger emergency as 1 month of expenses really limited if things go bad fast.
Depending on your career and risk tolerance, you will want to save 3-6 months of expense. You can mix these savings between high yield savings and bonds (maybe even index funds if you have a higher risk tolerance), but I recommend saving in low-risk investments or just putting it all in a high-yield savings account and calling it a day. This is your safety net and it should not be used as a high-risk fund.
STEP 5: INVEST 20% OF GROSS INCOME IN INDEX FUNDS
When you have your emergency fund set, we can now work on accumulating wealth. This means investing 20% of your gross income into index funds. You can do this in your 401k, IRA, brokerage accounts, etc.
Putting away 20% per year is all part of paying yourself first and with index funds averaging about 7% returns per year, the compounding effect will be substantial when you are of retirement age.
No matter what the stock market does, keep investing. I recommend that you automate this so that you don’t get tempted to make unwise decisions based on fear or greed.
STEP 6: BUY PROPERTY
The investment that makes the most people become millionaires is real estate.
Your ideal property should have monthly expenses that are 30% of your gross monthly income. The expenses should include, the mortgage, interest, taxes, insurance, and HOA.
STEP 7: PAY OFF DEBTS OR MAKE INVESTMENTS
The last step is to clean up your debts and make other investments with your excess cash.
The largest expense in retirement is typically living expenses. By this time, you should pay off the rest of your mortgage to lessen your expenses.
After you have paid off your mortgage, I recommend using your excess funds to either save, invest in riskier assets, donate, really whatever you want!
Once you’ve completed all of these steps, you should be financially free and independent!
