Financial freedom means different things to different people. For some, it means having the ability to handle unexpected expenses or emergencies. For others, financial freedom is paying cash for a large purchase, such as a new car or a dream vacation.
Maybe your idea of financial freedom is knowing that you can retire when you’re ready, on your terms, and have the lifestyle you want.
Whatever your specific definition of financial freedom is, what it all boils down to is you having control over your finances, instead of the other way around.
5 Tried-and-True Ways to Achieve Financial Freedom
As with most new endeavors, getting started is one of the hardest parts of the process. To help you kick off your financial freedom journey, let’s walk through a few of the most effective, time-tested methods for reducing expenses, controlling spending, and setting you up for financial independence.
1. Track your spending so you know where your money is going.
Keeping a record of your daily spending is a great first step toward financial freedom. Many people spend mindlessly on unnecessary goods and services, then wonder why they never have any extra cash.
Tracking your purchasing habits over time helps you pinpoint and eliminate wasteful purchases. For example, $3 a day for your morning coffee may not seem like a lot at the time, but over the course of a year, those coffees add up to more than $700. That’s money that could be earning interest in your IRA or getting you a plane ticket to Acapulco.
To get started, take an inventory of your spending habits. Look at your checking account and your credit card statements and record all of your purchases over the previous six months. Then categorize all of your purchases by type. Some of your expenses will be fixed, such as your mortgage, car insurance, and utility bills. Others are more variable, including grocery store purchases, random shoe splurges, and that magazine subscription you forgot you had.
Tracking your spending doesn’t have to be complicated. A simple spreadsheet or personal expense tracker app is all you need. Once you have your expenses entered and categorized, you can see where your money goes each month and make informed decisions about where to reduce spending.
2. Set a budget (and stick to it).
Now that you have the big picture of which expenses are necessary and which can be eliminated or reduced, you can work on a budget. Although budgeting may not sound like a lot of fun, if you stick with it, the end result will make it all worthwhile.
Referring back to your pared down expense inventory, compare your income to your outflow. If there isn’t anything left over once the bills are paid, you’ll need to look for other costs to cut.
Don’t be afraid to be brutal and cut down to just the necessities; this is only temporary. You can live with one streaming service instead of three, and most store brands are just as good as the expensive ones.
Once you have your budget set, the challenge becomes sticking to it. It takes a lot of willpower to break the unnecessary spending habit. Find an accountability partner to be your support system and ask them to remind you of your goals when you are struggling to resist a nonessential purchase.
3. Make a “get out of debt” plan.
In Q4 2021, credit card debt in the U.S. reached $860 billion dollars, with the average cardholder owing $5,934. When you add to that amount a home loan, car payment, and student loans, it’s easy to see why many people feel like they are drowning in debt.
Financial freedom can seem out of reach when a large percentage of your income goes toward paying off debt. However, creating a plan to get out of debt, even if it takes a while, will keep your long-term financial dream alive.
Now that you’re tracking your spending and have your budget in place, the next thing you need to do to eliminate debt is stop borrowing money. No more swiping your credit card, no new store credit, no new loans.
Many financial experts recommend taking a “snowball” approach to paying down your existing debt. This means you make the minimum payment on all of your debts except one, which will get the maximum amount you can budget toward repayment.
Once that debt is repaid, target another debt, paying the minimum plus the amount you had budgeted for the first debt. Continue this process, snowballing payments into the target debt until it is paid off.
The debt you choose to pay off first may have the highest interest rate or the lowest balance; it’s really up to you. The important thing is to commit to rolling over the money to a new debt each time one is paid off.
4. Create an emergency fund—start small and think big.
Studies show that for many U.S. households, an unexpected $400 expense would affect their ability to cover their regular monthly bills. Without cash to pay for a medical emergency, car repair, or broken appliance, often the only alternative is to use a credit card. This adds even more debt that must be repaid before you can achieve financial freedom.
The best way to prevent one of life’s curveballs from derailing your financial goals is to create an emergency fund. Initially, you might think you can’t afford to save money until you have [insert your roadblock here]. But the reality is you can’t afford not to have an emergency fund if you want financial freedom.
Ideally, you will have 4-6 months’ worth of living expenses in your emergency fund. But that’s an end-goal, not a starting point. Saving even $10 a month is better than saving nothing, so look at your expense tracking and budget and find a way to allocate money to your emergency fund.
Having an emergency fund is so essential to financial independence that you may even consider finding a way to add to your income, even temporarily. Additional income from a second job, side gig, or even sales of household items can be diverted to your emergency fund, minimizing the likelihood that an unplanned expense will significantly add to your debt load.
5. Don’t expand your spending to match your pay increases.
Many people make the mistake of growing their lifestyle and expenses as their earning power grows. However, financial freedom doesn’t mean freedom to spend every dollar you earn. In fact, the opposite is true.
If you are committed to financial independence, how you allocate pay raises or other income increases can make a huge difference in how quickly you meet your goals.
Instead of spending your extra income on a bigger house, a newer car, or the latest and most expensive electronic device, maintain your current costs of living. Use your new income to pay off a credit card, fund a retirement account, or create a financial safety net in your emergency savings account.
Resisting the urge to spend every dollar you make today is a giant step toward future financial freedom, which is worth far more than the latest smartphone.
How Do You Know When You Have Achieved Financial Freedom?
There is no concrete finish line for your financial freedom journey. Just like defining the concept, everyone will have their own benchmarks for success.
However, there are a few generally accepted indicators that you are well on your way to reaching financial freedom:
- Limited use of debt for large purchases, including cars
- No more living paycheck to paycheck
- 4-6 months of expenses in an emergency fund safety net
- Ability to fund both savings and retirement accounts
- Retirement readiness on your terms
Achieving financial independence isn’t easy, but it is definitely worth the effort. The five money management strategies above can help you break free from debt and minimize wasteful spending to create a solid foundation for future financial freedom.
Get started on your financial freedom journey and start building your safety net. Download 4 Tips for Building an Emergency Fund Savings Account.