If you’re living paycheck to paycheck, you’re likely too focused on making rent, paying bills, and staying within your financial means to plan too far ahead. But if you want to enjoy the financial freedom that comes with paying off debt and building up savings, know that you can start today.
Financial independence doesn’t happen overnight, but you don’t have to wait to start creating a brighter financial situation. Even when money is tight, there are simple steps you can take to make progress toward these goals.
Set a Budget
Even if you’re already spending less than you make every month, it’s important to set a budget so you can track your spending and develop better money management habits.
Your budget should also account for at least some amount of savings each month, which can be put toward various goals that contribute to financial freedom.
Over time, you can use your spending budget to identify more ways to cut your living expenses—think cutting cable, cooking at home more, or buying off-brand groceries—that will help you increase your savings and accelerate your progress toward achieving financial independence.
Consolidate Debt—If It Saves You Interest
Are you carrying multiple forms of debt? Depending on your interest rates and your current monthly payments, it might make sense to consolidate this debt into a single monthly payment, which could reduce the amount of interest you’ll pay.
Student loans, credit cards, and other types of debt are excellent candidates for this consolidation, and this option can reduce your monthly expenses while giving you a more realistic path to paying off your debt. Depending on your financial goals, you can use the extra money to fund other savings and investments, or to accelerate your debt repayment while paying less interest in the long run.
Create a Debt Payoff Plan
Whether or not you choose to consolidate, any plan for financial freedom needs to include a debt payoff plan. Car loans, student loans, credit card balances, home equity, and other types of debt are huge obstacles to reaching your financial goals because you’re repaying money you’ve already spent instead of building toward the future.
If you have multiple debt payments you’re making every month, make an individual plan for when each one will be paid off. Then, once the first debt is fully paid, take that money and roll it over to the next debt scheduled for payoff.
Put Money Into an Emergency Fund
Paying down debt is important, but it doesn’t have to be your only goal. If you don’t already have one, an emergency fund can be a great financial safeguard that creates financial freedom by improving your ability to withstand sudden expenses and life changes.
Many consumers may choose to slowly build up this emergency fund as they pay down their debt. Experts recommend aiming for a fund that can cover 4-6 months of living expenses in the event of a job loss or other unexpected event, but if that’s not practical, you can start small and steadily grow this fund over time.
As you pursue long-term financial freedom, you’ll want to start putting away savings that generate earnings and grow your net wealth over time.
Consider investments into a 401(k) at your place of work if this is an option, or open your own retirement account to build up your retirement savings—and possibly score a nice tax break, too.
Keep Living Expenses Flat as Your Income Grows
One of the biggest opportunities to build greater financial freedom comes when you start receiving increases to your monthly income. Whether you earn a promotion, ask for and receive a raise, or take a new job that pays more money, this extra income can be your best asset in paying off debt and achieving financial freedom.
When extra income comes your way, the best thing to do is nothing. Don’t buy a new car, don’t upgrade your house, and don’t start spending more on restaurants, entertainment, and other luxuries.
Keep your living costs the same as they were before. If you can do this, you can take all of the extra money from your income increase and put it toward paying off high-interest debt and investing into retirement and other funds.
As you start building toward financial freedom, it can seem like the progress you’re making is small. But remember that this progress continues to build on itself and gain momentum over time. A year from now, you’ll be proud that you started today.