We all have our own visions of what financial independence and success look like. Most of the time, we hitch our ideas of financial freedom to the financial goals we have set for ourselves. Each milestone and goal achieved is another step in the direction of hard-won financial security and independence that often takes years to build.
But some aspects of financial freedom are universal. Even if they aren’t your ultimate financial goals, these smaller achievements are great milestones on the way to achieving true financial freedom. Here’s a look at what it takes to build this success for yourself.
Financial Freedom Means Minimal Reliance on Debt
You may still have a mortgage on your home, and you may use credit cards to pile up travel rewards. But for the most part, financial freedom means a limited use of debt, including no carried credit card balances, no auto loans or personal loans, and ideally no student loans.
Instead of taking out loans to afford big purchases, financial freedom means you’re able to save up cash and make those purchases without any reliance on debt. You’re spared the interest rates and payment schedules brought by debt, keeping more of your monthly income in your bank account.
With this low utilization of debt, you’ll also have an easier time getting approved for credit—and managing the monthly payments—if a situation arises where you do need to take on debt.
The End of Paycheck-to-Paycheck Living
When you’re forced to live paycheck to paycheck, you’re often caught in an endless cycle of paying bills, paying off credit cards, and scraping together your savings bit by bit over time.
As you grow your savings and strengthen your financial footing, though, you should find yourself no longer at the mercy of this endless cycle. Instead of rationing your money until the next paycheck comes in, you can take comfort in knowing that even if that paycheck arrives late, your finances will be unaffected.
Breaking free of the paycheck-to-paycheck lifestyle could reduce the amount of stress around your finances, and it will offer day-to-day financial stability that you may have never experienced until now.
A Healthy Emergency Fund
When you achieve financial freedom, you have enough financial cushion to weather unexpected expenses or even a short-term loss of income. Instead of being forced to take on debt, this emergency fund provides a buffer that should offer peace of mind even when your finances are in great shape.
Ideally, an emergency fund will feature enough cash reserves to get you through 3-6 months of living expenses. If you’re not able to tuck away that much money right away, you can build up those funds gradually over time, making small but meaningful steps toward greater financial freedom.
Financial freedom depends on your ability to not only save money in a savings account but also to fund retirement accounts and other investments that will continue to grow in value over time.
For greater financial freedom, aim to diversify your investments across a number of different options. In addition to owning a home, this may include the 401(k) offered by your employer, traditional IRAs, Roth IRAs, and investment properties, among other options.
A financial advisor can help you diversify these investments to control your risk while maximizing your potential income generation both now and in retirement.
A Plan for Early Retirement
When the time comes, you may have no interest in retiring early. Some people are happy to keep working long after they’ve saved up for retirement. But even if you want to enjoy a long career, it doesn’t hurt to target an earlier retirement date to give yourself flexibility down the road.
By targeting early retirement, you can accelerate your savings plan and preserve your financial freedom even in the event of layoffs or other surprises in the future.
The Road to Financial Freedom Starts Today
Financial freedom is the result of years of diligence and wise money management. By setting financial goals and reinforcing the right spending and savings habits, you can work toward your dream financial future one day at a time.
Ready to set a budget that supports your goals of financial freedom? Download A Complete Guide to Budgeting today.
*Originally published January 2021. Updated September 2021.