Financial freedom is something that so many of us hope for. It is possible, and here are 5 steps to get you started.
1. Know Where Your Money Is Going: Until I finally sat down and tracked exactly where my money was going each month, I really had no idea how much money was flying out of my wallet on things that, in the big scheme of things, got me nowhere and meant nothing other than instant gratification. Things such as eating at restaurants can kill your monthly budget.
The tool to knowing where your money is going is creating a monthly budget. This will detail your income and expenses for the month and show you where any improvements can be made. If you have never actually created a budget a budget before, it can be one of the more difficult and frustrating processes, but trust me, it gets easier and eventually you actually look forward to creating your budget. Alright, I’m not sure I would go that far, but it might not give you that pounding headache every month.
When you detail your expenses, utilities, insurance, mortgage, etc., as well as all of your debts such as credit cards, loans, student loans, vehicle payments, etc., and then your miscellaneous spending such as restaurants, gifts, entertainment, etc., you will be able to map out where you may be leaking money. Trust me, your jaw will drop when you see how much the miscellaneous category ends up being the first time you do your budget. The key is to cut the miscellaneous category down as much as possible and put that extra money toward your debts each month. We will get to that part in a bit.
There are so many apps, programs, and websites out there that will help you create a monthly budget. I have found that EveryDollar works fairly well for creating a simple monthly budget based on what you a projecting to bring in from income and spend on expenses and debts. They are not a sponsor, just an app and website that I have found works fairly well and is easy to use. As a matter of fact, they are affiliated with Dave Ramsey, who is an authority on financial freedom. If you are looking for a good app dedicated to the digital envelope system, I recommend GoodBudget, again not a sponsor. I would love them to be (contact me, lol). Keep your budget simple. You don’t have to go out and spend money on a software program or app. The simpler, the better.
2. Be Prepared For Emergencies: It is inevitable that something is going to happen. This is real life, not a fairytale. Someone in your family will get sick, some will get hurt, the car will break down, the air conditioner will go out, or worst of all you will lose your job. I don’t wish any of that on anyone, but I don’t know anybody that one of those things has not happened to. This is why you need to have at least 3-6 months worth of expenses in an emergency fund which should be a separate bank account than your checking or savings. This emergency fund should be put in place before you begin to pay off your debts and becomes your safety net for life’s surprises.
Let’s be clear about this emergency fund, it is to be used for emergencies and emergencies only. An emergency to one person may not be an emergency to another person, but eating out, clothes, or an oil change are not emergencies. An emergency would be an injury, vehicle breakdown, job loss, etc. Do not touch this account for anything other than an emergency, and if you do need to use this account, replenish it as soon as possible.
Having an emergency fund that will get you through 3-6 months will put you in a position in a much less stressful position to begin and continue through your financial journey and will make an “emergency” an “inconvenience”. The difference between living paycheck to paycheck and knowing that you have the ability to survive for a few months if necessary is like night and day.
3. Payoff Your Debts: Once you have a handle on where your money is going and you have adjusted your expense categories to a point you are comfortable with, it is time to tame the debt beast. I know, that debt mountain looks impossible right now, but that is why you rearranged your priorities in the previous step and figured out that you don’t need to eat out as much. This is where we put that reallocated money to work for you and make it useful.
To do this, make a list of all of your debts including your credit cards, student loans, personal loans, vehicle loans, etc., and order them from lowest to highest balance. Do not worry about interest rates at this point and do not include your mortgage in this list. List each debt’s minimum payment and remaining balance next to it.
Look at your current monthly budget and take any money that is left over after paying your expenses and minimum payments on your debts and put that extra money toward your debt with the lowest remaining balance until that debt is paid off. Once that debt is paid off, you will take all of the money you were paying on the debt you just paid off and add it to the minimum payment you were paying on the next lowest debt until that debt is paid off. Keep going that way until all of your debts are paid off. You will recognize this as the debt snowball method from Dave Ramsey, and this is nothing new and is definitely not rocket science. It is common sense and is touted by financial experts because it works.
This process may take you months or years depending on your level of debt. The great thing about this method is that you obtain small victories early and this helps build your confidence and keeps your mental game strong. When you see progress early and often, you tend to stay with something, am I right? This is why when you spread a small amount over all of your debts every month and you never really pay any one of them off, you get frustrated and end up raising the white flag. Hit the lowest balanced debt with all guns blazing and obliterate it. Victory!
4. Get A Side Hustle: If you find yourself in a position where you plateau and you don’t feel like you are making any progress on your debt, and your budget is bulletproof, get your side hustle on. You should already be in a mindset that you will do whatever it takes to climb that mountain of debt and look down from the summit, so it is time to put your ego aside and increase your income.
Pick up extra hours at work if you are an hourly employee, the overtime can really add up. If you have an untapped skill, put it to use. Do you like creating websites, fixing computers? Are you handy around the house? Promote your talents and pick up some side jobs around the neighborhood. If you have reliable transportation, consider delivering pizzas or food on nights and weekends. Along those same lines, you could deliver people being a Uber or Lyft driver. The possibilities are really endless, use your imagination, just make it legal.
The point is, any extra income you can scrounge up is going to speed up your climb and is going to make those victories come quicker.
5. Contribute To Your Retirement: One of the most important things you can do is to invest in yourself. When you pay off your debt, you are going to begin to be able to build your personal wealth because you aren’t going to have those debt payments to worry about anymore. One thing you want to do, if you haven’t already, is to begin contributing to a 401k. If your employer has one, contribute 15%, if your employer does not have a 401k, open a Roth IRA and start contributing now.
By contributing to a 401k or Roth IRA, you are investing your money and building wealth at the same time. Make sure you find a qualified and trusted financial professional who will help you get the best return on your investment. You really can get a good return on these plans and this is one of the most effective ways to build wealth.
Give Back: This is not an official step, but this is, by far, one of the most karmic parts of financial freedom. It won’t seem easy or logical at first, but get in the mindset of giving back. Find a charity that appeals to you. Donate to your local church, community organization, etc. Whatever it is, make it personal. When you find a passion and a cause, you will become more focused and more at peace with yourself and others. Try to designate a small percentage of your monthly income for giving.
This information is for educational purposes and you should always consult a financial professional when making financial decisions.
– You can do it, we believe in you!