How to Reach Financial Freedom: These 10 Habits Will Help You to Achieve It
Financial freedom refers to the ability of an individual to live a life without relying on a job or paycheck.
KEY TAKEAWAYS
- Financial freedom means having sufficient savings, investments, and income to live the life you want for yourself and your family. It’s about having enough money to cover your needs and wants.
- It allows you to make choices and live the life you desire without being limited by financial worries, constraints, or limitations. It’s about having enough money to cover your needs and wants.
- Common tips for financial freedom include tracking your income and expenses, living below your means, and keeping learning on personal finance.
Here are the 10 habits you can start achieving financial freedom today.
1. Track Your Income and Expenses
It is simply impossible to reach financial freedom unless you know how much money you make and where you spend it. You need to have a record-keeping system to track your income and expenses. With the help of this kind of system, you know exactly how much you are spending and where you are spending your money. Knowing where the money is coming in and going out helps you to develop a plan for the money.
The simplest way to keep track of your income and expenses is with the help of a good smartphone app. Find an app that fits your needs, and enter all your income and expenses to manage your money.
2. Create a Budget
Tracking your income and expenses leads you into creating a budget. If you don’t know how to create a budget, the following steps can help you to do it!
Here’s how to create a budget in seven steps.
1. Create a budget in an Excel sheet: You need to check where your money comes from and where it goes.
2. Calculate your income: You need to state how much money you make each month. This includes your normal paychecks and any extra money you earn through a side hustle or freelance work.
3. Calculate your expenses: You need to list your monthly expenses like rent, utilities, loans, etc.
4. Calculate the difference between your income and expenses: When you subtract expenses from income, this number should be bigger than zero.
5. Label fixed and variable expenses: Fixed expenses are bills you can’t avoid such as rent, and utilities. Variable expenses are bills you can be more flexible like gym membership, travel plans, etc.
6. Set financial goals: You need to identify what you’re saving for and how much you need to save.
7. Review your progress: At the end of each month, you need to review your progress, and reevaluate your budget.
3. Manage Your Cash
Cash management helps you to see the money you have coming in from your salary, investments, side hustles, rental income, and any other things that you generate income and going out for expenses like rent expense, bills, and other living expenses. On the other hand, it helps you control your income and expenses.
So how can you manage your cash?
You can manage your cash by following these steps:
- Calculate how much income you generate each month
- Identify your expenses
- Review your finances
- Create a budget
- Start saving
- Invest in reliable financial products
- Monitor your investment on a regular basis
4. Manage Your Debt
When you manage your cash, it’ll be much easier for you to keep track of your finances and manage your debt. Take a look at following tips to manage your debt easier!
- Always pay your debt on time.
- Pay more than the minimum on credit cards.
- Know how much income and debt you have, and then calculate debt-to-income ratio (Ideally, this ratio should be lower than 36%).
- Apply for credit only when you really need it.
- Check your credit report
5. Live Below Your Means
If you can live below your means, you have a great opportunity to reach financial success.
No matter where you are today, you can change your lifestyle and start living below your means. In order to achieve living below your means, you need to make the necessary lifestyle adjustments, budget your money, and cut unnecessary expenses.
Never forget that don’t let your expenses determine how much you save!
6. Start Saving
The sooner you start saving to achieve financial freedom, the easier they will be to reach. Start saving as soon as you get your first paycheck! And after, make your savings automatic.
Before proceeding to the next step, please evaluate how much of your income you are saving. Because this will help you to find your savings ratio. The savings ratio is calculated by dividing total savings by gross income .
A high savings ratio indicates that you can invest enough money in your future, whereas a low ratio may signify that you have limited capacity for investment.
Speaking of which, if you don’t know how to start saving money, the good news is that there are plenty of articles about saving money in Save Money section! Educating yourself on saving is necessary to achieve financial freedom.
7. Start Investing
When you save enough money for investment, you should focus on how your money will grow; that is, how your money will turn into wealth. You need a basic understanding of investments to have the ability to manage your savings and investments.
You’ll learn how to get started investing below!
To get started investing, you should determine a strategy based on the amount you will invest. You can begin investing with $100 or $1000. The amount of money you’ll start with is not important. It’s significant to be financially ready to invest. If you’re ready to start investing, you need to figure out how much money you should invest, what assets you should invest, and what your risk tolerance is.
Here are four steps to start investing:
- Start investing early and consistently: Investing early and consistently when you’re young is one of the best ways to take full advantage of returns on your money. Your investment returns start earning their own return thanks to compound earnings. Also, when you build wealth systematically through investments, it’ll improve your spending habits.
- Choose your investments by diversifying your portfolio: You need to find investments that fit your financial goals and choose the different types of investments by diversifying your portfolio. Remember that you should never put all your investments in one security.
- Decide how much to invest: When you choose your investments, you need to decide the amount of money you’ll invest in each investment type. How much you’ll put in depends on your financial goal.
- Measure your risk tolerance: Different people have different tolerances for risk. You need to measure your risk tolerance because it is one of the most important factors that affects which assets you’ll add to your portfolio. If you don’t worry about short term downs in your investment, you probably have higher risk tolerance. If you worry with short term downs, you may have a lower risk tolerance.
8. Build An Investment Portfolio
After you start saving and investing, it’s time to build your portfolio. While building your portfolio, select different combinations of assets that are best suited to help you reach your financial goals. Some common investments to include in your portfolio are stocks, bonds, short term certificates of deposit accounts, mutual funds, exchange traded funds, commodities, real estate, etc.
While developing an investment portfolio, always remember this:
This means that you should diversify your investments.
Also remember that after you build your investment portfolio, you should always monitor your investment. Because monitoring your portfolio helps you to review your investment performance and make adjustments to your savings.
9. Plan for Retirement
No matter how young you are, it’s never too early to start planning for retirement. There’ll be a time when you retire. So, if you want retirement to be successful, you need to develop a retirement plan. Prepare yourself mentally and financially, and make sure you have enough money saved to fund your retirement plan.
10. Keep Learning on Personal Finance
The best way to reach financial freedom is to keep learning about money; that is, personal finance. Keep in mind that knowledge is power and an understanding of personal finance gives you the ability to handle financial troubles.
If you don’t have a financial background, the good news is that there are plenty of articles about personal finance in this section! Educating yourself on it is a must to reach financial freedom.
Conclusion
You’ve been introduced to the steps of financial freedom. You’re ahead of the game: Get started, manage your money and take control of your financial situation!
Keep in mind that these 10 steps are just the beginning of achieving financial freedom. If you’re ready to learn more, check out these additional resources from Money and Financial Literacy.