Ask a room of people to define financial freedom, and you’re likely to get a dozen answers.
For some, financial freedom means being able to pay the bills with money left over each month or having a fully funded emergency account. Others may want to retire early and travel extensively.
“It’s important to take time to reflect and be honest with yourself about what matters most to you,” Lena Haas, principal and head of wealth management advice and solutions for financial services firm Edward Jones, says.
Regardless of how you define financial freedom, the following 15 steps will help you achieve your vision for the future.
1. Determine your financial goals.
2. Know your current financial situation.
3. Open the right accounts.
4. Set up a deposit schedule.
5. Track your spending.
6. Formulate a budget or spending plan.
7. Trim your budget.
8. Prepare for “surprise” expenses.
9. Create a debt payoff plan.
10. Build an adequate emergency fund.
11. Monitor your credit.
12. Evaluate your career options.
13. Invest for the future.
14. Prepare your legacy.
15. Find a trusted financial advisor.
Determine Your Financial Goals
It will be hard to achieve financial freedom if you don’t first define what that means for you personally.
Nicole Rosen, enrolled agent in Wenatchee, Washington, and owner of Boundless Advisors, says to ask yourself what you want six months from now. “Then, work backward from that goal.”
Goals can include short-term plans, such as going on vacation or buying a new vehicle, as well as long-term objectives like retirement. It may also be helpful for people to analyze their beliefs about money and examine their relationships with it.
Rather than assuming wealth is something attainable only by those with high incomes, recognize that even middle-class families can move from living paycheck to paycheck to a financially comfortable lifestyle — as long as they spend less than they earn.
Having clearly stated goals can also help deter impulse spending. This way, if an enticing purchase comes up, you can ask yourself if it’s going to make you happy in the future … or decide if you’ll regret it because it will set you back, Haas says.
Know Your Current Financial Situation
Regardless of whether you’re just out of college or getting ready to retire, it’s essential to understand where you stand financially at the moment.
Add up debt, calculate expected income and identify holes in your financial picture, such as a lack of insurance or emergency savings. Consulting with a professional may be helpful in this process, particularly if you have complex finances or are approaching retirement.
Then, once you have a handle on your current financial situation, keep tabs on it going forward by regularly reviewing account statements. “If you never look at your statements, how do you know where your money is going?” Rosen asks.
Open the Right Accounts
There is no one single account that’s right for all your money. You should place cash for retirement in a tax-favored 401(k) or IRA account, while it’s typically best to keep college savings in a 529 plan. If you have a high-deductible health insurance plan, consider opening a health savings accounts to pay for medical expenses.
[Prepare for the Unknown With an Emergency Fund]
Meanwhile, keep your emergency fund separate from your other savings to avoid dipping into it unnecessarily. High-yield savings account are usually offered by online institutions like Marcus by Goldman Sachs and Discover Bank, and these can ensure your money earns some interest. The most important consideration for an emergency fund, however, is that it’s liquid and insulated from market losses.
That means cryptocurrency and aggressively invested portfolios are not the place for emergency funds, according to Nick Holeman, director of financial planning for online advisory firm Betterment.
“The point of the emergency fund is to be there when you need it,” he says. Rather than select a risky investment that could lose money, he recommends parking emergency savings in cash accounts that are “slow, steady and boring.”
[SEE: 7 of the Best Cryptocurrencies to Buy Now.]
Set up a Deposit Schedule
Once you have your accounts set up, create a system to ensure they’re fully funded. Many employers will direct deposit paychecks into multiple accounts, so you can divert a portion of your income to checking, regular savings and your emergency fund. You can also contribute directly to your 401(k) through a payroll deduction.
“If you have an employer match in a 401(k), try to contribute enough to get the full match,” Holeman advises.
[Read: How to Maximize Your 401(k) Match.]
For other savings goals, you may be able to set up automatic transfers from your bank account to other financial accounts. Finance experts often recommend saving 10% of your income for emergencies or other goals and another 10% for retirement.
Track Your Spending
If you’re currently living paycheck to paycheck, setting aside money for emergency and retirement savings can seem daunting. To find out exactly how much you can save, you first need to understand how much you spend.
Take a month to track where your money goes, from major bills to the cash you spend on coffee in the morning. Using a free app like Mint or Marcus Insights can make it easy to collect and categorize spending data — and also help you pinpoint hidden expenses.
Tracking expenses requires diligence and a significant shift in behavior for some, but seeing where your money goes over time is a crucial step.
Formulate a Budget or Spending Plan
More commonly known as a budget, a spending plan outlines how you expect to use your money each month. As you create this document, consider whether the items you list will bring you closer to your financial goals.
“It’s a tool,” says Howard Dvorkin, certified public accountant and chairman of Debt.com. “It has to be constantly worked and updated.”
In the past, people were limited to using a pencil and paper or perhaps a spreadsheet, but now there are numerous options that make budgeting easier. The same apps you use to track expenses can also often be used to create suggested budgets based on spending. Using an app can turn what might have been a long process into something that is quick and easy.
If you aren’t sure where to start, Rosen recommends making a list of regular bills along with their due dates. Then compare that list to your paydays. “Decide what you will pay for from each paycheck,” she says.
Trim Your Budget
Between creating a budget and tracking expenses, it should quickly become apparent if you have enough money to sustain your current level of spending. If not, you’ll need to trim expenses, and the obvious place to start is with unused or duplicative services, such as multiple subscriptions to streaming services you rarely used.
“There’s a lot of junk in people’s budgets,” Dvorkin says. “You’ve got to try to live below your means.”
Trimming expenses doesn’t necessarily mean cutting your morning latte or gym membership. Instead, people should think beyond the small expenses and consider major lifestyle changes that could benefit their financial situations.
Selling your house or buying a cheap, used car may seem like a significant sacrifice. It can be worthwhile, however, if it helps achieve your ultimate goal of lifelong financial independence.
If you get pushback from family or friends about lifestyle changes, reconsider who you spend your time with . “Surround yourself with people who are like-minded,” Holeman says.
Prepare for ‘Surprise’ Expenses
It’s a mistake to think about budgeting in terms of monthly expenses only. Throughout the year, every household will encounter bills from expected insurance premiums to unexpected vehicle repairs.
Planning for these expenses is not impossible. You can anticipate even unexpected expenses like car repairs and broken appliances because all mechanical items have a limited lifespan. By setting aside a small amount each month, families can be prepared for these “surprises.” Making direct transfers to a separate account is an efficient way to accomplish this.
If your surprise bill each year is taxes that you owe, Holeman recommends adjusting your tax withholdings at work. Likewise, if you receive a large refund each year, consider having less taken out in payroll taxes each week. “Everyone should strive when they do their taxes to break even,” he says.
[How to Adjust Your Tax Withholding]
Create a Debt Payoff Plan
For most, financial freedom means eliminating debt. While it can be difficult to own a house without a mortgage, getting rid of credit card debt or even car loans can be more achievable.
Usually, the best way to eliminate debt is to focus all your extra money on one debt while making minimum payments on the rest. From a mathematical standpoint, it may make the most sense to start with the debt that has the highest interest rate.
Paying off the debt with the smallest balance first, however, can build momentum. When you pay off that debt, don’t let the money you had been paying toward it get absorbed by your budget. Instead, apply that amount to the next debt on your payoff plan.
Another option is to make half payments, Rosen says. This works especially well for those who are paid bi-weekly. They can pay half of their amount due with each paycheck. “Then, you’ll have an extra payment by the end of the year,” she says.
Check with your mortgage lender first, though. Not all lenders accept partial payments.
Build an Adequate Emergency Fund
It can be tempting to deplete savings to pay off debt faster but that approach can backfire. Without an emergency fund, you risk going into high-interest credit card debt should an unexpected expense occur. Instead of prioritizing debt over savings or vice versa, direct a portion of your available cash to each priority every month.
“Building and maintaining an emergency fund should be an essential part of your overall financial strategy,” Haas says.
While conventional wisdom is to save enough money to cover your expenses for three to six months, that can sound overwhelming to some. Instead, focus first on having enough in savings to replace a single paycheck.
After saving enough to replace one paycheck, gradually add to the emergency fund until it can pay for several months’ worth of expenses should you find yourself unable to work for any reason. Once that savings account is fully funded, you can divert money to other needs like retirement and college savings.
Monitor Your Credit
Your credit score can determine your access to loans with low interest rates. In some states, employers can review a job applicant’s credit history when making hiring decisions, and insurance companies in certain areas may use credit to set policy premiums. Reducing debt and paying bills on time are two ways to boost a sagging credit score.
“Everyone should be reviewing their finances at least once a year or at every major life event,” Holeman says. He makes a point to request his credit reports and print out his Social Security statement at the start of each year.
Federal law allows consumers to request a free copy of their credit reports once each year through the website AnnualCreditReport.com. During the COVID-19 pandemic, credit reporting companies Equifax, Experian and TransUnion voluntarily offered free weekly reports to consumers.
Evaluate Your Career Options
Don’t overlook the importance of your job when it comes to achieving financial freedom. While income is obviously important, there is more to a job than the money you bring home each week.
Employers may match contributions to retirement funds, provide access to a variety of insurance products and even connect workers to sources of financial advice and money management tools.
Just as important, the right job may provide options such as flexible scheduling and remote work that can support your wellness and personal goals. That, in turn, can alleviate stress and make it easier to stick to financial plans.
Invest for the Future
Many assume they need large incomes to achieve financial freedom but that isn’t necessarily true. Some households with high incomes may always carry substantial debt, ensuring they’ll never be wealthy.
Meanwhile, other wealthy families may have modest incomes. Rather than amassing wealth through their income or an inheritance, many become wealthy because they save and invest money throughout their lives.
“Once you know how much your goals will cost, you can create the appropriate savings and investment strategies to potentially help you reach the needed amounts,” Haas says. “For your retirement goal, you will likely need to contribute regularly to your IRA and 401(k) or other employer-sponsored retirement plan.”
While a 401(k) is ideal for retirement savings, other accounts like 529 plans and health savings accounts may be better for other expenses such as college and medical bills.
The wide range of investment options can be confusing, though. “A financial advisor can help you determine investment moves appropriate for your goals and risk tolerance — and consider hypothetical scenarios,” Haas says.
Prepare Your Legacy
This step isn’t so much about creating your own financial freedom as much as ensuring your heirs’. After a lifetime of managing money correctly, you don’t want your money to end up in the pockets of relatives you didn’t intend it to — or, with Uncle Sam.
Create a will, update the beneficiaries on financial accounts and, if your assets are considerable, talk to an attorney or CPA to discuss strategies to minimize estate taxes. Beyond that, regardless of your income, make sure you maintain adequate life insurance to support your loved ones in the event you die unexpectedly.
It’s important you continually update your financial and estate plans too. Throughout the years your life will change — and so will tax laws. Your financial plans need to change along with them.
Find a Trusted Financial Advisor
Some people are comfortable managing their own money and investments but this final step will be important to others, particularly given recent challenging economic conditions.
“At Betterment, we’ve seen more people reaching out and wanting to work with human advisors than at any time in the last seven years,” Holeman says.
Meeting with a financial planner or tax advisor once a year can be helpful to evaluate your current situation and map out strategies for the future. These individuals aren’t emotionally invested in your money decisions, and a trusted professional can provide objective advice and tips you might overlook.
If you don’t think you need or want professional help, at least commit to expanding your own knowledge of money matters.
“Take five minutes out of your day and read something that’s going to help improve your finances,” Dvorkin says. Just one article a day can help improve your financial literacy and empower you to make smart decisions for yourself and your family.
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15 Steps to Achieve Financial Freedom originally appeared on usnews.com
Update 03/15/23: This story was published at an earlier date and has been updated with new information.
