he ongoing coronavirus pandemic has shaken the global economy, leading to skyrocketing unemployment and reductions in income. According to a recent survey published by Statista, the average American has been negatively impacted by the pandemic. On a scale of 1 to 10 (with 1 being no impact and 10 being severely impacted), the average level of the pandemic’s impact on respondents’ personal finances was 5.2.
Meanwhile, 61% of young Americans say they’re stressed by the state of their finances and believe the pandemic has severely “derailed their journey to financial independence,” according to TD Ameritrade’s latest Financial Independence Survey.
Even with many countries reopening their economies and providing aid to struggling sectors, the economic uncertainty caused by the pandemic is likely to extend into the foreseeable future.
Given these dire circumstances, wouldn’t it be great to have a financial safety net to safeguard you and your loved ones’ future?
Picture this: your ability to meet your family’s basic needs isn’t threatened by a recession. A medical emergency won’t leave you drowning in debt, and the financial impact of unemployment is cushioned by other streams of income.
These positive scenarios are made possible when you have financial freedom.
Chapter 1: What is Financial Freedom?
Financial freedom is about having control of your finances, and not the other way around. Your bills are easily covered by the income you generate, and you have a nest egg tucked away for emergencies and retirement. It means living the life you want without having to overly rationalize every dollar spent.
The path to financial freedom isn’t easy. In fact, it requires discipline, determination, and hard work. But the worry-free disposition that comes with achieving this type of independence is worth all the effort. Research has shown that an increase in financial security is linked to better health and overall quality of life.
Chapter 2: Planning for Your Financial Freedom in 10 Easy Steps
1. List down your financial goals.
The first step to financial freedom is identifying your financial goals. Do you want to earn an X amount of money each year to afford a certain lifestyle? Do you want to save for a house, a car, a vacation, or retirement?
List down all of your short-term and long-term financial goals to help you get a clearer picture of your financial road map.
The financial goals (and the exact steps to achieving them) will vary from person to person. For example, the financial goals of a single 25-year-old female will differ from those of a married, middle-aged man. Both groups will also have access to different sources of income.
Like all expenses, your financial goals need to be integrated into your budget (more on this later). This way, you can take concrete steps towards achieving your goals while making room for other expenses.
Make your goals as specific and time-bound as possible (ex: In five years time, I would have saved X amount of money for a first-home deposit). This makes it possible for you to perform periodic check-ins to align your current financial status with your overall financial road map.
2. Calculate and pay off your debts.
It goes without saying that shouldering large amounts of debt is a major impediment to financial freedom. Hence, it’s only logical to include debt elimination in your list of financial goals.
Start by calculating your total debt. Then, proceed to figure out which debt-reduction strategy works for you. You can use either the debt avalanche method (which prioritizes eliminating debt with the highest interest rate), or the debt snowball method (which recommends paying off debt with the lowest interest rate first). The process of debt elimination won’t be easy and quick, but shedding off debt, even in increments, is your gateway to financial freedom.
3. Create multiple streams of income.
Diversifying your sources of income is a viable means of breaking the cycle of living from paycheck to paycheck. It’s also a great way to grow your wealth-building potential.
Of course, there are only 24 hours in a day and it’s not sustainable to grind for long hours on end. The key is to include a source of passive income in the mix so you won’t have to compromise your health and well-being in the process.
Listed here are some of the best ways you can generate multiple streams of income:
Freelance work can be done on top of your day job for a few hours each day or during weekends. The work encompasses any task that can be done in exchange for money, including writing blog posts, working as a virtual assistant, driving for Uber or Lyft, or walking the dogs in your neighborhood.
Freelancing is a great way to monetize your talents and resources without being bound by a contract or strict working hours. You can check out platforms like Upwork and Fiverr, or even local listings in Facebook Groups, to discover freelance job listings that you qualify for.
Dropshipping is a business model that allows you to start selling products even if you don’t have much capital. You also won’t have to worry about managing inventory or shipping your products to your customers since you don’t need to be in contact with the products to sell them. Instead, customers buy the products from your online store and you pass the sales orders to a third-party supplier. The third-party supplier then ships the orders to your customers.
Once you’ve established an efficient system, many processes can be automated and you won’t have to closely monitor everything to earn money. Check out our guide on how to start dropshipping for more information.
This is the most common way to earn passive income. It involves renting out or selling property that you own, such as land, housing, or storage space. The money you’ve invested in buying a property will return as cash flow once it has been rented out.
On the other hand, you can also have your property listed for sale. House flipping has been gaining traction for years now. It’s basically buying an affordable property, fixing it up to raise its value, then selling it for a tidy profit.
Invest Your Money
Investing your money is a great way to grow your wealth and achieve your financial goals. Proven investment vehicles include:
The stock market
Considering the wide range of investment vehicles, with their varying risks and levels of complexity, it would be wise to consult a financial advisor before diving headfirst into any type of financial investment.
A financial advisor will assess each client’s financial situation, goals, and needs to develop a customized portfolio and investment strategy.
4. Improve your financial literacy.
Financial literacy means having the knowledge and confidence to manage every aspect of your finances, including:
- Budgeting and saving
- Debt Elimination
- Buying Insurance
- Investing in the stock market
- Tax Planning
- Retirement and Estate planning
Being savvy about finances will also arm you against scams and prevent you from making poor decisions with your money.
Take advantage of the wealth of knowledge available today. Give yourself a few hours per week to read books, listen to podcasts, or consume online resources that will enrich your financial literacy. If you want to take it a step further, you could attend financial literacy courses (some of which are available for free online). Whichever method you choose, investing in your financial knowledge will help you build better financial habits.
5. Make a budget and stick to it.
Budgeting is an effective way to manage your finances. When you formulate a spending plan, you can keep track of where your hard-earned money is going. Depending on your schedule of payments, you’ll also get a better view of when your finances may be tight and when you’re likely to have extra money.
There are several ways to manage a budget, and the key to doing it successfully is to follow a plan that suits your situation. Here are a few examples:
50/20/30 Budget Rule
This rule means spending 50% of your net pay on needs (utility bills, groceries, mortgage or rent, and insurance), 20% on savings, and 30% on wants (extra groceries, entertainment. etc).
Pay Yourself First Budget
This method recommends allocating 20% of your income to your financial goals BEFORE directing the 80% of it elsewhere. You can also modify the percentage depending on your circumstance—hitting a 30/70 or even 50/50 ratio.
This practice starts off with listing different budget groups and ranking them from most to least important. The idea is to allot the lion’s share of your budget to the most important group and the least amount to those furthest down the list.
Whichever budgeting scheme you choose, make sure you’re committing a portion of your money to your financial goals. You don’t have to overwhelm yourself by going to the extreme and living way below your means in the first few months. Assess the situation first and adjust accordingly. Remember that even a little (but consistent) amount is way better than zero.
6. Spend your recreational budget on experiences.
If you do decide to allot some of your budget for wants and recreation, it would be wise to spend it on experiences rather than material possessions. Rather than succumbing to the bottomless pit of material wants, spending your money on experiences will likely add greater vitality to your life. And the novelty doesn’t wear off as quickly as getting the latest gadget or the fanciest suit.
Stacked memories of family getaways to the beach or annual vacations to foreign countries will remind you of why you’re working so hard in the first place. Plus, a break in your routine will be good for your mental health and productivity in the long run.
7. Invest in high-quality possessions.
When you have to buy something that provides long-term value, it’s important to make wise and informed decisions. You’ll want to purchase something that will work in the most optimal way for as long as possible. It’s common knowledge that quality is often compromised when items are too cheap. But in some cases, expensive doesn’t always mean better.
To ensure you’re getting value for money, consider reading up on professional reviews. This will help you learn the pros and cons that come with owning the product, ways to store it properly to prolong its usefulness, etc.
You can also use customer reviews to help you narrow down your options and decide if an item is worth buying or not.
8. Take care of your health.
Health is wealth isn’t an adage for nothing. It’s part of your journey to financial freedom to be a good guardian of your assets—including your physical, mental, and emotional health. It would be hard to maximize your earning potential if you’re constantly ill. Plus, hospital bills will create a huge dent in your savings, even if you’re insured.
Enjoying the good life requires discipline, consistency, and focus. And it’s good to know that investing time and resources towards your health always leads to tangible results. So even with a busy schedule, make sure you’re nourishing yourself with a proper diet, doing consistent physical activity, and getting sufficient doses of sleep and rest.
9. Hire a financial advisor.
On top of being financially educated, getting sound advice from a financial advisor will help you make strategic decisions about your finances. Also known as financial planners, financial advisors counsel their clients on wealth management, retirement planning, and other personal money matters.
Financial advisors can assist you by drafting plans for you to follow. They can also recommend investment products and vehicles. They’ll typically charge you a straight commission whenever they make a transaction or sell you a product. Others charge a fee based on the money they’ve been given to manage, while others charge an hourly fee.
If you’re looking for a cost-effective alternative, you can start by using robo-advisors or other online planning services.
10. Grow your savings.
To safeguard the long-term welfare of yourself and your loved ones, you’ll need to grow your emergency and retirement funds.
An emergency fund is your safety net when unforeseen circumstances arise, such as unemployment, emergency repairs, or serious illnesses. The emergency fund’s purpose is to keep you financially solvent without the need for high-interest loans, credit cards, or withdrawals from your 401(k).
Many financial advisors recommend putting aside up to half a year’s worth of expenses in an emergency savings account. When choosing a savings account, consider opening an account that offers easy access and a high interest rate. As emergencies will strike at short notice, quick access to funds is crucial. Just make sure to keep the savings account separate from your everyday bank account so you’re not tempted to dig into your reserves.
Retirement planning is the process of determining retirement income goals, and encompasses the decisions and actions that must be undertaken to achieve those goals. This involves choosing a retirement savings program, identifying viable sources of income, estimating expenses, as well as managing assets and risks. To be truly successful, retirement planning needs to take into account life expectancy versus future expenses and liabilities.
In the United States, popular investment vehicles include IRAs and 401(k)s. These allow savers to grow their savings and enjoy specific tax advantages. To learn more about retirement planning throughout the various stages of life, check out this helpful article from Investopedia.
Additionally, there is a movement whose proponents are committed to saving up to 70% of their income to fund early retirements. Proponents of the Financial Independence, Retire Early (FIRE) movement aim to quit formal employment in their 30s or 40s and live off small withdrawals from their financial portfolios.
Chapter 2: True Financial Freedom Involves Changing Your Perspective on Money
In your pursuit of financial freedom, it helps to view money from a proper perspective. Drop the view that money is something you simply need to pay the bills and afford the lifestyle and things that you want. Instead, look at money as an instrument that can better your life and the lives of others. When handled wisely, it can fund your dreams and uplift others.
A string of tactical decisions to increase your income, working towards improving your financial literacy, and sticking closely to a budget and savings plan are just some of the building blocks that will lead to financial freedom—regardless of the state of the economy or the world. The end result is the comfortable, worry-free life that you deserve.