Financial freedom—having enough savings, investments, and cash on hand to afford the lifestyle you want for yourself and your family— is an important goal for many people. It also means growing a nest egg that will allow you to retire or pursue any career you want—without being driven by the need to earn a certain amount each year.
Unfortunately, too many people fall far short of financial freedom. Even without occasional financial emergencies, escalating debt due to overspending is a constant burden that keeps them from reaching their goals. When a major crisis—such as a hurricane, an earthquake, or a pandemic—completely disrupts all plans, additional holes in safety nets are revealed.
Trouble happens to nearly everyone, but these 12 habits can put you on the right path.
- Set life goals—big and small, financial and lifestyle—and create a blueprint for achieving those goals.
- Make a budget to cover all your financial needs and stick to it.
- Pay off credit cards in full, carry as little debt as possible, and keep an eye on your credit score.
- Create automatic savings by setting up an emergency fund and contributing to your employer’s retirement plan.
- Take care of your belongings—maintenance is cheaper than replacement—but, most importantly, take care of your health.
1. Set Life Goals
What is financial freedom to you? Everyone has a general desire for it, but that's too vague a goal. You need to get specific about amounts and deadlines. The more specific your goals, the higher the likelihood of achieving them.
Write down these three objectives: 1) what your lifestyle requires; 2) how much you should have in your bank account to make that possible; and 3) what age is the deadline to save that amount.
Next, count backward from your deadline age to your current age and establish financial mileposts at regular intervals between the two dates. Write all amounts and deadlines down carefully and put the goal sheet at the front of your financial binder.
2. Make a Monthly Budget
Making a monthly household budget—and sticking to it—is the best way to guarantee that all bills are paid and savings are on track. It’s also a regular routine that reinforces your goals and bolsters resolve against the temptation to splurge.
3. Pay Off Credit Cards in Full
Credit cards and other high-interest consumer loans are toxic to wealth-building. Make it a point to pay off the full balance each month. Student loans, mortgages, and similar loans typically have much lower interest rates; paying them off is not an emergency. However, paying these lower-interest loans on time is still important—and on-time payments will build a good credit rating.
4. Create Automatic Savings
Pay yourself first. Enroll in your employer’s retirement plan and make full use of any matching contribution benefit, which is essentially free money. It’s also wise to have an automatic withdrawal into an emergency fund, which can be tapped for unexpected expenses, as well as an automatic contribution to a brokerage account or something similar.
Ideally, the money for the emergency fund and the retirement fund should be pulled out of your account the same day you receive your paycheck, so it never even touches your hands.
Keep in mind that the recommended amount to save in an emergency fund depends on your individual circumstances. Also, tax-advantaged retirement accounts come with rules that make it difficult to get your hands on your cash should you suddenly need it, so that account should not be your only emergency fund.
5. Start Investing Now
Bad stock markets—known as bear markets—can make people question the wisdom of investing, but historically there has been no better way to grow your money. The magic of compound interest alone will grow your money exponentially, but you do need a lot of time to achieve meaningful growth.
However, remember that—for everyone except professional investors—it would be a mistake to attempt the kind of stock picking made famous by billionaires like Warren Buffett. Instead, open an online brokerage account that makes it easy for you to learn how to invest, create a manageable portfolio, and make weekly or monthly contributions to it automatically. We’ve ranked the best online brokers for beginners to help you get started.
Achieving financial freedom can be very difficult in the face of growing debt, cash emergencies, medical issues, and overspending, but—with discipline and careful planning—it is possible.
6. Watch Your Credit Score
Your credit score is a very important number that determines the interest rate you are offered when buying a new car or refinancing a home. It also impacts the amount you pay for a range other essentials, from car insurance to life insurance premiums.
The reason credit scores have so much weight is that someone with reckless financial habits is considered likely to be reckless in other areas of life, such as not looking after their health—or even driving and drinking.
This is why it’s important to get a credit report at regular intervals to make sure that there are no erroneous black marks ruining your good name. It may also be worth looking into a reputable credit monitoring service to protect your information.
7. Negotiate for Goods and Services
Many Americans are hesitant to negotiate for goods and services, because they're afraid that it makes them seem cheap. Conquer this fear and you could save thousands each year. Small businesses, in particular, tend to be open to negotiation, so buying in bulk or positioning yourself as a repeat customer can open the door to good discounts.
8. Stay Educated on Financial Issues
Review relevant changes in tax law to ensure that all adjustments and deductions are maximized each year. Keep up with financial news and developments in the stock market and do not hesitate to adjust your investment portfolio accordingly. Knowledge is also the best defense against fraudsters who prey on unsophisticated investors to turn a quick buck.
9. Maintain Your Property
Taking good care of property makes everything from cars and lawnmowers to shoes and clothes last longer. The cost of maintenance is a fraction of the cost of replacement, so it’s an investment not to be missed.
Learn to know the difference between the things you want and the things you need.
10. Live Below Your Means
Mastering a frugal lifestyle means developing a mindset focused on living a good life with less—and it's easier than you think. In fact, before rising to affluence, many wealthy individuals developed the habit of living below their means.
This isn’t a challenge to adopt a minimalist lifestyle. It simply means learning to distinguish between the things you need and the things you want—and then making small adjustments that drive big gains for your financial health.
11. Get a Financial Advisor
Once you’ve gotten to a point where you’ve amassed a decent amount of wealth—either liquid assets (cash or anything easily converted to cash) or fixed assets (property or anything not easily converted to cash)—get a financial advisor to help you stay on the right path.
12. Take Care of Your Health
The principle of proper maintenance also applies to your body—and taking excellent care of your physical health has a significant positive impact on your financial health as well.
Investing in good health is not difficult. It means making regular visits to doctors and dentists, and following health advice about any problems you encounter. Many medical issues can be helped—or even prevented—with basic lifestyle changes, such as more exercise and a healthier diet.
Poor health maintenance, on the other hand, has both immediate and long-term negative consequences on your financial goals. Some companies have limited sick days, which means a loss of income once paid days are used up. Obesity and other dietary illnesses make insurance premiums skyrocket, and poor health may force early retirement with lower monthly income for the rest of your life.
What Is Financial Freedom?
Everyone defines financial freedom in terms of their own goals. For most people, it means having the financial cushion (savings, investments, and cash) to afford a certain lifestyle—plus a nest egg for retirement or the freedom to pursue any career without the need to earn a certain salary.
What Is the 50/30/20 Budget Rule?
The 50/30/20 budget rule, popularized by Senator Elizabeth Warren, is a guideline to achieve financial stability by dividing after-tax income into 3 categories of spending: 50% for needs, 30% for wants, and 20% for savings and paying down debt. We have built an easy-to-follow budgeting calculator to help you categorize and control your spending and saving—which is the essential first step toward financial freedom.
Will a Bad Credit Score Make My Car Insurance Higher?
Although some states—including California, Hawaii, Washington, Massachusetts, and Michigan—limit or prohibit the use of credit scores to determine auto insurance rates, many companies do use a credit-based scoring system to decide whether to insure you and how much you will pay.
The Bottom Line
These 12 steps won’t solve all your money problems, but they will help you develop the good habits that get you on the path to financial freedom. Simply making a plan with specific target amounts and dates reinforces your resolve to reach your goal and guards you against the temptation to overspend. Once you start to make real progress, relief from the constant pressure of escalating debt and the promise of a nest egg for retirement kick in as powerful motivators—and financial freedom is in your sights.