So you decided to become financially free. That is a genius decision. Having to worry about money constantly is bad for your health and your wallet. Living in constant fear of creditors or collection calls is a nightmare, and one you can avoid.
But how do you start? Life is expensive, especially if you have kids or a previous debt. Sometimes it may seem impossible to get out of your current situation. However, if you live in a free (or relatively-free) country and you are willing to make some sacrifices (sorry, nothing comes for free these days) you can significantly improve your financial status in the very near future.
Step 1 – Get Out of Debt
If you are in debt (except for a mortgage which you pay on time), you should first get rid of it. Debt is like an investment going against you, which means the more time goes by, the less money you have. Being in debt is an emergency, and should be treated as such. Your time and resources should be aimed at getting out of debt – paying more than the minimum payments (which are mostly interest payments), bargaining for more money, and most importantly – not getting into more debt. If you find yourself in a hole, stop digging.
If you need help, consider contacting debt relief specialists who will create a personalized plan that will help you leave the days of debts behind. Even without them, there are several methods to get out of debt quickly (prioritizing by interest rate or total money owed). Just pick one that works for you and stick with it. Discipline is key here. When you are debt-free, no creditor has power over you.
Step 2 – Stop Incurring More Debt
When you’re debt free, stay that way! Only buy what you can afford right now. Using a credit card? Pay it off in full each month. Don’t let more debt enter your life, since it only works against you. Make sure your expenses are less than your income and don’t postpone any payments. Interest on them can be deadly.
More importantly, don’t take loans for everyday expenses. Loans should be taken only to buy assets which will increase in value or help you generate more income (such as well-thought business loans). Personal loans can drown you in debt and you should avoid them at all cost. If you want something, save towards it. Don’t borrow now and work for years to pay it off. Remember: in debt, interest works against you.
Step 3 – Create Emergency Reserves
Once you owe nothing, you can start working for yourself rather than others. Calculate how much you spend each month on average and start saving towards a sum that will last you for six months. For example, if you spend $3,000 each month, you need to save at least $18,000 in your emergency reserves. These reserves should be saved in a savings account or any investment which does not decrease in value and can be cashed in almost immediately.
Use these reserves only for emergencies – if you get fired or have a huge necessary expense which cannot be paid off your regular checking account. This money is not for travel, buying a boat, or purchasing jewelry. Its sole purpose is to save you in case of an emergency.
Cannot Save? That’s Not True
If you think “there is no way I can save such sums of money”, you are mistaken. Since you are debt free, you already have an income equal to or larger than your expenses. Now you can (and should) go both ways: increase your income and decrease your expenses. This way you will save money much faster.
First, see how you can get more money from your job. Ask for a raise, take a side-job if possible. Negotiate hard and you will get what you want (of course, don’t burn bridges. You still need a job). If you’re willing to take on some risk, start a side-business. Everyone has something to sell, and today it’s easier than ever to sell online. There are also many companies that let you work from home (for example, some telemarketing jobs), so you can use that time as well. Of course, leave some time for yourself.
Secondly, every time you spend money, no matter if it’s a small or large sum, write it down. At the end of each month take a look at your expense list and think which expense was unnecessary. It can be difficult to lower your standard of living, but it’s always smart to live below your means. When you want more, increase your means.
Step 4 – Get Your Credit in Order
If you were in debt, your credit score is probably very poor. This is a situation which you have to resolve, since a big part of our financial lives depends on that score. It may prevent you from renting a house or cause you to pay heavily for an emergency loan or mortgage (it is HIGHLY recommended to NEVER take an emergency loan, but when you reserves run out and you’re out of options, it can be a temporary fix).
Improving your score is a hard task, but since you’re out of debt, you should be able to pay off your credit cards entirely every month. You can also try some credit repair services if you think they may help you. Most of them have free consultation, so use it before you make any commitment.
Step 5 – Save and Invest
This is where freedom begins. You were in debt, which is investments working against you. Now you will finally have investments working for you. Each and every month take what you saved and put it in an investment account. Don’t go crazy – invest in stocks, bonds, real estate, and other investments that you understand. After you invest, just forget it’s there. It’s not meant to grow ten-fold in a year. But over time, as you invest more and reap the benefits of compound interest, this sum will grow larger. The more you save each month, the faster you’ll reach financial freedom.
Step 6 – Financial Freedom
This is your goal. Being financially free means, at least for us, that you don’t have to go to work in order to sustain your current standard of living. In other words, your passive income (income not generated by being an employee but “passively” – dividends, rent, etc.) is larger than your expenses. This is what financial freedom is all about – choices. In this case, you don’t have to work, but you can choose to work (for an even larger income). You become the owner of your own time, your greatest, irreplaceable asset. That is the true meaning of freedom.
Of course, the term “passive income” is misleading. Nothing is ever passive. All those investments must be handled carefully, which also takes time. However, it takes much less time than working for eight or nine hours a day. The rest of your time can be spent on improving your health, being with your family, or reading books. You decide. You choose.
This list is very general, but describes the general idea rather well. Achieving the final step isn’t easy. It takes time and discipline to reach that point (and if you have trouble trimming your expenses, a big income). But even partial freedom is better than financial slavery, or debt.
FinanciallyGenius.com strives to get you to financial freedom, so this post will remain sticky, the first post you see on the home page. It should always be clear to you and us where we are and where we want to go.
* Inspired by Dorin Hartmann, writer of HaSolidit (in loose translation: “The Solid Investor”), a personal finance and investment blogger.