Financial Freedom is the ultimate goal for many of us. But what does it really mean, and how do you get here?
Those are the questions that a lot of us get stuck on.
Financial Freedom might seem more like a dream than anything else. The goal is to shift that dream into reality.
There are actionable steps you can take to achieve financial freedom. Even if you don’t get exactly what you wanted, you will be better off financially if you follow these steps than if you keep considering financial independence an unachievable dream.
What do you have to lose?
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What Is Financial Freedom?
The technical definition of financial freedom is that you have enough money in savings, investments, and passive income that you don’t have to work a traditional job.
Many people use financial freedom synonymously with financial independence, but there’s a subset of people who consider financial independence having a job and taking care of yourself without parental or spousal support.
Although both definitions are valid, some like to use financial freedom to describe living job free to avoid confusion.
I have a slightly different definition of financial freedom, which makes it easier for anyone to obtain. It’s not about sacrificing everything you enjoy so you never have to work again.
It’s about choosing the lifestyle you want and having the time to pursue your passions – even if you get paid for them.
What Are the Steps to Financial Freedom?
Many famous finance so-called gurus will tell you that there is an easy path to financial freedom for everyone. You will achieve liberation if you follow their seven-step plan, 10-step plan, or 12-step plan.
The problem with these plans is that they aren’t realistic. Every single person has different starting points, end goals, circumstances, and obstacles to overcome.
Although these plans offer a place to start and can help give you ideas, they don’t work for everyone and don’t allow for many variations.
Some folks end up feeling like failures because they can’t seem to escape debt, and others have so many bills that they can’t save anything extra.
Obtaining financial freedom isn’t a one-size-fits-all plan.
Take the Quiz: What Type of FIRE Are You?
How Do You Get Financial Freedom?
The fact that there isn’t a one-size-fits-all path to financial freedom doesn’t make it harder to get there. It makes things easier.
You can do numerous things to achieve financial freedom and easily tweak any plan to make it work for you.
However, there are a few things you need to figure out before you make your plan.
Here are the top two things you need to consider before creating your financial independence roadmap.
The most important thing you need to determine is your personal goals. Do you want to live in a quaint cabin off the grid? Travel the world in an RV? Live in major cities and enjoy the nightlife? Have a humble abode in the suburbs where the kids can visit?
There are many paths in life, and whichever you choose will have implications on your financial goals and your quest for financial freedom.
Differing life goals is the most significant limitation of the step-plans discussed above. Those plans assume everyone wants to follow the traditional life script – go to college, get married, buy a house, have kids, work a job they hate, and retire.
Many of us don’t want to follow that script. There’s nothing wrong with following your dreams and living an unconventional life. There’s also nothing wrong with wanting to follow the script to a tee.
Determining what you want out of life is the first step to plotting your route to financial freedom.
Once you’ve figured out your life goals, it’s time to map out your financial goals.
What do you need to do financially to achieve your life goals?
Your financial goals will vary wildly based on your life goals. If your main goal is to build generational wealth for your children, you should focus on funding a 529 college savings plan and buying a home.
However, if your goal revolves around traveling in the world in an RV, your financial goals will be focused on financing or purchasing an RV and paying for that lifestyle.
If you need help getting started – snag our free Financial Freedom Mind Map. It’s a four-page printable mind map/worksheet that will help you visualize the life you want and take steps toward achieving it.
The 5 Building Blocks of Financial Freedom
One thing that the personal finance gurus get right is that everyone can use simple building blocks to achieve financial independence.
Whether you are saving for a house or an RV, you still need to save money, right? Whether you are investing for a child’s college fund or your retirement, you still need to be investing.
Getting your finances in order is the first step to achieving your financial goals, regardless of what those goals are.
There are five main building blocks of financial freedom: creating a financial plan, building a budget, saving, investing, and paying off debt.
Let’s take a look at each of them.
Making a Financial Plan
After you figure out your life and financial goals, your next step is making a plan to achieve them.
You will need to write out your current status and goals, then determine actionable steps you can take to achieve your goals.
Our Financial Freedom Mind Map Worksheet can help you with this, as can our epic post on building a financial plan.
You can also check out our Youtube video:
Building a Budget
The financial plan is an essential building block and will help get you into the correct headspace for achieving your goals.
But it’s a planning session. The first actionable step you need to take is building a budget.
Budgeting isn’t exciting or glamorous, and it can be downright dull. However, it needs to be done.
You need to start controlling your money. The basic premise of a budget is to manage your money rather than let your money control you. It helps you visualize your spending, understand your subconscious priorities, and shift your expenditures, so they better align with your goals.
Budgeting also helps you find places where you’re needlessly spending money.
Now that you control your spending, it’s time to start saving some money. Hopefully, you’ve identified places in your budget where you are spending too much money and can cut back.
There are numerous ways to save money, from saving on living expenses to saving at the grocery store.
You can use the money that you saved for a variety of things. You can add more money to your emergency fund or use it to start working on the other two building blocks of financial freedom.
Although saving money is great, and you should fund your short-term wants and needs via a savings account, it’s not enough for long-term goals. The interest on savings accounts has been at “historical lows” for as long as I’ve been able to have an account. Although many banks now offer 3-4% APR, it’s not typically enough to beat rising inflation.
Investing is the best way to beat inflation and ensure you are prepared for any eventuality. I prefer investing in low-cost index funds because they offer automatic diversification and don’t take too much of your hard-earned money away in fees.
However, there are numerous other ways to invest. You can purchase individual stocks, real estate, and commodities, and you can even invest in yourself by starting a side hustle or building a business.
It’s best to diversify your investment portfolio to include a mix of different types of assets.
See Next: Everything You Need to Know About Barista FIRE
Pay off Debt
The final building block is paying off debt. Debt is like a ball and chain you carry around with you. It holds you back from pursuing new opportunities because you constantly have to focus on paying what you owe.
You should first focus on paying off the highest interest-rate debt, such as credit card debt. Put the cards away and promise yourself that you won’t use them unless there is an emergency and you have to.
Next, focus on student loan debt, which is a huge burden to an entire generation. Apply for loan forgiveness if you can, and pay as much as you can each month.
Finally, try to avoid getting into more debt. Save up for a new car and drive that beater longer. Work to build good credit before applying for a mortgage, or avoid buying a house if homeownership isn’t one of your big life goals.
Homeownership isn’t for everyone, and if you don’t want it, don’t let what society thinks push you into such a significant financial decision.
What Should I Do First?
Experts will tell you that you should do these things in a specific order, but it’s hard to say what’s most important without knowing your specific goals.
One thing that most do agree on is that you should try to get at least a thousand dollars in an emergency account first.
Some experts will tell you that you should work on paying off debt next, but I disagree. It could take years to pay off thirty to forty thousand dollars of debt. You will miss out on compound interest and investment gains in those years if you focus solely on debt repayment.
The Triangle Approach
You need to do all three. I call it the Triangle Approach to achieving your financial goals.
Let’s say you have a hundred extra dollars at the end of each month after making minimum payments on all of your debts and investing in your retirement account. You should split that hundred dollars between savings, paying off debt, and non-retirement investment accounts.
Since you already have that thousand dollars in your emergency savings account, you can put the smallest amount there.
Sometimes I put as little as ten bucks a month in my emergency savings – but that’s okay. Slight growth is still growth and will help prevent you from getting into even more debt should an emergency arise.
The remaining ninety dollars should be split between investments and paying off debt, depending on your financial goals. If your goal is to improve your credit score to buy a house, you should focus more on paying off the debt. If your goal is to quit your job as soon as possible and live off investment income, you should focus more on building up your non-retirement investment accounts.
The Triangle Approach helps you build your debt-savings-investment triangle based on your individual goals.
Read Next: How to Set and Slay Your Financial Goals
How Do I get to Financial Freedom in Five Years?
Some people can achieve financial freedom in five years, and others can’t. Whether you can or not depends upon your individual situation and your goals.
My definition of financial freedom is slightly different than the traditional definition in that I consider working for myself and building an online empire doing the things that I love to do as a form of financial freedom.
While it’s true that I’ll still be technically working, I’ll be working on things I love to work on and won’t have to report to a boss or meet anyone’s deadlines but my own. Passion Fire is my Financial Freedom.
If you are in the same boat, achieving financial freedom in five years is easy if you start building your passions into a profitable business today. The harsh reality is that it takes time to make any venture profitable.
Whether you want to be a content creator or an artist, an Esty seller, or anything else, if you start working towards that dream now, five years should be enough to make it a reality.
However, suppose your goal for financial independence is a Fat Fire lifestyle of living in a high-cost-of-living area and enjoying the nightlife every night. In that case, it’s probably going to take you longer.
The timeline is very fluid, depending on your personal goals.
How Much Money Do I Need for Financial Freedom?
The big question is, how much money do you need? And, like anything, that depends on your goals. Many people will throw out a number, like a million dollars, and say they will retire once they have that.
But do you really need that much? Do you need more? Only you can answer that.
Take a hard look at your goals and what you need to get there. Check out this post on how much money you need to get started.
Financial Freedom is Achievable
There is so much to the financial independence movement that some type of FIRE is available to most people. Follow the road map in your own financial plan, and you will get there in no time!
Melanie launched Partners in Fire in 2017 to document her quest for financial independence with a mix of finance, fun, and solving the world’s problems. She’s self educated in personal finance and passionate about fighting systematic problems that prevent others from achieving their own financial goals. She also loves travel, anthropology, gaming and her cats.