Key takeaways:
- When you control your money instead of letting your money control you, you’ve achieved financial freedom.
- There are many things you can do to achieve financial freedom; some are easier than others, but all are possible with a little planning.
- Even doing things that cost nothing, like setting up automated bill pay, automating your savings, setting financial goals, and monitoring your credit score can put you on the path to financial freedom.
I’ve been a financial professional for more than two decades, and you’d be surprised at how the words financial freedom mean so many different things to people. I’ve heard everything from winning the lottery to saving enough for a comfortable retirement—even to just having enough money in the bank to cover the cost of an unexpected car repair without wondering how you’re going to make it the rest of the month. I propose that what financial freedom really means to most people is that you’ve finally achieved control over your money, rather than letting money dictate your life.
So how do you get there? Here’s what I’ve learned over the years.
1. Set some financial—and life—goals
Financial freedom doesn’t happen on its own; it’s achieved by setting a series of goals you’d like to reach in your lifetime, working out a plan to achieve them, and putting your plan into play. Your goals should be specific and include a timeline. For example, “I’d like to own a house” is an admirable goal, but “I’d like to own a house five years from now” gives your goal some specificity and allows you to set up some reasonable milestones.
2. Budget and live below your means
When I say, “live below your means,” I’m not talking about making your current life miserable for the sake of your future. But many people have some wiggle room in their finances where a small lifestyle adjustment can create a decent source of savings. That’s where making a budget comes in. Writing down all your monthly expenditures will give you a starting point to find positive changes you can make. To me, living below your means ultimately translates to not spending extra money just because you have it.
3. Automate your bills and savings
This is one of my favorite tips because it’s one that has become very easy with innovations in online banking and electronic payments. Automating your savings and bill paying essentially takes decision-making out of your hands. You can move a regular, set amount of money into your savings account each month, and ensure that your credit score stays strong by scheduling your regular monthly bill payments, eliminating the possibility of late or forgotten payments. The best part of automating your savings is that you can easily transfer the money back into checking in case of a financial emergency, so you’re not locking up the money where you can’t get it.
4. Establish an emergency fund
An emergency fund is savings you’ve set aside that allows you to pay for the unexpected, whether it’s car repairs, dental work, or covering rent if you’re between jobs. The rule of thumb is to save three to six months of expenses—I know that sounds like a lot, but that’s just the goal. Even if you save just $300 or $500, it can give you a healthy buffer against an expense you weren’t expecting.
5. Think smart about debt
I don’t know anyone without some level of debt—myself included. However, it’s how you approach your debt that makes a big difference. First, know how much you owe. Write down the amounts of all your current debt, along with the annual interest rate so you can put together a payment plan. For some people, it makes sense to pay more towards the high-interest debt first, as it will cost you more in the long term. But, if you’re the type of person that gets motivated by crossing things off your list, you might consider paying down the smaller debts first. The sense of accomplishment you get from finally getting a debt paid off can feel great—and help motivate you to pay off the other debts faster.
6. Monitor your credit
Make AnnualCreditReport.com one of your favorite websites. This site allows you to request a free credit report every 12 months from each of the three major credit bureaus—Equifax, Experian, and TransUnion. Use the site to spot identity theft and make sure there haven’t been any fraudulent accounts opened up in your name; take immediate steps to correct any errors you find. Having good credit opens up a lot of money-saving doors for your future.
7. Invest in your future
With the right mix of savings and investments, one day you might be able to make your job a choice, rather than a necessity. Establish a balanced portfolio of investments in stocks, bonds, and/or mutual funds, and build savings in the form of IRAs, certificates, or money market accounts. Smart investors never put all their investment eggs in the same basket; they spread their money out across different types of investments. The way in which you mix and match your investments among stocks, bonds, and other options is called asset allocation and holds the key to helping you pursue your goals. For more information about asset allocation, talk to a financial professional.
8. Maximize your employer’s retirement plan
Many employers offer 401(k) retirement plans that automatically deduct a certain amount from each paycheck, and then invest that money in a mixed portfolio. Even better, a lot of employers will offer a contribution matching up to a certain percentage of what you put in every paycheck. That’s free money that you don’t want to leave lying on the table.
9. Hire a financial professional
Call me biased, but in my experience, hiring a financial professional to build a comprehensive financial plan is one of the most important steps you can take toward financial freedom. I've met a lot of people who think they can go it alone. While this strategy is an option, it often results in missed opportunities. Financial professionals like myself can help you understand the nuances of the financial world and make decisions that will genuinely help you work toward your life goals—for the greatest control over your money and your future.
Why is financial freedom important?
Financial freedom gives you the opportunity to make choices about how you want to live, rather than having those choices dictated for you. It’s important to remember that financial freedom looks a little different for everyone—we all have different goals and timelines. But no matter what financial freedom looks like for you, it can be achieved with some careful planning and a willingness to set goals.
So, what are you waiting for? Grab some paper and a pencil, and let’s get started!
Mike Klopfer, CFP®
Financial Advisor
A financial professional with more than 20 years of experience, Mike Klopfer helps individuals, families, and businesses plan for their future and pursue their goals.
He is an alumnus of the University of Colorado in Boulder and has earned the highest credential in the financial planning field, the CERTIFIED FINANCIAL PLANNER™ (CFP®) professional certification.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Asset allocation does not ensure a profit or protect against a loss.
