The steps to financial freedom are easy. All it takes is extreme dedication and discipline. It surprises me that hundreds of millions live in financial bondage. How else would you explain that millions of Americans rely on government grants, loans, and relief packages to survive?
Often, the blame lies with individuals for their unhealthy management of finances. I mean, some of us make incredibly poor decisions with cash, no argument. Otherwise, some blame the government, and I have to nod my head even if I don’t agree with their points. Our system of taxes is perhaps too harsh. What else would you think when taxes take nearly 50% of your monthly income?
However, despite these limitations, a few are financially free among us. As a financial expert, I receive calls and emails every day on this topic. It appears everyone wants to have financial freedom, although few eventually do. Some of us take courses, discuss with advisors, and surf the internet every hour—yet, find ourselves struggling with our finances.
I attribute this to the complex rules or complicated steps these sources ask us to follow. In this blog, therefore, I ensure to take out unnecessary jargon while simplifying these practical steps. Note that you have to follow these steps to financial freedom accordingly.
Manage Your Debts Wisely
John is a 25-year-old who just completed college—soaked in student loans, which he has to pay monthly until he is probably 35 or 40. To begin his career, John gets another loan, thanks to his credit score. In 5 years, John wants a car, and although he hasn’t finished payments for previous debts, he applies for more. John is working after all and repaying smoothly. He takes an additional loan to buy his first apartment—no more rents…
John is 70% of Americans. And here’s another catch: these are good debts compared to what others use their loans for. Some are soaked in bad debts, which are usually through personal dues or bank overdrafts. Such debts are used to buy or enjoy items, such as clothes, shoes, furniture, vacations, and entertainment—two words for this: wealth destruction.
The first rule towards debt management is never to take a loan you can avoid. Loans are destructive. You could work something out through friends or family. Ask for financial help that does not have legal binding. Get a job that pays, no matter how little, and spend minimally as you work. It is usually easier to save when there’s a target.
If you cannot avoid taking a loan, however, at least never owe bad debts. They have no impact on your life, albeit for the brief emotional satisfaction you derive when you just buy. It, therefore, baffles experts that most Americans are soaked in bad debts. Never buy things you can’t afford. There’s just one word of advice here: flee!
The goal of debt management is to have a limited amount of good debts with zero or minimal amount of bad debts.
Make Provisions For Emergencies
The most recommended way of providing for emergencies is to set aside some funds for this sole purpose. An emergency fund will solve problems without creating more. Granted, you’re a meticulous planner who things hardly surprise, but this doesn’t mean you see the future. If you do not have a time machine that takes you to the future, an emergency fund is must-have.
Adequate provisions for emergencies keep you out of trouble and save you time and stress. You do not have to bother in case of any unforeseen circumstances. If your kid got into a bike accident, an emergency fund ensures he gets quality treatment quickly. If your car breaks down, you can easily repair it. More significantly, an emergency fund secures opportunities. Although it is wrong to invest without proper planning, some opportunities are simply incredible.
To set up an emergency fund, save a fixed part of your income every month. Your emergency fund should be 6 or 8 times your monthly expenses. For example, if you spend $1000 monthly, your emergency fund should be $10, 000 at least.
Here’s an important tip: do not use your emergency fund unnecessarily. Ensure you spend from the funds only when unavoidable. If you could source money somewhere else, please do. Keep this cash until you need it.
Without sufficient funds reserved for unexpected occurrences, you may have to resort to borrowing to solve problems. If you do so, you find yourself at the first step all over again.
Most fall into the deceit of “living the American dream.” What’s the American dream?
In that order.
Good news: 90% achieve all these except for the last. You may excuse them. It isn’t easy to reach a peak after all.
Bad news: the peak is the only thing that matters. This is very much similar to a race: you run, run, run, and then fall before the final lap. Horrible.
This victimizing cycle starts after college. You’re already in loans, but you secure a job. While repaying your debts, you’re saving. You buy a house (more expenses), acquire a car (even more expenditures), vacations, luxuries and family, and then retirement—which is when you realize your folly.
You never saved enough. You were earning, getting promotions, but so were you spending.
Note: spending, not investing.
You’ll most likely spend 15–20 years to repay your mortgage debt, maybe 5–10 for your car, and 10–15 saving for your kid’s college funds.
In percentage, you’re spending over 80% of your income without any investment.
The third step, therefore, requires that you invest in one or two opportunities. There is no guarantee of success, granted, but it’s much better than reckless spending. You can try out passive long-time investments, such as the federal government bonds or stocks and company shares. If you are braver, you can try out the riskier short-time options as they pay higher returns.
There are several investment opportunities. Avoid the acquisition of irrelevant properties, like apartments, cars, or clothes, when you shouldn’t. Focus more on things that generate returns instead of expenses.
The steps to financial freedom are easier than you think. A quick rerun: maintain a low debt profile, save for emergencies, and invest wisely. An excellent way towards achieving these steps is to avoid unnecessary purchases or acquisitions.