- 3 min read
Gaining Debt Freedom
Financial freedom gives you the flexibility to pursue your dreams, enjoy your family and free time, or enjoy your retirement. Financial freedom does not simply mean being out of debt. It means being comfortable with your income and financial future, knowing how to live within your means, and having enough money to accomplish your goals. The first step to financial freedom is getting out of debt.
Gaining Debt Freedom
The first step to achieving financial freedom is to resolve your debt. Make a list of all of your debts, and rank them according to type, amount, and interest rate.
Your goal should be to pay off all of the credit card and personal loans as quickly as possible. Car loans can either be paid off next or paid off over time. If your student loans have a low interest rate (below 6%), then paying them off does not need to be a priority. Your mortgage is considered a good debt. Paying it off early is not necessary for financial freedom unless you have completed the other steps.
If you need help paying off your debts, you may need to consider getting some sort of debt help such as debt consolidation or debt settlement.
Controlling Your Expenses
Learning to manage your expenses is a big part of paying down debt, but it is also important for people who do not have debt. Your expenses should be at least 20% lower than your income. That allows you to respond to any financial surprises, as well as save and invest money for the future.
If you are currently living paycheck to paycheck, or are close to it, list all of your expenses and income and see where you can make cuts or improve your income. Accomplishing both would give you the most benefit. Once you have reduced your expenses, use the difference to pay down debt, contribute to savings, or invest in your retirement.
Saving for the Future
Once your debt is eliminated and your expenses are manageable, the next step is saving for the future. There are three aspects to saving:
- Retirement investments
- The emergency fund
If you have a retirement plan at work that offers matching funds, contribute at least enough to receive the full match. From there you can decide how much more to contribute. If you do not have matching, contribute to the plan anyway. Due to the wonders of compounded interest, you will be amazed by how your money will grow.
In addition to retirement, you should establish an emergency fund. Ideally, your fund should contain enough to cover three month's expenses, but you can save more.
Once your retirement and savings plans are in place, start investing in the stock market. Index funds are the best way to get your feet wet.
Enjoying Financial Freedom
Once you have achieved financial freedom, you will no longer experience the day-to-day stress of worrying about paying bills and you will have the financial flexibility to take a vacation, retire early, or support your children and grandchildren. Financial freedom is more than a financial status, though. It's also a mindset. Once you attain it, you can only keep it by maintaining the practices that got you there.