In order to achieve financial freedom, you must demonstrate certain financial behaviors and knowledge, and acquire specific personality traits as you go through a number of stages toward achieving financial freedom. There is no way you can achieve financial freedom overnight. It is a journey that you must be committed to taking, no matter how painful it is, all while making sacrifices along the way.
The U.S. Consumer Financial Protection Bureau’s definition of “financial well-being” is a very good starting point. It lays the right foundation in your quest to being financially free. This definition will help us identify a number of pre-requisites for achieving financial freedom.
Financial well-being is defined as a state of being wherein you:
1. Have control over day-to-day and month-to-month finances and cash flow. (You can cover your expenses and pay all your bills and loan commitments on time. You do not worry about having enough money to get by.)
2. Have the capacity to absorb a financial shock when it suddenly comes your way. (Emergencies do appear, and having spare money to pay for these unexpected expenses will be vital to your financial well-being.)
3. Are on track to meet your financial goals. (Whether or not you have a formal financial plan, you have financial goals that are important to you. You want to work hard toward achieving those goals.)
4. Have the financial freedom to make choices that will allow you to enjoy life. (You are able to do things without worrying whether you have the money or not. “Just do it” is your financial mantra!)
In short, financial well-being is a state of being. It’s where a person can fully meet current, ongoing, and future financial obligations. Those who are financially free, feel secure in their financial future. They are able to make daily choices that allow enjoyment of life.
These elements of financial well-being have strong timeframe dimensions. The first and fourth elements of the definition above pertain mainly to your present situation. The second and third elements pertain to securing and future-proofing your future.
Remember this:
People who have high levels of financial well-being feel in total control of their day-to-day and month-to-month finances and cash flow. They can cover their expenses and pay their bills and loans on time. Generally, they do not worry about having enough money to get by.
You need to demonstrate or acquire the following behaviors that will support your financial well-being:
- Effective routine money management, which encompasses often unconscious habits, intuitions, and decision-making shortcuts (heuristics);
- Financial research and knowledge-seeking, which support purposeful, informed financial decision-making;
- Financial planning and goal-setting, which give purpose and structure to individual financial decisions; and
- Following through on financial decisions (the final step between intention and desired outcomes).
In addition, you need to have or acquire the following financial ability knowledge:
- Knowing when and how to find reliable information to make a financial decision;
- Knowing how to process financial information to make sound financial decisions; and
- Knowing how to execute financial decisions, adapting as necessary to stay on track.
Finally, you need to have the following personal traits that will influence your behavior, preferences, and expectations about money and your finances:
- Comparing yourself to your own standards, not to others (internal frame of reference or mindset);
- Being highly motivated and committed to staying on track and achieving your goals in the face of obstacles and difficulties (perseverance);
- Having a tendency to anticipate and plan for the future, control impulses, and think creatively to address unexpected challenges (executive functioning); and
- Believing in yourself and your ability to positively influence your financial outcomes for a better future and outcome (financial self-efficacy).
You can find out about the status of your financial well-being from this U.S. government website, by visiting consumer finance.gov. Answer ten questions to measure your current financial well-being and take steps to improve your personal circumstances based on the report that will be produced for you after you have answered the questions.
Here’s the thing: There’s no magic fairy person who will suddenly appear in front of you and instantly transform your financial life for you. You must put in significant effort and commitment if you want to be financially free. It will take hard work. You have to do it yourself.
There are a number of stages that you must go through before you can achieve financial freedom. Taking small baby steps will be the way to go for you.
You must work your way through these stages using a strategy and plans that will lead you to your ultimate financial independence.
- Financial dependence: Firstly, you need to transition from depending on the support of others, including friends and family members, to provide your own support with the work and effort of your own hands. You are essentially on your own.
- Financial solvency: You need sufficient income from your own efforts to pay all of your living expenses. You need to be current on all of your bill payments, including your credit card and loan repayments.
- Financial stability: You need to save money and accumulate a special buffer account so that unexpected expenses and opportunities don’t cause you to fall behind or miss out on any payments.
- Debt freedom: You need to make a plan to become totally debt-free, and ruthlessly implement that plan until it’s accomplished.
- Financial security: You want to have your basic living expenses totally covered by your investments and business system income (e.g. blog or franchise), alone, without the need for you to work for “active income.” You work because you want to work, not because you have to work to support yourself.
- Financial independence: Your current lifestyle expenses can be funded from your investment income (known commonly as “passive income”) without you needing to work to earn money. You work because you want to.
- Financial freedom: You’ve built your investment income to a point where it fully funds your current lifestyle expenses and any desired lifestyle goals that you may have. You may even reach financial abundance where you have room to spare, allocating your surplus money to a charity of your choice or other worthy causes.
Here are some practical steps you can take in your journey to achieve financial freedom:
- Begin to think positively about money. Thinking negatively about money is an emotional obstacle that you must eliminate. This positive mindset will set the right focus for you to build wealth.
- The key to building a strong financial future is to understand how much you spend and to save right now. It can give you a sense of control and confidence that makes it easier to make financial changes in your life.
- If you’re living beyond your means (i.e. spending more than you earn), then you’ll need to adjust your expenses accordingly so you don’t go further into debt. Overspending is what led you to debt in the first place!
- If you have debt, pay it off quickly. Make a list of all your debt, excluding your home mortgage. Your debt list should include car loans, credit cards, student loans, and so on. Pay down each debt one-by-one, starting with the highest interest-rate debt.
- If you cannot control your credit card spending, then cut up your credit cards.
- Adjust your spending if required. Purchase based on necessity. Be an investor, not a consumer. You owe it to yourself to be honest about what you’re doing so you’re not wondering why you can’t reach your goals.
- Write down your goals for financial freedom and review them regularly. Always think of how you could accomplish them. Financial goals don’t just happen. You make them happen. It requires you to assess where you want to be five, 10 and 20 years from now.
- Once you know where you’re going, you need a strategy and detailed plans to get there. The usual route is to spend less than you earn, and invest the surplus money in such a way that you can get to where you want to go.
- Regularly review your actions by asking “What did I do right?” and “What would I do differently, next time?”
- Plan every day in advance, especially the night before. It will make you far sharper and more precise at everything you do. It gives you better focus. It gives you a greater sense of self-control and personal power when you work from a list and tick the items off one-by-one.
- Invest in yourself by purchasing courses on money management; read books on personal finance, and find articles online about money.
- If you’re in a relationship, talk to your partner or spouse about money because most couples never talk to each other about money or their financial goals. Relationships break up due to these issues.
- Review your insurance coverage for medical, dental, life and disability.
- Reduce your taxes by embarking on tax planning.
- Create an investment policy that will set the foundation for the right mix of investments (e.g. real estate, cash, stocks, unit trust, etc.).
- Every adult who owns assets and has a spouse or children should have an accurate and up-to-date will and power of attorney.
- Diversify your income streams and start a side hustle. Increase your income by finding a higher-paying job and starting a side business while you have your job.
- Find a mentor(s) and really pay attention to everything they do.
- Increase your emergency savings to three to six months’ worth of expenses.
- Optimize contributions to your retirement fund.
