Achieving financial freedom is many people’s goal.
It is generally defined as having enough savings, investments, and enough cash on hand to afford the lifestyle you want for yourself and your family—and a growing nest egg that will allow you to retire at any time or pursue the career you want without being driven by earning a certain amount each year.
Just about everybody wants to become financially independent – so why do so few people get there?
One of the secrets to attaining financial independence is that it doesn’t usually “just happen”.
It starts with a detailed plan, and a willingness to commit to that plan.
Unfortunately, too many people could not achieve it.
They are burdened with debt that is just increasing, unpredictable financial emergencies, profligate spending, and other issues that thwart them from reaching their goals.
Then there are unexpected and unwanted events, such as a hurricane or earthquake—or pandemic—that make plans turn out not as planned.
Challenges happen to nearly everyone, but these habits will help you trade your way to financial freedom.
These 22 Habits Will Help You trade your way to Financial Freedom
1. “Decide You Want It More than You Are Afraid Of It”
OK – that quote is from the recently discredited Bill Cosby, but it’s brilliant nonetheless. And it’s an important point too. One of the reasons more people don’t reach financial independence is they’re afraid – not of being financially independent, but of the changes in their lives they’ll have to make to get there.
Taylor R. Schulte, CFP, Financial Planner, Founder & CEO, Definefinancial.com recognizes it doesn’t happen overnight:
If you are new to the financial planning process, it’s important to remember you don’t need to go from zero to sixty overnight. Just like a fitness trainer would be hesitant to recommend an all-out body-straining routine on your first day in the gym, I wouldn’t expect someone to start implementing advanced planning techniques in the first week. Pick a reasonable and attainable goal, and get used to achieving small wins on your track to financial independence.
Decide You Want It More than You Are Afraid Of ItBill Cosby
For example, if you are new to saving, you don’t need to immediately put aside half of your paycheck. Start with a small amount – maybe $20 per pay period – and increase it as you get more comfortable with the process. Starting out slow will help you build the confidence needed for long-term success.
In order to become financially independent, you have to have a serious heart-to-heart talk with yourself. You want to get a few things clear in your head, including:
A definition of exactly what financial independence means to you – following someone else’s definition won’t get you there
A realistic picture of your current financial situation
A realistic idea as to what you’ll have to give up to get where you want to go
A realistic assessment of the obstacles in your path
A series of goals that will help you to become financially independent
That last point is a discussion all its own…
2. Set Life Goals
What does financial freedom mean to you?
Write down how much you want to have in your bank account at a specific time frame, what the lifestyle you want entails, and at what age this should be achieved.
The more specific your goals, the higher the chances of achieving them.
3. Create a Series of Steps that Will get You Where You Want to Go
Becoming financially independent isn’t a single goal, but a series of sub-goals. This is because your financial life has several facets. In order to reach your overall goal of financial independence, you’ll have to establish goals in the various areas of your financial life, including,
- Increasing your income
- Controlling your spending habits
- Paying off your student loan and credit card debt
- Understanding your savings patterns
- Determining your investment objectives
- Defining your long-term financial goals
- Purchasing the best life insurance for your family
- Implementing a legacy plan for your heirs
We’re going to go over each of these categories in some detail, but it’s important you create such a list, with a corresponding goal relating to each individual category. That will ensure you are moving your entire financial situation forward, rather than trying to do it one category at a time.
4. Make a Budget
Making a monthly household budget—and adhering to it—is the best way to assure that all bills are paid and savings are on track.
It’s also a regular routine that reinforces your goals and helps you to keep track of your expenses
5. Pay Off Credit Cards debt
Credit cards and similar high-interest consumer loans are poisonous to building wealth.
Make it a part of the plan to pay off the full balance each month.
Student loans, mortgages, and similar loans typically have much lower interest rates; paying them off is not an emergency but gradually.
Paying debt on time is and will build a good credit rating.
6. Create Automatic Savings
Pay yourself first. Enroll yourself in your employer’s retirement plan and make full use of any matching contribution benefit.
It’s also wise to set up an automatic withdrawal for an emergency fund, which can be tapped for unexpected expenses, and an automatic contribution to a brokerage account or something similar.
It is better the money is being pulled the same day you receive your paycheck, so it never even touches your hands, avoiding temptation entirely.
However, keep in mind that the right amount to save is highly debated. In some cases, the feasibility of such a fund can be a question.
Don’t be one of those people who say “I’ll start saving money when…” The problem with telling yourself that is “when” never comes.
The better position? When is now! When is always. You should always be saving money no matter what’s happening. That’s one of the very best strategies to make sure you are always moving forward.
If you don’t have enough room in your budget to save money now, then the answer is to increase your income, lower your expenses, or both.
As John Maxwell says “You’ll never change your life until you change something you do daily. The secret of our success is found in your daily routine.”
Tony Liddle, CEO and Financial Advisor at Sark Investments sits down with his wife each January and write out our annual goals:
We set up a business and personal budget for ourselves and include savings goals. Then to keep ourselves accountable we review our budget monthly. This keeps us on track to reaching our financial goals. I’d recommend setting up a system that works best for you and your family.
Just writing down your goals will help you start the process. But, reviewing them daily and having honest conversations about where you are financially will determine your success or failure in becoming financially free.
Never let excuses stand in the way of saving money. It’s a long-term goal that starts today – and never stops.
7. Start Investing Now
Bad stock markets can make people question this, but historically there has been no better way to grow your money than through investing. The magic of compound interest will help it increase exponentially over time, but you need a lot of time to achieve meaningful growth. Don’t try to be a stock picker or trick yourself into thinking you can be the next Warren Buffett. There can only be one.
Instead, open an online brokerage account that makes it easy for you to learn how to invest, create a manageable portfolio, and make weekly or monthly contributions to it automatically. We’ve ranked the best online brokers for beginners to help you get started.
Achieving financial freedom can be very difficult in the face of growing debt, cash emergencies, medical issues, and overspending, but it is possible with discipline and careful planning.
Once your emergency fund is adequately stocked, you can begin thinking about investing your money. This is important because investing is about using your money to earn more money. The larger your investment portfolio becomes, the closer you get to financial independence.
Ideally, your efforts to save money should never slow down once you have built your emergency fund. Instead, increase your efforts to fund your investment accounts. That should be easier to do once you have an emergency fund in place.
8. Invest No Matter What the Market is Doing
In hindsight, it’s obvious there have been better times to invest than others. But since no one knows what the future holds, you can’t know when that will be in the future. Plan to invest no matter what the market is doing. If you’re investing periodically, you’ll be dollar-cost-averaging into the market, which will minimize the risk you’re taking should the market decline.
If you do feel it’s a bad time to invest, then simply cut back on how much you are investing in equities. But at the same time, continue accumulating cash and fixed income investments in your portfolio, that way it’ll be there to buy when the timing looks a little bit more favorable.
9. Diversify Your Investments
This gets back to not knowing what the markets will do in the future. The best way to protect yourself against unexpected surprises is to diversify your investments across several different asset classes.
Big picture, you should have a certain amount of money invested in stocks, fixed-income investments, peer-to-peer lending, cash, natural resources, and real estate. That will keep you from taking a big hit in the event any of those sectors crashes, while at the same time taking advantage of strong markets wherever they may be.
Also, don’t get crazy with your investments. Stick with index funds for stocks, since they have lower investment fees and don’t generate a whole lot of capital gains taxes. Keep your real estate investments in real estate investment trusts (REITs), which are actually something like real estate portfolios themselves.
10. Diversify Your Income Sources
Just as you would diversify your investment portfolio, you should also diversify how you make money. Both the economy and the job market are not as stable as they were a couple of decades ago, and you have to be prepared to ride out the ups and downs.
For example, if you have a full-time job, work on creating a side business. Not only will it provide you with an additional source of income for savings and debt reduction, but it may also form the replacement for the job you lose in the next recession.
11. Stay Out of Debt
Your credit score determines what interest rate you are offered when buying a new car or refinancing a home. It also impacts seemingly unrelated things, such as car insurance and life insurance premiums.
The reasoning is that someone with reckless financial habits is also likely to be reckless in other aspects of life, such as driving and drinking. This is why it’s important to get a credit report at regular intervals to make sure that there are no erroneous black marks ruining your good name. It may also be worth looking into one of the best credit monitoring services to further protect your information.
It’s hard to make a case for being financially independent when you owe money to banks or other people. You should have a goal of getting out of debt as soon as possible.
You can have different time horizons for getting out of debt with each debt category.
For example, you can commit to eliminating your credit card debt in five years, while eliminating your student loan debt in 10 years, and your mortgage in 15 years.
That’s not an overnight solution to your current debt problems, but it sets you heading in the right direction.
And once you get out of debt in any category, stay out and never come back! There’s no such thing as “good debt” when you’re trying to achieve financial independence.
12. Shield as Much Income From Taxes as Possible
Taxes represent a major reduction in your income, which means you will have less money available to save, invest, and pay off debt. By using strategies that reduce income taxes, you’ll be able to keep more of your income, rather than turning it over to the tax authorities.
The easiest and best way to shield your income from taxes is through retirement plans. If your employer offers a 401(k) plan at work, put as much of your income into it as you can afford. At a minimum, invest up to the amount that will get you the maximum employer matching contribution. For example, if your employer offers a 50% match (3%) up to a 6% contribution by you, you should contribute at least 6% – and of course, more is always better.
Also, take advantage of individual retirement accounts (IRAs). Take one even if you don’t qualify for an income tax deduction for taking one. Even without the tax deduction on the contribution, both traditional and Roth IRAs still allow you to defer income taxes on investment income.
If you’re self-employed, create your own retirement plans for your business, such as a solo 401(k), or a SEP or SIMPLE IRA. Using such a plan, you can shelter much as 20% of your income – up to $53,000. That’s a lot of tax savings right there.
13. Block Out the Spendthrifts in Your Life
Are there one or more people in your social circle who you could reasonably characterize as a spendthrift? If so, one of the sacrifices you may need to make to reach financial independence will be to either reduce your contact with this person (or people) or even eliminate them from your life altogether.
I know that sounds harsh, but is also totally necessary. The people with who we keep company can have a profound effect on how we view and spend money.
If you are surrounded by people who “live for the moment” – meaning they mostly spend their money having fun rather than saving for the future, you will inevitably get pulled into that behavior.
Many Americans are hesitant to negotiate for goods and services, worrying that it makes them seem cheap. Overcome this cultural handicap and you could save thousands each year. Small businesses, in particular, tend to be open to negotiation, where buying in bulk or repeat business can open the door to good discounts.
15. Always Keep Your Career or Business Moving Forward
If you can steadily increase your income – while keeping your spending level – you will reach all of your financial goals much more quickly.
You can keep your career moving forward by keeping your work skills sharp and increasing your value to your employer. You should put yourself in the running for promotions where possible, and hold yourself open for better opportunities with other employers. If you are self-employed, it means steadily working to keep your business moving up to the next level.
Chris Hammond, financial advisor and founder of RetirementPlanningMadeEasy.com shares his career tips:
Working on advancing your career is like investing in yourself. It’s one of the best ways to get a good return on your investment, whether you are salaried or self-employed.
If you are self-employed, that just means you have a lot of “bosses” that you serve. So, periodically ask those “bosses/clients” how you can better serve them. I have done this in the past through simple surveys. I simply ask what challenges they are facing and how I can better serve them. The better you can serve people, the more value you bring to the table, the more it helps you become a higher earner.
16. Continuous Education
Review all applicable changes in the tax laws each year to ensure that all adjustments and deductions are maximized. Keep up with financial news and developments in the stock market and do not hesitate to adjust your investment portfolio accordingly. Knowledge is also the best defense against those who prey on unsophisticated investors to turn a quick buck.
17. Create a Safety Net
If you have been living paycheck-to-paycheck up to this point, your first savings goal should be to create a safety net. You can do that by creating an emergency fund.
An emergency fund should be held in a perfectly safe account – like a savings account, money market account, or a short-term certificate of deposit. It’s not for investment, because investment involves risk, and that’s not the purpose of an emergency fund.
Your first goal should be to accumulate a sufficient amount of cash in the account to cover 30 days’ worth of living expenses. Once that’s achieved, your goal should be to add another 30 days’ worth of living expenses. The account should have between three months and six months of living expenses if you’re a salaried employee, and between 6 and 12 months if you have a self-employed job or are paid entirely by commissions.
Andrew McFadden, CFP and Founder of Panoramic Financial Advice thinks it unwise to navigate life without any sort of financial cushion:
Life is full of surprises and changes, and it will do you a lot of good to have a liquid stash of cash you can access quickly in case of an emergency. Emergencies like getting laid off, the car dying, or your child needs urgent medical treatment, and your health insurance doesn’t quite provide the coverage you thought it did.
Do you want to be up a creek without a paddle when those situations occur? Sure, you could probably charge those emergencies to a credit card with reward points, but that’s going to end up costing you a lot in interest charges in the long-run. The goal is to make smart choices by planning ahead.
Additionally, more and more today, I am seeing the need for an emergency fund because people get sick of working for tyrant bosses and want the financial flexibility to walk out the door if they can’t stand the frustration anymore. No emergency fund – no flexibility to call your own shots.
18. Live Below Your Means
Mastering a frugal lifestyle by having a mindset of living life to the fullest with less is not so hard. Indeed, many wealthy individuals developed a habit of living below their means before rising to affluence.
This isn’t a challenge to adopt a minimalist lifestyle or a call to action to head to the dumpster with things you’ve hoarded over the years. Making small adjustments by distinguishing between the things you need and the things you want is a financially helpful habit to put into practice.
The reason it’s so important is it’s the single step that will provide most of the spare cash you will need in order to accomplish most of the other steps. Learning to live beneath your means is one of the central costs of learning how to become financially independent. And if you have not mastered this technique in the past, doing so will range anywhere from uncomfortable to downright painful.
“Setting goals is the first step into turning the invisible into the visible” Tony Robbins
Jose V. Sanchez, financial advisor at JosevSanchez.com experienced living within his means as a child:
Our parents grew up extremely poor, but wealthy in tradition, family, and faith. Their nurturing frugality instilled both a tradition of resisting needless spending and the value of time over money. Setting a goal to champion frugality has made the biggest impact in wealth accumulation in my life. This value of frugality is a tradition that my wife and I are passing on to our kids.
Delayed Gratification. Get comfortable with that term. No – make that, get very comfortable with it. It means being willing to sacrifice now in order to provide for a better life for you and your loved ones in the future.
If you’re currently struggling with your finances, there’ll be no easy way over this hurdle. You’ll probably have to cut out every expense in your budget that is not absolutely necessary, it even does what you can to reduce those that are.
It could include the passing of the annual family vacation, driving your car for years after paying off your car loan, living in your current home even though most of your neighbors traded up, and buying your clothing in thrift stores while everyone else you know shopping at the mall.
That’s just a shortlist of the sacrifices you’ll have to make. But in making them, you’ll be clearing money in your budget to build savings, get out of debt, and invest for the future.
19. Get a Financial Advisor
Once you’ve gotten to a point where you’ve amassed a decent amount of wealth—be it liquid investments or tangible assets that aren’t as readily available to convert to cash—get a financial advisor to educate you and help make decisions.
20. Take Care of Your Health
The principle of proper maintenance also applies to the body. Invest in good health with regular visits to doctors and dentists, and follow health advice about any problems you encounter. Many problems can be helped—or even prevented—with lifestyle changes such as more exercise and a healthier diet. Some companies have limited sick days, making it a notable loss of income once those days are used up. Obesity and ailments make insurance premiums skyrocket, and poor health may force earlier retirement with lower monthly income.
21. Make Sure You Have Enough Insurance Coverage
Early in your journey toward financial independence, you may want to maintain minimal insurance coverage to keep your insurance expenses low. But, as your wealth grows, your insurance coverage has to rise along with it.
Though we don’t normally think of it in this way, the primary purpose of insurance is to protect our assets. The more assets you have, the greater your insurance coverage needs to be.
Review all of your coverages annually. That includes health, auto, homeowners, disability, and affordable life insurance. As your wealth grows, low coverage levels and high deductibles can work against you in a crisis. That defeats the whole purpose of having insurance of any kind.
22. Commit to Refocusing on Your Goal Regularly
In order to become financially independent, you will need to become fully committed to your plan. You should have a written plan – that includes goals for each financial category – and plan to review them annually.
The purpose is twofold:
To make sure your goals are on track, and
To keep yourself focused on your ultimate goal of becoming financially independent
This is incredibly important, particularly number two. It’s very easy to get sidetracked on the road to financial independence. For example, you may find yourself getting very comfortable about two-thirds of the way there, and starting to spend more money and save less.
Think of it as an affirmation, in which you renew your commitment. You should do that at least annually, but in reality, you should do it as much as you need to.
Becoming financially independent isn’t easy. That’s why you need a detailed plan, and a commitment; sticks to it. Use this list as a guide, and modify it to fit your own circumstances. You’ll get there – as long as you don’t give up!